Valuation Concepts and Methodologies PDF

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Valuation Concepts and MethodologiesFundamental Principles of ValuationVALUATIONValue: how much a particular object is worth to a particular set of eyes Valuation: estimation of an asset’s value based on variables perceived to be related to future investment returnsCONCEPTS OF VALUEIntrinsic Value ...

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Valuation Concepts and Methodologies Fundamental Principles of Valuation VALUATION Value: how much a particular object is worth to a particular set of eyes Valuation: estimation of an asset’s value based on variables perceived to be related to future investment returns

CONCEPTS OF VALUE Intrinsic Value  based on assumption there is a hypothetically complete understanding of its investment characteristics  on the basis of an evaluation or available facts, to be true or real value that will become market value when other investors reach same conclusion Going Concern Value  under going concern assumption Liquidation Value  net amount realized if the business is terminated and the assets are sold piecemeal  based on assumption that entity will be dissolved and assets will be solved individually Fair Market Value  price at which property would change hands between 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

ACTIVE INVESTORS Fundamental Analysts

 interested in understanding and measuring intrinsic value of the firm  Fundamentals: refer to characteristics of an entity related to its financial strength, profitability, and risk appetite  lean towards long term investment strategies Activist Investors  looks for companies with good growth prospects that have poor management  usually do takeovers Chartists  stock prices are significantly influenced by how investors think and act  rely on available trading KPIs such as price movements, trading volume, short sales Information Traders  more adept in guessing or getting new information about firms and they can predict how the market will react based on this

VALUATION PROCESS 1. Understanding the business 2. Forecasting financial performance 3. Selecting right valuation model 4. Preparing valuation model based on forecasts 5. Applying valuation conclusions and providing recommendation

Fundamental Principles of Valuation BASIC CONCEPTS Green Field Investments: start from scratch Brown Field Investments: partially or fully operational; already in goingconcern state Going Concern Business Opportunities: businesses that has long term into infinite operational period Salvage Value: value upon termination of company Earning Accretion: 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. Equity Control Premium: amount added to the value of the firm in order to gain control

Terminal Value: value of the company in perpetuity or in a going concern environment Terminal Value= Where: Growth rate (g) =

Net Cash Flows: amounts of cash available for distribution to both debt and equity claim from the business or asset (restricted & unrestricted) Free Cash Flows: cash produced from operation (unrestricted) Free Cash Flows = Revenue – OPEX – Taxes – Capital expenditures

EBITDA margin: overview of the opportunities investors is going to realize among others

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1 NCF n n−1 ) −1 NCF 0

Equity Value: amount appropriated to equity shareholders

COMPARABLE COMPANY ANALYSIS 1. Price Earnings Ratio  value of company as compared to what it actually earned MVPS P ratio= EPS E ∴ MVPS=EPS ×

APPROACHES IN VALUING GCBO DISCOUNTED CASH FLOWS ANALYSIS

[

(

NCf ( n ) g

P ratio E

2. Book to Market Value  appreciation of the market to the value of the company as oppose to the value it reported under its SFP .

BMV =

Net Book Value per Share Market Value per Share

∴ MVPS=

Net Book Value per Share BMV

Where: NBV per sh=totalasset −liabilities− 3. Dividend yield ratio

P S

 Value which they can actually get from the company Dividend per sh Dividend yield ratio= MV per sh Dividend per Share ∴ MVPS= DYR 4. EBITDA multiple MVPS EBITDA per share ∴ MVPS=EBITDA multiple × EBITDA per EBITDA multiple=

Where: EBITDA: Earnings before interest, taxes, Depreciation and Amortization

ECONOMIC VALUE ADDED Economic value added  Most conventional way to determine the value of the asset  Assess ability of the firm to support its cost of capital with its earnings EVA=Net Cash Flows−Cost of capital Where: Cost of Capital=investment × WACC

STEPS IN FINANCIAL MODELLING Financial model: representation of operations 1. Gather historical and market information and references 2. Establish drivers for growth and assumptions 3. Determine the reasonable cost of capital 4. Execute the formulas to compute for the value Make scenarios and sensitivity analysis based on the results...