What is "Asset Approach”?

What is "Asset Approach”? Please apply the concept of "Asset Approach" answer the following questions (Explain your answer with diagram) (1) A fall in the Taiwan dollar interest rate how to affect NTS/USS exchange rate? (2) A rise in the expected future exchange rate how affects NTS/US$ exchange rate?

ASSET APPROACH

An asset-based approach is a type of business valuation that focuses on a company's net asset value. The net asset value is identified by subtracting total liabilities from total assets. There is some room for interpretation in terms of deciding which of the company's assets and liabilities to include in the valuation and how to measure the worth of each. It's a way of determining the value of a business. It's calculated by subtracting a company's total liabilities from its net asset value (NAV), or the fair market value of the company's total assets. It's often used to evaluate a business that is preparing for liquidation. The asset approach is defined by the International Glossary of Business Valuation Terms (“Glossary”) as a general way of determining a value indication of a business, business ownership interest or security using one or more methods based on the value of assets minus liabilities. Under this approach, the valuation analyst adjusts the value of the assets and liabilities (both reported and not reported) of the business from their stated values to the chosen standard of value for the engagement, i.e. fair market value.(In applying an asset approach, the valuation analyst must make an assumption about the operational premise of value for the business. The operational premise of value is an assumption regarding the most likely set of transactional circumstances that are applicable to the business being valued. Two of the general premises utilized are going concern, meaning the business is expected to operate indefinitely into the future, and liquidation, meaning the business should be shut down and the assets disposed of in either an orderly or forced manner.)

The first challenge when using the asset-based approach is deciding which assets and liabilities to include in the calculation. The second is deciding how to measure their value. For example, a company's balance sheet may not include products that were developed internally rather than bought. If that internal product is also unique to that company it may have an intangible value that is difficult to determine.

The asset-based approach is normally used to assess the value of businesses that are no longer operating or running at a loss to see what it would cost to recreate them. Alternatively, for businesses that are based on assets and not on income, the adjusted asset-based approach bases the valuation of the assets on their current market value rather than the historical costs.

Understanding an Asset-Based Approach:

Identifying and maintaining awareness of the value of a company is an important responsibility for financial executives. Overall, stakeholder and investor returns increase when a company’s value increases, and vice versa.

There are a few different ways to identify a company’s value. Two of the most common are the equity value and enterprise value. The asset-based approach can also be used in conjunction with these two methods or as a standalone valuation. Both equity value and enterprise value require the use of equity in the calculation. If a company does not have equity, analysts may use the asset-based valuation as an alternative.

Many stakeholders will also calculate the asset-based value and use it comprehensively in valuation comparisons. The asset-based value may also be required for private companies in certain types of analysis as added due diligence. Furthermore, the asset-based value can also be an important consideration when a company is planning a sale or liquidation.

Calculating Asset-Based Value:

In its most basic form, the asset-based value is equivalent to the company’s book value or shareholders’ equity. The calculation is generated by subtracting liabilities from assets.

Often, the value of assets minus liabilities differs from the value reported on the balance sheet due to timing and other factors. Asset-based valuations can provide latitude for using market values rather than balance sheet values. Analysts may also include certain intangible assets in asset-based valuations that may or may not be on the balance sheet.

(1) The fall in the Taiwan dollar interest affects NT$/US$ exchange rate. To understand these will help;

In Taiwan markets,Taiwan's trade surplus continued to increase and foreign capital flowed in, the enormous portfolio investment abroad by Taiwan's residents kept the NT dollar relatively weak. The trade-weighted average nominal effective exchange rate index of the NT dollar slightly declined by 0.22 percent for the year of 2006. The movements of the NT dollar against other currencies, including the US dollar, the euro, the Japanese yen, the Chinese renminbi (RMB) and the Korean won, in 2006 are analysed as follows.

Regarding the movements of NT$/US$ exchange rates, the NT dollar fluctuated between 31.338 and 33.316. From the beginning of 2006 to January 12, due to large foreign capital inflows and the foreign exchange sale by domestic firms, the NT$/US$ appreciated from 32.818 to 31.880. Subsequently, since the market expected that the Fed's stance towards rate hikes would turn conservative, and the economy of the Euro Area continued to recover, the US dollar depreciated in the international market. However, the effect of these international factors was offset by the outward remittances of oil payments and the enormous demand for foreign exchange from insurance companies to invest abroad, the NT$/US$ depreciated to 32.669 on March 24.(figure)

