Valuation Methods and Design

ASSET BASED
VALUATION
Retchie Jasper Dangeros-Lorenzo, CPA, MBA
 VALUATION CONCEPTS AND METHODOLOGIES

ASSET-BASED VALUATION

ASSET has been defined by the industry as transactions that would

yield future economic benefits as a result of past transactions.

Hence, the value of investment opportunities is highly dependent

on the value that the asset will generate from now until the
future.

The value should also include all cash flows that will be
generated until the disposal of the asset.
 ASSET-BASED VALUATION

In practice, valuation is a sensitive and confidential activity in

their portfolio management. Valuation should be kept confidential
to allow the company to negotiate a better position for them to
acquire an opportunity.
 ASSET-BASED VALUATION

GREEN FIELD INVESTMENTS

• are investments that started from scratch

BROWN FIELD INVESTMENTS

• are those opportunities that can be either partially or fully

operational;
• are those already in the going concern state, as most businesses
are in the optimistic perspective that they will grow in the
future. Therefore, they can be considered as going concern
businesses
 ASSET-BASED VALUATION

GOING CONCERN BUSINESS OPPORTUNITIES

• are those business opportunities that has a long term to

infinite operational period.

• The advantage of GCBOs is that we already have a reference for

their performance--from its historical performance or an
existing business with a similar nature.
 VALUATION CONCEPTS AND METHODOLOGIES

BENEFITS OF ENTERPRISE-WIDE RISK MANAGEMENT BY COMMITEE

OF SPONSORING ORGANIZATION OF THE TREADWAY COMMISSION

• Increase the opportunities;

• Facilitate management and identification of the risk factors
that affect teh business;
• Identify or create cose-efficient opportunities;
• Manage performance variability;
• Improve management and distribution of resources across the
enterprise; and
• Make the business more resilient to abrupt changes.
 ASSET-BASED VALUATION

BENEFITS OF ENTERPRISE-WIDE RISK MANAGEMENT BY COMMITEE

OF SPONSORING ORGANIZATION OF THE TREADWAY COMMISSION

• The importance of identifying risks is to enable investors to

quantify the impact of the risk and/or the cost of managing
these risks.

• Theoretically, asset value is dependent on the ecnonomic

benefits (i.e. cash flows) it gives.
 ASSET-BASED VALUATION

• Since the entire company is driven by its asset base, the value
of the company can be best attributed to the value of its
assets.
⚬ The advantage of using this approach is it enables the
analyst to validate the firm value through the value of its
assets.
⚬ Some approaches may rely on the ability of the asset to
generate more revenues.
⚬ However, this only focuses on the current and historical
value of the asset and will disregard the value it can
generate.
 ASSET-BASED VALUATION

Among the popular methods used to determine the value using assets
as its bases are:
1. book value method
2. replacement value method
3. reproduction value method
4. liquidation value method
 ASSET-BASED VALUATION

BOOK VALUE METHOD

• Defined as the value recorded in teh accounting records of the

company
• Highly dependent on the value of the assets as declared in the
audited financial statements, particularly the balance sheet or
the statement of financial position.
• International Accounting Standard No. 1
⚬ requires that the statemetn of financial position to
summarize the total value of its assets, liabilities, and
equity of a firm.
 ASSET-BASED VALUATION

BOOK VALUE METHOD

• The assets are required to be categorized into current and non-

current assets.
⚬ Current assets are those expected to be realized within the
company's normal operating cycle, expected to be realized
within 12 months after these transactions were reported, or
held primarily for the purpose of trading.
￭ Cash and cash equivalents may also be included only if it
is not restricted
⚬ Noncurrent assets are those benefits that can be realized in
more than 12 months.
 ASSET-BASED VALUATION

BOOK VALUE METHOD

• Liabilities are also so categorized as current and non-current:

⚬ Current liabilities are expected to be settled within the

entity's normal operating cycle, due to be settled within 12
months, held for the purpose of trading or if the company
does not have ability to settle beyond 12 months.

