LESSON 1: INTRODUCTION TO VALUATION, CONCEPTS, &

ELEC01
METHODS. AND VALUATION PROCESS
SOPHOMORE CLASS: SUMMER | S.Y. 2024-2025 | Delin, Carla Joy

financial managers managing the investment

WHAT IS VALUATION? portfolio.
●​ balances risk and return by diversifying
assets.
●​ Valuation is the analytical process of
determining the current or projected worth
of an asset or something. This also FUNDAMENTAL ANALYST
determines the economic value of a business
asset or company. ➔​ persons who are interested in understanding
and measuring the intrinsic value of a firm. It
THREE MAJOR FACTORS can be either value or growth investors.

●​ Current Operations – How is the operating ACTIVIST INVESTORS

performance of the firm in recent year?
●​ Future Prospects – What is the long-term, ➔​ tend to look for companies with good growth
strategic direction of the company? prospects that have poor management.
●​ Embedded Risk – What are the business risks
involved in running the business? CHARTISTS

IMPORTANCE OF VALUATION IN
➔​ it relies on the concept that stock prices are
ACCOUNTING PROFESSION significantly influenced by how investors
think and act. It also rely on available trading
●​ Basis for financial reporting KPis such as price movements, trading
●​ It provides accurate and relevant financial volume, and short sales when making their
information investment decisions.
●​ Crucial for audits and due diligence.
●​ Supports compliance with accounting INFORMATION TRADERS
standards such as IFRS and GAAP.

➔​ traders that react based on new information

ROLES OF VALUATION IN BUSINESS
about firms that are revealed to the stock
market.
●​ Portfolio Management
●​ Corporate Finance
ACTIVITIES THAT CAN BE PERFORMED
●​ Legal and Tax Purposes

Under the portfolio management, the following

PORTFOLIO MANAGEMENT
activities can be performed by valuation techniques:
●​ Stock Selection
●​ The relevance of valuation in portfolio ●​ Deducting Market Expectations
management largely depends on the
investment objectives of the investors or

ELEC 01: VALUATION CONCEPT METHOD LESSON #1 | ROSARIO, NHERIE KRIZIA F. | 23-BSA-02 | 24-2134-793
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 LESSON 1: INTRODUCTION TO VALUATION, CONCEPTS, &
ELEC01
METHODS. AND VALUATION PROCESS
SOPHOMORE CLASS: SUMMER | S.Y. 2024-2025 | Delin, Carla Joy

CORPORATE FINANCE ACQUISITION

➔​ It involves managing the firm's capital ➔​ usually has two parties: the buying firm and
structure, including funding sources and the selling firm.
strategies that the business should pursue to ◆​ Buying Firm - needs to determine
maximize firm value. the fair value of the target
➔​ It deals with prioritizing and distributing company prior to offering a bid
financial resources to activities that increase price.
firm value. ◆​ Selling Firm - should have a sense
➔​ The ultimate goal is to maximize the firm of its firm value to gauge
value by appropriate planning and reasonableness of bid offers.
implementation of resources, while balancing
profitability and risk appetite. MERGER
➔​ maximize shareholder value through
effective financial management.
➔​ describes the transaction wherein two
companies had their assets combined to
LEGAL TAX AND PURPOSE form a wholly new entity.

➔​ Valuation is also important to businesses DIVESTITURE

because of legal and tax purposes.
➔​ This is also the case for businesses that are
➔​ sale of a major component or segment of a
dissolved or liquidated when owners decide
business to another company
so. Firms are also valued for estate tax
purposes if the owner passes away.
SPIN-OFF

ANALYSIS OF BUSINESS TRANSACTIONS/DEALS

➔​ separating a segment or component business
and transforming this into a separate legal
➔​ examines the financial impact of company
entity.
activities like sales, purchases, or
investments.
➔​ helps assess profitability, efficiency, and LEVERAGE BUYOUT
financial stability.
Business deals include the following corporate events: ➔​ acquisition of another business by using
●​ Acquisition significant debt which uses the acquired
●​ Merger business as a collateral.
●​ Divestiture
●​ Spin-off TWO IMPORTANT UNIQUE FACTORS
●​ Leverage Buyout
1.​ Synergy
2.​ Control

ELEC 01: VALUATION CONCEPT METHOD LESSON #1 | ROSARIO, NHERIE KRIZIA F. | 23-BSA-02 | 24-2134-793
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 LESSON 1: INTRODUCTION TO VALUATION, CONCEPTS, &
ELEC01
METHODS. AND VALUATION PROCESS
SOPHOMORE CLASS: SUMMER | S.Y. 2024-2025 | Delin, Carla Joy

