FEDERAL POLYTECHNIC NEKEDE

P.M.B 1036 OWERRI IMO STATE

ASSIGNMENT ON

DISCUSSION OF VALUES AS IT APPLIES TO THEORIES

AND PRACTICE OF VALUATION/APPRAISAL

WRITTEN BY

NAMES: ENEMUO CHIDERA DAVID

DEPT: ESTATE MANAGEMENT

LEVEL: HND 1 MORNING

COURSE TITLE: VALUATION

COURSE CODE: EST 311

DATE: MAY, 2024

1
 ABSTRACT

This paper covers a review of theory construction, a critical analysis of prior “value theory”, and an
attempt in a comprehensive value theory construction. Prior value theory in the Economics literature
has been highly fragmented, and left a gap between value and modern economic theory. This new
value theory explains the gap and amalgamates the various perspectives of value. The outcome
includes a theoretical statement and supporting propositions and appraisal.

2
 INTRODUCTION

Value is the monetary, material, or assessed worth of an asset, good, or service. "Value" is attached to
a myriad of concepts including shareholder value, the value of a firm, fair value, and market value.
The process of calculating and assigning a value to a company or an asset is called valuation. Value is
versatile and carries various perspectives. Economic studies have a long history of looking into its
nature (Daraban, 2016; McCracken, 2001) as well as other disciplines such as axiology
(Aschenbrenner, 2012), psychology and philosophy. The purpose of this paper is to (re)construct a
value theory that explicates the nature of value including its semantics and mechanics. The rationale of
revisiting the Value Theory is the insight generated from another business research on value creation.

CONCEPT OF VALUE

Value theories

Value theory started as early as 1600s; natural value by W. Petty (1623-1687); value based on land
and labor, R. Cantillon (1680-1734); value and market price, N. Barbon (1640-1698); utility as value,
F. Galiani (1728-1787), W. Jevons (1835-1882), and C. Menger (1840-1921); objective value,
intrinsic value, A. Smith (1723-1790); value driven by labor, K. Marx (1818-1883) and D. Ricardo
(1772-1823); value driven by supply-demand, A. Marshall (1842-1924) (Dara ban, 2016).

Various conceptual analysis include Rapp, Olbrich, and Venitz (2018) in intrinsic value and subjective
value analysis; Kim and Hall (2020) in intrinsic-extrinsic value analysis; Costanza (2004) in
subjective-objective value analysis; Viner (1925) in utility and hedonic value analysis. Intrinsic value
is internal to human subject, and extrinsic value is external to human subject and towards
products/services (Kim & Hall, 2020). Subjective value is a “subjective standpoint of individuals and
their internal value systems and from the objective standpoint of what we may know from other
sources about the connection” (Costanza, 2004). Value is viewed from two main perspectives:
valuation of goods (i.e. utility and worth) and axiological/hedonic judgment (Kim & Hall, 2020; Pink,
2020; Yang & Lin, 2014).

Value is associated with value drivers (i.e. labor and utility), price, cost, money, subjective/objective
view, intrinsic/extrinsic view, instrumental/terminal view, exchange/usage view, and
axiology/hedonics. These are the fundamental issues in the theory of value (e.g. Freeman, 2010)
However, between modern economics of supply/demand and price/quantity and the wealth of value

3
theory discussions, there is an obvious gap. There was no transition between value theory and modern
economics, nor why value theory became almost oblivious in modern economics.

MEANING OF VALUE IN VALUATION

Value should be defined as "estimates of the parameters of the possible price distribution for the
subject property as of a given date." Identifying the value estimate reported as an explicit central
tendency measure such as mean, mode or median adds clarity and interpretability to the valuation.

The term value can also be applied to the value of a company versus the valuation of a company.
Although value and valuation are often used interchangeably, the value of a firm is a number,
while valuation is expressed as a multiple to earnings, earnings before interest and taxes (EBIT), or
cash flow.

MARKET VALUE AND MARKET PRICE

Market value is what a good, service or a company might get on an open and fair market. Market price
is the price a buyer is willing to pay. If a house has a market value of $250,000, a buyer can pay
$275,000 to ensure they don't lose the house to another buyer. The house would then have a market
price of $275,000.