⚬ Non-current liabilities which are due to be settled longer

than 12 months.
 ASSET-BASED VALUATION

BOOK VALUE METHOD

• In the book value method, the value of enterprise is based on

the book value of the assets less all non-equity claims against
it. Hence, the formula is as follows:
 ASSET-BASED VALUATION

BOOK VALUE METHOD

• To illustrate, Grape and Vines Corp. on the Year 20xx presented

their statement of financial position with following balances:
⚬ Current assets is Php 500 Million
⚬ Non-current assets is Php 1 Billion
⚬ Current Liabilities is Php 200 Million
⚬ Non-current liabilities is Php 700 Million
⚬ Outstanding shares is 1 Million
 ASSET-BASED VALUATION

BOOK VALUE METHOD

With the given information, the net book value of the assets is
Php 600 per share computed as follows

Current Assets Php 500,000,000

Non-current Assets 1,000,000,000
Total Assets 1,500,000,000

Current Liabilities Php 200,000,000

Non-current Liabilities 700,000,000
Total Assets 900,000,000
 ASSET-BASED VALUATION

BOOK VALUE METHOD

• The advantage of using book value method is that it provides a

more transparent view on firm and is more verifiable since this
is based in the figures reflected in the financial statements.

• However, the book value only reflects historical value (only

based on what is recorded in the accounting books) and might
not reflect the real value of business now.
 ASSET-BASED VALUATION

BOOK VALUE METHOD

• The limitation is that it does not account for the full value
of the nets assets now that would result for overage or
understatement of value of the net assets recorded in the
books.
 ASSET-BASED VALUATION

REPLACEMENT VALUE METHOD

• The National Association of Valuators and Analysts has defined

the replacement costs as the cost of similar assets that have
the nearest equivalent value as of the valuation date

• The value of the individual assets shall be adjusted to reflect

the relative value or cost equivalent to replace teh asset
 ASSET-BASED VALUATION

REPLACEMENT VALUE METHOD

• The following are the factors that can affect the replacement
value of an asset:
• Age of the asset - It is important to know how old the
asset is. This will enable the valuator to determine the
costs related in order to upkeep a similar aged asset and
whether assets with similar engineering design are still
available in the market
 ASSET-BASED VALUATION

REPLACEMENT VALUE METHOD

ii. Size of the assets

• this is important for fixed assets particularly real property
where assets of the similar size will be compared. Some analyst
find that the assets can produce the same volume for teh assets
of the same size
 ASSET-BASED VALUATION

REPLACEMENT VALUE METHOD

iii. Competitive advantage of the asset

• Assets which have distinct characteristics are hard to replace.
However, the characteristics and capabilities of the distinct
asset might be found in similar, separate assets. Some
valuators combine the value of the similar, separate assets
that can be perform the function of the distinct asset being
valued.
 ASSET-BASED VALUATION

REPLACEMENT VALUE METHOD

The value of the equity using the replacement value method is

computed using the formula
 ASSET-BASED VALUATION

REPLACEMENT VALUE METHOD

To illustrate, following through the given information for Grapes

and Vines Corp., suppose that 50% of the non-current assets has an
estimated replacement value of 150% of its recorded net book value
while the remaining half has estimated value of 75% of their
recorded net book value.
 ASSET-BASED VALUATION

REPLACEMENT VALUE METHOD

• Calculate the replacement value of the afffected items:

Since the values presented are the one presented in the statement
of financial position, it assumed that is the net book of the non-
current assets.
 ASSET-BASED VALUATION

REPLACEMENT VALUE METHOD

50% of Non-current Assets - 150% of the net book value

Non-current Assets Php 1,000,000,000
% of affected item 50%
50% of the Non-current Assets Php 500,000,000
Premium on Replacement 150%
Adjusted Non-Current Assets (A) Php 750,000,000
 ASSET-BASED VALUATION

REPLACEMENT VALUE METHOD

50% of Non-current Assets is 75% of the net book value

Non-current Assets Php 1,000,000,000
% of affected item 50%
50% of the Non-current Assets Php 500,000,000
Discount on Replacement 75%
Adjusted Non-Current Assets (B) Php 375,000,000
 ASSET-BASED VALUATION

