How to Calculate the Value of a Firm

Value of firm means if today firm is sold to anybody what amount will be given to the partners of that firm. Today, everyone is smart. Everybody will study the financial statement of firm. By analysis the balance sheet and current market value of firm's assets, anybody can calculate the value of a firm.

We are giving the steps which will be easy for you. Before explaining the steps, we want to tell that firm is different from company. So, there is no effect of market share price because this is not any company. 

1. Calculate the Market Value of Firm's Total Assets

There are two types of assets. One is fixed assets and second is current assets. Make the list of all fixed assets which are showing in balance sheet. Balance sheet will just showing the book value which will be different from market value. Different fixed assets may be different market. Just go to each market and ask the market value of each fixed asset and make the list.

S.No. Name of Asset Name of Market  Estimated Market Value
1. Machinery Machine Market $ 40,000
2.  Furniture Furniture Shops $ 10,000
3.  Building Real Estate $ 70,000
4.  Investment in Shares Stock Market $ 60,000
5. Vehicles Automobiles Market $ 80,000
6.  Fixed Deposits in Bank  Bank $ 20,000
7.  Given Secured Loans Financial Market $ 30,000
8. Debtors Financial Market $  5,000
9. Cash Cashier $ 40,000 (Actual )
10. Bank Balance Banks $ 40,000 (Actual )
11.  Inventory Inventory Market $ 30,000
Total Market Value of Assets $ 425000

2. Calculate the Market Value of Firm's Outside Total Liabilities

Now, calculate the estimate value of outside liabilities. Include both current and fixed liabilities.
3. Calculate the Market Value of Net Assets 

Now take the difference of estimated market value of your all assets and outside liabilities. In first point, if there is $ 425000 is your market value of all assets. Suppose, market value of your outside liabilities are $ 4,00,000, then value of your firm will be

= $ 4,25,000 - $ 4,00,000 = $ 25,000

4. Calculate the Value of Goodwill

If you did not calculate the value of goodwill, you should calculate the value of Goodwill. Today, we are estimating a very easy way to calculate the goodwill. For example, you have calculate your firm's value as $ 25000. Take the data of the 3 firms which can be compare with your firm.

For example

Firm A Sold $ 35000

Firm B Sold $ 30000

Firm C Sold $ 40000

Now calculate its average

its average sale value will be $ 35000. It means, if you will sell, you can demand $ 10,000 for goodwill because you are comparing other businesses on the basis of your annual turnover, total book value of assets and liabilities. So, if other party will buy your firm, he will get the benefit of this goodwill. Now, your market value of firm will be $ 25000 + $ 10000 = $ 35000.

Related : How to Calculate the Value of Shares 

See Also : CS Accounting Notes 


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Accounting Education: How to Calculate the Value of a Firm
How to Calculate the Value of a Firm
Accounting Education
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