‘VALUATION CONCEPTS AND METHODOLOGIE:! EXERCISES or False. Write TRUE if the Statement is true and the word FALSE if d the statement inconsistent with the truth. Value pertains to how much a pai i to a particular set of eyes. 2. Methods to value for real estate can may be different on how to value an entire business. 3. Businesses treat capital as a scarce resource that they should compete to obtain and efficiently manage | 4. According to the CFA Institute, valuation is 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. 5. Valuation includes the use of forecasts to come up with reasonable estimate of value of an entity’s assets or its equity. 6. Valuation techniques may differ across different assets, but all follows similar fundamental principles that drives the core of these approaches. 7. As valuation mostly deals with projections about future events, analysts should hone their ability to balance and evaluation different assumptions used in each phase of the valuation exercise, assess validity of available empirical evidence and come up with rational choices that aligns with the ultimate objective of the valuation activity. 8. In the corporate setting, the fundamental equation of value is grounded on the principle that Alfred Marshall popularized — a company creates value if and only if the return on capital invested exceed the cost of acquiring capital. 9. Value, in the point of view of corporate shareholders, relates to the difference between cash inflows generated by an investment and the cost associated with the capital invested which captures both time value of money and risk premium. 10. Intrinsic value refers to the value of any asset based on the assumption assuming there is a hypothetically complete understanding of its investment characteristics. EE eeEWE ATION CONCEPTS AND METHODOLOGI 1 Sa Going Concem firm value is determined under the going concern assumption. The going concern assumption believes that the entity wil! continue to do its business activities into the foreseeable future, Liquidation Value is the net amount that would be realized if the business is terminated and the assets are sold piecemeal. Fair Market Value is the price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts. 14. Fundamental analysts are persons who are interested in understanding and measuring the intrinsic value of a firm. Fundamentals refer to the characteristics of an entity related to its financial strength, profitability or risk appetite. Activities investors usually do “takeovers” — they use their equity holdings to push old management out of the company and change the way the company is being run. 17. Chartists relies on the concept that stock prices are significantly influenced by how investors think and act. Ghartists rely on available trading KPIs such as price movements, trading volume, short sales - when making their investment decisions. 18. Information Traders are Traders that react based on new information about firms that are revealed to the stock market. The underlying belief is that information traders are more adept in guessing or getting new information about firms and they can make predict how the market will react based on this. An acquisition usually has two parties: the buying firm and the selling firm. The buying firm needs to determine the fair value of the target company prior to offering a bid price. 20. Merger is the general term which describes the transaction two companies have their assets combined to form a wholly new entity.VALUATION CONCEPTS AND METHODOLOGIES Divestiture is the sale of a major component or segment of a business (e.g. brand or product line) to another company ies, 23. Spin-off is separating a segment or component business and transforming this into a separate legal entity whose ownership will be transferred to shareholders. aE Leveraged buyout is the acquisition of another business by using significant debt which uses the acquired business as a collateral. 24. Synergy can be attributable to more efficient operations, cost reductions, increased revenues, combined products/markets or cross-disciplinary talents of the combined organization. 25. 26. ot Corporate finance mainly involves managing the firm's capital structure, including funding sources and strategies that the business should pursue to maximize firm value. Valuation is also important to businesses because of legal and tax purposes. Top-down forecasting approach — Forecast starts from international or national macroeconomic projections with utmost consideration to industry specific forecasts. 28. Bottom-up forecasting approach — Forecast starts from the lower levels of the firm and builds the forecast as it captures what will happen fo the company. 29. Sensitivity analysis is the common methodology in valuation exercises wherein multiple other analyses are done to understand how changes in an input or variable will affect the outcome (ie. firm value). 30. Uncertainty is captured in valuation models through cost of capital or discount rate. 31. Uncertainty is captured in valuation models through cost of capital or discount rate. 32. Valuation is 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. 33. Definition of value may vary depending on the context Different definitions of value include intrinsic value, going concern value, liquidation value and fair market value. EE| VALUATION CONCEP” ANSWER STATEMENT 34. Valuation plays significant role in the business world with respect to portfolio management, business transactions or deals, corporate finance, legal and tax purposes. 35. Generally, valuation process involves these five steps: understanding of the business, forecasting financial performance, selecting right valuation model, preparing valuation model based on forecasts and applying | conclusions and providing recommendations. 36: Value is defined at a specific point in time 37. Value varies based on ability of business to generate future cash flows 38. Market dictates appropriate rate of return for investors _| 39 Value is influenced by transferability of future cash flows Value is impact by liquidityIN CONCEPTS AND METHODOLOGIES PLE CHOICE THEORY. Write the letter of the best answer before r of the question or statement being answered. pertains to how much a particular object is worth to particular set of eyes. a. Price b. Value c. Cost d. Fundamentals 2. According to the CFA Institute, is the estimation of set's value based on variables perceived to be related to 2 investment returns, on comparisons with similar assets, or, shen relevant, on estimates of immediate liquidation proceeds. a. Valuation b. Price Estimation c, Fundamentals d. Appraisal Valuation places great emphasis on the that are iated in the exercise. a. Professional judgment b. Human reasoning c. Professional Skepticism d. Due diligence The value of a businesses can be basically linked to three major , except is a. Current Operations b. Future Prospects c. Embedded Risks d. All of the above 5 One major factor linked to the value of business that shows how ne operating performance of the firm in the recent year. a. Current Operations b. Future Prospects c. Embedded Risks d. All of the above6. One major factor linked to the value of business that reflects what is the long-term and strategic decision of the company. a. Current Operations b. Future Prospects c. Embedded Risks d. All of the above 7. One major factor linked to the value of business that shows what are the business risks involved in running the business. a. Current Operations b. Future Prospects c. Embedded Risks d. All of the above 8. refers to the value of any asset based on the assumption assuming there is a hypothetically complete understanding of its investment characteristics. a. Going concern value b. Liquidation Value ¢. intrinsic Value d. Fair Market Value 9. particularly relevant for companies who are experiencing severe financial distress. a. Going concern value b. Liquidation Value c. Intrinsic Value d. Fair Market Value 10. Value is determined under the going concern assumption. a. Going concern value b. Liquidation Value c. intrinsic Value d. Fair Market Value 41.The price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.Ratna PTS AND METHODOLOGIES a. Going concern value b. Liquidation Value c. Intrinsic Value d. Fair Market Value 12. The relevance of valuation in largely depends on the investment objectives of the investors or financial managers managing the investment portfolio. a. Portfolio Management b. Fundamental Management c. Financial Management d. Investment Management 13. These are persons who are interested in understanding and measuring the intrinsic value of a firm a. Fundamental Analysts b. Activist