Asset-Based Valuation PDF

ASSET-BASED VALUATION Mama, Martin, Porillo, and Rodriguez  TOPIC OUTLINE 1 INTRO TO ASSET BASED VALUATION 2 BOOK VALUE METHOD 3 REPLACEMENT VALUE METHOD 4 REPRODUCTION VALUE METHOD 5 LIQUIDATION V...

ASSET-BASED VALUATION Mama, Martin, Porillo, and Rodriguez  TOPIC OUTLINE 1 INTRO TO ASSET BASED VALUATION 2 BOOK VALUE METHOD 3 REPLACEMENT VALUE METHOD 4 REPRODUCTION VALUE METHOD 5 LIQUIDATION VALUE METHOD VALUATION GROUP 1  TOPIC OUTLINE 6 LIQUIDATION VALUE 7 SITUATIONS TO CONSIDER 8 GENERAL PRINCIPLES 9 TYPES OF LIQUIDATION 10 CALCULATING LIQUIDATION VALUE VALUATION GROUP 1 VALUATION GROUP 1 ASSETS ARE THE RESOURCES OWNED BY A BUSINESS. THEY ARE THE OPPOSITE OF LIABILITIES, WHICH ARE WHAT THE BUSINESS OWES. XERO (2024)  VALUATION process of estimating the economic value of an asset, business or company. should be kept confidential to allow the company to negotiate a better position for them to acquire an opportunity. VALUATION GROUP 1 VALUATION GROUP 1 TYPES OF INVESTMENTS GREEN FIELD BROWN FIELD INVESTMENTS INVESTMENTS a company will build its own, is when a company or government brand new facilities from the entity purchases or leases existing ground up production facilities to launch a new production activity.  WHAT ARE GCBOs? GOING CONCERN BUSINESS OPPORTUNITIES ARE THOSE BUSINESSES THAT HAS A LONG TERM TO INFINITE OPERATIONAL PERIOD. VALUATION GROUP 1 VALUATION GROUP 1 BENEFITS OF ERM 1. increase the opportunities; 2. facilitate management and identification of the risk factors that affect the business; 3. identify or create cost-efficient opportunities 4. manage performance variability; 5. improve management and distribution of resources across the enterprise; and 6. make the business more resilient to abrupt changes. ABV APPROACH enables the analyst to validate the firm value through the value of its assets. focuses on the current and historical value of its assets and will disregard the value it can generate in the future VALUATION GROUP 1 VALUATION GROUP 1 ABV APPROACH can be used if the basis of the value is concretely established and complete. Information required include: total value of assets financing structure classes of equity and other sources of funding  ABV METHODS Book Value Method Replacement Value Method Reproduction Value Method Liquidation Value Method VALUATION GROUP 1 VALUATION GROUP 1 BOOK VALUE METHOD DESCRIPTION can be defined as the value recorded in the accounting records focuses on the current and historical value of its assets and will disregard the value it can generate in the future the value of the enterprise is based on the book value of the assets less all non-equity claims against it. VALUATION GROUP 1 BOOK VALUE METHOD FORMULA Total Assets xxxx Less: Total Liabilities xxxx Net Book Value xxxx Divide: Number of Outstanding Shares xxxx Value per Share xxxx SAMPLE PROBLEM QRS Company has total assets worth Php 10 million and total liabilities of Php 7 million. What is the share value if the company has 2,000,000 shares? VALUATION GROUP 1 SAMPLE PROBLEM Total Assets 10,000,000 Less: Total Liabilities 7,000,000 Net Book Value 3,000,000 Divide: Number of Shares 2,000,000 Value per Share 1.50 VALUATION GROUP 1 VALUATION GROUP 1 BOOK VALUE METHOD PROS AND CONS provides a more transparent view on firm value and is more verifiable since it is based on figures reflected in the financial statements. only reflects historical value and might not reflect the real value of the business VALUATION GROUP 1 REPLACEMENT VALUE METHOD WHAT IS REPLACEMENT COST? As defined by the National Association of Valuators and Analysts, replacement cost is the cost of similar assets that have the nearest equivalent value as of the valuation date. VALUATION GROUP 1 REPLACEMENT VALUE METHOD FACTORS AFFECTING RV The value of the individual assets shall be adjusted to reflect the relative value or cost equivalent to replace that asset. The age of the asset, size of the assets, and competitive advantage of the asset are the factors that can affect the replacement value of the asset. VALUATION GROUP 1 REPLACEMENT VALUE METHOD SCENARIO: INSURANCE Assume that the book value of QRS Company’s building is Php 5 million and the estimated replacement cost