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  • startwitharoux startwitharoux Apr 23, 2004 9:02 PM Flag

    More on valuation:

    Another potential valuation method, the net asset value method resembles the liquidation value approach to determining equity value. The net asset value method, much like the liquidation approach, attempts to value the common equity on the basis of the fair market value of the firm�s net assets. Net assets are computed as total assets minus total liabilities. The valuation technique attempts to ascertain the fair market value of the assets, deducts the book value of the liabilities, and determines a value per share based on the residual value, termed net asset value.
    In general, the courts have recently rejected this approach in most cases because it does not value the firm as a going concern. For instance, in TV58 Limited Partnership v. Weigel Broadcasting Co., the judge rejected an asset value approach prepared by Merrill Lynch.[9] Despite the fact that Merrill Lynch is one of the most highly respected investment banking firms in the U.S., the judge stated, �While a cost (or �asset value�) approach may occasionally be appropriate in valuing a going concern, it tends to undervalue intangible factors of a business (i.e. goodwill and synergy).� As stated by the judge in this case, the biggest flaw associated with this approach is the fact that the shareholder is not compensated for the future earnings potential of the entity. Other intangibles, such as brand names and human capital, can often be the most valuable assets a firm has.

    Occasionally this approach is the best valuation method available and in such cases, the court has accepted it as a valid and acceptable approach. For example, in cases where it is inevitable that the firm will be dissolved, the net asset value approach, or the liquidation approach are often the estimators of fair value. However, it should be noted that this approach is being rejected by the court more often as more sophisticated valuation methods are being developed and used in the financial community.

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