Relationship between Market Value and Market Price

On the other hand, market price refers to the price at which the exchange of goods takes place. It is
determined purely by demand and supply, which means that the amount the buyer is willing to pay
must be exactly equal to what the seller is willing to accept. The market value of a good is the same as
its market price only when a fair market exists. For a market to operate under fair or efficient
conditions, certain criteria must be adhered to:

1. No distress

None of the parties to a contract of sale must be in a hurry or in need to complete the transaction.
Usually, a distressed buyer or seller can make a wrong decision that does not reflect the market
situation correctly.

2. Sufficient time, information, and market exposure

Both the buyer and the seller are given enough time to do their research, understand the market,
analyze alternatives, and make an informed decision.

4
3. Mutually agreed price

None of the parties involved must be forced to make the transaction, and the final price decided must
be agreed upon by both the buyer and the seller.

However, a fair market doesn’t always present itself.

How is Market Value Expressed?

Market value can be expressed in the forms of mathematical ratios that give the management insight
into what the company’s investors think of the organization, both at present and in the future.

 Earnings per Share (EPS): EPS is calculated by allocating a portion of a company’s profit to
every individual share of stock. A higher EPS denotes higher profitability.
 Book Value per Share: It is calculated by dividing the company’s equity by the total number
of outstanding shares.
 Market Value per Share: It is calculated by considering the market value of a company
divided by the total number of outstanding shares.
 Market/Book Ratio: The market/book ratio is used to compare a company’s market value to
its book value. It is calculated by dividing the market value per share by the book value per
share
 Price-Earnings (P/E) Ratio: The P/E ratio is the current price of the stock divided by the
earnings per share.

How is Market Value Calculated?

There are multiple methods for calculating market value. They are as follows:

Income Approach

1. Discounted Cash Flow (DCF)

Under the DCF approach, the market value is a function of an estimate of the present value of future
cash streams of a given company. It is done by projecting future cash flow, which is then discounted to
reach its present value. The discounting rate depends on prevailing interest rates and the degree of risk
associated with the business to be valued.

2. Capitalized Earnings Method

The capitalized earnings method is used for calculating the worth of a stable income-producing
property. The net operating income accrued over a period of time is divided by the capitalization rate,
which is an estimate of the potential return on investment.

5
Assets Approach

Under the assets approach method, the fair market value (FMV) is calculated by computing the
adjusted assets and liabilities held by a company. It takes into account intangible assets, off-balance
sheet assets, and unrecorded liabilities. The difference between the FMV of the assets and liabilities is
the value of net adjusted assets.

Market Approach

1. Public Company Comparable

The value of a business can be evaluated by comparing all the businesses operating with the same
scale in the same industry or region. After establishing a peer group of comparable companies, ratios
such as EV/EBITDA, EV/Revenue, P/E ratio can be calculated.

2. Precedent Transactions

Under the precedent transactions method of valuation, the price paid for similar companies in earlier
transactions is used as a reference. The method is most commonly used before a prospective merger
and acquisition deal. It is very important to identify a transaction within the same industry, a similar
scale of operations, and involving the same type of buyer.

Elements of values in appraisal

what is needed to achieve value (D.U.S.T.) (D)emand (Effective) -Ability of someone to buy;
purchasing power of buyer. (U)tility -Usefulness; with ability to satisfy wants and desires in the minds
of others. (S)carcity - increases value because buyers compete (Overabundance decreases value
because sellers compete). (T)ransferability – Seller must have good title free of “clouds on title”.

Types of Value : Market Value - the probable price a willing, informed seller would accept and a
willing, informed buyer would pay, neither being under pressure to act; an “arm’s length transaction”;
value-in-exchange; fair market value. Market Price - the amount actually paid in the market. Value-in-
Use - the value to a particular user of income property not offering it for sale (includes value of
business). Cost - the total amount to produce the property.

Investment Value - the value to a particular investor.

Insurable Value - the value of the real property for insurance purposes.

Assessed Value - the value for property taxes.

Liquidation Value - the value on a forced sale, such as a lender’s foreclosure auction.

Forces Influencing Value

Social - Characteristics and customs of people; attitudes toward public education; lifestyles; family
sizes (but actual people living in the neighborhood are not an influence). Economic - Price levels;
employment trends; availability of credit; interest rates; supply and demand in housing.
6
Government/Legal -Zoning and land-use regulations; building codes; police, fire and health protection
services; environmental laws. Environmental/ Physical -Topography, climate, soil, natural resources
and developed resources; highway and recreation systems.