is Php 6 million. Premium @ Php 6 million = Most Prudent Approach Premium @ Php 4 million = Php 2 million difference VALUATION GROUP 1 REPLACEMENT VALUE METHOD FORMULA Total Assets xxxx Less: Total Liabilities xxxx Net Book Value xxxx Add/Less: Replacement Adjustments xxxx Adjusted Net Book Value xxxx Divide: Number of Outstanding Shares xxxx Replacement Value per Share xxxx SAMPLE PROBLEM 50% of NCA - 150% of the NBV Non-current Assets 1,000,000,000 % of Affected Item 50% 50% of the Non-current Assets 500,000,000 Premium on Replacement 150% Adjusted Non-Current Assets (A) 750,000,000 VALUATION GROUP 1 SAMPLE PROBLEM 50% of NCA is 75% of the NBV Non-current Assets 1,000,000,000 % of Affected Item 50% 50% of the Non-current Assets 500,000,000 Premium on Replacement 75% Adjusted Non-Current Assets (B) 375,000,000 VALUATION GROUP 1 SAMPLE PROBLEM Total Assets - Replacement Value Adjusted Non-current Assets (A) 750,000,000 Adjusted Non-current Assets (B) 375,000,000 Total Adjusted Non-Current Assets 1,125,000,000 Current Assets 500,000,000 Total Assets - Replacement Value 1,625,000,000 VALUATION GROUP 1 SAMPLE PROBLEM Replacement Value per Share 1,625,000,000 - 900,000,000 Replacement Value per Share = 1,000,000 shares Replacement Value per Share = Php 725.00 Note: The NBV for this problem is Php 900,000,000 VALUATION GROUP 1 VALUATION GROUP 1 REPRODUCTION VALUE METHOD This method is used when there’s no external information about how much it would cost to replace specialized equipment or assets. Reproduction Value is an estimate of the cost to rebuild or recreate the same asset with similar features and functionality. VALUATION GROUP 1 STEPS TO DETERMINE EQUITY VALUE USING THE REPRODUCTION VALUE METHOD 1. Conduct reproduction costs analysis on al assets Look at all the big things your company owns, like machines or buildings, and figure out how much it would cost to create them again today. VALUATION GROUP 1 STEPS TO DETERMINE EQUITY VALUE USING THE REPRODUCTION VALUE METHOD Example: Your company owns machines worth PHP 1 billion. You find out that 80% of these machines could be rebuilt for only 90% of their current cost. 80% of PHP 1 billion = PHP 800 million 90% of PHP 800 million = PHP 720 million This means that to rebuild most of your machines today, it would cost PHP 720 million. VALUATION GROUP 1 STEPS TO DETERMINE EQUITY VALUE USING THE REPRODUCTION VALUE METHOD 2. Adjust the Book Values: Deduct the adjusted reproduction costs and add assets like goodwill (value of the brand/reputation) and other current assets. Total assets = Adjusted non-current assets (PHP 720M) + Goodwill (PHP 200M) + Current assets (PHP 500M) = PHP 1,420,000,000 VALUATION GROUP 1 STEPS TO DETERMINE EQUITY VALUE USING THE REPRODUCTION VALUE METHOD Step 3: Calculate the Value per Share Let’s say your company owes PHP 900 million (liabilities), and you have 1 million shares of stock. VALUATION GROUP 1 LIQUIDATION VALUE METHOD This method is a way of figuring out how much a company's assets are worth if the company stops operating and sells everything. It assumes that the company’s value is based on what its assets (like buildings, machines, inventory, etc.) could be sold for when the business shuts down. VALUATION GROUP 1 LIQUIDATION VALUE METHOD The focus is on the salvage value—what each item is worth if sold off. For example, if a company sells all its equipment after closing, how much money would that bring? It’s a safe estimate because it doesn’t assume the company will earn money in the future. It focuses only on what’s there today—ignoring any potential growth or profit. VALUATION GROUP 1 WHAT IS LIQUIDATION VALUE? The liquidation value is the net amount that can be gathered if a business shuts down and its assets are sold piecemeal. It is considered the most conservative valuation method, as it often results in a value lower than other methods like the going-concern value. Liquidation Value is the money a company could get if it sold all its assets (like equipment, furniture, or buildings) right away, usually when the company is closing down. It’s the lowest value a company is worth because it’s calculated assuming the business is no longer running. VALUATION GROUP 1 EXAMPLES: In the case of a