Investors c. Chartists d. Information Traders 14. refer to the characteristics of an entity related to ancial strength, profitability or risk appetite. a. Intrinsic Value b, Fundamentals ¢. Technical Characteristics . Financial Value tend to look for companies with good growth prospects that have poor management. a. Fundamental Analysts b. Activist Investors c. Chartists gd. Information Traders +6. They believe that these metrics imply investor psychology and will predict future movements in stock prices. a. Fundamental Analysts b. Activist investors c. Chartists d. Information Traders EE |VALUATION CONCEPTS AND METHODOLOGIES 17. The underlying belief is that are more adept in guessing or getting new information about firms and they can make predict how the market will react based on this. Hence, correlate value and how information will affect this value. a. Fundamental Analysts b. Activist Investors cc. Chartists d. Information Traders 18. Under portfolio management, the following activities can be performed through the use of valuation techniques, except a. Stock Selection b. Deducing Market Expectation c. Both can be performed d. None of the above 19. Separating a segment or component business and transforming this into a separate legal entity whose ownership will be transferred to shareholders. a. Mergers b. Acquisitions c. Divestiture d. Spin-off 20. Sale of a major component or segment of a business (e.g. brand or product line) to another company a. Mergers b. Acquisitions c. Divestiture d. Spin-off 21. General term which describes the transaction two companies combined to form a wholly new entity a. Mergers b. Acquisitions c. Divestiture d. Spin-offRNEUr CONCEPTS AND METHODOLOGIES usually has two parties: the buying firm and the g firm. The buying firm needs to determine the fair value of the Jet company prior to offering a bid price. On the other hand, the .g firm (or sometimes, the target company) should have a of its firm value as well to gauge reasonableness of bid a. Mergers b. Acquisitions c. Divestiture d. Spin-off Acquisition of another business by using significant debt which uses the acquired business as a collateral. a. Mergers b. Acquisitions c. Divestiture d. Leveraged buy-out assumes that the combined value of two firms will greater than the sum of separate firms. can be attributable to more efficient operations, cost reductions, increased ues, combined products/markets or cross-disciplinary talents @ combined organization. a. Synergy b. Control c. Synergy and Control d. None of the above deals with prioritizing and distributing financial sources to activities that increases firm value. The ultimate goal maximize the firm value by appropriate planning and plementation of resources, while balancing profitability and risk tite. a. Financial Management b. Corporate Finance c. Risk Management d. Portfolio Management 28. Generally, the valuation process considers these steps, except a, Understanding the Business b. Forecasting Financial Performance d. Preparing Valuation mode! based on forecasts.d. All of the above 27 Which key principles in valuation refers to Business value tend to change every day as transaction happens? a. The value of a business is defined only at a specific point in time b. Value varies based on the ability of business to generate future cash flows c. Firm value can be impacted by underlying net tangible assets d. Market dictates the appropriate rate of return for investors 28. refers to the possible range of values where the real firm value lies. a. risk of the unknown b. volatility c. uncertainty d. None of the above 29. Which key principles in valuation refers to Market forces are constantly changing, and they normally provide guidance of what rate of return should investors expect from different investment vehicles in the market? a. The value of a business is defined only at a specific point in time b. Value varies based on the ability of business to generate future cash flows c. Firm value can be impacted by underlying net tangible assets d. Market dictates the appropriate rate of return for investors 30. The key principles in valuation refers to general concepts for most valuation techniques put emphasis on future cash flows except for some circumstances where value can be better derived from asset liquidation is a. The value of a business is defined only at a specific point in time b. Value varies based on the ability of business to generate future cash flows ¢. Firm value can be impacted by underlying net tangible assets d. Market dictates the appropriate rate of return for investorsFalse. Write TRUE if the Statement is true and the word FALSE if = statement inconsistent with the truth. Sas Asset has been defined by the industry as transactions that would yield future economic benefits as a result of past transactions. 2. Brown field investment is the term used to describe businesses that are starting from scratch. 3. Enterprise-wide Risk Management allows the company to increase performance variability. 4. Risk identification is important to allow investors to assess impact of the risk to their investment. 5. Brown field investments are easier to evaluate as information is already available from prior years 6. Book value is the term used to describe the value derived from the amounts reflected in the financial __|__ statements. 7. Borrowings that are contracted to be paid after 24 months is classified as current liabilities. 8. Equipment is classified as non-current assets. 9. To get book value per share, total liabilities is deducted from total assets and the resulting figure is divided by total authorized shares. 10. Book value method is a transparent approach since value can be easily verified by looking at the financial statements. 14. Replacement cost is the cost of similar assets that have the nearest equivalent value as of the valuation date. 12. Replacement value is affected by asset age, size and its competitive advantage. 13. Insurance companies use replacement value as basis to determine the appropriate insurance premium to be charged to their clients. 14. For real properties, it is more important to look at the age of the asset than its size. 15. Replacement value method is superior to book value as it gives an indication of true value of the firm as of the valuation date. 76. Replacement value is an estimate of cost of reproducing, creating, developing or manufacturing a similar asset 17. If there is no comparable assets found in the market, it is '@ appropriate to use reproduction value metho:ANSWER VALUATION Ct JODOLOGIES SaaS 18. Reproduction value is used for business ventures that are using highly specialized equipment in their operations. 79. Reproduction value is easy to validate despite not having comparable assets in the industry. 20. Among the approaches, the book value method gives the most recent approximate of the company value.CHOICE THEORY. Write the letter of the best answer before of the question or statement being answered. “Ys 5@s been defined by the industry as transactions that would yield “srs economic benefits as a result of past transactions. a Asset ®. Equity Net Assets Shares of Stocks bese ere investments which are already in the going concern state, as __ =e" business are in the optimistic perspective that they will grow in the r= because of historical proof @. Green Field Investments ©. Brown Field Investments ¢. Blue Field Investment ¢. Black Field Investments “= *ollowing describes the benefits of having a sound Enterprise-wide ‘Wise Menagement system except @. Facilitates elimination of all business risks Manage performance variability Enhance business resilience against changes ¢. Improve distribution of resource across the firm _ n= of the advantages of using asset-based methods in valuation is @. Relies on the ability of the firm to generate revenues in the coming years ©. Considers future cash flows that can be derived from the use of assets c. Incorporates how the market perceives the value of the company d. Enables stakeholders to validate firm value based on the value of assets it currently own ~s refers to the value recorded in the accounting books of a firm as. @'ected in the audited financial statements. @. Exit value ®. Book value c. Earnings per share cd. Fair market valueVALUATION CONCEPTS AND METHODOLOGIES 6. Receivables that are collectible after 60 days are classified as a. Current Liabilities b. Non-current Liabilities c. Current Assets d. Non-current Assets 7. The net book value of assets may also represents a. Total shareholder's equity b. Total assets c. Total liabilities d. Total long-term debt 8. Book value also reflects the company's a. Historical value b. Liquidation value