Valuation- 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.

The value of a business can be basically linked to the 3 major factors: CFE

Current operations- how is the operating performance of the firm in recent year?

 Introspective in nature, not only in terms of profit/loss

Future prospects- what is the long-term, strategic direction of the company?

 Outward in nature, looking forward in the future (long-term),

strategic

Embedded risk- what are the business risks involved in running the business?

 There is always a risk in the business. Risk is evaluated to know the

value of the business

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

 It is the valued that an investor considers (as an investor, how does

one regard the value of something?)

Going Concern Value- firm value is determined under going concern assumption.
It believes that the entity will continue to do its business activities into the
foreseeable future.

 Positive (the business will still continue its operation for a couple of
years)

Liquidation Value- the net amount that would be realized if the business is
terminated and the assets are sold piecemeal.
  The liquidation value is always generally lower than the real value of
the business.

Fair Market Value- always next to tax assessments. The fair market value is
usually the basis of the payment of tax in the Philippines.

Ex. Situation - Allan is selling a Php3million parcel of land to Biboy, the

real value of the land is Php2million. The Php1million profit of Allan will be the
basis of BIR to collect tax. (the fair market value is the Php2million)

- In terms of Fair Market value, we look into the external factors.

Roles of Valuation in Business: Portfolio Management

The relevance of valuation in portfolio management largely depends on the

investment objectives of the investors or financial managers managing the
investment portfolio.

Fundamental Analysts- persons who are interested in understanding and

measuring the intrinsic value of a firm.

Activist Investors- tend to look for companies with good growth prospects that
have poor management. Activist investors usually do “takeovers”.

Chartists- relies on the concept that stock prices are significantly influenced by
how investors think and act. Chartists rely on available trading KPIs such as price
movement, trading volume, and short sales when making their investment
decisions.

Information Traders- traders that react based on new information about firms that
are revealed to the stock market.
Under portfolio management, the ff. activities can be performed through the use of
valuation techniques:

 Stock selection
 Deducing market expectations

Analysis of Business Transactions/Deals

Acquisition- acquisition usually has two parties: the buying firm and the selling
firm. Company is acquired by another company

Merger- two companies had their assets combined to form a wholly new entity.

Divestiture- sale of major component or segment of a business to another company.

Spin-off- separating a segment or component business and transforming this into a

separate legal entity.

Leveraged buyout- acquisition of another business by using significant debt which

uses the acquired business as a collateral.

Valuation in deals analysis considers two important, unique factors: synergy and
control

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. This is usually an important matter for hostile takeovers (

Corporate Finance. The ultimate goal of corporate finance is to maximize the firm
value by appropriate planning and implementation of resources, while balancing
profitability and risk appetite.
 - Looks in different factors not only in the profit/loss including the planning
should also be good
- Firms are focused on maximizing shareholder value uses valuation concepts
to asses impact of various strategies to company value.

Legal and Tax Purposes

 Issuance of a fairness opinion for valuations provided by third party

 Basis for assessment of potential lending activities by financial institutions
 Shared-based payment/compensation

Porter’s Five Forces

Industry Rivalry- the nature and intensify of rivalry between market players in
the industry.

New Entrants – barriers to entry to industry by new market players. New entrants
include entry cost, speed of adjustment, economies of scale, reputation, switching
costs, sunk costs and government restraints.

Substitutes and Complements- the relationships between interrelated products

and services in the industry. This considers prices of substitute products/services,
compliment products/services and government limitations.

Supplier Power- how suppliers can negotiate better terms in their favor. When
there is strong supplier power, this tends to make industry profits lower

Buyer Power- how customers can negotiate better terms in their favor for the
products/services they purchase. (items na hindi puwede mag taas ng presyo, ex.
flour, sugar, sardines)

Generic corporate strategies to achieve competitive advantage according to

Michael Porter: CDF
Cost Leadership- it relates to the incurrence of the lowest cost among market
players with quality that is comparable to competitors allow the firm to price
products around the industry average. (items na kaya mabili)

Differentiation- firm tend to offer differentiated or unique product or services

characteristics that customers are willing to pay for an additional premium.

Focus- firms are identifying specific demographic segment or category segment to

focus on by using cost leadership strategy or differentiation strategy. (has a target
market)

Aggressive Accounting:

 Poor quality of accounting  Economic, industry, or

disclosure company
 Existence of related  High management or director
 Reported disputes with and/or turnover
changes in auditors  Excessive pressure on company
 Material non-audit services personnel to make revenue
performed by audit firm  Management pressure to meet
 Management and/or directors’ debt covenants
compensation tied to  History of securities law
profitability or stock price violation, reporting, or
persistent late filings

Forecasting Financial Performance

Forecasting financial performance can be looked at 2 lenses: (a) on a macro
perspective viewing the economic environment and industry where the firm
operates and (b) on a micro perspective focusing in the firm’s financial and
operating characteristics.
- Before doing forecasting 2 things must be considered. (1) understand how
the business operates and (2) look on the historical financial statements of
the business.
- Top- down forecasting approach- starts from international or national
macroeconomic projections with utmost consideration to industry specific
forecasts.
- Bottom- up forecasting approach- starts from the lowers levels of the firm
and is completed as it captures what will happen to the company based on
the inputs of its segments/ units.
- Comprehensive forecasting approach prevents any inconsistent figures
between the prospective financial statements and unrealistic assumptions.
- Forecasting process starts with the determining sales growth and revenue
projection of the business. Should also consider industry financial ratios
- Typically done on annual basis
- Seasonality affects sales and earnings of almost all industry
Preparing valuation model based on forecasts
Sensitivity analysis- common methodology in valuation exercises wherein
multiple analyses are done to understand how changes in an input or variable will
affect the outcome.
Situational adjustments/ Scenario Modelling- for firm-specific issues that affect
firm value that should be adjusted by analysts.
 Control premium- additional value considered in a stock investment if
acquiring it will give controlling power to the investors.
 Lack of marketability discounts- the stock cannot be easily sold as there is
no ready market for it.
 Illiquidity discount- should be considered when the price of particular shares
has less depth or generally considered less liquid compared to other active
publicly traded share.
Key Principles of Valuation
- The value of a business is defined only at a specific point in time
 - Value varies based on the ability of business to generate future cash
flows (it is important, good indicator of the business)
- Market dictates the appropriate rate for investors (market forces are
constantly changing)
- Firm value can be impacted by underlying net tangible assets (to target
investors)
- Value is influenced by transferability of future cash flows
- Value is impacted by liquidity

Learning Insights:
Throughout the discussion of valuation, I have learned how to evaluate the worth
of businesses and assets. Valuation is more than just assigning a price; it involves
analyzing current operations, future prospects, and risks to determine intrinsic
value, going concern value, liquidation value, and fair market value. These
valuations are essential for making informed business decisions. I have also
developed a structured approach to forecasting financial performance, utilizing
both top-down and bottom-up methods. By examining historical data, industry
trends, and macroeconomic factors, I can enhance the accuracy of my predictions.
Additionally, I employ sensitivity analysis and scenario modeling to understand
how different assumptions can affect valuation outcomes.