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3 Market values compared with calculated values Modern finance theory suggests that where an efficient market exists, the resulting market value will reflect all publicly available information and is the underlying economic value of the asset at a given point in time. Question List possible advantages and disadvantages of market values. Solution Advantages objective, realistic as realisable value on sale assuming the bid price is used, easy as doesnt require calculation, well understood and accepted, can be used as a comparison to other valuation methods to see whether an asset seems over or underpriced, Disadvantages may not be readily obtainable eg unquoted instruments, volatilevalues may fluctuate greatly even in the short term, may not reflect value of future proceeds, a decision is required about whether bid, mid or offer prices should be used, difficult to ensure consistency of basis with that of the liability valuation, value reflects the position of the marginal investor rather than the individual eg taxation, may not be the realisable value on sale eg if dealing in large volumes or illiquid stocks. End of question Market values can be subject to considerable fluctuation and it is sometimes argued that the use of market value depends on the vagaries of the market and obscures the underlying or intrinsic value of the asset. The counter argument is that using another valuation method in an attempt to identify the intrinsic worth of an asset involves an investment call as to the direction the market in that asset or class of asset will move. A market method or a calculated method can be used as a filter for selecting shares for sale or purchase for further consideration. In practice other factors would be taken into account before making buying or selling decisions. If a value other than market value is used, then it is important to make the implications of this clear to the client. For example, if a discounted cashflow approach is used, then the client needs to be aware that this is not necessarily the value that would be obtained on the sale of the assets. This is particularly true when shortterm solvency is being considered. For example, a discounted value of the assets may make it appear that the client is solvent, when in fact, if the assets were realised at their market value, they would be insufficient to cover the cost of the liabilities. Conclusion There are many different ways in which assets can be valued. None of the methods is necessarily better than the others, although may be a preferred method for valuing a particular asset type for a particular purpose. In the next sections of the chapter, we describe the ways in which some of the above methods are used to value particular asset classes.