c. Intrinsic value d. Fair market value 9. Using the book value has its advantages, the following statements provide them except a. Information necessary for computation can be quickly gathered b. Validated by a third-party expert with knowledge on how much assets are sold in the open market Shows a transparent view on firm value d. Can easily be validated by reviewing the company’s audited financial statements 9 10. Cost of similar assets that have the nearest equivalent value as of the valuation date. a. Book value b. Replacement cost c. Fair market value d. Reproduction value 11. The factor that affects the replacement value of an asset are the following except a. Competitive advantage of the asset b. Size of the asset c. Original acquisition cost of the asset d. Asset ageseers man basis to determine the value of the insurance premium to be ver the risk for an asset is 2. Original acquisition cost 5. Replacement cost Book value as of premium payment date Acquisition cost less accumulated depreciation and impairment losses © cetermining replacement costs of assets, valuators tend to with Actuaries Board of Directors Appraisers Equity Analysts ue and replacement values of an asset are theoretically The difference of these two is Book value is based on the historical acquisition costs while replacement value is based on the net asset value as of balance sheet date. ©. Book value can be computed from the financial statements while replacement value is gathered by employing services of an appraiser. ¢. Book value is computed on a per share basis, but replacement cost is shown as absolute values. Book value includes cost allowances for gaps against market prices while replacement cost does not. 2. thod is appropriate in valuing assets which do not have external information even after consulting with appraisers? 2. Book value method b. Replacement value method ¢. Reproduction value method d. Liquidation value method sé of reproduction value method is appropriate for the following a. When calculating value of new technology or start-up businesses ». Ventures with highly specialized equipment c. Companies that are highly reliant with intangible assets d. Businesses that use equipment supplied by third-party manufacturerID METHODOLOGIES 17. Reproduction value is the a Estimate of cost of reproducing, creating, developing or manufacturing a similar asset internally Salvage value of the asset Net value reflected in the company’s financial statements Cost of similar assets that have the nearest equivalent value as of the valuation date 18. What is the limitation imposed by the use of reproduction value method? a b. c. dq. it considers only the original cost of the assets.at the time they are acquired High professional fees of appraisers Difficulty in validating reasonableness of calculated value because of limited comparators Inability to forecast future cash flows accurately because of uncertainties in the market 19. The following methods shows the most recent value of the firm assets in the market as of the valuation date, except a. b. c. d. Replacement value method Liquidation value method Reproduction value method Book value method 20. When computing for book value, which of the following items should be deducted the asset value? a. Total liabilities b. Total shareholders equity c. qd Long-term debt only |. Ordinary share capitalerreur nar teraiss CHOICE PROBLEM. Write the letter of the best answer before = of the question or statement being answered. “= Slowing data were gathered from the annual report of Thom Prooucts: = ence per share Php 30.00 = ordinary shares 10,000 Stock, 5%, P100 par Php 10,000 Sry equity Php120,000 ‘eck value per share is 2. Php30.00 b. Php15.00 c. Php14.00 d. Php12.00 es ‘ollowing information was reported by Adele Company in their Gel siatemenis: ert Assets Php250,000 current Asseis 760,000 Liabilities 60,000 ent Liabilities 350,000 uch is the book value of Adele Company? a. Php 190,000 b. Php6800,000 c. Php660,000 d. Php1,010,000 ) Sem. én analyst, is looking at the 2019 financial statements of Smith ey and gathered the following details: 5 Php310,000 Bewables 320,000 200,000 Plant and Equipment 690,000 Payable 175,000 + Notes Payable 500,000 @eary Share Capital (250,000 312,500 sding shares, P1.25 par) mained Eamings 532,500Peasy There are no other issuances or buyback of shares in 2019. How much is the book value per share of Smith Company? a. Php6.08 b. Php3.38 c. Php2.13 d. Php1.25 4. ZYX Incorporated showed the following balances in its financial statements for 2019: Current Assets Php 510,000 Non-current Assets 1,065,000 Current Liabilities 355,000 Non-current Liabilities 1,000,000 Outstanding ordinary shares 500,000 What is the book value per share of ZYX incorporated? a. Php0.44 b. Php1.15 c. Php3.15 d. Php5.86 5. Accounting records of Arabica Company showed the following items as of December 31 Current assets Php 950,000 Current liabilities 600,000 Noncurrent assets 3,500,000 Noncurrent liabilities 2,000,000 Ordinary shares outstanding, January 1 400,000 Ordinary shares outstanding, December 31 500,000 In July 1, Arabica Company issued additional 100,000 ordinary shares to fund its investment plan. How much is the book value of Arabica Company as of December 31? a. Php4,450,000 b. Php3,850,000 c. Php2,450,000 d. Php1,850,000ICEPTS AND METHODOLOGIES ley) se Corporation showed the following balances in its financial Ss of December 31: Php 880,000 500,000 3,000,000 # Liabilities 1,500,000 o ag ordinary shares, beginning 1,200,000 ing ordinary shares, ending 1,500,000 Corporation issued additional 300,000 ordinary shares on part of its financing plan. What is the book value per share Corporation as of December 31? a. Php1.57 b. Php1.39 c. Php1.37 d. Php1.25 jowing information are related to Citrus Corporation: Php 15,000,000 over 3.0x Quity Ratio 1.5 average outstanding shares 200,000 shares mover only considered asset balance as of December 31. is the book value per share of Citrus Corporation based regoing information? a. Php75.00 b. Php25.00 c. Php15.00 d. Php10.00 Corporation reported 500,000 ordinary shares at the 1g Of 2020. In the beginning of the second quarter, convertible ders opted to exercise their option to convert to shares, to additional 100,000 shares. In October 1, Spice ion bought back 50,000 shares as they have spare cash @ weighted average outstanding shares for 2020? a. 600,000 shares b. 562,500 shares c. 550,000 shares d. 500,000 shares9. Hercules Company reported the following balances as of December 31, 2019: Current assets Php 750,000 Non-current assets 1,400,000 Current liabilities 400,000 Non-current liabilities 500,000 Outstanding ordinary shares 1,000,000 shares In 2020, analytics showed that current assets increased by 25%, non- current assets increased by 20% and current liabilities by 10%. Half of the non-current liabilities were also paid. At the beginning of 2020, additional 250,000 shares were issued by Hercules Company. How much is the book value of Hercules Company as of December 31, 20197 a. Php1,250,000 b. Php1,650,000 c, Php2,150,000 d. Php3,050,000 10. Refer to Hercules Company. How much is the book value per share in 2019? a. Php3.05 b. Php2.15 c. Php1.65 d. Php1.25 11. Refer to Hercules Company. How much is the net working capital as of December 31, 2020? a. Php247,500 b. Php350,000 c. Php497,500 d. Php937,500 12. Refer to Hercules Company. How much is the book value per share as of December 31, 2020? a. Php1.93 b. Php 1.54 c. Php1.25 d. Php1.00VALUATION CONCEPTS AND METHODOLOGIES of December 31, 2020, Cocoa Corporation reported the ms in its balance sheet: Php 240,000 $20,000 350,000 oa and plant 3,000,000. ment 850,000 payable 400,000 ™m notes payable 500,000 debt 1,000,000 ed average of 250,000 ding shares in 2020 Corporation contracted with a third-party appraiser to ne how much is the replacement cost of its assets. Based on t of the appraiser, the property and plant has replacement 425% of its reported value. On the other hand, the equipment smmands replacement cost of 70% of its value. According to the , the equipment was designed using an old technology, thus, replacement cost. Other assets and liabilities are valued h is the non-current assets reflected in the books of Cocoa on as of December 31, 2020? a. Php4,960,000 b. Php3,850,000 c. Php2,850,000 d, Php2,180,000 much is the book value per share of Cocoa Corporation as ber 31, 20207 a. Php19.84 ». Php16.24 c. Php15.84 d. Php12.24 much is the replacement value of the non-current assets of Corporation? a. Php3,345,000 b, Php3,850,000 c. Php4,345,000 d. Php5,455,000Co ise ols eal 16. How much is the replacement value per share of Cocoa Corporation? a. Php21.82 b. Php19.84 c. Php14.22 d. Php12.24 17. Caramel Company showed the following balances in its balance sheet as at year-end: Current Assets Php 450,000 Non-current Assets 1,150,000 Current Liabilities 300,000 Non-current Liabilities 900,000 Weighted average of outstanding shares 120,000 shares According to the appraisal, 60% of the non-current assets can be replaced at 150% of their reported book value while the remaining balance of the non-current assets has replacement value of 65%. Reported balance of other items approximates their replacement value. How much is the replacement value of Caramel Company at year- end? a. Php584,000 b. Php400,000 c. Php1,784,000 d. Php1,800,000 18. Refer to Caramel Company. What is the book value per share of Caramel Company? a. Php3.33 b. Php4.87 c. Php13.33 d. Php14.87 19. Samsan Company, a start-up company which developed its own data imaging algorithm, is trying to estimate the value of their company. Their latest financial statements showed the following information:RE erates Assets 1,250,000 current Assets 4,000,000 Liabilities 850,000 current Liabilities 250,000 * © their non-current assets is a patent for the technology they which has a recorded balance of P2,500,000. An equity is looking at buying the company. 