A method of assigning a fixed value to a company’s intangible assets that are not affected by changes in market value is calculated intangible value. Assets owned by a company that cannot be seen physically, such as trademarks, intellectual property and copyrights, a method of valuing assets of this nature is known as calculated intangible value. One of the methods that can be used to allocate a fixed value to intangible assets is by subtracting a firms book value from its market value. However, due to constant changes in the market value, using the above method is not an accurate way of allocating fixed value to intangible assets.
Determining the Calculated Intangible Value (CIV)
Finding a company’s Calculated Intangible Value involves seven steps:
- Calculate the average pretax earnings for the past three years.
- Calculate the average year-end tangible assets for the past three years.
- Calculate the company’s return on assets (ROA).
- Calculate the industry average ROA for the same three-year period as in Step 2.
- Calculate excess ROA by multiplying the industry average ROA by the average tangible assets calculated in Step 2. Subtract the excess return from the pretax earnings from Step 1.
- Calculate the three-year average corporate tax rate and multiply it by the excess return. Deduct the result from the excess return.
- Calculate the net present value (NPV) of the after-tax excess return. Use the company’s cost of capital as a discount rate.