Prof. dr hab. Dariusz Zarzecki
Head of MBA Study, University of Szczecin
Szczecin, Poland
Email: [email protected]
DOI: 10.23918/ICABEP2021p1
Abstract
Business valuation as a practical activity encounters many problems and challenges that the valuation theory aims to solve. What was once considered part of finance and a rather niche field in other academic areas is now becoming one of the leading fields of science.
The paper deals with the biggest challenges in business valuation, with special emphasis on valuing contingent liabilities and assets, and non-operating assets. Valuation of contingent liabilities and assets, which in some cases may account for a substantial part of the total value of a firm, is extremely difficult as assessing probabilities of cash flows associated with such items is based on a subjective judgment by a valuator. Operating assets generate the operating income. When we discount the stream of the operating income by the appropriate cost of capital, we have an income value of the operating assets of the entity. Companies, however, often possess considerable surplus of cash and marketable securities, as well as shares in other firms and other non-operating assets. The value of these assets ought to be added to the value of the operating assets to arrive at total firm value. Mixing operating and non-operating cash flows and discounting them by the same cost of capital is a common mistake observed in the business valuation practice, especially in less developed countries. It is recommended that the estimated value of each non-operating asset should be appraised separately and the resulting values added to the income value of operations to arrive at enterprise value. Enterprise valuation is an important area of business practice. The ever growing number of companies and the increasing importance of shares and intangible assets in the structure of nations’ wealth (especially in the case of the most developed ones) create a natural need to estimate the value of securities, whole enterprises, and different assets and liabilities. The number of potential and actual transactions regarding the above investment categories is huge and systematically increasing.
The article presents the most important, according to the author, challenges facing the theory and practice of business valuation. Progressive globalization, digitization, financialisation of the economy and dynamic technological development create new problems and challenges also in the area of business valuation.
ICABEP2021
International Conference on Accounting, Business, Economics and Politics
3rd joint conference organized by the collaboration of the Faculty of Administrative Sciences and Economics,
Tishk International University, College of Administration and Economics, Salahaddin University-Erbil, and
University of Szczecin, Poland.
