VALUATION CONCEPTS AND METHODS ■ Fair Value- an amount that is determined by what is
the buyer willing to pay and the seller is willing to sell
PRICE VS VALUE
PRICE - the (usually not
negative) quantity of payment or compensation
 given by one party to another in return for goods or services
 In modern economies, prices are generally expressed in
units of some form of currency
■ VALUE - all about how much something is worth,
whether in an estimate or exact amount
■ When somebody invests, they expect the value of their
investment 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
Price is what you pay for, while Value is what you get
VALUATION
 the analytical (quantitative) process of determining the
current or projected worth (value) of an asset or
something
 Conceptual frameworks of valuation is about the issue
of what affects or what drives the value to change
■ EX. A company's value is driven by its ability to earn a
good or 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
OBJECTIVE /USES OF VALUATION
 when we are trying to determine the fair value of an
asset.
under the conditions that both parties are willing or
voluntarily enter into the exchange transaction.
Various reasons for performing a business valuation
A. Litigation
o In a court case, such as an injury case, or divorce, or
where there is an issue with the value of the business,
someone may need to provide proof of the company’s
worth that could be the basis of claims for any damages,
or be based on the actual worth of your businesses and
not inflated figures estimated by a lawyer.
B. Exit strategy planning
o 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 increase its value as an exit
strategy. Your business exit strategy needs to start early
enough before the exit, addressing both involuntary and
voluntary transfers.
C. Buying a business
o Sellers and buyers of businesses 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.
D. Selling a business
o As mentioned, sellers and buyers usually have different
opinions on the worth of the business. The sellers,
 however, would want to be certain that they are getting
what it is worth, thus they may have to perform their
valuation process as well.
E. 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 will give
you good information that will help you make better
business decisions. As in the financial reporting
standards, the use of current value accounting is more
evident.
F. 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 of your company’s worth is
usually required since it enhances your credibility to the
lenders or potential investors.
G. 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
reasons 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 change 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 few 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 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 investments, 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 forecasts will use.
■ The market commands what the proper rate of
return for investors
Market forces are usually in a state of flux, and they guide
the rate of return that is needed by potential buyers in a
particular marketplace. Market forces include the type of
industry, financial costs, and general economic conditions.
Market rates of return offer significant benchmark
indicators at a 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 value.
■ The value of a business may be impacted by
underlying net tangible assets market
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 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 influenced by the transferability of future
cash flows
How transferable the cash flows of the business are to
a potential acquirer will impact the value of the
company. Valuable businesses usually operate without
the control of the owner. If the business owner exerts a
huge control over the delivery of service, revenue growth,
maintenance of customer relationships, etc., then the
owner will secure the goodwill and not the business.
■ Value is impacted by liquidity
This principle functions based on the theory of demand and
supply. If the marketplace 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 contexts, more
business interest liquidity translates into more business
interest value
Concepts of Valuation
■ Valuation is 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
GOING CONCERN VALUE
 Going concern value is also known as the total value
 This differs from the value that would be realized if its
assets were liquidated—the liquidation value—because
an ongoing operation has the ability to continue to earn
a profit, which contributes to its value.
 A company should always be considered a going concern
unless there is a good reason to believe that it will be
going out of business.
 Going-concern value is the idea that a company will
continue to be in business and be profitable.
 Goodwill is the difference between going-concern value
and liquidation value. Goodwill consists of intangible
assets, such as company brand names, trademarks,
patents, and customer loyalty.
 Going-concern value is often higher than the liquidation
value. When a company is acquired, the purchase price
is typically based on its going-concern value. This
means that a company being acquired can charge a
pricing premium that is higher than the value of its
assets and takes into account the value of its future
profitability, intangible assets, and goodwill.
SAMPLE.
 Suppose that the liquidation value of Widget Corp. is
PhP10 million. This sum represents the current value of
inventory, buildings, and other tangible assets that can
be sold assuming that the company is completely
liquidated. However, Widget Corp.'s going-concern value
could very well be Php60 million, as the company's
reputation of being the world's leading widget producer
and its ownership of patents and associated rights for
widget production mean that the company should have
a large and steady stream of future cash flows.
LIQUIDATION VALUE
■ The liquidation value is the value of company real
estate, fixtures, equipment, and inventory. Intangible
assets are excluded from a company's 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.
■ determined a company's assets such as real estate,
fixtures, equipment, and inventory.
■ Intangible assets are excluded from a company's
liquidation value
■ 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.
■ Potential investors will assess the liquidation value of a
company before investing. Investors want to know how
much of their funds would be returned in the event of
bankruptcy.
