Chapter 14: Assumptions (1)

Question 1

Define embedded value

Answer 1

Sum of:
shareholder-owned share of net assets, where net assets are defined as excess assets over those required to meet liabilities
PV of future shareholder profits arising from existing business

Purpose:
1. to include ininternal management accounts
2. toinclude in published financial statements
3. todetermine appraisal value for sale or purchase
4. toassess the growth in EV for payment of bonuses to staff or salespeople

Question 2

Define appraisal value

Answer 2

1. appraisal value = embedded value + goodwill
   2.goodwill = future expected profits from future business