RoyaltyStat Blog

Valuation of Intangibles From Initial Capital Stock

Posted by Ednaldo Silva

The initial stock of identifiable assets ("capital stock"), including tangible and intangible assets, is based on the project's initial investment, rate of depreciation or amortization, and estimated growth rate of revenue. This initial capital stock can be estimated by a straight-line equation:

Valuation of Intangibles Based on the Perpetual Inventory Method (PIM)

Posted by Ednaldo Silva

The NPV (net present value) of intangibles has serious break-points. To avoid them, we propose using the perpetual inventory method (PIM). A major advantage of PIM is that no forecasting of revenue attributed to the intangible is needed; instead, we use actual annual expenditures recorded on the company's general ledger (GL), say annual R&D and annual advertising expenses attributed to creating self-developed separate and distinct intangibles. Another major advantage of PIM is that intangible value is not sensitive to changes in discount rates, which in turn depend on an applicable interest rate and a controversial measure of risk attributed to projected royalties.

Intangibles Are Not Hard to Value

Posted by Ednaldo Silva

The valuation of self-developed intangibles does not produce any special analytical problem compared to the valuation of tangible assets. The key issue is to separate and distinguish in the company's general ledger the stream of income and expenses attributed to the identifiable assets. E.g., it’s recognized that R&D expenses (XRD in Capital IQ Compustat’s mnemonics, or investment) produces technology intangibles, such as patents, know-how, and trade secrets. Likewise, it's recognized that advertising and promotion expenses (XAD) produces marketing intangibles, such as trademarks (branding) and customer list. In short, it’s recognized that:

Present Value of Intangibles May Not Be Realized

Posted by Ednaldo Silva

The present value (“PV”) of intangibles based on projected (unrealized) royalties is speculative. As such, the PV of intangibles determined for tax purpose is mostly advocated by naïve analysts, policy-makers, and tax administrators. It's well-known that the PV of any income-earning asset, including intangibles, can be computed by using a weighted sum formula: 

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