Business Planning and Evaluation · Chapter 1 · 1.1.1

What is it worth?

How the answer to the question of what value is changed over three centuries.

18th–19th c.Manufacturerquantity of labour
c. 1870Merchantmarginal utility
early 20th centuryInvestorpresent value
1950–1970Analystrisk
from 1980Analystperception

Rolandas Rakštys · Lecturer · Vytautas Magnus University, Agriculture Academy · Faculty of Bioeconomy Development, Department of Business and Rural Development · [email protected] · ORCID 0000-0003-0299-9930

Chapter 1 “Foundations of Business Value”, section 1.1.1 · English translation of v0.16.5 (2026-10-15) · set v1.0.2 · 15 slides, ≈ 28 min

Rakštys, R. (2026). Chapter 1. Foundations of Business Value (English translation of v0.16.5, 2026-10-15). Verslo planavimas ir vertinimas [Business planning and evaluation]. Vytautas Magnus University, Agriculture Academy. https://rakstys.eu/studijos/verslo-planavimas-ir-vertinimas/en/skyriai/ch01/ · CC BY-NC-ND 4.0

The universality of the value problem

What is value?

One of the oldest and most contested questions in economics.

Aristotlevalue in use and value in exchange Todaymeasuring intangible capital, valuing digital platforms
Philosophy of economic value Theory of business value inherits all its conceptual tensions and unresolved questions
Purpose of the sectionTo understand why different valuation schools coexist – and why their synthesis is not merely possible but necessary.
Classical political economy
A. Smith, The Wealth of Nations (1776)

Water is cheap, diamonds are dear

Value in use
the usefulness of a thing
Value in exchange
the ability to trade it for other things
In use In exchange Water
In use In exchange Diamond
Unresolved until
the marginalist revolution
Classical political economy
The labour theory of value · D. Ricardo, K. Marx

Value as a quantity of labour

The value of a commodity depends on the comparative quantity of labour necessary to produce it.

(Ricardo, 1817)

Value = quantity of labour

the value of a commodity depends on the quantity of labour required to produce it

PROBLEM 1Why does labour of differing quality create differing value?
PROBLEM 2Why does scarcity affect price independently of labour input?
Value – an objective property of production
The marginalist revolution
The theory of marginal utility

The break around 1870

Three scholars, almost simultaneously and independently.

Jevonsc. 1870
Mengerc. 1870
Walrasc. 1870
Value is determined not by the cost of production but by the subjective utility that an additional unit of a good confers on the consumer.
Waterabundant
low marginal utility
Diamondsscarce
high marginal utility
The marginalist revolution
Significance for the theory of business value

Value depends on the valuer

1
From the producer to the valuerValue depends on the valuer’s perception, expectations and alternatives.
2
Marginal analysisA cash flow, a client or an investment is assessed by its marginal contribution.
3
The Austrian schoolValue arises in the mind of the actor, as a relation between ends and the means available. (Mises, 1949)

The same asset – a different basis of valueClick a basis and watch the marker

Who values: investor, manager, regulator…
Who values?For what purpose?On what assumptions?
Different results for the same asset (IVSC, 2022)
The neoclassical synthesis
A. Marshall · early 20th century

Value “as by scissors”

Supplycost of production Demandmarginal utility Value (price) – the interaction of both blades
The neoclassical synthesis – the dominant paradigm and the intellectual basis for modern financial theory.
The neoclassical synthesis
I. Fisher (1906, 1930) · the theory of capital and income

Value as present value

The value of an asset is the discounted present value of future income streams.

Present value today future future income

J. B. Williams, The Theory of Investment Value (1938)

First applied discounted cash flow (DCF) logic systematically to the valuation of shares: the value of a share equals the present value of all future dividends.

The cornerstone of modern fundamental valuation.

D. Friday (1922)
Economic value spans a wider range than market price and calls for a multi-dimensional approach.
Revolution in finance · 1950–1970
Three mid-20th-century works

Risk enters value

MARKOWITZ (1952)Portfolio theory

Investors choose portfolios, optimising the relation between return and risk. Risk is formalised.

MODIGLIANI AND MILLER (1958)Capital structure theorems

Under ideal conditions value does not depend on capital structure – only on operating cash flows and their risk.

SHARPE (1964), LINTNER (1965), MOSSIN (1966)Capital Asset Pricing Model(CAPM)

The discount rate in the light of systematic risk (the beta coefficient).

Classical
paradigm

The value of a company is the present value of expected future free cash flows, discounted at a rate reflecting systematic risk.Still dominant in practice and in the academic literature (Damodaran, 2012)

Extensions of the paradigm
The strategic perspective · Porter (1985), Barney (1991)

Where cash flows come from

StrategyBehaviourIntangible capital
Strategic choices Competitive positioning Unique resources Cashflows Value chain; resource-based view (RBV)
Value created Captured imitators
Value creation and value capture are different things (Lepak et al., 2007). An innovation may create a great deal of value, but if it is easily imitated, only a part is captured.
Extensions of the paradigm
Behavioural finance · Kahneman and Tversky (1979), Shiller (1981, 2000), Thaler

Price is not value

time fundamental value market price
expectations sentiment narratives
The assumption that market prices always reflect fundamental value has been dismantled. Perception is an independent layer in the formation of value, not “noise”.
Extensions of the paradigm
Intangible capital

