Lesson 16 of 16
Asset-based models determine the fair value of a stock by calculating the market value of the firm's assets and subtracting the market value of its liabilities and preferred stock.
Equity Value = Market Value of Assets -- Market Value of Liabilities
Since the firm's assets and liabilities will be at book value, the analysts will adjust these values to their fair value or market value.
The adjust the book value of assets for market values, the firms will use the depreciated values, adjust these values for inflation or estimate the replacement of the assets.
Since a firm will have many intangible or off-balance sheet assets, it is quite difficult to apply the asset-based valuation models. Generally analysts will use another valuation model such as discounted cash flow model in conjunction with the asset-based valuation model. These models are useful for firms having mostly tangible assets or assets for which market value can be easily determined. These models are commonly used to value private firms.