THE VALUATION PROCESS AND PRACTICE

Definition of the Problem:

Identify real estate and property rights

- Effective date of value and objective of appraisal

- Definition of value and any limiting conditions

Preliminary Survey & Appraisal Plan

- Data and sources needed Personnel needed and time chart

- Fee proposal and contract

Data Collection and Analysis

- General Data (Economic)

- Market analysis
- Forecast

General Data (Locational)

- Region and community

- Neighborhood

Specific Data (Appraised Property)

- Title and record data

- Physical characteristics of site and improvement

Specific Data (Comparative Properties)

- Sales and rentals

- Listings
- Costs

Highest and Best Use Analysis Site Valuation the Three Approaches to Value

- Sales Comparison Approach

- Income (capitalization) Approach
- Cost Approach

CLASSIFICATION OF VALUES

7
The appraiser considers three approaches to develop indications of value. These are:

- Cost approach
- Sales comparison (market) approach
- Income approach.

All three approaches are used to arrive at an indication of value. The three indications of value are
then reconciled into one final conclusion of market value.

Cost Approach to Value

The cost approach can be used to appraise all types of improved property. It is the most reliable
approach for valuing unique properties. The cost approach provides a value indication that is the sum
of the estimated land value, plus the depreciated cost of the building and other improvements. The
total cost of constructing a new building today frequently sets the upper limit of value, assuming the
building is the highest and best use for the land. The cost approach produces a reliable indication of
market value when a sound building replacement or reproduction cost estimate is coupled with
appropriate accrued depreciation estimates.

The principle of substitution is the basis for the cost approach to value. A person will pay no more for
a building than the cost of constructing an equally desirable substitute, assuming no unusual delay.
Equally desirable substitute means the substitute need not be an exact duplicate, but contains similar
utility and amenities as the existing structure. This provides the rationale for developing the
replacement cost of the subject building rather than the reproduction cost.

Replacement cost is the cost of constructing, using current construction methods and materials, a
substitute structure equal to the existing structure in quality and utility. Replacement cost is generally
used for mass appraisal purposes. It provides expediency and a reliable indication of the cost for most
structures. The replacement cost method is the cornerstone of residential mass appraisal. The
replacement cost includes, but is not limited to, direct and indirect costs and entrepreneurial profit.

Reproduction cost is the cost of constructing, as closely as possible, an exact replica of the existing
structure. Direct costs are expenditures for labor, utilities, equipment, the materials used to construct
the improvement, and the contractor’s profit and overhead. Indirect costs are expenditures for items
other than labor and materials such as financing, interest on construction loans, taxes and insurance
during construction, marketing, sales and lease-up costs, plans, and specifications.

Entrepreneurial profit is a market-derived figure that represents the amount an entrepreneur expects to
receive in compensation for his or her risk and expertise associated with development. This is the
difference between the total cost of development of the property and its market value after completion.

Sales Comparison (Market) Approach to value

In the sales comparison, or market, approach, value is estimated by comparing the subject property to
similar properties that have sold. The sales comparison approach often produces the most reliable
evidence of RMV because sales are based on the actions of buyers and sellers in the marketplace. This
8
approach assumes the typical buyer will compare sales and asking prices to make the best possible
purchase. Like the cost approach, the sales comparison approach is based on the principle of
substitution. This principle presumes that a prudent buyer will pay no more for a property than the
purchase price of a similar and equally desirable property. Sales Data Proper collection and analysis of
sales data, along with selection of appropriate units of comparison, is critical to applying the sales
comparison approach. Sales data must be adjusted based on market conditions, then applied to the
subject of the appraisal. Gather sales from recorded instruments and analyze them to confirm the
conditions of sale and the validity of the sales price. Do not use a sale that is not representative of the
market. Verify sales by personal contact or letter to ensure the most reliable sales. Verification may
reveal whether the sale involved personal property, an exchange, atypical financing, or unusual
motivation on the part of the buyer or seller. When possible, sales should be physically inspected to
determine the condition of the property at the time of sale.

