27-05-2013, 12:09 PM
Valuation of Intangibles
Valuation of Intangibles.ppt (Size: 782 KB / Downloads: 15)
Intangible assets do not generate cash flows on their own but allow a company to charge higher prices for its products and generate more in cash flows
Eg:brand
Brand, to put it simply, is a covenant with the consumer, a promise that the brand and its products will meet the expectations generated over time.
Brands provide the basis for differences between apparently similar offers. They play a key role in generating and sustaining the financial performance of a business. In industry where competition is increasing and there is surplus capacity, strong brands help in differentiating products in the market.
Four different ways of estimating value of intangibles
1. Relief from royalty method.
Under the royalty relief approach it is imagined that the business does not own its brand but licences it from another business at a market rate. The royalty rate is usually expressed as a percentage of sales. The valuation consists of first estimating the royalty rate as a percentage of sales and then projecting that fee over the useful life of a brand. One then computes the NPV (net present value) of the sum of those fees over the brand's expected lifespan.
2. Capital invested:
The book value of an intangible asset is estimated by looking at what a firm has invested in the asset over time.
For eg: With brand name, this would require looking at advertising expenditures over time,capitalising these expenses and looking at the balance of expenses that remains unamortised.
The disadvantage of this method is the value may not match or even be close to the market value of the asset
3. Premium profit method:
The premium profit method looks at valuing the brand by considering the premium profit generated by a business, if any, using the brand and comparing it with a business not using a comparable brand.
The segregated cash flows need to be discounted at a reasonable discount rate to arrive at the value of the brand
Valuation of Human Capital
A firm with a well trained ,loyal, and intelligent workforce should be worth more than an otherwise similar firm with a less expert workforce.
This is true for consulting firms, investment banks , and other entities that derive most of their value from human capital