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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 Value Functional: Applications

The Value Functional: Applications

(p.262) (p.263) 16 The Value Functional: Applications
The Economics of Business Valuation

Patrick L. Anderson

Stanford University Press

This chapter demonstrates practical uses of the value functional approach in the estimation of the value of operating businesses. It includes a detailed discussion of state and control variables, a presentation of four different ways to formulate and solve a value functional problem, including dynamic programming (also called “stochastic control”), Markov Decision Problem (“MDP”), Hamilton-Jacobi-Bellman (“HJB”) method, and “by hand.” The author also presents computational designs for these methods, and observations on the practical difficulties of using them. Finally, the author demonstrates the use of this approach on three actual companies. This allows the reader to see the difference in results (and of the necessity for subjective adjustments) among the value functional and other valuation methods described in this book.

Keywords:   dynamic programming, stochastic control, Markov Decision Problem, MDP, Hamilton-Jacobi-Bellman, value functional, business value

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