2 Company tried to trace back the costs of developing the * end determined that the reproduction cost of that particular *'s at P3,000,000. 's the book value of Samsan Company? a. Php5,250,000 b. Php5,000,000 c. Php4,150,000 d. Php4,000,000 Seer io Samsan Company. What is the reproduction value of “Gersen Company? a. Php5,000,000 b. Php4,650,000 c. Php4, 150,000 d. Php4,000,000BU hee) eA) METHODO! Relea PROBLEMS P2-1. Lykajems Inc. showed the following balances in its audited financial statements. Current Assets PhP2,500,000 Non-current Assets 8,000,000 Current Liabilities 2,100,000 Non-current Liabilities 5,000,000 Weighted average outstanding ordinary shares 2,000,000 shares Compute for the following: 1. Book value of Lykajems, Inc. 2. Book value per share P2-2. The accountant of Green Tea Company is looking at the different account balances in the company records. The accountant was asked to provide preliminary valuation numbers for an upcoming management discussion. The following account balances were generated from the records: Accounts payable 20,000 Accounts receivable 70,000 Accrued liabilities 1,000 Cash 50,000 Intangible assets 70,000 Inventory 52,000 Long-term investments 150,000 Long-term liabilities 125,000 Marketable securities 46,000 Notes payable (short-term) 25,000 Property, plant, and equipment 705,000 Prepaid expenses 3,000 Requirements: 1. Total current assets 2. Total non-current assets 3. Total current liabilities 4. Total noncurrent liabilities 5. Book value of Green Tea Company 6. Book value per shareVALUATION CONCEPTS AND METHODOLOGIES he balance sheet of Koala Company as of December 31 is presented 2019 2020 P 45,000 P 60,000 Witetsbie securities 60,000 85,000 ac ‘eceivable (net) 60,000 80,000 - 70,000 100,000 a plant and equipment (net) 300,000 280,000 Patel assets P490,000 — P545,000 s and Shareholders’ Equity ayable 35,000 45,000 notes payable 50,000 50,000 yable 85,000 75,000 shares 200,000 225,000 earnings 120,000 150,000 sta! Habilities and shareholders’ equity P490,000 P545,000 ry shares has par value of P1.00 per share. in April 1, 2020, the Koala cany issued additional shares as part of its funding plan. ite for the following: k value as of December 31, 2019 k value per share as of December 31, 2019 k value as of December 31, 2020 = Sook value per share as of December 31, 2020 The balance sheet of Argentum Company is presented below: Assets 2020 Cash P 160,000 Trade receivables 580,000 Inventory 340,000 Property, plant and equipment (net) 2,350,000 Total assets 3,270,000 Liabilities and Shareholders’ Equity Accounts payable 420,000 Long-term bonds payable 900,000 Ordinary shares 4,500,000 Retained earnings 450,000 Total liabilities and shareholders’ equity 3,270,000Geers The owners of Argentum Company is looking at how much they can sell the company. They are assessing how much is the range of the firm value based on company assets. A third-party appraisal was made for property, plant and equipment which resulted with the following findings: property and buildings with book value of P1,000,000 has market value of P1,500,000. The remaining portion is for equipment which was deemed can be replaced at 80% of its book value. Other assets and liabilities approximate their replacement values. Compute for the following: 1. Book value of Argentum Company 2. Replacement cost of property, plant and equipment 3. Replacement value of Argentum Company P2-5. The balance sheet of Valentine Company is presented below: Assets 2020 Cash P 350,000 Trade receivables 800,000 Equipment 1,250,000 Intangible assets 500,000 Total assets P2,550,000 Liabilities and Shareholders’ Equity Accounts payable 200,000 Short-term notes payable 200,000 Ordinary shares 2,000,000 Retained earnings 450,000 Total liabilities and shareholders’ equity P2,550,000 The intangible assets — a patent to a new auditory technology — is self- developed three years ago. An investor is looking at buying the company and Valentine Company would like to give an initial quotation. Since the technology is unique and does not have any comparables, the software development team quoted that the cost of reproducing the intangible assets is at 120% of its net asset cost. Compute for the following: 1. Book value of Valentine Company 2. Reproduction cost of intangible assets 3. Reproduction value of Valentine CompanyVALUATION CONCEPTS AND METHODOLOGIES 7) The summarized balance sheet of Mundane Corporation is shown ao PhP23,500,000 400,000,000 45,000,000 20,000,000 sutstanding 3,000,000 shares rent assets can be sold in the market at 80% of its recorded value. ‘or the following: ok value of Mundane Corporation ok value per shareVALUATION CONCEPTS AND METHODOLOGIES ESERCISES Yowe or False. Write TRUE if the Statement is true and the word FALSE if he statement inconsistent with the truth. 4. According to the CFA institute, liquidation value refers to the value of a company if it were dissolved and its assets sold individually. _ 2. Liquidation value represents the net amount that can be gathered if the business is shut down and its assets are sold piecemeal. 3. Liquidation value is the base price or the floor price for any firm valuation exercise. 4. Liquidation value should not be used to value profitable or growing companies as this approach does not consider growth prospects of the business. 5, Liquidation value should be used for dying or losing companies where liquidation is imminent to check whether profits can still be realized upon sale of the assets owned, 6. A unique callout for liquidation value is if the firm is operating under a proprietorship or a partnership model. 7. Business failure is the most common reason why businesses close or liquidate. Early symptoms of business failure are low or negative returns. 8. Insolvency happens when a company cannot pay liabilities as they come due. : 9. Bankruptcy is the most serious type of business failure as this happens when liabilities become greater than asset balance. 10. Divestment can be driven by different internal factors such as mismanagement, poor financial evaluation and decisions, failure to execute strategic plans, inadequate cash flow planning or failure to manage working capital. 11. External factors such as severe economic downturn, occurrence of natural calamities or pandemic, changing consumer preferences and adverse governmental regulations may also contribute to business failure. 12. Most corporations only have finite number of years to operate as stated in their Articles of incorporation. This is also similar in the case of projects like joint ventures with finite life. EEEANSWER Ss ate is already certain, it is more appropriate to compute terminal value using going concern value. 14. Once the contract with the government expires or scarce resource become fully depleted and no new site is prepared to support operation, this might signal potential liquidation and valuation should be based on liquidation value. Liquidation value is the most appropriate valuation approach among all as it considers the realizable value of the asset if it is sold now based on current conditions. 