Income Approach of value

Income-producing properties are appraised using all three approaches to value. However, since
income property is usually bought and sold on its ability to generate and maintain an income stream, it
is typical to place more weight on the income approach. One basic principle in estimating the value of
income property is the anticipation of future benefits. The income approach, also called income
capitalization, converts future benefits of property ownership into an indication of present worth
(market value). Present worth, which is the result of capitalizing net income, is the amount a prudent
investor would be willing to pay now for the right to receive the future income stream. Steps in the
Income Approach to Value The steps used to value property by the income approach are: ™ Estimate
potential gross income. ™ Deduct vacancy and collection loss. ™ Add miscellaneous income to arrive
at effective gross income (EGI). ™ Estimate expenses before discount, recapture, and taxes. ™ Deduct
expenses from EGI to determine the net operating income (NOI). ™ Select the proper capitalization
rate. ™ Determine the appropriate capitalization procedure to be used. ™ Capitalize the net income
into an indication of present value.

ATTRIBUTES OF ECONOMIC VALUE

Economic value is the value that person places on an economic good based on the benefit that they
derive from the good. It is often estimated based on the person’s willingness to pay for the good,
typically measured in units of currency. The economic value should not be confused with market
value, which is the market price for a good or service which can be higher or lower than the economic
value that any particular person puts on a good.

Attributes

Economic Value of Consumer Goods

Because economic value is subjective and dependent on a person’s intentions it cannot be directly
measured. Various methods have been devised in order to try to quantify or estimate economic value
however.

9
Willingness to Pay
The classic method that economists use to estimate how much people value an economic good is to
look at the price they pay for it. When an individual buys a good, they give up a given amount of
money in return. Because they value both the good they receive and the money they give up based on
their subjective, intended use (for the good or the money) it is obvious from their choice to purchase
the good, that they must place a higher economic value on the good than on that amount of money.
Thus, the price that a person pays for a good provides one way to quantify the economic value of that
good.

Hedonic Pricing
Hedonic pricing is another way of estimating the economic value of a good. Hedonic pricing uses
statistical regression analysis to estimate the economic value the people attach to the various specific
attributes of a good based on past transactions. Because these attributes, or qualities, of the good are
what determine how well the good will suit an individual's intended use for the good, they will
indirectly influence the economic value of the good. Economists can create statistical models of how
the attributes of similar goods have influenced the price of similar goods in past transactions, and use
these to estimate the economic value of a given good based on it’s attributes.

Economic Value in Marketing

Companies use the economic value to the customer (EVC) to set prices for their products or services.
EVC is not derived from a precise mathematical formula, but it considers the tangible and intangible
value of a product. The tangible value is based on the product's functionality, and the intangible
value is based on consumer sentiment toward product ownership.

For example, a consumer places a tangible value on a durable pair of sneakers that provide protection
and support during athletic activity. However, the sneaker's brand label or affiliation with a celebrity
can add intangible value to the sneakers. Marketer can use surveys, focus groups, or other tools, so
get an idea of how much value consumers will place on the sneakers based on their characteristics.

BASIC PRINCIPLES OF VALUE

Many economic principles influence the value of real property. They are interrelated, and their relative
importance varies, depending on local conditions. The following principles are important:

Substitution
Substitution is probably the most important factor in pricing residential property in a neighborhood
with an active market. The value of a given parcel of real property is determined using the principles
of substitution. The maximum worth of the real estate is influenced by the cost of acquiring a
substitute or comparable property.

Highest and Best Use

Of all the factors that influence market value, the primary consideration is the highest and best use of
the real estate. A property’s highest and best use is its most legally profitable and physically permitted
use – that is, the use that provides the highest present value.

10
Law of Supply and Demand
As it does with any marketable commodity, the law of supply and demand affects real estate. Property
value rises as demand increases or supply decreases. For example, when interest rates decline, demand
for residential property increase significantly, resulting in dramatic increases in prices.

Conformity
In neighborhoods of single-family houses, buildings normally should follow the principle of
conformity, that is, they should be similar in design, construction, and age to other buildings in the
neighborhood to realize their maximum value. An elaborate mansion on a large lot with a spacious
lawn is worth more in a neighborhood of similar homes than it would be in a neighborhood of more
modest homes on smaller lots. Subdivision restrictive covenants are designed to promote the principle
of conformity to maintain and enhance values.

Contribution
Any improvements to a property, whether to vacant land or a building, is worth only what it adds to
the property’s market value. An improvement’s contribution to the value of the entire property may be
greater or smaller than its cost.

Law of Increasing and Diminishing Returns

Improvements to land and structures reach a point at which they have no positive effect on property
values. As long as money spent on such improvements produces a proportionate increase in income or
value, the law of increasing returns is in effect. When additional improvements bring no corresponding
increase in income or value, one can observe the law of diminishing returns.

