COMPREHENSIVE II.

REVIEWER: FUNDAMENTAL
Valuation Concepts CONCEPTS
and Methods A. Value vs. Price vs. Cost
Concept Meaning
The present worth of future
I. INTRODUCTION Value
economic benefits.

TO VALUATION Price
What is paid in the market to
acquire an asset.
Amount incurred to
Valuation is the analytical process of Cost produce/acquire the item
determining the present worth of an asset, historically.
business, liability, or income stream. It is
fundamental in finance, investment
decisions, taxation, mergers and
acquisitions, and financial reporting. B. Types of Value
1. Fair Market Value (FMV) – price
agreed by a willing buyer and seller.
2. Fair Value (Accounting Standard)
A. Key Purposes of – an exit price in an orderly
Valuation transaction (IFRS 13).
3. Investment Value – value to a
1. Investment decision-making — specific investor based on personal
buy, sell, hold assets returns.
2. Financial reporting — fair value 4. Intrinsic Value – theoretical true
measurement (IFRS/GAAP) value based on future cash flows.
3. Taxation — estate tax, property tax, 5. Liquidation Value
transfer pricing o Orderly liquidation –
4. Mergers & Acquisitions — reasonable exposure time
business worth determination o Forced liquidation –
5. Litigation and disputes — distressed sale
damages, settlement values 6. Going Concern Value – value
6. Financing decisions — collateral assuming business continues
valuation, credit evaluation operations.

C. Return Concepts
 1. Required Rate of Return –
minimum acceptable return IV. VALUATION
2. Discount Rate – used to determine
present value APPROACHES
3. Capitalization Rate = Risk-free rate
+ Risk premium Valuation is traditionally divided into three
4. Opportunity Cost of Capital – major approaches:
foregone benefit of alternative

1️⃣ Market Approach

III. TIME VALUE
(Comparable
OF MONEY (TVM)
Approach)
Valuation is grounded in the idea that
money today is worth more than money Valuation based on market prices of similar
tomorrow. assets.
Common methods:
Key Formulas

1. Present Value (PV)

A. Comparable Company
Analysis (CCA) – Multiples
PV=FV(1+r)nPV = Method
\frac{FV}{(1+r)^n}PV=(1+r)nFV
Uses valuation multiples from peer
2. Future Value (FV)
companies:
FV=PV(1+r)nFV =
• P/E Ratio
PV(1+r)^nFV=PV(1+r)n
• EV/EBITDA
• P/Sales
3. Present Value of Annuity (PVA)
• P/BV
PVA=PMT(1−(1+r)−nr)PVA = PMT \left(
\frac{1-(1+r)^{-n}}{r} Formula
\right)PVA=PMT(r1−(1+r)−n)
Value=Multiple×Financial Metric\text{Valu
4. Perpetuity e} = \text{Multiple} \times \text{Financial
Metric}Value=Multiple×Financial Metric
PV=PMTrPV = \frac{PMT}{r}PV=rPMT

B. Comparable Transaction
Analysis (CTA)
Uses transaction prices from recent Cost to recreate exact replica of the asset.
acquisitions.

Less: Depreciation
C. Market Price Method
Types of depreciation in valuation:
Value = Current trading price (for publicly-
listed securities) 1. Physical deterioration
2. Functional obsolescence
3. Economic obsolescence

Advantages

• Easy to apply Formula

• Reflects real market behavior
• Useful when many comparable Value=Cost New−Depreciation\text{Value}
transactions exist = \text{Cost New} -
\text{Depreciation}Value=Cost New−Depre
ciation
Disadvantages

• Hard to find true comparables

• Market can be irrational Advantages
• Not suitable for unique assets
• Useful for assets with no market
• Based on observable cost data

Disadvantages
2️⃣ Cost Approach • Ignores future income
Based on the principle of substitution — a • Hard to estimate depreciation
buyer will not pay more than the cost to accurately
replace the asset.

A. Replacement Cost New

(RCN) 3️⃣ Income Approach
Cost to create an equivalent asset with Valuation based on present value of future
similar utility. benefits.