16. if the liquidation value is above income approach valuation (based on going-concern principle) and liquidation comes into consideration, liquidation value should not be used. If the nature of the business implies limited lifetime (e.g. a quarry, gravel, fixed-term company etc.), the terminal value must be based on liquidation. All costs necessary to close the operations (e.g. plant closure costs, disposal costs, rehabilitation costs) should also be factored in and deducted to arrive at the liquidation value. Non-operating assets should be valued by liquidation method as the market value reduced by costs of sale and taxes. Since they are not part of the firm’s operating activities, it might be inappropriate to use the same going concern valuation technique used for business operations. If such result is higher than net Present value of cash-flows from operating the asset, the liquidation value should be used. Liquidation valuation must be used if the business continuity is dependent on current management that will not stay. 20. For analysts, liquidation value method can also be used as benchmark in making investment decisions.24. When a company is profitable with good industry outlook, the liquidation will typically be lower than the prevailing market price of the share. 22. Share price often reflects growth prospects of the company which is a consideration that liquidation value does not have. 23. For firms that are experiencing decline or industry is consistently declining, prevailing share prices might be lower than liquidation value 24. Because liquidation value is lower than market price of share, these corporate investors buy the shares at prevailing market price and sell the company at the higher liquidation value. This results in risk-free arbitrage profit for these corporate investors. 25. The liquidation value considers the present value of the sums that can be obtained through the disposal (i.e. sale) of the assets of the firm in the most appropriate way, net of the sums set aside for the closure costs, repayment of the debts and settlement of all liabilities, and net of the tax charges related to the transaction and the costs of the process of liquidation itself. 26. Liquidation value can be further computed on a per share basis by dividing total liquidation value by outstanding ordinary shares. 27. Liquidation value per share should be considered together with other quantitative (e.g. current share price, going concern DCF) and qualitative metrics to justify business decisions to be made. 28. Assets are sold strategically over an orderly period to attract and generate the most money for the assets. This is called forced liquidation. 29. Orderly liquidation is liquidation process, at which the asset or assets are sold as quickly as possible, such as at an auctionVALUATION CONCEPTS AND METHODOLOGIES Sass 30. SSS Cale )n for liquidation value at closure date is somewhat like the book value calculation, except the value assumes a forced or orderly liquidation of assets instead of book value. Book value should not be used as liquidation value. 31. 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. 32. Even if these assets being liquidated generate lower than expected return in the present business, 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 invested in the assets. 33. In practice, the liabilities of the business are added from the liquidation value of the assets at closure to determine the liquidation value of the business. The overall value of a business that uses this method should be lower than going-concern value. in computing for the present value of a business or property on a liquidation basis, the estimated net proceeds should be discounted at a rate that reflects the risk involved back to the date of the original valuation. 35. Estimation of liquidation values will be more complex if assets can be easily identified or separated; hence, individual valuation may be impractical.1PLE CHOICE THEORIES. Write the letter of the best answer before ember of the question or statement being answered. represents the net amount that can be gathered if shut down and its assets are sold piecemeal. Going Concern Value ©. Liquidation Value ¢. Bankruptcy Value ¢. Closing Value 7 Which statement is not correct about liquidation value? 2. Liquidation value refers to the value of a company if it were dissolved and its assets sold individually. b. In some texts, liquidation value is also known as business closing value. cc. Liquidation value may continue to erode based on the time frame available for liquidating assets. . If liquidation value becomes higher compared against going concern value, this may signal that a significant business event transpired which makes the liquidation value more appropriate in valuation exercise. = These are situation that most likely consider liquidation value, Business Failures . Divestment b. c. Corporate End of Life d. Depletion of scarce resources Which of the following is not correct related to liquidation a. If the liquidation value is below income approach valuation (based on going-concern principle) and liquidation comes into consideration, liquidation value should be used. b. If the nature of the business implies limited lifetime (e.g. a quarry, gravel, fixed-term company etc.), the terminal value must be based on liquidation. All costs necessary to close the operations (e.g. plant closure costs, disposal costs, rehabilitation costs) should also be factored in and deducted to arrive at the liquidation value.Pike esaey eMart tele) c. Non-operating assets should be valued by liquidation method as the market value reduced by costs of sale and taxes. Since they are not part of the firm’s operating activities, it might be inappropriate to use the same going concern valuation technique used for business operations. If such result is higher than net present value of cash-flows from operating the asset, the liquidation value should be used Liquidation valuation must be used if the business continuity is dependent on current management that will not stay. 2 5. Which of the following is incorrect statement related to the use of Liquidation Value in Investment Analysis? a. Liquidation value method can also be used as benchmark in making investment decisions. b. For firms that are experiencing decline or industry is consistently declining, prevailing share prices might be lower than liquidation value. ¢. When liquidation value is lower than market price of share, these corporate investors buy the shares at prevailing market price and sell the company at the higher liquidation value. d. If the company can be readily liquidated any time, market price per share should never be below book value per share if all reported assets in the balance sheet is accurate. 6. Assets are sold strategically over an orderly period to attract and generate the most money for the assets. a. Orderly Liquidation b. Forced Liquidation c. Divestment d. Bankruptcy 7. Liquidation process, at which the asset or assets are sold as quickly as possible, such as at an auction. a. Orderly Liquidation b. Forced Liquidation c. Divestment d. BankruptcyPenta cae) METHODOLOGIES 12. This is the situation where liquidation value is considered when the number of years the company can operate Is not extended particularly when the primary objective is reach like in cases of Partnership and Join Ventures. a. Business Failures b. Divestment c. Corporate End of Life d. Depletion of scarce resources 13. This is the situation where liquidation value is considered for industries which purpose are related to highly regulated by the government which are normally limited like mining and oil. a. Business Failures b. Divestment c. Corporate End of Life d. Depletion of scarce resources 14. If the nature of the business implies limited lifetime (e.g. a quarry, gravel, fixed-term company etc.), the terminal value must be based on liquidation. All costs necessary to close the operations (e.g. plant closure costs, disposal costs, rehabilitation costs) should also be factored in and deducted to arrive at the liquidation value. a. Statement is True b. The underline word or term should be liquidation value to make the statement correct. c. The underline word or term should be bankruptcy value to make the statement correct. d. The underline word or term should be salvage value to make the statement correct. 15. Statement A. In computing for the present value of a business or property on a liquidation basis, the estimated net proceeds should be discounted at a rate that reflects the risk involved back to the date of the original valuation. Statement B. This is important to ensure that all assumptions are aligned. Liquidation value can be used as basis for terminal cash flow (instead of going concer terminal cash flow) in a DCF calculation in order to compute firm value in case there are years that the firm will still be operational prior to liquidation.tse) lea) . Both Statements are correct . Only Statement A is correct . Only Statement B is correct Both Statements are incorrect. a. b. d.RU ee ey MULTIPLE CHOICE PROBLEM. Write the letter of the best answer before the number of the question or statement being answered. 