Valuation is the process of determining the value of an investment, asset, or security). There are several approaches to valuation, including discounted cashflow valuation, relative valuation, and contingent claim valuation). Valuation can be done for assets, such as investments in marketable securities, business enterprises, or intangible assets such as patents, data, and trademarks, or for liabilities, such as bonds issued by a company). The process of valuation is subjective, and the process itself can affect the value of the asset in question). Valuations may be needed for various reasons, such as investment analysis, capital budgeting, merger and acquisition transactions, financial reporting, and taxable events to determine the proper tax liability).
In general, a company can be valued on its own on an absolute basis, or else on a relative basis compared to other similar companies or assets. There are several methods and techniques for arriving at a valuation, each of which may produce a different value. Fundamental analysis is often employed in valuation, although several other methods may be employed such as the capital asset pricing model (CAPM) or the dividend discount model (DDM) .
Valuation is an important exercise since it can help identify mispriced securities or determine what projects a company should invest in. Some of the main reasons for performing valuation include determining sale value and tax reporting.
