Valuation Concepts and Methods | Chapter 2
Valuation
- the estimation of an asset's value based on variables perceived to be
related to future investment returns, on comparison with similar
assets, or, when relevant, on estimates of immediate liquidation
proceeds.
- Places great emphasis on the professional judgment.
- Mostly deals with projections about future events.
The Value of Business can be basically linked to three major factors:/
1. Current Operations
2. Future Prospects
3. Embedded risks
Different definitions of Value:
1. Intrinsic Value
2. Going Concern Value
3. Liquidation Value
4. Fair market value
Valuation Concepts and Methods | Chapter 2
Asset-Based Valuation is more commonly used by analysts and valuators
since the asset is the best representation of what the company currently has
less the non-equity claim against the assets.
Asset-based valuation methods normally observed by the practitioners are:
book value method, replacement value method, reproduction value method,
and liquidation method.
1. Book Value method uses the asset values as presented on the
statement of financial position less the liabilities.
Total Assets−Total Liabilities
Net Book Value of Assets=
Number of Outstanding Share s
To illustrate, Grape and Vines Corp. in the Year 20xx presented their
statement of financial position with the following balances: Current
Assets is Php500 Million; Non-current Assets is Php1 Billion; Current
Liabilities is Php200 Million; Non-current Liabilities is Php700 Million
and the Outstanding shares is 1 Million.
With the given information, the net book value of the assets is Php600
per share computed as follows:
Current Assets Php 500,000,000
Non-current Assets 1,000,000,000
Total Assets Php 1,500,000,000
Current Liabilities Php 200,000,000
Non-current Liabilities 700,000,000
Total Liabilities Php 900,000,000
Php 1,500,000,000−Php 900,000
NBV of Assets=
1,000,000 shares
Php 600,000,000
¿
1,000,000 shares
NBVof Assets=Php 600/ share
2. Replacement Value method adjusts the assets values as presented
on the statement of financial position less liabilities. The adjustment
shall be geared towards presenting it based on the replacement value.
Valuation Concepts and Methods | Chapter 2
Net Book Value ± replacement adjustment
Replacement Value=
outstanding shares
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 replacement value of 75% of
their recorded net book value. With the given information, the equity
value is adjusted:
1. Calculate the replacement value of the affected items.
Since the values presented are the one presented in the statement of
financial position, it is assumed that it is the net book value of the non-
current assets.
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
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
Total Adjusted Non-current Assets
Adjusted Non-Current Assets (A) Php 750,000,000
Adjusted Non-Current Assets (B) 375,000,000
Total Adjusted NCA Php 1,125,000,000
2. Add back the unadjusted components
Total Adjusted Non-current Assets Php1,125,000,000
Add: Current Assets 500,000,000
Total Assets - Replacement ValuePhp1,625,000,000
3. Apply the Replacement Value Formula
Php 1,625,000,000−900,000
Replacement Value=
1,000,000,000 shares
Php 725,000,000
¿
1,000,000
Valuation Concepts and Methods | Chapter 2
Replacement Value=Php 725 /share
3. Reproduction Value method adjusts the asset values and will
consider the value when the asset is rebuilt.
Net Book Value± adjustment s
R eproduction Value=
outstanding shares
To illustrate using the information of Grapes and Vines Corp., supposed
that it was noted that the 80% of the total noncurrent assets are
cheaper by 90% of the book value when reproduced. 20% of the total
noncurrent assets are comprised of goodwill which upon testing was
proven to be valued correctly.
1. Conduct reproduction cost analysis to all assets
80% of the Total Noncurrent Assets if reproduced is equal to 90%
of its value
Non-current Assets % of affected item Php 1,000,000,000
% of affected item 80%
Php 800,000,000
➤ Since the remaining 20% or Php 200 Million is goodwill and
already in its proper value, it will not be adjusted.
2. Adjust the book value to reproduction costs
Non-current Assets Php 800,000,000
Reproduction Cost Estimate % 90%
Reproduction Cost 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 Php1,420,000,000
3. Apply the replacement value formula using the figures calculated in
the preceding step.
Php 1 , 420 , 000,000−900,000
Rep roductionValue=
1,000,000,000 shares
Php 520 , 000,000
¿
1,000,000
Valuation Concepts and Methods | Chapter 2
Rep roductionValue=Ph p 520/share
4. Liquidation Value method presents the value based on its salvage
value.
