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Financial Valuation: Applications and Models, + Website, 3rd Edition by James R. Hitchner

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Chapter 2

Standards of Value

In Chapter 1 of this text, there is a brief discussion of the standards of value commonly used by analysts. The chapter contains definitions of the five most frequently used standards of value: fair market value, investment value, intrinsic value, fair value (state rights), and fair value (financial reporting). There is also a brief discussion concerning the relationship between standards of value and premises of value. While this discussion is extremely useful as an introduction, in this chapter we discuss these concepts in greater depth. Selection and application of the appropriate standard of value is critical in providing valuation services that are useful and relevant.

INTRODUCTION1

From a practical point of view, the appraisal process can be viewed as no more than answering the question: “What is the value?” That question is often followed by another question: “What do you mean by value?” These questions highlight the importance of selecting, understanding, and applying the correct standard of value. The identification of the type of value being sought is known as the standard of value. Each standard of value contains numerous assumptions that represent the underpinnings of the type of value being utilized in a specific engagement. Even if a standard of value is specified, there is no guarantee that all would agree on its underlying assumptions. As James C. Bonbright wrote in his pioneering book, Valuation of Property:

When one reads the conventional ...

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