How much an asset or company is worth in a financial market Show What is Market Value?Market value is usually used to describe how much an asset or company is worth in a financial market. It is mutually determined by market participants and is interchangeably used for market capitalization when dealing with assets and companies. Summary
Relationship between Market Value and Market PriceOn the other hand, market price refers to the price at which the exchange of goods takes place. It is determined purely by demand and supply, which means that the amount the buyer is willing to pay must be exactly equal to what the seller is willing to accept. The market value of a good is the same as its market price only when a fair market exists. For a market to operate under fair or efficient conditions, certain criteria must be adhered to: 1. No distressNone of the parties to a contract of sale must be in a hurry or in need to complete the transaction. Usually, a distressed buyer or seller can make a wrong decision that does not reflect the market situation correctly. 2. Sufficient time, information, and market exposureBoth the buyer and the seller are given enough time to do their research, understand the market, analyze alternatives, and make an informed decision. 3. Mutually agreed priceNone of the parties involved must be forced to make the transaction, and the final price decided must be agreed upon by both the buyer and the seller. However, a fair market doesn’t always present itself. How is Market Value Expressed?Market value can be expressed in the forms of mathematical ratios that give the management insight into what the company’s investors think of the organization, both at present and in the future.
How is Market Value Calculated?There are multiple methods for calculating market value. They are as follows: Income Approach1. Discounted Cash Flow (DCF) Under the DCF approach, the market value is a function of an estimate of the present value of future cash streams of a given company. It is done by projecting future cash flow, which is then discounted to reach its present value. The discounting rate depends on prevailing interest rates and the degree of risk associated with the business to be valued. 2. Capitalized Earnings Method The capitalized earnings method is used for calculating the worth of a stable income-producing property. The net operating income accrued over a period of time is divided by the capitalization rate, which is an estimate of the potential return on investment. Assets ApproachUnder the assets approach method, the fair market value (FMV) is calculated by computing the adjusted assets and liabilities held by a company. It takes into account intangible assets, off-balance sheet assets, and unrecorded liabilities. The difference between the FMV of the assets and liabilities is the value of net adjusted assets. Market Approach1. Public Company Comparable The value of a business can be evaluated by comparing all the businesses operating with the same scale in the same industry or region. After establishing a peer group of comparable companies, ratios such as EV/EBITDA, EV/Revenue, P/E ratio can be calculated. 2. Precedent Transactions Under the precedent transactions method of valuation, the price paid for similar companies in earlier transactions is used as a reference. The method is most commonly used before a prospective merger and acquisition deal. It is very important to identify a transaction within the same industry, a similar scale of operations, and involving the same type of buyer. Additional ResourcesCFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:
How is FMV calculated for private company?For public companies, the fair market value is public and determined by the market. In private companies, the Fair Market Value (FMV) is the accepted current value of one share of a private company's common stock.
How is share price of private company calculated?Widely considered the most common and simple method of valuing shares in a private company is comparable company analysis (CCA). The process behind CCA involves utilising the metrics and performance of similar stature businesses within the same industry in order to attempt to draw conclusions over valuations.
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