1. WW Inc. recently has had financial difficulty and is being liquidated The firm has a liquidation value of Php 2,000,000 — Php 800,000 from the fixed assets that served as collateral for the mortgage bonds and Php 1,200,000 from all other assets (all prior claims have been satisfied). The firm's current capital structure is as follows: Unsecured bonds — Php 1,000,000 Mortgage bonds — Php 800,000 Preference shares — Php 200,000 Ordinary shares — Php 500,000 How much will the ordinary shareholders from the liquidation? a. Php 1,000,000 b. Php 666,667 c. Php 396,000 d. Php 0 2. Tang Mining is considering the acquisition of Zang Mining at a cash price of Php 6,000,000. The primary motivation for Tang's purchase of Zang is for a special piece of drilling equipment that it believes will generate after-tax cash flows if Php 2,000,000 per year during the next S years. Zang Mining has liabilities of Php 9,000,000 and Tang estimates that it can sell the remaining assets Php 6,500,000. Tang will use a 15 percent cost of capital for evaluating the acquisition. Based on this information, what is the net value of the special drilling equipment? a. Php 1,795,690 b. Php 1,500,000 ¢. Php (1,795,690) d. Php (1,500,000) 3. At year end, Lysle Company balance sheet showed total assets of Php 50 million, total liabilities of Php 30 million, and 500,000 shares of ordinary shares outstanding. If Lysle could sell its assets for Php 40 million, Lysle liquidation value per share of ordinary share is 4 a. Php 40.00 b. Php 20.00 c. Php 10,00 d. Php 5.00AND METHODOLOGIES 4. A firm reported current assets of Php 1,000,000, which can be quidated at 80 percent of book value. Total liabilities, including eferred stock, equal Php 270,000. The firm has 20,000 shares of mmon stock outstanding. What is the liquidation value per share of common stock? a. Php 50.00 b. Php 40.00 ¢, Php 36.50 d. Php 26.50 Kristine, a shareholder, received P10 per share as liquidation lue for the 1,000,000 shares of Cathy Company that she owned. ‘stine owned 10% ownership stake in Cathy Company. How much was the liquidation value of the Cathy Company? a. Php 10 million b. Php 50 million c. Php 100 million d. Php 124 million 5. Magic Homes is to be liquidated, All creditors, both secured and unsecured, are owed Php 2 million. Administrative costs of liquidation and wages payments are expected to be Php 500,000. A sale of assets is expected to bring Php 3 million after all costs and taxes. What is the liquidation value of Magic Homes? a. Php 3,000,000 b. Php 2,000,000 ¢. Php 1,000,000 d. Php 500,000 7. The PQ Partnership is not going well, and the partners have decided to liquidate the business. The partners share income and ‘oss in a ratio of 2:1. PQ Partnership reported cash of Php 50,000 ¢ building valued at Php800,000. They owe Php 500,000 to various creditors. Upon checking with realtors, they can sell the building at Php 600,000 based on current prices. How much is the iquidation value of PQ Partnership? a. Php 350,000 b. Php 150,000 c. Php 850,000 d. Php 650,000 HE oe |8. Leth Company is currently undergoing liquidation proceedings and is consulting with potential buyers about the amount it can recover from the sale of its assets with book value of P7,000,000. Based on the quotations, the assets can fetch price of P6,000,000 if it will be sold within one year as negotiations and bidding will allow interested buyers to compete for the purchase. An interested buyer is willing to pay for P4,000,000 to purchase the assets now. Leth Company has liabilities to settle amounting to P2,000,000, How much is the orderly liquidation value of Leth Company? a. Php 6,000,000 b. Php 5,000,000 c. Php 4,000,000 9. Refer to Leth Company. How much is the forced liquidation value of Leth Company? a. Php 6,000,000 b. Php 5,000,000 ¢. Php 4,000,000. d. Php 2,000,000 10. A firm's common stock currently sells for Php 75 per share. The firm has total assets of Php 1,000,000 and total liabilities, including preferred stock, of Php 350,000. If the firm has 10,000 shares of common stock outstanding, how much is the liquidation value per share is this approximates book value? a. Php 100 b. Php 75 c. Php 65 d. Php 35| VALUATION CONCEPTS Myosmenstrass EXERCISES True or False. Write TRUE if the Statement is true and the word FALSE if d the statement inconsistent with the truth Many investors and analysts find that the best estimate for the value of the company or an asset is the value of the returns that it will yield or income that it will generate. Income is based on the amount of money that the company or the assets will generate over the period of time. In income-based valuation, investors consider two opposing theories: the dividend irrelevance theory and the bird-in-hand theory. The dividend irrelevance theory was introduced by Modigliani and Myron Gordon that supports the belief that the stock prices are not affected by dividends or the returns on the stock but more on the ability and sustainability of the asset or company. Bird-in-the hand theory believes that dividend or capital gains has an impact on the price of the stock. Bird-in-the hand theory is also known as dividend relevance theory developed by Miller and John Lintner. Earning accretion is the additional value inputted in the calculation that would account for the increase in value of the firm due to other quantifiable attributes like potential growth, increase in prices; and even operating efficiencies. Earnings dilution will increase value if there are future circumstances that will affect the firm negativel Equity control premium is the amount that is added to the value of the firm in order to gain control of it Precedent transactions, on the other hand, are previous deals or experiences that can be similar with the investment being evaluated. In income-based approach, a key driver is the cost of capital or the required return for a venture. Cost of capital can be computed through (a) Weighted Average Cost of Capital or (b) Capital Asset Pricing Model “3 The average cost of capital formula can be used in determining the minimum required return. WACC may also ide other sources of financing like Preferred Stock and Retained Eamings.VALUATION CONCEPTS AND METHODOLOGIES ANSWER us cost of equity may be also derived using Capital Asset Pricing Model or CAPM. the cost of capital is a major driver in determining the equity value using income based approaches. The most conventional way to determine the value of the asset is through its economic value added. 18. In Mathematics, economic value added (EVA) is a convenient metric in evaluating investment as it quickly measures the ability of the firm to support its cost of capital using its earnings. 19. EVA is the excess of the company earnings after deducting the cost of capital 20. The general concept of EVA is that higher excess earings is better for the firm. 21 Cost of debt is tax-exempt, hence, there is tax benefit from it. 22. Cost of equity is riskier as compared to the cost of debt | which is variable. 23. ‘One of the elements that must be considered in using EVA is the reasonableness of eamings or retums. 24. The value of the company can also be associated with the anticipated returns or income earnings based on the historical earnings and expected earings. 25. In capitalization of earnings method, earnings are typically interpreted as resulting cash flows from operations, but net income may also be used if cash flow information is not available. 26. In capitalized earnings method, the value of the asset or the investment is determined using the anticipated earnings of the company divided by the capitalization rate (i.e. cost of capital). 27. Capitalized eamings method provides for the relationship of the (1) estimated earnings of the company; (2) expected yield or the required rate of return; (3) estimated equity value. 28. In the capitalization of earnings method, if earnings are fixed in the future, the capitalization rate will be applied directly to the projected fixed earnings. 29. Another scenario in the capitalization eamings method Is that the future earnings are not constant and vary every year, the suggested approach is to determine average of earnings of all the anticipated cash flows.ANSWER VALUATION CONCEPTS AND METHODOLOGIES 30. 31 STATEMENT Capitalized earnings only represent the assets that actually generate income or earnings and also includes value of the idle assets. While this method is simple and convenient, one of the limitations of capitalization of earnings is that this does may not fully account for the future earnings or cash flows thereby resulting to over or undervaluation. 