There are some apprehensions among certain sections regarding valuation that need to be explained. In all modalities of privatization, it is essential to arrive at a value that serves as a base and criterion for carrying out transaction. The value is the amount of assets and business of the PE perceived by the investor and the government. It is based on their respective perceptions of business perspectives and market fundamentals. The future earning power and associated risks and liabilities of the PE could be perceived differently by different market players resulting in a range of values.
Reliable valuation is crucial to the success of the privatization programme.
Fair market value is almost universally accepted as the cash equivalent or the price at which property changes hands between a willing buyer and a willing seller, both being adequately informed of the relevant facts and neither compelled to buy or sell. The valuation of PE as a going concern normally employs one of several different methods mainly of calculating future cash flows and then discounting them by the cost of capital. The replacement value is the cost of replacing a particular PE while investment value refers to the investment required for entry into a similar business. Liquidation value is the net amount an owner can realise is business is terminated and the asstes sold off piecemeal. Book value is the sum of the assets accounts, net depreciation and amortization.