The Concept of Value

and Fundamentsals
Principle of Valuation
Valuation, Concepts, and Methods
BSA 2-1
Abayan, Naomi / Adier Elena / Añover, Angela /
Blas, Angel / Lagrosa Richeene / Narciso, Leah
 Topic’s Outline
Interpreting
01 Different Concepts of
Value
04 Key Principles
in Valuation
02 Roles of Valuation
in Business
05 Risks in Valuation
03 Valuation Process
 VALUATION

is the estimation of an asset's value based on variables

perceived to be related to future investment returns, on
comparisons with similar assets, or, when relevant, on
estimates of immediate liquidation proceeds. Valuation
includes the use of forecasts to come up with reasonable
estimate of value of an entity's assets or its equity.
01 INTERPRETING DIFFERENT CONCEPTS OF VALUE

Value of a Business
Three Major Factor:
Current Operations - how is the operating performance of
the firm in recent year?
Future Prospects - what is the long-term, strategic direction
of the company?

Embedded Risk - what are the business risks involved in

running the business?
01 INTERPRETING DIFFERENT CONCEPTS OF VALUE

Intrinsic Value
refers to the value of any asset based on the assumption
that there is a hypothetical complete understanding of its
investment characteristics.

Going Concern Value

The going concern assumption believes that the entity will
continue to do its business activities into the foreseeable
future. It is assumed that the entity will realize assets and
pay obligations in the normal course of business.
01 INTERPRETING DIFFERENT CONCEPTS OF VALUE

Liquidation Value
The net amount that would be realized if the business is
terminated and the assets are sold piecemeal. Firm value is
computed based on the assumption that entity will be
dissolved, and its assets will be sold individually hence, the
liquidation process
01 INTERPRETING DIFFERENT CONCEPTS OF VALUE

Fair Market Value

The price, expressed in terms of cash, at which property
would change hands between a hypothetical willing and able
buyer and a hypothetical willing and able seller, acting at
arm's length in an open and unrestricted market, when
neither is under compulsion to buy or sell and when both
have reasonable knowledge of the relevant facts.
02 ROLE OF VALUATION IN BUSINESS
Portfolio Management

Analysis of Business Transactions/Deals

Corporate Finance

Legal and Tax Purposes

Other Purposes
02 ROLE OF VALUATION IN BUSINESS
PORTFOLIO MANAGEMENT

1.Fundamental Analysts - these are persons who are

interested in understanding and measuring the intrinsic value
of a firm.
2.Activist Investors- activist investors tend to look for
companies with good growth prospects that have poor
management. They usually do “takeovers”.
02 ROLE OF VALUATION IN BUSINESS
PORTFOLIO MANAGEMENT

3.Chartists- chartists relies on the concept that stock prices

are significantly influenced by how investors think and act.

4.Information Traders- traders that react based on new

information about firms that are revealed to the stock market.
Sell-side analysts
Buy-side analysts
02 ROLE OF VALUATION IN BUSINESS
ANALYSIS OF BUSINESS TRANSACTIONS/DEALS
Business deals include the following corporate events:

1.Acquisition- has two parties: the buying firm and selling firm.

2.Merger- transaction wherein two companies had their assets

combined to form a wholly new entity.

3.Divestiture- sale of a major component or segment of a

business to another company.
02 ROLE OF VALUATION IN BUSINESS
ANALYSIS OF BUSINESS TRANSACTIONS/DEALS

4.Spin-off- separating a segment or component business and

transforming this into a separate legal entity.
5. Leveraged buy-out- acquisition of another business by
using significant debt which uses the acquired business as a
collateral.
02 ROLE OF VALUATION IN BUSINESS
ANALYSIS OF BUSINESS TRANSACTIONS/DEALS

Valuation in deals considers two important unique factors:

Synergy - potential increase in firm value that can
be generated once two firms merge with each other.

Control - change in people managing the

organization brought about by the acquisition.
02 ROLE OF VALUATION IN BUSINESS
CORPORATE FINANCE
Function: Manage the firm’s capital structure.

Small businesses that needs additional money to expand use

valuation concepts when approaching private equity investors
and venture capital providers.