Afterwards, the G7 summit urged China and other Asian countries to adopt more flexible exchange rate regimes, the market expected the Fed to halt rate hikes, and Japan's economy boomed remarkably. These factors caused the US dollar to continue depreciating in the international market. On top of these, the continuous inflows of foreign capital and the sale of foreign exchange by domestic banks caused the NT$/US$ to appreciate to a yearly high of 31.338 on May 10. Later, the US economy showed sign of weakness and the Fed suspended rate hikes. Nevertheless, heightened geopolitical risk, including the missile test of North Korea and the Middle East tension, prompted the market to hold more US dollars. On the domestic front, outward remittances of foreign capital and insurance companies, and demand for foreign exchange by banks and importers reinforced the downward trend in the NT dollar. The NT$/ US$ depreciated to a yearly low of 33.316 on October 25. In November 2006, as the US economy slowed down and rate hikes by the European Central Bank (ECB) narrowed the interest rate spread with the US, the US dollar turned weak. Meanwhile, the Asian currencies also strengthened against the US dollar and foreign capital inflows continued. These factors reversed the depreciation trend of the NT dollar, which stood at 32.596 against the US dollar at the end of 2006. Compared with the previous year-end, the NT dollar slightly appreciated by 0.78 percent against the US dollar at the end of 2006. However, on a daily average basis, the NT$/US$ exchange rate depreciated by 1.05 percent in 2006 from the previous year. With respect to the NT dollar exchange rate against the euro, as the economy of the Euro Area grew strongly in 2006, the ECB raised interest rates six times in a row since December 2005, narrowing the interest rate spread between the US and the Euro Area. Consequently, the euro appreciated against the US dollar significantly, and also against the NT dollar, in 2006. The NT dollar depreciated by 9.82 percent against the euro between the end of 2005 and 2006, and by 2.24 percent on a daily average basis in 2006 over the previous year. Regarding the NT dollar against the Japanese yen, since Japan's economy continued to recover, the Bank of Japan (BOJ) ended the quantitative monetary easing policy in early March 2006. Moreover, the market expected that the Japanese yen to appreciate along with the RMB after the G7 summit. As a result, the yen appreciated remarkably against the US dollar after the middle of April 2006. In July, the BOJ indicated a slowdown in the pace of policy rate rises, leading the market to expect limited rate rises by the BOJ for the rest of 2006.

Moreover, missile and nuclear tests conducted by North Korea triggered concerns over geopolitical risk in East Asia. Furthermore, the interest rate spread between the Euro Area and Japan expanded as a result of continuous rate rises in the Euro Area. The above-mentioned factors caused the yen to depreciate against the US dollar. Since the yen depreciated by a greater extent than the NT dollar against the US dollar, the NT dollar appreciated against the Japanese yen by 1.44 percent between the end of 2005 and 2006, and by 4.40 percent on a daily average basis in 2006 over the previous year. Although China implemented macro-tightening policy to curb an overheating economy, its economy continued to grow rapidly and large trade surplus built up. As a result, the RMB appreciated gradually against the US dollar and also against the NT dollar. Compared with the end of 2005, the NT dollar depreciated by 2.63 percent against the RMB at the end of 2006. On a daily average basis, the NT dollar depreciated by 3.77 percent against the RMB in 2006 over the previous year. Despite North Korea's missile and nuclear tests, South Korea's economic growth accelerated to 5.0 percent in 2006, mainly due to a slide in crude oil prices, an increase in private investment, as well as an expansion in exports. With fast economic growth and large capital inflows, the Korean won significantly appreciated against the US dollar and also against the NT dollar in the year. The NT dollar depreciated by 7.11 percent against the Korean won between the end of 2005 and 2006 and by 7.8 percent on a daily average basis in 2006 compared with the previous year.

Significant Increase in Foreign Exchange Trading

Trading in the Taipei foreign exchange market increased significantly in 2006. Total net trading volume for the year increased by 30.0 percent from the previous year to US$3,910.84billion. The daily average turnover stood at US$15.64 billion, representing an increase of 29.5 percent over the previous year. The increase in turnover mainly reflected increases in external trade, capital movements, and third currency transactions. The marked appreciation of the euro against the US dollar, and the slowdown in the BOJ's rate rises, which caused the interest rate spread between Japan and the US and Europe to remain significant, both contributed to the increase in third currency transactions. In terms of trading partners, transactions between banks and non-bank customers accounted for 33.6 percent of total net turnover. Interbank transactions made up a 66.4 percent share, including 17 percent for transactions among local banks and 49.4 percent for those between local banks and overseas banks. As far as traded currencies are concerned, NT dollar trading against foreign currencies accounted for 41.5 percent of total trading volume, with the NT dollars trading against the US dollars accounting for a major share of 38.9 percent. Transactions in third currencies accounted for 58.5 percent of total trading volume, with trading mainly in currency pairs of US dollarJapanese yen and US dollar-euro, which accounted for 27.0 percent and 13.8 percent of total trading, respectively. In particular, the trading volume of the NT dollar against other currencies only increased by 9.9 percent, while that of third currencies grew significantly by 49.4 percent. With respect to types of transactions, spot transactions accounted for the highest share with 48.9 percent of total turnover, followed by foreign exchange swaps with 28.3 percent, forwards with 10.5 percent, options with 10.1 percent, cross currency swaps with 1.2 percent, and margin trading with 1.0 percent. Compared with those in 2005, the trading volumes of all the types increased. In addition, the turnover of forwards, swaps and options based on foreign currency interest rates, stock price indices, commodity prices, and credit in the bank-customer market amounted to US$150.77 billion in 2006. Of this amount, interest rate-related derivatives accounted for the lion's share of US$146.98 billion or 97.5 percent, representing a year-on-year decrease of 6.2 percent