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Subject 3. Definitions (Standards) of Value PDF Download
There are different definitions of value. They are used for different purposes. To make things more complex, different organizations may have different perspectives on what a given definition of value means.
Fair market value (FMV) is the price at which a willing buyer will buy from a willing seller. They both know the relevant facts and neither are under any compulsion to buy or sell. FMV is generally the basis for tax assessment.
What is "arm's-length transaction"? Basis of determining fair market value (FMV), it is a dealing between independent, unrelated, and well informed parties looking out for their individual interests. Transactions involving family members, and parent companies and subsidiaries, are deemed arm-in-arm dealings. To qualify as an arm's length transaction, neither of the involved parties may have any interest in the transaction's consequences to the other party.
Market value is similar to FMV. It usually refers to the amount that could be received on the sale of real estate when there is a willing seller and buyer.
Fair value is used in financial reporting and in certain litigation matters. It is very similar to (fair) market value.
Investment value is the value to a particular investor based on this investor's investment requirements and expectations. It is a subjective measure of value, a 'value-in-use', while market value is an objective 'value-in-exchange'. This is the most important distinction between the two definitions: (fair) market value is determined by the price of a general willing buyer, while investment value is defined by a particular buyer, a price which reflects the particular facts and circumstances of that investor. Investment value can be either higher or lower than market value.
To illustrate, consider the case of a hypothetical hospital. Different types of buyers seeking a control or majority interest may result in a higher price than fair market value.
- One investor may provide specific market synergies that increase revenues and/or decrease costs, resulting in a higher pro-forma operating margin.
- A publicly traded company purchaser may acquire the hospital at any price that results in a lower valuation multiple than the price of the buyer's stock; the accretive nature of such a transaction may increase the buyer's willingness to pay a higher price.
- A regional buyer may pay a higher price than fair market value for intangible benefits, which may include the elimination of a competitor, a greater market presence, and the creation of favorable relationships with local physicians.
- A regional buyer may pay more than fair market value because cost of building a new facility is higher than the fair market value of the current facility.
Intrinsic value is the "true" or "actual" value of an asset. It may or may not be the same as the current market value. Value investors use a variety of analytical techniques in order to estimate the intrinsic value of assets in hopes of finding investments where the true value of the investment exceeds its current market value.
Learning Outcome Statementsdescribe uses of private business valuation and explain applications of greatest concern to financial analysts;
CFA® 2023 Level II Curriculum, Volume 4, Module 27
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