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The Economics of Business ValuationTowards a Value Functional Approach$
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Patrick Anderson

Print publication date: 2013

Print ISBN-13: 9780804758307

Published to Stanford Scholarship Online: September 2013

DOI: 10.11126/stanford/9780804758307.001.0001

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The Economics of Business Valuation

Patrick L. Anderson

Stanford University Press

This chapter presents the theory behind the novel value functional method. This includes the importance of the definition of the firm introduced in this book, which includes separation, replicable business practices, and an objective of the firm that is not restricted to profit maximization, the maximization of value, rather than profit, a whirlwind introduction to control theory, and the distinction between the familiar concept of a function and the obscure notion of a functional. The author then presents a functional equation (or Bellman equation) that relates the value of a firm to specific optimization by the manager or entrepreneur. This theory is the basis for the tenth approach to valuation described in this book: the “recursive” or “value functional” approach. The author concludes by proposing conditions for the existence of a solution to the value functional equation for actual firms, basing these in human transversality conditions that he outlines.

Keywords:   business value, value functional, recursive model, functional equation, Bellman equation, control theory, profit maximization, three-element definition of the firm, Bellman, human transversality conditions

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