Valuation

You go to market and buy some vegetables. You pays Rs. 20. Next day, you again go to the market and buy same vegetables by paying Rs. 40. You see the price of same vegetables has been increased. It means, vegetables have become more costly. For living the life, we need vegetables. Value of vegetables is same all the time for human being. Its value is equal to satisfaction of hunger. There will same value for poor and rich. But in the finance, value is not measured on basis of our basic human needs. But it is decided by demand, supply, market fluctuations, mis-happenings,  and many other factors. To study valuation is very interesting for me.


 It has two reason

1st Reason of Study of Valuation :  It is the important subject of ICWAI. Name of subject is Business valuation management. Beginning chapter is valuation.

2nd Reason of Study of Valuation : It is also part of subject of Financial Reporting of CA Final Class.

Today, what I have studied, I am sharing with you.

What is Valuation as per Finance?

Valuation is estimation of financial value of anything. Suppose, we buy inventory of Rs. 500000. Rs. 500000 is the value of that inventory. Like inventory, every asset which we buy, may have some financial worth. This financial worth is fixed on the basis of its uses, benefits, demand, supply or any other business factor. Before, selling inventory to us, our buyer will think, what value will he get from us. If he know good valuation method, he will surely take good value of this in the form of its price.



Why is Valuation Needed?

Following are main reasons of Valuation

1. Investment Analysis 

In investment analysis, we do the analysis of shares, bonds, debentures and other investments. But, for this analysis, we need all the data relating to past value of any particular investment. Only valuation study can be helpful for us for getting this.

2. Capital Budgeting 

Capital budgeting is the technique of choosing best investment proposal. In capital budgeting, we compare present value of cost of project and present value of the benefits of project. Both items are dependent on good valuation method.

3. Merger and Acquisition 

In merger and acquisition, we acquire some or all the assets and liabilities of other company. Now, question is, what prices should be given by us to seller of company. Merge or acquisition price can be fixed with valuation study.

4. Financial Reporting 

It is the duty of CA to make financial reporting of his company. If he is the chief accountant or finance director of his company. In financial reporting, he has to show the value of every asset and liability of company. If your company is financial company, you have to show your assets and liabilities on the basis of fair market value. Due to this reason, CA must know valuation.

5. Proper Taxation 

There many taxation like tax on short term and long term capital gains and wealth taxation is based on the correct valuation of assets.

Method of Valuation 

There two major methods of valuation :

1st Method of Valuation  : Discounted Cash Flow Method

According to this, that asset's value will be high who will provide high value of net cash flow within short period.

2nd Method of Valuation : Net Asset Method

According to this method of valuation, we compare all the assets with all the liabilities. A company whose net asset or net worth is more will be highly valuable company. 

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