Asset-Based Valuation Methods

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Questions and Answers

What is the meaning of the acronym GCBOs?

Going Concern Business Opportunities

The Book Value Method disregards the value that assets can generate in the future.

True

What is the most prudent approach to valuing a building with a replacement cost of Php 6 million and a book value of Php 5 million?

Premium @ Php 6 million

When is the Reproduction Value Method used in valuation?

When there is no external information about the replacement cost of specialized equipment or assets. Signup and view all the answers

Which of the following is the most conservative valuation method?

Liquidation Value Method Signup and view all the answers

Explain the difference between Orderly Liquidation and Forced Liquidation.

Orderly Liquidation involves selling assets strategically over a period to maximize value, while Forced Liquidation sells assets quickly, often through auctions, regardless of potential discounts. Signup and view all the answers

What does the Liquidation Value method aim to determine?

The liquidation value method seeks to determine the worth of a company's assets if it were to shut down and sell everything, disregarding future earnings potential. Signup and view all the answers

When is Liquidation Value considered important?

Liquidation Value becomes essential when a failing company needs to assess the value of its assets to repay investors or creditors, or when there is no hope for recovery. Signup and view all the answers

Goodwill is a factor that is considered in the Liquidation Value method.

False Signup and view all the answers

What are some situations that necessitate considering Liquidation Value as a valuation method?

Situations requiring Liquidation Value analysis include business failures due to consistent operating losses, severe economic downturns, natural disasters, or pandemics, as well as scenarios like corporate or project end-of-life, or depletion of scarce resources. Signup and view all the answers

What is the general principle for valuing unused land or idle machinery in the context of Liquidation Value?

Unused land or idle machinery should be valued based on their liquidation value as these assets are not generating income and their market value is likely to be reduced by sale costs and taxes. Signup and view all the answers

What does the Liquidation Value of a company represent?

The Liquidation Value represents the net amount a company could receive by selling all its assets piecemeal if it were to shut down. Signup and view all the answers

Study Notes

Asset-Based Valuation

Asset-based valuation is the process of estimating the economic value of an asset, business, or company.
This process should be kept confidential for negotiating better positions for acquiring opportunities.
Assets are the resources owned by a company, and liabilities are what the company owes.

Topic Outline

Introduction to Asset-Based Valuation
Book Value Method
Replacement Value Method
Reproduction Value Method
Liquidation Value Method
Liquidation Value
Situations to Consider
General Principles
Types of Liquidation
Calculating Liquidation Value

Asset Valuation Methods

Book Value Method: Defined as the value recorded in accounting records, focusing on current and historical asset value (disregarding future value). The enterprise value is the book value of assets less non-equity claims.
- Formula: Total Assets - Total Liabilities = Net Book Value / Number of Outstanding Shares = Value per Share
Replacement Value Method: The cost of replacing similar assets, considering their condition and competitive advantage.
- Factors: Age of asset, size, and competitive advantage
- Scenario: Insurance (book value vs. replacement cost)
- Formula: Total Assets - Total Liabilities = Net Book Value + Replacement Adjustments = Adjusted Net Book Value / Number of Outstanding Shares = Replacement Value per Share
Reproduction Value Method: An estimate of the cost to rebuild or recreate an asset with similar features and functionality.
- Steps
  - Conduct reproduction cost analysis on all assets
  - Consider the cost of creating the assets today
  - Example Calculation: If a company has machines worth PHP 1 billion, and 80% of the machines can be rebuilt at 90% of their current cost; 80% of PHP 1 Billion = PHP 800 million, and 90% of PHP 800 million = PHP 720 million.
  - Adjust the book value (deducting reproduction costs and adding goodwill and other current assets)
Liquidation Value Method: The net amount a company's assets can be sold for if the company stops operating, considering the company's assets (buildings, machines, inventory, etc.)
- Focus: Salvage value of each item.
- For example, calculate the amount from selling equipment if the company closes.
- It disregards the company's future potential growth or profit.
- Types of Liquidation:
  - Orderly Liquidation: assets sold strategically over an orderly period to attract buyers and generate the most money.
  - Forced Liquidation: assets sold quickly, such as at auction.
- Formula:
Present Value of sale of Asset - Present Value of Cost of Termination and settlement for liabilities - Present Value of Tax Charges for Transactions and other Liquidation Costs = Liquidation Value.

Additional Info

Going Concern Business Opportunities (GCBOs): Businesses with a long-term to infinite operational period.
Factors Affecting RV (Replacement Value): age, size, and competitive advantage.
Situations to Consider for Liquidation Value: Business failures (internal and external factors). Potential external factors include: economic down-turns, changing consumer preferences, governmental action/regulation, natural disasters, and health crises.
Book Value Method Pros and Cons: Transparent and verifiable based on financial statements, but may not represent the real value of the business. Only reflects historical values.
Key Points to Remember: Liquidation value is a conservative estimate. Asset values depend on context (hotel furniture, perishable goods). Goodwill, reputation, and skilled employees are excluded from liquidation value calculations.

Sample Problem (Book Value Method):

If QRS Company has PHP 10 million in total assets and PHP 7 million in liabilities and 2,000,000 shares; the share value is PHP 1.50 per share.

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Description

This quiz covers key concepts and methods related to asset-based valuation, including the Book Value Method, Replacement Value Method, and Liquidation Value Method. Understand how to estimate the economic value of various assets and the principles that guide this important financial process.