Premise of Value

Posted in Finance, Accounting and Economics Terms, Total Reads: 947

Definition: Premise of Value

Premise of value is the set of assumptions made while valuing a company – such as whether it is a going concern or going to be liquidated etc.

There are two premises of value:

• Going concern : value of the organization as an ongoing business enterprise

• Liquidation: value of the organization when all the assets are terminated

The premise used for fair value creation is as follows:

• In use: whether the assets create maximum value when they are used in combination with other assets of the organization

• In exchange: whether the assets of the organization provide value on a standalone basis

The above assumptions which are called “premise of value” are the basis on which the valuation of the firm rests and hence is important. These assumptions might not correctly reflect the actual conditions prevailing, but are useful for computing the value , which is often used to compare companies.



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