Competition
All residential properties are susceptible to competition, some more than others. The only house for
sale in a nice, well-maintained neighborhood has a better chance of selling at or near market value
than if several houses on the same street are for sale.

Change
All property is influenced by the principle of change. No physical or economic condition remains
constant. Market forces are taken into consideration when preparing the opinion of value.

Anticipation
Most buyers purchase real estate with the expectation that its value will increase and they have been
rewarded when the anticipation proves correct. In inflationary times, the anticipation of higher prices
creates a multitude of buyers, driving prices higher than can be supported for longer periods. In
Colorado, the prices for mountain properties have increased dramatically, especially if they are in or
near a ski resort area.

But when the market began to opt-out, the anticipation of a price recession can cause investors to put
the property on the market, forcing prices lower. Anticipation also is important to prices of property in
times of decreasing interest rates, when builders rush to fill the expected demand.

11
FACTORS AFFECTING REAL PROPERTY VALUES

The value of real property can be influenced by many factors, such as location and type of use;
however, when appraisers make/render an opinion of market value, they must also take into
consideration how typical buyers and sellers are responding in the market. Appraisers emulate what
informed buyers and sellers will do in an open market. Therefore, we begin this lesson by first
reviewing some of the basic concepts of real estate economics that affect how typically informed
buyers and sellers respond in an open market, and then reviewing some concepts and principles
applicable to the income approach.

Based on observation and analysis of real estate markets, appraisers have developed principles to
describe how real estate markets operate. These underlying appraisal principles are important in
understanding the foundation of the income approach to value and the actions of typical buyers and
sellers in the real property market. Although these principles are individually listed, many of the
principles are interrelated or affect the other in determining real property value.

12
 REFERENCES

Aaker, D. A., & McLoughlin, D. (2014). Strategic Market Management. John Wiley & Sons.
Aschenbrenner, L. (2012). The Concepts of Value: Foundations of Value Theory (Vol. 12).
Springer Science & Business Media.

Bacharach, S. B. (1989). Organizational Theories: Some Criteria for Evaluation. Academy of

Management Review, 14, 496-515. https://doi.org/10.2307/258555 Costanza, R. (2004).
Value Theory and Energy. Encyclopedia of Energy, 6, 337-346.

Daraban, M. C. (2016). An Empirical View on Value Theory and Value-Based Management. CBU
International Conference Proceedings, 4, 26-35. https://doi.org/10.12955/cbup.v4.740

DiMaggio, P. J. (1995). Comments on “What Theory Is Not”. Administrative Science Quarterly, 40,
391-397. https://doi.org/10.2307/2393790

Eggert, A., & Ulaga, W. (2002). Customer Perceived Value: A Substitute for Satisfaction in Business
Markets? Journal of Business & Industrial Marketing, 17, 107-118.
https://doi.org/10.1108/08858620210419754 Freeman, A. (2010). Trends in Value Theory
since 1881. World Review of Political Economy, 1, 567-605. https://mpra.ub.uni-
muenchen.de/48646/

Kim, M. J., & Hall, C. M. (2020). Can Sustainable Restaurant Practices Enhance Customer Loyalty?
The Roles of Value Theory and Environmental Concerns. Journal of Hospitality and Tourism
Management, 43, 127-138. https://doi.org/10.1016/j.jhtm.2020.03.004

McCracken, H. L. (2001). Value Theory and Business Cycles. The Minerva Group, Inc.
https://books.google.com.tw/books?hl=zh-TW&lr=&id=rvOSZG3_BoQC&oi=fnd&pg

Möller, K. E. K., & Törrönen, P. (2003). Business Suppliers’ Value Creation Potential: A Capability-
Based Analysis. Industrial Marketing Management, 32, 109-118.
https://doi.org/10.1016/S0019-8501(02)00225-0

Oluru, D., Purchase, S., & Peterson, N. (2008). From Customer Value to Repurchase Intentions and
Recommendations. Journal of Business & Industrial Marketing, 23, 554-565.
https://doi.org/10.1108/08858620810913362

Payne, A., & Holt, S. (2001). Diagnosing Customer Value: Integrating the Value Process and
Relationship Marketing. British Journal of Management, 12, 159-182.
https://doi.org/10.1111/1467-8551.00192 Pink, M. (2020). Value Theory in the Economics of
Sustainable Development. Problemy Ekorozwoju, 15, 95-102.
https://doi.org/10.35784/pe.2020.1.11

13