1st Semester|A.Y.

2022-2023

MODULE 1
Fundamentals of Principles of
Valuation
September 19 - 23, 2022

PROF ELEC 1
Valuations Concepts and Methods

GeralynA.Quiambao, MBM
Instructor

BS in Accountancy
BSA 3A

1
 MABALACAT CITY COLLEGE
Institute of Business and Computing Education
1st Semester, Academic Year 2022-2023
PROF ELEC1: VALUATIONS CONCEPTS AND METHODS

MODULE 1: Fundamentals of Principles of Valuation

I. LEARNING OBJECTIVES:

1. Describe Foundations of value

2. Understand Frameworks for valuation
3. Definition of valuation
4. Describe Concepts of valuation ​
5. Explain Objectives/uses of valuation
6. List Importance/Rationale of valuation

II. TOPIC OUTLINE:

 Foundations of value
 Frameworks for valuation
 Definition of valuation
 Concepts of valuation
 Objectives/uses of valuation
 Importance/Rationale of valuation

III. LESSON PROPER

 Foundations of Value

“Value” is defining measurement of any market in the economy of today. Value is all about how much something is
worth , whether in an estimate or exact amount. When somebody invest, they expect the “value” of their investment to
increase by an amount that is acceptable to them or sufficient enough to increase by an amount that is acceptable to them
or sufficient enough to compensate the risk or sacrifice they took, incorporating the time value of money.

Therefore, knowing how to measure value and how to create is an essential tool for everybody to be able to make decision,
wise decisions.

 Definition of Valuation
Valuation is the analytical (quantitative) process of determining the current or projected worth (value) of an asset or
something.

There are several techniques or tool available to be used in doing valuation. Each of these methods may give different
results or value, what matters is how this will be used in the decisions why such valuation is being done.

Valuations determine the economic value of a business, asset or company.

 Frameworks for valuation

Conceptual frameworks of valuation is about the issue of what affects or what drives the value to change. A company’s
value is driven by its utility to earn a good and healthy return on invested capital (ROIC) and by its ability to grow.
Healthy rates of return and growth result in high cash flows, the ultimate source of value.
 Concepts for valuation

Valuation based on economic factors, industry variables, and on the analysis of financial statements and the entire outlook
of the firm. Valuation process will determine the long run fundamental economic value of its common stock or preferred
stock. Different concepts of valuation are based on the following:
1. Going concern value
2. Liquidation value
3. Market value
4. Book value
5. Intrinsic value

1. Going Concern – the certainty that your business will operate in the future. A business that is assumed will meet its
financial obligations when they fall due.

The value of the securities of a profitable operating firm with prospects for indefinite future business might be expressed
as a going concern value.

The worth of the firm would be expressed in terms of the future profits, dividends, or expected growth of the business.

2. Liquidation Value
 Liquidation value is the total worth of a company's physical assets if it were to go out of business and its assets
sold.
 Liquidation value is determined a company's assets such as real estate, fixtures, equipment, and inventory.
 Liquidation value is usually lower than book value, but greater than salvage value.
 Assets are sold at a loss during liquidation because the seller must gather as much cash as possible within a short
period.

3. Market Value

 It is the value in the market.

 It is also called the fair value.
 It is where the buyer and seller meet.
 It is easy to get the market value of bonds and stocks, and other materials if they are traded in the market. (ex.
Jollibee, San Miguel Corp, BDO, BPI, Meralco, PLDT,Globe, Ayala Corp, SM, ABS-CBN, Puregold)
 For those that are publicly traded, you will know their market value in the Philippine Stock
Exchange.
 Ex. Lazada and Shopee – the price there is the market value

4. Book Value

In accounting, book value is the value of an asset according to its balance sheet account balance. For assets, the value is
based on the original cost of the asset less any depreciation, amortization or impairment costs made against the asset.
Wikipedia

Book value per share (BVPS) is the ratio of equity available to common shareholders divided by the number of
outstanding shares. This figure represents the minimum value of a company's equity and measures the book value of a
firm on a per-share basis.

5. Intrinsic Value

Intrinsic value is a measure of what an asset is worth.

This measure is arrived at by means of an objective calculation or complex financial model.

 Objectives/uses of valuation
Valuation is useful when we are trying to determine the fair value of an asset. Fair value is the amount which is
determined by what is the buyer willing to pay and the seller is willing to sell under the conditions that the both parties are
willing or voluntarily enter in the exchange transaction.
 Importance/Rationale of valuation

Business valuation is an important exercise since it can help in improving the company. Here are some of the reasons why
there is a need to perform a business valuation.

Although the goal f valuation is to determine the fair market value, there is no one way to be certain of the ultimate price
paid. Typically, it depends on many factors including industry, sector, valuation method and the economic conditions.