REPLACEMENT VALUE METHOD

Total Adjustment Non-current Assets

Adjusted Non-current Assets (A) Php 750,000,000
Adjusted Non-current Assets (B) Php 375,000,000
Adjusted Non-Current Assets (A) Php 1,125,000,000
 ASSET-BASED VALUATION

REPLACEMENT VALUE METHOD

2. Add back the unadjusted components

Total Adjustment Non-current Assets Php 1, 125,000,000

Add: Current Assets Php 500,000,000
Total Assets - Replacement Value Php 1,625,000,000
 ASSET-BASED VALUATION

REPLACEMENT VALUE METHOD

Replacement value = Php 1,625,000,000 - Php 900,000,000

1,000,000 shares

Replacement value = Php 725,000,000

1,000,000

Replacement Value = Php 725 per share

 ASSET-BASED VALUATION

REPRODUCTION VALUE METHOD

• In some instances, no external information is available that can serve

as basis for replacement cost of assets that are highly specialized in
nature. In this case, reproduction value is used instead.
• Reproduction Value is an estimated cost of reproducing, creating,
developing, or manufacturing a similar asset.
⚬ For example, the firm has an internally constructed equipment
costing Php 1 million that processes 500 tons of inventory. After
few years of using the equipment, the firm estimated that developing
another asset with similar capability i.e. to generate 500 tons of
inventory will cost Php 1.3 million.
 ASSET-BASED VALUATION

REPRODUCTION VALUE METHOD

• This requires reproduction cost analysis which is internally done by

companies especially if the assets are internally developed. Hence,
this method is useful when calculating the value of new or start-up
businesses, ventures that specialized equipment assets, firms that are
heavily dependent on intangible assets and those with limited market
information.
• While this is a convenient approach, the challenge of using this
method is the ability to validate the reasonableness of the value
calculated since there are only limited sources of comparators and
benchmark information that can be used.
 ASSET-BASED VALUATION

REPRODUCTION VALUE METHOD

Steps in determining the equity value using the reproduction value method
are as follows:
• Conduct reproduction costs analysis on all assets
• Adjust teh book values to reproduction costs values (similar as
replacement value)
• Apply the replacement value formula using the figures calculated in
the preceding step.
 ASSET-BASED VALUATION

REPRODUCTION VALUE METHOD

• To illustrate using the informaton of Grapes and Vines Corp., supposed

that it was noted that the 80% of the total non-current assets are
cheaper by 90% of the book value when reproduced. 20% of the total
non-current assets are comprised of goodwill which upon testing was
proven to be valued correctly.
 ASSET-BASED VALUATION

REPRODUCTION VALUE METHOD

• Conduct reproduction cost analysis to all assets

• 80% of the Total Non-current Assets if reproduced is equal to 90% of
its value

Non-current Assets Php 1,000,000,000

% of affected item 80%
Php 800,000,000

• Since the remaining 20% or the Php 200 million is goodwill and already
in its proper value, it will not be adjusted.
 ASSET-BASED VALUATION

REPRODUCTION VALUE METHOD

2. Adjust the book value to reproduction costs

Non-current Assets Php 800,000,000
Reproduction Cost Estimate 90%
Php 720,000,000

Non-current Assets - Reproduction Cost Php 720,000,000

Add: Goodwill 200,000,000
Total Non-current Assets Php 920,000,000
Add: Current Assets 500,000,000
Total Assets Php 1,420,000,000
 ASSET-BASED VALUATION

REPRODUCTION VALUE METHOD

3. Apply the replacement value formula using the figures calculated in teh
preceding step

Reproduction Value = Php 1,420,000,000 - Php 900,000,000

1,000,000 shares

Reproduction Value = Php 520,000,000

1,000,000 shares

Reproduction Value = Php 520/share

 ASSET-BASED VALUATION

LIQUIDATION VALUE METHOD

• Is an equity valuation approach that considers the salvage as the value

of the asset. This assumes that the reasonable value for the company to
be purchased is the amount which the investors will realize in the end
of its life or the value of the when it is terminated.
• While the value it provides is the most conservative, the limitation of
this approach is that the future value is not fully incorporated in the
calculated equity value.
 REFERENCE

Valuation Concept and Methodologies, 2021 edition, by Lascano, Baron, and Cachero