Invisible value

factoriesequipment · inventory brands patentsdata organisational routines human capital ACCOUNTING gap
The industrial era
Value is “visible”: factories, equipment, inventory.
Since the late 20th century
An increasing share of value is created through intangible sources.
The dominant form of value, yet accounting reflects it inadequately (Crouzet et al., 2022). One of the most pressing problems in valuation theory.
From a one-dimensional number to a multi-layered ontology

Each school added a dimension

PeriodSchool / authorPrincipal contribution
2000–Crouzet et al., Haskel & WestlakeIntangible capital, platforms, data, ESG
1979–Kahneman, Tversky, Shiller, ThalerBehavioural biases, narratives, market anomalies
1980–1990Porter, Barney, FreemanStrategy, resources, stakeholders
1950–1970Markowitz, Modigliani–Miller, SharpeRisk, capital structure, the discount rate
1938J. B. WilliamsDCF as a valuation method
early 20th c.The neoclassicals (Marshall, Fisher)Equilibrium price; the logic of discounted flows
c. 1870The marginalists (Jevons, Menger, Walras)Value as subjective utility
18th–19th c.Classical political economy (Smith, Ricardo, Marx)Value as an objective property of production
a one-dimensional, “objective” magnitudea multi-dimensional, contextual, dynamic construct

No layer abolished its predecessor – each added to it and complicated it. Next: the five-layer ontological decomposition (1.1.2).

The illusion of precision

The illusion of precision arises when numerical exactness masks fragile assumptions.

after Phelan (1997)
partial view
A one-dimensional measure of value

Each measure lights up only one facet.

The first step towards serious business valuation is an honest acknowledgement of this partiality.

APA 7

References

Barney, J. (1991). Firm Resources and Sustained Competitive Advantage. Journal of Management, 17(1), 99–120. https://doi.org/10.1177/014920639101700108

Crouzet, N., Eberly, J. C., Eisfeldt, A. L., & Papanikolaou, D. (2022). The Economics of Intangible Capital. Journal of Economic Perspectives, 36(3), 29–52. https://doi.org/10.1257/jep.36.3.29

Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset (3rd ed.). Wiley.

Fisher, I. (1906). The Nature of Capital and Income. Macmillan.

Fisher, I. (1930). The Theory of Interest. Macmillan.

Freeman, R. E. (1984). Strategic Management: A Stakeholder Approach. Pitman.

Friday, D. (1922). An Extension of Value Theory. The Quarterly Journal of Economics, 36(2), 197–219. https://doi.org/10.2307/1883479

Haskel, J., & Westlake, S. (2018). Capitalism Without Capital: The Rise of the Intangible Economy. Princeton University Press.

International Valuation Standards Council [IVSC]. (2022). International Valuation Standards. IVSC.

Kahneman, D., & Tversky, A. (1979). Prospect Theory: An Analysis of Decision Under Risk. Econometrica, 47(2), 263–291. https://doi.org/10.2307/1914185

Lepak, D. P., Smith, K. G., & Taylor, M. S. (2007). Value Creation and Value Capture: A Multilevel Perspective. Academy of Management Review, 32(1), 180–194. https://doi.org/10.5465/amr.2007.23464011

Lintner, J. (1965). The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets. The Review of Economics and Statistics, 47(1), 13–37. https://doi.org/10.2307/1924119

Markowitz, H. (1952). Portfolio Selection. The Journal of Finance, 7(1), 77–91. https://doi.org/10.2307/2975974

Mises, L. von. (1949). Human Action: A Treatise on Economics. Yale University Press.

Modigliani, F., & Miller, M. H. (1958). The Cost of Capital, Corporation Finance and the Theory of Investment. The American Economic Review, 48(3), 261–297.

Mossin, J. (1966). Equilibrium in a Capital Asset Market. Econometrica, 34(4), 768–783. https://doi.org/10.2307/1910098

Phelan, S. E. (1997). Exposing the Illusion of Confidence in Financial Analysis. Management Decision, 35(2), 163–168. https://doi.org/10.1108/00251749710160322

Porter, M. E. (1985). Competitive Advantage: Creating and Sustaining Superior Performance. Free Press.

Ricardo, D. (1817). On the Principles of Political Economy and Taxation. John Murray.

Sharpe, W. F. (1964). Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk. The Journal of Finance, 19(3), 425–442. https://doi.org/10.2307/2977928

Shiller, R. J. (1981). Do Stock Prices Move Too Much to Be Justified by Subsequent Changes in Dividends? The American Economic Review, 71(3), 421–436.

Shiller, R. J. (2000). Irrational Exuberance. Princeton University Press.

Smith, A. (1776). An Inquiry into the Nature and Causes of the Wealth of Nations. W. Strahan and T. Cadell.

Williams, J. B. (1938). The Theory of Investment Value. Harvard University Press.

Rakštys, R. (2026). Chapter 1. Foundations of Business Value (English translation of v0.16.5, 2026-10-15). Verslo planavimas ir vertinimas [Business planning and evaluation]. Vytautas Magnus University, Agriculture Academy. https://rakstys.eu/studijos/verslo-planavimas-ir-vertinimas/en/skyriai/ch01/ · CC BY-NC-ND 4.0

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