32) 33. One of the elements that must be considered in using EVA is the appropriate cost of capital While this method is simple and convenient, one of the limitations of capitalization of earings is the ability to incorporate contingencies: While this method is simple and convenient, one of the limitations of capitalization of earnings is that assumptions used to determine the cashflows may not hold true since the projections are based on a limited time horizon. 35. Discounted Gash Flows is the most popular method of determining the value. This is generally used by the investors, valuators and analyst because this is the most sophisticated approach in determining the corporate value. 36. Discounted Cash Flows is more verifiable since this allows for a more detailed approach in valuation. 37. The discounted cash flows or DCF Model calculates the equity value by determining the present value of the projected net cash flows of the firm. 38, There isn’t one perfect method to determine a company’s value, which is why assessing a company’s future earnings has some drawbacks. 39. The Income based approach is favorable since it is easy to apply and makes use of real-world transactions to derive a value. If a business is worth what someone is willing to pay for it, then the market approach is the most appropriate methodology to determine that value. 40. The mechanics of Income based approach involve finding a price multiple of the benchmark, i.e. price to earnings ratio, EV to EBITDA, price to book value, etc. The price multiple is then multiplied with the relevant financial metric of the business being valued to arrive at a valuation estimate.VALUATION CONCEPTS AND METHODOLOGIES MULTIPLE CHOICE THEORIES. Write the letter of the best answer before the number of the question or statement being answered. 1. Avaluation approach that is based on the concept that the actual value of a business lies in the ability to produce revenue, profit and eventually wealth in the future. a. Income Based Valuation Approach b. Market Based Valuation Approach c. Asset Based Valuation Approach d. Liquidation Valuation Approach 2. The following methods are NOT income-based valuation technique except a. Economic Value Added, Capitalizing current eamings and discounted future earnings -b. Economic Value Added, Capitalization of earnings method and discounted cashflow method c. Economic Value Added, Capitalizing past earnings and discounted cashflow approach d. Economic Value Added, Discounted Cashflow and Revenue Approach 3. Valuation approach that determines the equity value by calculating the present value of the expected future net cash flows or profits Revenue Approach Discounted Cashflows Method Approach Capitalization of Earnings Approach Economic Value Added aon 4. A valuation method used to estimate a firm's worth based on earnings forecasts. It uses these forecasts for the earnings of a firm and the firm's estimated terminal value at a future date, and discounts these back to the present using an appropriate discount rate. . Revenue Approach . Discounted Cashflows Analysis Capitalization of Earnings Approach Economic Value Added aeonlel eles) AND © 1 S The following are ways on to estimate terminal value except Liquidation Value Model Multiples Approach Stable Growth Approach Going Concern Model apo in Income based valuation, investors consider two opposing theories a. dividend relevance theory and bird-in-hand theory b. bird-in-hand theory c. dividend irrelevance theory d. both bandc The. theory was introduced by Modigliani and Miller that supports the belief that the stock prices are not affected by dividends or the returns on the stock but more on the ability and sustainability of the asset or company. a. dividend relevance theory b. bird-in-hand theory c. dividend irrelevance theory d. both b andc The theory believes that dividend or capital gains has an impact on the price of the stock. a. dividend relevance theory b. bird-on-hand theory c. dividend irrelevance theory d. both aandb . The is also known as Income based valuation approach a. earings approach b. market approach c. asset-based approach d. going concem approach In sensitivity analysis, this factor is the additional value inputted in the calculation that would account for the increase in value of the firm due fo other quantifiable attributes like potential growth, increase in prices, and even operating efficiencies. a. earning accretion EE 8a2. 13. 14. 16. :THODOLOGIES g increments d. earning decrements . In sensitivity analysis, this factor will reduce value if there future circumstances that will affect the firm negatively. a. earning accretion b. earning dilution ¢. earning increments d. earning decrements . This is the amount that is added to the value of the firm in order to gain contro! of it. a. equity accretion b. earnings premium c. equity control premium d. additional paid in capital These are the factors that can be considered to properly value the asset using income based valuation approach, except a. earning accretion or dilution b. equity accretion or dilution ¢. equity control premium d. precedent transaction Using the income based valuation, these are previous deals or experiences that can be similar with the investment being evaluated. a. earning accretion or dilution b. equity accretion or dilution ¢. equity control premium d. precedent transaction . These transactions are considered risks that may affect further the ability to realize the projected earnings. a. earning accretion or dilution b. equity accretion or dilution ¢. equity control premium d. precedent transaction A key factor that is used to discount the net cash flows in the future is 5 a. cost of equity b. cost of earningsRe eS Ra ade). 2 SeLci ny c. cost of debt d. cost of capital 17. The cost of can be computed primarily by getting the weight of cost of sources of fund, through and a. cost of equity; weighted average cost of capital: capital asset pricing model b. cost of equity; average cost of capital; capital asset pricing model c. cost of capital; weighted average cost of capital; capital asset pricing model d. cost of capital; average cost of capital; capital asset pricing model 18. The is a calculation of a firm's in which each category of is proportionately weighted. a. weighted average cost of capital; capital; cost of capital b. weighted average cost of capital; cost of capital; capital c. average cost of capital; capital; cost of capital d. average cost of capital; cost of capital; capital 19. The beta in Capital Asset Pricing Model is a. use to represent volatility/risk of the market b. arbitrary systematic risk coefficient cc. the pricing multiple used to compute for the cost of capital d. the credit spread/debt premium added to risk free rate. 20. The following statements are correct for the Economic Value Added (EVA), except: a. The most conventional way to determine the value of the asset is through its economic value added. b. Economic value added (EVA) is a convenient metric in evaluating investment as it quickly measures the ability of the firm to support its cost of capital using its earnings. c. EVAis the excess of the company's equity after deducting the cost of capital. d. The general concept here is that higher EVA is better for the firm. 21. The elements that must be considered in using EVA are as follows, exceptRA areas a. Reasonableness of earnings b. Appropriate cost of capital c. Volatility of the market d. Both a and b 22. In which income based valuation method wherein the value of the asset or the investment is determined using the anticipated earnings of the company divided by the cost of capital? a. Economic Value Added (EVA) b. Capitalization of Earnings Method c. Capital Asset Pricing Method d. Discounted Cashflow Method 23. The following statements are factual discussions about Capitalization of Earnings Method except: a. In capitalization of earnings method, the value of the asset or the investment is determined using the anticipated earnings of the company divided by the cost of capital. b. You may use past earnings in the Capitalization of Earnings method for cases wherein earnings are fixed. c. The formula used in Capitalization of Earnings is actually grossing up the future earnings using capitalization rate to come up with the estimated asset value. d. Cost of Capital used in the Capitalization of Earnings method is equivalent to the expected yield or the required rate of return. 