Fair Value
Lesson:
What's an item worth? Sometimes items are worth different amounts in different places and to different people.
The place where the vast majority of sales take place is known as the principal market.
When there is a principal market, we just use the price there (ignoring transaction costs) as the fair value of an item. The theory is that the principal market has the most buying activity, it probably reflects the price best. It will be less likely to be affected by market manipulations or happenstance.
Sometimes, however, there isn't a principal market. There might be two, twenty, or two hundred active markets.
In these cases, how do we decide which market to use in order to value our item?
We pick the market for which the price added to the total costs is least.
Once we've found the correct market, we value our item at that market's price and ignore the transaction costs entirely.
Here are the relevant facts:
- Chicago has transaction costs of $139.
- Columbus is the primary market.
- Columbus quoted a price of $645.
- Chicago quoted a price of $637.
- Columbus has transaction costs of $140.
Answer:
- $645
Explanation:
- First, check to see if there is a primary market.
- Since Columbus is named as the primary market, use its quoted price (the transaction costs are ignored).