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Intangible Asset Valuation Method

IP.com Disclosure Number: IPCOM000125991D
Original Publication Date: 2005-Jun-27
Included in the Prior Art Database: 2005-Jun-27
Document File: 2 page(s) / 40K

Publishing Venue

IBM

Abstract

Intangible assets are given a valuation based on a combination of corporate financial statement analysis and real options analysis

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Intangible Asset Valuation Method

With much of the value of a corporation being intangible, that is, it doesn't appear as assets on the balance sheet, a method of deriving the value of these intangible assets is an issue that needs an answer. Intangible assets are difficult to evaluate since they may or may not be producing current revenue. Thus an approach that focuses strictly on financial statement analysis is inadequate. Some approaches use real option analysis. However, real options only values assets in the form of options that have not yet been exercised so it is inadequate to account for the intangible assets that are earning value. This invention disclosure describes an approach to using both financial statement analysis and real option analysis to arrive at a total intangible asset value for a firm.

First, we will consider the analysis of a financial statement to determine intangible value that is currently earning income. We will assume that income is a function of the net assets owned by the firm (that are earning income):

Net Income = f(Shareholder Equity + Intangible Assets Earning Income)

A firm's market value should be no more than the present value of its future net income stream. Let us assume that this income stream is a perpetuity; that with its current net assets, the firm will earn the same amount each year. To find the present value, this income stream should be discounted at the equity cost of capital. The equity cost of capital is used because we are discounting based on equity only and not on total assets where the weighted average cost of capital would be more appropriate. Thus we have the following equation:

Value of firm = Net Income / Equity Cost of Capital

To find the net income that would make the firm's market value equal to its shareholder equity, we simply substitute shareholder equity into the above equation for the value of the firm and perform a little algebra:

Shareholder Equity = Net Inco...