Various reasons for performing a business valuation

1. Litigation

In a court case, such as an injury case, divorce, or where there is an issue with the value of the business, someone may
need to provide proof of company’s worth that could be the basis of claims for any damages, or be based o the actual
worth of your businesses and not inflated figures estimated by a lawyer

2. Exit strategy planning

In cases where there is a plan to sell a business, it is wise to come up with a base value for the company and then
come up with a strategy to enhance the company’s profitability so as to increases its value as an exit strategy. Your
business exit strategy needs to start early enough before the exit, addressing both involuntarily and voluntary transfers.
A valuation with annual updates will keep the business ready for unexpected and expected sale. It will also ensure
that you have correct information on the company fair market value and prevent capital loss due to lack of clarity or
inaccuracies.

3. Buying a business
Sellers and buyers of business usually have different opinions on the worth of the business. However, the real
business value is what the buyers are willing to pay. A sound business valuation should consider market conditions,
potential income, and other similar concerns to ensure that the investment being done is viable. Business buyers must
exercise prudence by normally hiring a business broker who can help you with the process.

4. Selling a business
As mentioned, sellers and buyers have different opinions on the worth of the business. The sellers, however, would want
to be certain that they are getting what is worth, thus they may have to perform their valuation process as well.

5. Strategic planning
The true value of assets may not necessarily be reflected on the assets schedule, and if there has been no adjustment of
the balance sheet for various possible changes, it may be risky. Having a current valuation of the business decisions. As
in the financial reporting standards, the use of current value accounting is more evident.

6. Funding
Bankers, financing companies or any potential investors require an objective valuation when someone is negotiating or
applying for credits, loans or any funding requirements. Professional documentation oy your company’s worth is usually
required since I enhances your credibility to the lenders or potential investors.

7. Selling a share in a business

For business owners, proper business valuation enables you to know the worth of your shares and be ready when
you want to sell them. Just like during the sale of the business, you ought to ensure you get good value from your share.

Business valuation is a critical financial analysis that needs to be done by a valuation expert who has appropriate
qualifications. Business owners are able to negotiate a tactical sale of their entity, plan an exit strategy, acquire financing ,
and reduce the financial risk during litigation.

 Fundamental principles of valuation or value creation

Business valuation involves the determination of the fair economic value of a company or business for various as
mentioned earlier.

Key Principles of Business Valuation

The following are the key principles of business valuation that business owners who want to create value in their business
must know.

 The value of a business is defined only at a specific point in time.

The value of a business usually experiences changes every single day. The earnings, cash position, working
capital, and market conditions of a business are always changing. The valuation made by business owners a months or
years ago may not reflect the true current value of the business. The value of a business requires consistent and regular
monitoring. This valuation principle helps business owners to understand the significance of the date of valuation in the
process of business valuation.

 Value primarily varies in accordance with the capacity of a business to generate future cash flow.

A company’s valuation is essentially a function of its future cash flows except in unusual situations where net asset
liquidation may lead to a higher value.

The consideration here is the term “future”. It implies that historical results of the company’s earnings before the date of
valuation are useful in predicting the future results of the business under certain conditions. Another consideration is the
term “ cash flow”. It is because cash flow, which takes into account capital investment, working capital changes, and
taxes, is the true determinant of business value. Business owners should aim at building a comprehensive estimate of
future cash flows for their companies. Even though making estimates is a subjective undertaking, it is vital that the value
of the business is validated. Reliable historical information will help in supporting the assumptions that the forecast will
use.

 The market commands what the proper rate or return for investors

Market forces are usually I a state of flux, and they guide the rate of return that is needed by potential buyers in particular
marketplace. Market forces include the type of industry, financial costs, and the general economic conditions. Market
rates of return offers significant benchmark indicators at as specific point in time. They influence the rates of return
wanted by investors over the long term. Business owners need to be wary or concerned of the market forces in order to
know the right time to exit that will maximize values.

 The value of a business may be impacted by underlying net tangible assets

Business valuation measures of the relationship between the operational value of a company and its net tangible value.
Theoretically, a company with a higher underlying net tangible asset value has a higher going concern value. It is
because of the availability of more security to finance the acquisition and lower risk of investment since there are more
assets to be liquidated in case of bankruptcy. Business owners need to build an asset base. For industries that are not
capital intensive, the owners need to find means to support the valuation of their goodwill.

 Value is impacted by liquidity

This principle functions based on the theory of demand and supply. If the market place has many potential
buyers, but there are a few quality acquisition targets, there will be a rise in valuation multiples and vice versa. In both
open market and notional valuation context, more business interest liquidity translates into more business interest value.
Business owners need to get the best potential purchasers to the negotiating table to maximize price. It can be achieved
through a controlled auction process.

Although they are technical valuation concepts, the basics of the valuation principles need to understood by
business owners to help them increase the valuation of their business.
 REFERENCES:

Suggested Web Readings

https://www.scribd.com/document/533667849/IM-ACCO-40013-Valuation-Concepts-and-MethodsSuggested Web
Readings
https://courses.lumenlearning.com/wm-organizationalbehavior/chapter/what-is-organizational-behavior/

Prepared by: Reviewed by:

GERALYN A. QUIAMBAO, MBM MYRNA C. CALMA, CPA, Ph.D.,FRIAcc

Instructor BSA Field of Study Head/Institute Dean
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