Notes in Valuation Method
Notes in Valuation Method
CHARTISTS MERGER
- they rely on the concept that stock prices are - transaction of two companies combined to
significantly influenced by how investors think form a wholly new entity
and act and on available trading KPIs such as
DIVESTITURE
Price movements, trading volume, short sales
- sale of a major component or segment of a
when making their investment decisions
business to another company
NOTES IN VALUATION METHOD
PROVIDING RECOMMENDATION
Formula
Factors that can affect the replacemen value of 1. Calculate the replacement value of the
an asset affected items.
• Age of the asset - enable the valuator to 2. Add back the unadjusted components
determine the costs related in order to
upkeep a similarly aged asset and
whether assets with similar engineering
design are still available in the market 3. Apply the Replacement Value Formula
• Size of the asset - is important for fixed
assets particularly real property where
assets of the similar size will be
compared
• Competitive advantage assets - which
have distinct characteristics are hard to
replace However, the characteristics and
REPRODUCTION VALUE METHOD
capabilities of the distinct asset might
be found in similar, separate assets Reproduction value is an estimate of cost of
reproducing, creating, developing or
REPLACEMENT VALUE METHOD
manufacturing a similar asset.
The value of the equity using the replacement
Reproduction value method requires
value method is computed using the formula.
reproduction cost analysis which is internally
Replacement Value = Net Book Value ± done by companies especially if the assets are
Replacement Adjustments internally developed.
90% of the book value when reproduced. 20% • represents the net amount that can be
of the total non-current assets are comprised of gathered if the business is shut down
goodwill which upon testing was proven to be and its assets are sold piecemeal
valued correctly • considered as the minimum or floor
value for any firm valuation exercise
1. Conduct reproduction cost analysis to all
assets. Appropriate to use in cases of:
80% of the Total Non current Assets if • business failures
reproduced is equal to 90% of its value. • end of life of business or project
• depletion of scarce resources
repayment of the debts and settlement there are years that the firm will still be
of all liabilities, and net of the tax operational prior to liquidation.
charges related to the transaction and • Special consideration should be
the costs of the process of liquidation emphasized for intangible assets like
itself. patents and internally developed
• It can also be computed on a per share software programs which are often
basis by dividing total liquidation value unsaleable.
by outstanding ordinary shares and be • When takeovers occurs, it is usual that
considered together with other goodwill is recognized as part of the
quantitative and qualitative metrics to transactions.
justify business decisions to be made. • Monetary equivalent specific for
intangible assets cannot be reliably and
separately measured.
• Instead, intangible assets are offset
against shareholders’ equity to come up
with conservative liquidation value.
ILLUSTRATIVE EXAMPLE 1
• Calculation for liquidation value at
closure date is somewhat like the book Pavement Company below balances based on
value calculation, except the value its accounting books records. Pavement
assumes a forced or orderly liquidation company has 250,000 outstanding shares.
of assets instead of book value.
• Book value should not be used as
liquidation value.
• Liquidation value can be obtained based
on the potential sales price of the assets
being sold instead of relying on the
costs recorded in the books.
• Liquidation value is far more realistic as
compared to the book value method.
• Liquidation value should be based on
the potential earning capacity of the
individual asset when sold to the buying
party instead of the original capital Pavement Company is undergoing financial
invested. problems and management would like to assess
• The present value of a business or liquidation value as part of their strategy
property on a liquidation basis is formulation If assets will be sold/realized, they
computed as the estimated net will only realize amount based on the table on
proceeds should be discounted at a rate the next slide.
reflects the risk involved back to the
date of the original valuation. To compute for the adjusted value of the assets,
• Liquidation value can be used as basis the current book value should be multiplied by
for terminal cash flow in DCF calculation the assumed realizable value if they are
in order to compute firm value in case liquidated Next, the liabilities should be
NOTES IN VALUATION METHOD
EARNING ACCRETION
▪ weighing the cost of each specific type ▪ The excess earnings shall be
of capital accumulated for the firm.
▪ The general concept here is that higher
excess earnings is better for the firm.
The cost of equity may be also derived using Cost of Capital = Investment value x Rate of
Capital Asset Pricing Model or CAPM Cost of Capital
The value of the equity can be calculated using ▪ more verifiable since this allows for a
this formula: more detailed approach in valuation