EXAMPLE
Liquidation is the difference between some value of tangible
assets and liabilities. As an example, assume liabilities for
company A are P550,000. Also, assume the book value of
assets found on the balance sheet is P1 million, the salvage
value is P50,000, and the estimated value of selling all
assets at auction is P750,000 or 75 cents on the peso. The
liquidation value is calculated by subtracting the liabilities
from the auction value, which is P750,000 minus
P550,000, or P200,000.
MARKET VALUE
 Market value is the term used to describe how much an
asset or a company is worth on the financial market,
according to market participants
 commonly used to refer to the market capitalization of a
company, which is calculated by multiplying the
number of shares in circulation by the current market
price.
Example of market value
 To calculate the market value of a company, you would
take the total shares outstanding and multiply the figure
by the current price per share. For example, if ABC
Limited has 50,000 shares in circulation on the market,
and each share is priced at $25, its market value would
be $1.25 million (50,000 x $25).
■ Pros of market value
 Market value can give an indication of whether a
company’s shares are over- or undervalued, depending
on the difference between market value and the fair
value.
 Traders and investors will often buy and sell stocks
based on their findings. This allows them to take
advantage of the disconnect between the two prices
when the market corrects itself.
■ Cons of market value
 To establish the market value of a share, there has to be
historical data that can be used to compare the market
value of one share against another
 Without a comparable figure, a company’s value is not a
useful indicator of whether market participants should
be interested in the stock. There has to be a benchmark
against which other market values are measured.
 Market value can also be quite an objective measure, as
share prices are determined by fluctuations in supply
and demand. This means that the market value of an
asset only represents what someone is willing to pay for
it, rather than its intrinsic value
BOOK VALUE
 equal to the cost of carrying an asset on a company's
balance sheet, and firms calculate it netting the asset
against its accumulated depreciation
 Book value is the accounting value of the company's
assets less all claims senior to common equity (such as
the company's liabilities). The term book value derives
from the accounting practice of recording asset value at
the original historical cost in the books.
 An asset's book value is equivalent to its carrying value
on the balance sheet.
 Book value is often lower than a company's or asset's
market value.
 Book value per share (BVPS) and the price-to-book (P/B)
ratio are utilized in fundamental analysis.
■ two main uses of :
■ It serves as the total value of the company's assets that
shareholders would theoretically receive if a company
was liquidated.
■ When compared to the company's market value, book
value can indicate whether a stock is under- or
overpriced
INTRINSIC VALUE
■ Intrinsic value is a measure of what an asset is worth
■ There are various ways to calculate intrinsic, or true,
value.
 Discounted cash flow analysis is used for many intrinsic
value calculations.
 Intrinsic value is a core concept that value investors use
to uncover hidden investment opportunities.
 In options trading, intrinsic value is the difference
between the current price of an asset and the strike
price of the option.
 When an asset's market price is below its intrinsic
value, it may be a smart investment
INTRINSIC VALUE OF OPTIONS CONTRACT
OPTION CONTRACTS -grants the buyer the right, but not
the obligation, to buy or sell the underlying security at a
preset price called the strike price.
 The intrinsic value of both call and put options is the
difference between the underlying stock's price and
the strike price. If the calculated value is negative, the
intrinsic value is zero. In other words, intrinsic value
only measures the profit as determined by the difference
between the option's strike price and market price.
 PROS AND CONS OF INTRINSIC VALUE OF OPTIONS
CONTRACT
■ Pros
 Intrinsic value helps determine the value of an asset, an
investment, or a company.
 Intrinsic value provides the amount of profit that exists
in an options contract.
■ Cons
 Calculating the intrinsic value of a company can be
subjective since it estimates risk and future cash flows.
 The intrinsic value of an option is incomplete since it
doesn't include the premium paid and time value.
 Example of an Option's Intrinsic Value
 Let's say a call option's strike price is P15, and the
underlying stock's market price is P25 per share. The
intrinsic value of the call option is P10 (P25 minus P15).
If the option premium paid at the onset of the trade were
P2, the total profit would be p8 if the intrinsic value was
P10 at expiry.
 On the other hand, let's say an investor purchases a put
option with a strike price of $20 for a $5 premium when
the underlying stock was trading at $16 per share. The
intrinsic value of the put option is the $20 strike price
less the $16 stock price, or $4 in-the-money.
 An intrinsic value of $4 at expiry combined with the
premium paid of $5 means the investor has a loss
despite the option being in-the-money
 It's important to note that the intrinsic value does
not include the premium. It's not the same as the
actual profit on the trade since it doesn't include the
initial cost. Intrinsic value only shows how in-the-money
an option is, considering its strike price and the market
price of the underlying asset.