Valuation Approaches and Methodologies

• Studying valuation approaches and methodologies is vital for informed decision-making processes in finance and accounting
• Valuation involves fair estimation, worth of assets, securities, and liabilities
• Stakeholders are provided with important insights for areas such as investment and taxation
• Valuation methods blend financial theory, market analysis, and quantitative modeling
• Practitioners need a deep understanding amid fluctuating market conditions, laws, and tech developments

Approaches of Valuation

• Three widely used valuation approaches are market-based, income/earnings-based, and asset/cost-based
• The market approach values assets based on what similar assets have sold for
• The income/earning approach calculates present value based on future earnings
• Asset/cost approach uses the cost to develop or acquire a similar asset

Selecting the Correct Approach

• The proper value identification should be based on finalized purpose and an understanding which could involve:
  • Nature of asset
  • Input information reliability
  • Strengths & Weakenesses
  • Market Participants
  • Premise of Valuation

Observable vs Unobservable inputs

• Market data develops Observable Inputs
• Non-availability market data develops Unobservable Inputs
• Market Participants must be knowledgable and independent willing buyers and sellers

Market Based Approach

• Market Approach relies on the real world worth of a business or asset
• Market efficiency, supply and deman, and comparative analysis are used

Elements of using Market Approach

• Availability and realiablity recent transactions is needed
• The asset to be valued is actively traded is needed
• Recent, orderly transactions in the asset are of an identical nature are needed

Benefits to using Market Approach

• Simple to understand and use
• Uses other valuation information and is consistent
• Assumes market consensus so reflects market conditions

Limitations of Market Approach

• Relative valuation quality depends on the comparable of companies
• Recognizing comparable companies, the stage and various business risks is difficult
• Accounting recognition differens can distort valuations

Market Price Method

• Considers traded prices and markets of asset
• Reducing the impact of volatility uses Weighted average or volume weighted average

Comparable Companies Multiple (CCM) Method

• Internationally accepted valuation method that derives from similar market prices of comparable companies traded in Active Market
• It can be referred to as Guideline Public Company or Guideline Publicly Traded Comparable Method

Considerations for selecting comparable company assets

• Operational Processes
• Cash Flows
• Growth Potential
• Risks

CCM Steps in Deriving a value:

• Recognize Market Comparable Companies
• Selection and Computation of Market Multiples
• Assess assets with comparable counterparts to pinpoint notable differences
• Point out any Material Adjustments
• Apply adjusted Market Multiple to the parameter of relevant assets
• Computation of Value of the Asset using Market Multiples based on different metrics

Determining Factors for Identifying the comparables:

• Industry
• Operations
• Line of Business
• Similar Economic Forces
• Size of the Comparable
• Lifecycle
• Profitability/ Margins
• Diversification

Computation of Market Multiples as a common ratios:

• Revenue
• Earnings before Interest, Tax, Depreciation and Amortization (EBITDA)
• Profit after Tax (PAT)
• Earnings per Share (EPS)
• Book Value (BV)
• Enterprise Value (EV)

Factors when Differences Arise

• Size
• Geographic Location
• Absolute terms profitability
• Lifecycle stage
• Product Diversification
• Expected growth
• Management Profile
• (ESG) norms
• Control premium and adjusting for such directly or indirectly at the operation
• Discount lack of marketability illiquidity
• Size adjustments to smaller companies

Comparable Transaction Multiple (CTM) Method

• Internationally Accepted. Also known as GT Method
• Transaction Multiples based on business value / asset price

Important steps in deriving a value using CTM

• Identification of Transaction Comparable;
• Selection and computation of transaction Multiples;
• Tracing Assets with Comparable counterparts for material discrepancies
• Pinpointing material difference Adjustments
• Applying adjusted Transactions
• Computing asset of value

Factors

• Date should be close to valuation date
• Orderly Selection
• Avaliablity and understandablity of reliable transactions and other information

Adjustment of material differences

• Required differences and adjustements in risk profiles and liability

Income / Earning Based Approach

• Valuation is based on Maintainable future amounts into a single current discounted/capitalized amount.
• The Basic Time Value of Money formula is as follows: FV = PV x (1 + i)^n