24. In capitalization of earnings method, these types of assets are not Part of the computation hence need to be added to the Capitalized Earnings. a. Fixed Assets b. idle Assets c. Current Assets d. Noncurrent Assets 25. The following statements are limitations of capitalization of earnings method, except a. this does may not fully account for the future eamings or cash flows thereby resulting to over or undervaluation b. inability to incorporate contingencies ¢. assumptions used to determine the cashflows may not hold true since the projections are based on a limited time horizon d. Itis simple and convenientVALUATION CONCEPTS Ropiiarrteas WULTIPLE CHOICE PROBLEM. Write the letter of the best answer before number of the question or statement being answered. HBB Company for the last ten years, has earned and had cash flows of about Php 500,000 every year. As per the predictions of the company's earnings, the same cash flow would continue for the foreseeable future. The expenses for the business every year is about Php 100,000 only. Based on the available public information a Php 4 million Treasury bond has a prevailing return of Php 400,000 annually. Using Capitalization of Earnings approach, what is the value of HBB Company? Php 4,000,000.00 Php 3,000,000.00 Php 2,000,000.00 Php 1,000,000.00 ooo 2. HCB Company for the last ten years, has earned and had cash flows of about P600,000 every year. As per the predictions of the company’s earnings, the same cash flow would continue for the foreseeable future. The expenses for the business every year is about P500,000 only. Based on the available public information a Php 4 million Treasury bond has a prevailing return of Php 40,000 quarterly. > Using Capitalization of Earnings approach, what is the value of HCB Company? Php 3,000,000.00 Php 2,500,000.00 Php 3,500,000.00 Php 1,000,000.00 pose o Heart, Inc. plans to sell its business and has used Capitalization of Earnings to be an appropriate valuation method with a stable cashflow of Php 1,000,000.00 for the last 5 years. Forecast shows that similar level of cashflow would continue in the next several years. With the stability of the business it was sold to HBB, Inc. for Php 6,000,000.00 with premium of Php 1,000,000.00. Similar instruments based on the available data is a Treasury Note with a determined quarterly interest rate. Annual Operating Expenses isPhp 600,000.00 Compute for the capitalization rate used by Heart, Inc. noo Hai-dee is looking to buy a property that costs Php115,000, and can be leased out for Php750 a month. She has done some research and has determined the net operating expenses to be Php5,000 per year. Her desired cap rate is 10%. What is the appraisal value of this property using the capitalization of eamings approach? . Php 40,000.00 . Php 42,500.00 Php 45,000.00 Php 50,000.00 pepe . Heinz, inc. expects to generate earnings over the next five years of Php50,000.00; Php60,000.00; Php65,000.00; Php70,000.00 and Php75,000.00. Using the Capitalization of Earnings Method, what is the estimated value of the firm using 10,00% required rate of return? a. Php 640,000.00 b. Php 657,378.72 c. Php 657,738.72 d. Php 604,000.00 Herbert, Inc. expects to generate earnings over the next five years of Php50,000.00; Php60,000.00; Php65,000.00: Php70,000.00 and Php75,000.00. Using the Capitalization of Earnings Method, what is the estimated value of the firm using 8.00% required rate of return? . Php 600,000.00 Php 800,000.00 Php 500,000.00 . Php 700,000.00 aQo0m . Ernesto, Inc. has projected average earnings every year of Php 100 Million. Debt to Equity Ratio is 3:1. After tax cost of debt is 5% while cost of equity is 10%. The Board of Directors of the companyRE aon a seers decided to sell the company for P1 Billion. Compute for the Economic Value Added (EVA). a. Php 37,500,000.00 b. Php 50,000,000.00 c. Php 0.00 d. Php 25,000,000.00 8. Using Weighted Average Cost of Capital (WACC), ignoring taxes, compute the cost of capital of a company with debt ratio of 0.75:1 and is paying yearly average interest for its loans of 4% and dividend rate of 5% yearly. a. 4.00% b. 4.25% c. 4.50% d. 5.00% 9. Using Capital Asset Pricing Method (CAPM), compute for the cost of capital (equity) with risk-free rate of 5%, market return of 12% and Beta of 1.3. a. 14.01% b. 14.10% c. 14.00% d. 14.11% 40. Using Capital Asset Pricing Method (CAPM), compute for the cost of capital (equity) with risk-free rate of 4%, market return of 8% and Beta of 1.5. a. 10.00% b. 11.00% c. 12.00% d. 13.00% 11. With risk-free rate of 5%, Beta of 1.5, market retum of 8%, prevailing credit spread of 3%, tax rate of 30% and Equity ratio of 30%, compute for the weighted average cost of capital, a. 6.00% b. 6.77% c. 7.00% d. 7.77% 4 N With risk-free rate of 6%, B credit spread of 3%, tax rate CAPM method compute for @ 5, market return of 8%, prevailing and Equity ratio of 30%, Using15. 16. 17. - 9.00% 6.77% - 8.00% 8.77% a. b. c d . The appropriate WACC of a firm is 6.43%. With risk-free rate of 4%, market return of 8%, prevailing credit spread of 3%, tax rate of 30% and Equity ratio of 30%, compute for the volatility of stocks or Beta. a. 1.00 b. 1.25 ec. 1.50 d. 1.75 . The appropriate WACC of a firm is 6.43%. With risk-free rate of 4%, market return of 8%, prevailing credit spread of 3%, tax rate of 30% and Equity ratio of 30%, compute for the after tax cost of debt. a. 4.90% b. 5.00% c. 7.00% d. 10.00% SPPE Corp. is planning to expand and new projects is expecting to earn an average of Php375,000 annually. If the project requires for Php5,000,000 investment at 10% cost of capital. Compute for the Economic Value Added. a. Php 125,000.00 b. (Php 125,000.00) c. Php 875,000.00 d. (Php 875,000.00) SLAC Corp. is planning to expand and new projects is expecting to earn an average of Php750,000 annually. If the project requires for Php5,000,000 investment at 12% cost of capital. Compute for the Economic Value Added. a. Php 150,000.00 b. (Php 150,000.00} ¢. Php 600,000.00 d. (Php 600,000.00) SPRO Corp. is planning to expand and new projects is expected to have an EVA of Php200,000.00. The annual cost of capital at 10% amounts to Php400,000.00. What is the average monthly earning projected for this project?JATION CONCEPTS AND METH a. Php 600,000.00 b. Php 50,000.00 c. Php 60,000.00 d. Php 500,000.00 18. SLMA Corp. for the last ten years, has earned and had cash flows of about P600,000 every year. As per the predictions of the company’s earnings, the same cash flow would continue for the foreseeable future. The expenses for the business every year is about P500,000 only. Based on the available public information a P4 million Treasury bond has a prevailing return of P40,000 quarterly. Using Capitalization of Earnings approach, assuming SLMA would sell 20% of its shareholdings, what will be the minimum selling price? a. Php 2,500,000.00 b. Php 500,000.00 c. Php 1,500,000.00 d. Php 1,000,000.00 19. SPLI, Inc. has a Debt to Equity Ratio of 3:1. After tax cost of debt is 5% while cost of equity is 10%. The Board of Directors of the company decided to sell 100% of the company for Php 1 Billion. Compute for the projected monthly average earnings assuming an EVA of Php 57,500,000.00 a. Php 37,500,000.00 b. Php 10,000,000.00 c. Php 120,000,000.00 d. Php 100,000,000.00 20. The appropriate WACC of a firm is 6.77%. With market return of 8%, prevailing credit spread of 3%, tax rate of 30% and Equity ratio of 30%, what is the risk free rate of the firm with Beta of 1.5? a. 4% b. 5% Cc. 6% d. 7%Problems P4-1. You have been asked by an Investor to compute for the Economic Value Added of the companies he is considering to invest into as follows: E Corp. V Corp. |__ACorp. Net Investment | 55,000,000.00 | 60,000,000.00 | 70,000,000.00 WACC 8.00% | 9.00% 10.00% Net Operating [Profit After Tax_| 4,550,000.00 | 5,450,000.00 | 6,850,000.00 a. Which company under consideration has the highest EVA? b. Which companies would you recommend for investment? c. What is the EVA of each companies under consideration? P4-2. Compute for the missing figures using CAPM Method: CCorp | ACorp. | P Corp. | MCorp. Risk Free rate z 3.00% | 4.00% | 5.00% | Beta [1.25 2 1.30 1.40 | Market Retum __| 12.00% | 11.00% 2 8.00% Cost of Equity 14.50% | 15.00% | 11.80% a Additional questions a. Which company has the highest cost of equity? b. Which company has the lowest cost of equity? P4-3. As an Analyst, you were tasked to compute for the Weighted Average Cost of Capital of various companies given the following information. Income Tax rate is 25%. Co Ca | Hex WCorp | ACorp. | Corp. _| Corp. Risk Free rate 4.00% | 3.00% | 2.00% | 3.50% Beta 1.25 1.50 1.30 1.40 _| Market Return 12.00% | 11.00% | 10.00% | 8.00% | Debt to Equity ratio 25 3 4 35 Credit Spread (in | BPS) 200 300 250 450