Main methods:
B. Reproduction Cost New
(RPCN)
 For valuing stocks based on dividends.
A. Discounted Cash
P0=D1r−gP_0 = \frac{D_1}{r-g}P0=r−gD1
Flow (DCF) Method
Most widely used valuation technique for D. Excess Earnings Method
businesses.
(Hybrid Approach)
Formula
Used in intangible asset valuation.
Value=∑CFt(1+r)t+TV(1+r)n\text{Value} =
\sum \frac{CF_t}{(1+r)^t} + Value = Tangible asset value + Capitalized
\frac{TV}{(1+r)^n}Value=∑(1+r)tCFt excess earnings
+(1+r)nTV

Where:

• CFₜ = cash flow in year t V. VALUATION OF

•
•
r = discount rate
TV = terminal value (end of forecast DIFFERENT
period)
ASSETS
Terminal Value (TV)

TV=CFn+1r−gTV = \frac{CF_{n+1}}{r- A. Valuing Equity

g}TV=r−gCFn+1
Methods:

1. Dividend discount model

B. Capitalization of 2. Free cash flow to equity (FCFE)
Earnings / Cash Flow 3. Residual income model

Used for businesses with stable earnings.

Value=Normalized Cash FlowCap Rate\text

{Value} = \frac{\text{Normalized Cash B. Valuing Debt
Flow}}{\text{Cap
Rate}}Value=Cap RateNormalized Cash Flo Bond Value=∑Coupon(1+r)t+FV(1+r)n\text
w {Bond Value} = \sum
\frac{Coupon}{(1+r)^t} +
\frac{FV}{(1+r)^n}Bond Value=∑(1+r)tCo
upon+(1+r)nFV
C. Dividend Discount
Model (DDM)
C. Valuing Real A. Discount Rate
Determination
Estate
Weighted Average Cost of Capital
Methods: (WACC)
• Sales comparison approach WACC=were+wdrd(1−t)WACC = w_e r_e
• Replacement cost + w_d r_d(1-t)WACC=were+wdrd(1−t)
• Income (capitalization rate) method

Value=Net Operating Income (NOI)Cap Rat Cost of Equity (CAPM)

e\text{Value} = \frac{\text{Net Operating
Income (NOI)}}{\text{Cap re=rf+β(rm−rf)r_e = r_f + \beta (r_m - r_f)re
Rate}}Value=Cap RateNet Operating Incom =rf+β(rm−rf)
e (NOI)

B. Forecasting Assumptions
D. Valuing
• Revenue growth
Intangibles • Operating margins
• Capital expenditures
• Brand • Working capital changes
• Patents • Terminal growth rate
• Customer lists
• Goodwill

Methods:
VII. VALUATION
•
•
Relief-from-royalty
Multi-period excess earnings ADJUSTMENTS
• Cost-to-create
• Control premium
• Minority discount
• Marketability discount
• Synergy adjustments
VI. VALUATION • Non-operating assets adjustments

INPUTS &
ASSUMPTIONS
 Value=500,0000.12=₱4,166,667Value =
VIII. COMMON \frac{500,000}{0.12} =
₱4,166,667Value=0.12500,000=₱4,166,667
ERRORS IN
VALUATION Example 3 — Market
1. Wrong discount rate Multiple
2. Overly optimistic cash flow
projection Industry P/E = 14
3. Double-counting adjustments Company Earnings = ₱1,000,000
4. Mixing nominal and real values
5. Terminal value too large Value=14×1,000,000=₱14,000,000Value =
6. Inconsistent assumptions 14 \times 1,000,000 =
₱14,000,000Value=14×1,000,000=₱14,000,
000

IX.
ILLUSTRATIVE
EXAMPLES

Example 1 — DCF
Valuation
A project generates ₱200,000 per year for 5
years. Discount rate = 10%.

PV=200,000(1−(1.10)−50.10)=₱758,000PV
= 200,000 \left(\frac{1-(1.10)^{-
5}}{0.10}\right) =
₱758,000PV=200,000(0.101−(1.10)−5
)=₱758,000

Example 2 —
Capitalization Method
Normalized NOI = ₱500,000
Cap rate = 12%