Instances with Income Approach

• Not enough Market Data or few comparables
• Asset produces reliable and reasonable cashflow

Price Earnings Ratio based Valuation

• The price-to-earnings (P/E) ratio measures a company's share price relative to its earnings per share (EPS)

DCF Method

• Internationally accepted application of the Income approach is arguably recognized methods to find Business Value
• The business's values can be indicated from the value of cashflow projection of the business

Variants of DCF

• Two variants used is Equity which determins the total value
• The other helps in determining Enterprise Values
• Difference between Equity being a total value versus Enterprise being a total worth

3 Methods of Calculating Value

• Gordon
• Exit Multiple
• Salvage / Liquidation

Important points to keep in mind with Cash Flow

• Project financial statements that give a complete image fit with the pieces including revenue and interest
• The first step shall be authenticating historical data or the other aspects that have significant interests from purchasers

Factors about the future forecast in cash flow

• Asset
• Life
• Sufficient period
• Reliable data
• revenue growth/profitability
• policy changes
• Capital Expenditure
• Working Capital

Discount rate

• A risk measure including the risk-free rate and calculating equity cost
• Average Cost of Capital (WACC) is used to Discount all Future Cash Flows, this may need to be factord into the Equity and Average to get cost of Rates

Traditional Methods in Determining Cost of Equity

• Dividend Capitalization Model
• Capital Asset Pricing Model (CAPM)

Capital Asset Pricing Model (CAPM)

• Commonly used and considers market risk which must be compensated
• Typically greater than risk-free rate

Formula for cost of equity

• Risk free + Market risk

Beta

• Asseses stoch or asset to market sensitivity and provides the steps to get returns across time by dividing functions

How to obrain Beta for Unlisted Companies

• Identification of publicly listed companies
• Publicly available databases
• Spreadsheet
• Average betas

Discounted Future Earnings Method (DFE)

• The "earning measure non-DCF based valuation" uses future earnings based on factors like projected earnings, discounting, historical financial data, industry trends, and expectations

Valuation of Intangibles

• Accounting definition of an Intangible Asset is Identifiable Non-Monetary Asset Without Physical Substance
• Common examples: Patents, Copyrights, Customer Lists, licenses, Franchises etc

Methods to value

• Relief From Reaching
• Multi-period excess earnings method
• With and without method

Relief From Royalty Method (RFR)

• Used to determine value of brand and other intangibles assuming there is a licensor

Key Factors

• Projections
• Discount Rate
• Appropriate royalty rate
• assets, rigths and economic returns

Multi-Periord Excess Earnings Method (MEEM)

• Used for when unable to have a reliable measure
• Used when other assets are demined

With and Without Method (WWM)

• Determiens Cash flow values with assets and a notional business value

Asset / Cost Based Approach

• The current replacement assesses how to replace for service
• This approach determiens business based on asset or business values
• Useful for assets entitites, holdings and distressed etc

Cost Approach and Limitations

• Ignores Amount Timing
• Doesn't consider risk, perfomance of competition, company history, assets etc

Under the Cost Approach is

• An asset can quickly recreate
• Liquidation is to be determined
• Certain Companies aren't used ie: indebtminable etc

Book Value

• When valuing certain adjustment should occur where value reflects historical cost vs economical, where market value recognizes

Net Replacement Value

• Giving current values will result in a fair value and still may need recognition assets and valeu

Net Realiziable Balue

• When an entity is wound these assets are valued and better than when going concernig, this means liquid

Valuing the vaious caegories and steps

• Replacement or reproduction, depreciate and depreciation
• Securities can valied if the rates quoted, and second rates may be needed
• Invertory, where it can base used based on adjustments and current pricing

Sundry Debtors

• Debts can be valued and considering value recovery

Contingent Assets

• Possibiliies of recovery should be made

Devopment Expenses - Should be reviewed

Intangible Assets

• Book value has to consider replacement and their values on a going concern