fair market value

(noun)

An estimate of the market value of a property, based on what a knowledgeable, willing, and unpressured buyer would probably pay to a knowledgeable, willing, and unpressured seller in the market. An estimate of fair market value may be founded either on precedent or extrapolation but is subjective. Fair market value differs from other ways of determining value, such as intrinsic and imposed value.

Related Terms

Examples of fair market value in the following topics:

  • Market Value vs. Book Value

    • Book value is the price paid for a particular asset, while market value is the price at which you could presently sell the same asset.
    • Market value is often used interchangeably with open market value, fair value, or fair market value.
    • In many cases, the carrying value of an asset and its market value will differ greatly.
    • If the asset is valued on the balance at market value, then its book value is equal to the market value.
    • Ways of measuring the value of assets on the balance sheet include: historical cost, market value or lower of cost or market.

  • Drawbacks of Repurchasing Shares

    • Shares may be repurchased if the management of the company feels that the company's stock is undervalued in the market.
    • It repurchases the shares with the intention of selling them once the market price of the shares increase to accurately reflect their true value.
    • Not every shareholder, however, has a fair shot at knowing whether the repurchase price is fair.
    • The repurchasing of the shares benefits the non-selling shareholders and extracts value from shareholders who sell.
    • It is difficult for shareholders, especially relatively uninformed ones, to judge how the announcement will affect the value of their holdings if there is no guarantee that the full announced repurchase will occur.

  • The Weightings

    • MVe stands for the market value of equity; MVd stands for the Market Value of Debt; Re stands for cost of equity; Rd stands for cost of debt; and t is the company's tax rate.
    • Market value is the price at which an asset would trade in a competitive auction setting.
    • For market price to equal market value, the market must be efficient and rational.
    • Market value also requires the element of "special value" to be disregarded.
    • Special value refers to a synergy that may exist between two parties that makes the fair price of a transaction higher.

  • Present Value of Payments

    • Bond valuation is the determination of the fair price of a bond.
    • As with any security or capital investment, the theoretical fair value of a bond is the present value of the stream of cash flows it is expected to generate.
    • F = face value, iF = contractual interest rate, C = F * iF = coupon payment (periodic interest payment), N = number of payments, i = market interest rate, or required yield, or observed / appropriate yield to maturity, M = value at maturity, usually equals face value, and P = market price of bond.
    • The bond price can be summarized as the sum of the present value of the par value repaid at maturity and the present value of coupon payments.
    • Bond price is the present value of coupon payments and face value paid at maturity.

  • Market/Book Ratio

    • The price-to-book ratio is a financial ratio used to compare a company's current market price to its book value.
    • The price-to-book ratio, or P/B ratio, is a financial ratio used to compare a company's current market price to its book value.
    • In the first way, the company's market capitalization can be divided by the company's total book value from its balance sheet.
    • As with most ratios, it varies a fair amount by industry.
    • P/B ratios are commonly used to compare banks, because most assets and liabilities of banks are constantly valued at market values.

  • Impact of the SML on the Cost of Capital

    • The security market line is a graphical representation of the capital asset pricing model that illustrates the idea that investments are priced efficiently based on the expected return and beta-value (risk).
    • Companies often turn to capital markets in order to generate funds -- using the issuance of either debt or equity.
    • This would not be an attractive market situation for a company looking to raise capital.
    • Such an instrument would be a fair investment from an individual's perspective, and would lead to a fair cost of capital from a company's perspective.
    • The location of a financial instrument above, below, or on the security market line will lead to consequences for a company's cost of capital.

  • Time to Maturity

    • Instead, they are designated as money market instruments .
    • In the market for United States Treasury securities, there are three categories of bond maturities:
    • The fair price of a "straight bond," a bond with no embedded options, is usually determined by discounting its expected cash flows at the appropriate discount rate.
    • Where the market price of a bond is less than its face value (par value), the bond is selling at a discount.
    • Conversely, if the market price of bond is greater than its face value, the bond is selling at a premium.

  • Depreciation

    • Depreciation refers to two very different but related concepts: the decrease in value of assets (fair value depreciation), and the allocation of the cost of assets to periods in which the assets are used (depreciation with the matching principle).
    • Fair value depreciation affects the values of businesses and entities.
    • It is a concept used in accounting and economics, defined as a rational and unbiased estimate of the potential market price of a good, service, or asset, taking into account the amount at which the asset could be bought or sold in a current transaction between willing parties.
    • the expected salvage value, also known as residual value of the asset
    • The cost of an asset so allocated is the difference between the amount paid for the asset and the salvage value.

  • Implications and Limitations of the Efficient Market Hypothesis

    • Investors and researchers have disputed the Efficient Market Hypothesis both empirically and theoretically.
    • These errors in reasoning lead most investors to avoid value stocks and buy growth stocks at expensive prices, which allow those who reason correctly to profit from bargains in neglected value stocks and the excessive selling of growth stocks.
    • Speculative economic bubbles are an obvious anomaly, in that the market often appears to be driven by buyers operating on irrational exuberance, who take little notice of underlying value.
    • Rational investors have difficulty profiting by shorting irrational bubbles because, as John Maynard Keynes commented, "markets can remain irrational far longer than you or I can remain solvent. " Sudden market crashes, like the one that occurred on Black Monday in 1987, are mysterious from the perspective of efficient markets, but allowed as a rare statistical event under the Weak-form of EMH.
    • Posner accused some of his Chicago School colleagues of being "asleep at the switch," claiming that "the movement to deregulate the financial industry went too far by exaggerating the resilience-- the self healing powers-- of laissez-faire capitalism. " Others, such as Fama himself, said that the hypothesis held up well during the crisis and that the markets were a casualty of the recession, not the cause of it.

  • Understanding Future Stock Value

    • In financial markets, stock valuation involves calculating theoretical values of companies and their stocks.
    • There are many different ways to value stocks.
    • Market Cap, which is short for Market Capitalization, is the value of all of the company's stock.
    • Enterprise Value is equal to the total value of the company, as trading on the stock market.
    • To compute it, add the Market Cap (see above) and the total net debt of the company.