Larger companies who wish to obtain additional funds by

offering their shares to the public use valuation to estimate the
price they are going to fetch in the stock market.
02 ROLE OF VALUATION IN BUSINESS
LEGAL AND TAX PURPOSES

OTHER PURPOSES
Issuance of a fairness opinion for valuations provided by
third party (e.g. investment bank)

Basis for assessment of potential lending activities by

financial institutions

Share-based payment/compensation
03 VALUATION PROCESS
Understanding the Business

Forecasting Financial Performance

Selecting the Right Valuation Model

Preparing Valuation Model based on Forecast

Applying valuation and Providing Recommendations

03 VALUATION PROCESS

1. UNDERSTANDING OF THE BUSINESS

Performing industry and competitive analysis

Analysis of publicly financial information and

corporate disclosure
03 VALUATION PROCESS
Performing industry and competitive analysis
Industry analysis is a marketing process that provides statistics
about the market potential of your business products and
services.
It involves scrutinizing market size, competition, customer
behavior, and overall industry trends.
Competitive analysis involves identifying your direct and indirect competitors
using research to reveal their strenghts amd weaknesses in relation to your
own.
Its purpose is to get a competitive advantage in the market and improve your
business strategy.
03 VALUATION PROCESS
Performing industry and competitive analysis
Industry analysis is a marketing process that provides statistics about the
market potential of your business products and services.
It involves scrutinizing market size, competition, customer beahvior, and overall
industry trends.

Competitive analysis involves identifying your direct and

indirect competitors using research to reveal their strenghts
amd weaknesses in relation to your own.
Its purpose is to get a competitive advantage in the market
and improve your business strategy.
03 VALUATION PROCESS
03 VALUATION PROCESS
competitive position
It refers to how the products, services and the company itself is
set apart from the other competing market players.

generic corporate strategies to achieve competitive advantage

1. Cost Leadership 2. Differentiation 3.Focus

Firms are identifying

It relates to the incurrence Firms tend to offer specific demographic
of the lowest cost among differentiated or unique segment or category
market players with quality product or service segment to focus on by
that is comparable to characteristics that using cost leadership
competitors allow the firm customers are willing to strategy (cost focus) or
to price products around pay for an additional differentiation strategy
the industry average. premium. (differentiation focus)
03 VALUATION PROCESS

importance of understanding the business

1. Economic Conditions
2. Industry Peculiarities
3. Company Strategy
4. Company’s Historical Performance
03 VALUATION PROCESS
2. forecasting financial performance
TWO LENSES:

1. On a macro perspective viewing 2. On a micro perspective focusing in

the economic environment and the firm's financial and operating
industry where the firm operates characteristics.
in.
03 VALUATION PROCESS
2. forecasting financial performance
TOP-DOWN FORECASTING APPROACH
Starts from international or national macroeconomic projections
with utmost consideration to industry specific forecast.

BOTTOM-UP FORECASTING APPROACH

Forecast starts from the lower levels of the firm and is completed
as it captures what will happen to the company based on the
inputs of its segments/units.
03 VALUATION PROCESS
3. Selecting the right valuation Model
Selecting depends on the context and inherent
characteristics of the company being valued.

Valuation methods:
1. Asset-Based Valuation
2. Income Based Valuation
3. Discounted Cash flows Method
4. Market Value Approach
03 VALUATION PROCESS
4. Preparing valuation model based on forecasts
consider whether the resulting value from this process
makes sense based on their knowledge of the business.

2 Aspects:
2. Situational adjustments
1. Sensitivity Analysis
or Scenario Modelling

how changes in an
firm-specific issues
input or variable will
that affect the firm
affect the outcome
value
firm value
03 VALUATION PROCESS
2. Situational adjustments or Scenario Modelling
Factors that do not affect value in itself when analysts only
look at core business but still influence value regardless:

Lack of
Control Illiquidity
marketability
Premiums Discounts
discount
This is a reduction in value
This is an additional This is a reduction in of a stock due to its limited
value considered if the value of a stock liquidity, it cannot be
acquiring it will give because it cannot be quickly sold without
controlling power to easily sold as there is significantly affecting its
the investor no ready market for it price
03 VALUATION PROCESS
5. Applying valuation conclusions and
providing recommendation
based on all assumptions considered, analysts use the results to
provide recommendations or make decisions that suit their
investment objective.
Key Principles in Valuation

1 The Value of a Business is 4 Firm value can be

Defined Only at a specific impacted by underlying
point in time. net tangible assets.

2 Value varies based on the 5 Value is influenced by

ability of business to transferability of future
generate future cash flows cash flows

3 Market dictates the 6 Value is impacted by

appropriate rate of return liquidity.
for investors.
RISKS IN VALUATION
In all valuation exercises, uncertainty will be
consistently present.

Value consequently may be different based on

new circumstances.

Another aspect that contributes to uncertainty is

that analysts use their judgements to ascertain
assumptions based on current facts.

Performance of each industry can be also be

characterized by varying degrees of
predictability which ultimately fuels uncertainty.

Innovations and entry of new businesses may

also bring uncertainty to established and
traditional companies.
Thank
you!
See you next class!