Healthcare Valuation: The Financial Appraisal of Enterprises, Assets, and Services, Volume 2

CHAPTER 7

Basic Valuation Tenets

7.1 Economic Principles

7.1.1 Scarcity

7.1.2 Utility Theory

7.1.3 Expected Utility

7.1.4 Forward-Looking Value and Discounting

7.1.5 Summary

7.2 Financial Valuation Concepts

7.2.1 Standard of Value

7.2.2 Premise of Value

7.2.3 Level of Interest

7.2.4 Marketability Basis

7.2.5 Valuation Date

7.3 Conclusion

7.4 Key Sources

7.5 Acronyms

7.1 ECONOMIC PRINCIPLES

Underlying the arithmetic of it all, the application of the various approaches, methods, and techniques, as well as the rigors of the appraisal process, healthcare valuation is a discipline in the field of financial economics. Before proceeding with the subsequent chapters, which address the methodology and process of financial appraisal, this chapter reviews those economic principles and financial concepts that support the entire valuation endeavor, beginning with the principles of scarcity and utility.

7.1.1 Scarcity

“What each one of us can get is limited by time, by the incomes we earn, and by the prices we must pay. Everyone ends up with some unsatisfied wants. What we can get as a society is limited by our productive resources. These resources include the gifts of nature, human labor and ingenuity, and tools and equipment that we have produced … Our inability to satisfy all our wants is called scarcity”¹

It has long been held that the first principle of economics, which gives rise to all questions of interest in economics, is the principle of scar-city. The practice of economics involves ...