SYNERGY TYPES OF COST APPROACH

➔​ Potential increase in firm value that can be a.​ Asset – Based Valuation- Fair market value
generated once two firms merge with each less liabilities
other. b.​ Liquidation Value - Estimates the amount a
➔​ It assumes that the combined value of two company would receive if all assets were sold
firms will be greater than the sum of and debts paid
separate firms. c.​ Book Value - Reflecting historical cost
d.​ Replacement Cost - Estimates the cost to
CONTROL replace an asset with a similar one

➔​ change in people managing the organization INCOME-BASED APPROACH

brought about by the acquisition.
➔​ Values business based on present value
WHY PEOPLE NEEDS TO APPLY expected future cash flow
VALUATION TECHNIQUES?
TYPES OF INCOME-BASED APPROACH
●​ To determine the worth of assets and
businesses. a.​ Discounted Cash Flow - Calculates the PV of
●​ To help manage and improve business expected future cash flow, discounted at risk.
performance by identifying gaps and b.​ Free Cash Flow - Measures the cash flow
opportunities available after all operating expenses and
●​ Reduces risk in financial decisions. capital expenditures are paid.
●​ To meet regulatory requirements and foster c.​ EBITDA – Earnings before Interest,
transparent communications with Depreciation & Amortization - Measures of
stakeholders company’s profit before these deductions,
●​ To establish accountability and create used as a valuation
discipline in achieving business goals
MARKET-BASED APPROACH
TYPES OF VALUATION TECHNIQUES
➔​ Values company by comparing with similar
●​ Cost Approach business or transaction
●​ Income-Based Approach
●​ Market-Based Approach TYPES OF MARKET-BASED APPROACH

COST APPROACH a.​ Comparable Company Analysis - Examines

publicly traded companies similar to the one
➔​ estimates value based on the cost to replace being valued
the asset / net asset value

ELEC 01: VALUATION CONCEPT METHOD LESSON #1 | ROSARIO, NHERIE KRIZIA F. | 23-BSA-02 | 24-2134-793
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 LESSON 1: INTRODUCTION TO VALUATION, CONCEPTS, &
ELEC01
METHODS. AND VALUATION PROCESS
SOPHOMORE CLASS: SUMMER | S.Y. 2024-2025 | Delin, Carla Joy

b.​ Precedent Transactions - Analyzes historical

acquisition to estimate a potential valuations
c.​ Market Capitalization - Measures the total
value of a company’s outstanding shares,
reflecting investor perception of worth.

ELEC 01: VALUATION CONCEPT METHOD LESSON #1 | ROSARIO, NHERIE KRIZIA F. | 23-BSA-02 | 24-2134-793
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 LESSON 2: FUNDAMENTAL VALUATION & CONCEPTS ELEC01

SOPHOMORE CLASS: SUMMER | S.Y. 2024-2025 | Delin, Carla Joy

LIQUIDATION VALUE
WHAT IS VALUATION?
➔​ The net amount that would be realized if the
➔​ an estimate of an asset value based on business is terminated and the assets are
variables perceived to be related in the sold piecemeal.
future investment returns on comparisons ➔​ Firm value is computed based on the
with similar assets, or, when relevant, on assumption that entity will be dissolved, and
estimates of immediate liquidation proceeds. its assets will be sold individually - hence, the
liquidation process.
"A company creates value if and only the return on ➔​ Liquidation value is particularly relevant for
capital invested is the cost of acquiring capital." companies who are experiencing severe
-​ Alfred Marshall financial distress.

TYPES OF VALUE FAIR-MARKET VALUE

●​ Intrinsic Value ➔​ a price of an asset, and an exchange between

●​ Going-concern value a seller and a buyer in an open market.
●​ Liquidation Value NOTES:
●​ Fair-market value ➔​ Both parties should voluntarily agree with
the price of the transaction and are not
INTRINSIC VALUE under threat of compulsion.
➔​ Fair value assumes that both parties are
informed of all material characteristics about
➔​ Intrinsic value refers to the value of any asset
based on the assumption that there is a the investment that might influence their
hypothetical complete understanding of its decision.
investment characteristics
➔​ the value that an investor considers, on the VALUATION PROCESS
basis of an evaluation of available facts, to be
the "true" or "real" value that will become 1.​ Understanding the Business
the market value when other investors reach 2.​ Forecasting financial performance
the same conclusion. 3.​ Select the right valuation model
4.​ Prepare valuation model based on forecast
GOING-CONCERN VALUE 5.​ Applying valuation conclusions and
providing recommendation
➔​ The going concern assumption believes that
the entity will continue to do its business UNDERSTANDING THE BUSINESS
activities into the foreseeable future.
➔​ It is assumed that the entity will realize
assets and pay obligations in the normal
course of business.

ELEC 01: VALUATION CONCEPT METHOD LESSON #2 | ROSARIO, NHERIE KRIZIA F. | 23-BSA-02 | 24-2134-793
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