hotel closure, furniture, equipment, and other assets are sold separately. These assets no longer generate cash flows, so their value is reduced to their liquidation value. Perishable inventories need to be sold quickly, often at a discount, to avoid spoilage and loss. VALUATION GROUP 1 HOW IS IT DIFFERENT FROM OTHER VALUATION METHODS? Liquidation Value is like a "fire sale" price—how much you’d get if you sold everything as quickly as possible. Going-Concern Value looks at the business as if it will continue running, which usually makes the value much higher. VALUATION GROUP 1 WHEN IS LIQUIDATION VALUE IMPORTANT? If a company is failing, investors or creditors (the people who loaned money) want to know how much they can get back by selling off the company’s assets. It’s a last-resort method used when there’s no hope for recovery. VALUATION GROUP 1 KEY POINTS TO REMEMBER: 1. It’s conservative: Liquidation value is like the "safe" or "low- end" estimate of a company's worth. 2. Asset value depends on context: Some assets, like hotel furniture or perishable goods, lose value fast when sold during liquidation because they might not be useful outside the business. 3. Goodwill is excluded: If a company’s value depends on its reputation or skilled employees (like in partnerships), this is not included in liquidation value. VALUATION GROUP 1 SITUATIONS TO CONSIDER LIQUIDATION VALUE BUSINESS FAILURES Companies which consistently report operating losses will eventually impact and reduce firm value. If the firm only earns return at a rate lower than its cost of capital, this might signal business failure. When left unresolved, this may lead to insolvency or even bankruptcy. VALUATION GROUP 1 SITUATIONS TO CONSIDER LIQUIDATION VALUE BUSINESS FAILURES Business failures 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. VALUATION GROUP 1 SITUATIONS TO CONSIDER LIQUIDATION VALUE BUSINESS FAILURES These external factors that would attribute to business failure may take the form of, but not limited to the following: severe economic down-turn, dynamic consumer preferences, material adverse governmental action or regulation, occurrence of natural disasters or calamities, and occurrence of pandemic or general health hazards. VALUATION GROUP 1 SITUATIONS TO CONSIDER LIQUIDATION VALUE CORPORATE OR DEPLETION OF PROJECT END OF LIFE SCARCE RESOURCES Once the date arrives and life is not Once the contract with the government extended, due process takes place to end expires or scarce resource become the life of the corporation and start the fully depleted and no new site is liquidation process. If corporate end of life prepared to support operation, this is already certain, it is more appropriate to might signal potential liquidation and compute terminal value using liquidation valuation should be based on value. liquidation value.  GENERAL PRINCIPLES ON LIQUIDATION VALUE If the liquidation value is above income approach If the nature of the business implies limited valuation (based on going-concern principle) and lifetime (e.g. a quarry, gravel, fixed-term company liquidation comes into consideration, liquidation etc.), the terminal value must be based on value should be used. liquidation. Non-operating assets, such as unused land or idle machinery, should be valued based on their liquidation value, as these assets are not generating Liquidation valuation must be used if the business income. The market value of these assets will likely continuity is dependent on current management be reduced by the costs of sale and taxes, which that will not stay. makes using a going concern valuation approach inappropriate. VALUATION GROUP 1 VALUATION GROUP 1 TYPES OF LIQUIDATION ORDERLY LIQUIDATION FORCED LIQUIDATION assets are sold strategically over assets are sold as quickly as an orderly period to attract and possible, such as an auction generate the most money for the assets  CALCULATING LIQUIDATION VALUE Present Value of sale of Asset Php xxx.xx Less: Present Value of Cost Termination (xxx.xx) and settlement for liabilities Less: Present Value of Tax Charges for Transactions and other Liquidation Costs (xxx.xx) LIQUIDATION VALUE Php xxx.xx VALUATION GROUP 1 VALUATION GROUP 1 VALUATION GROUP 1 VALUATION GROUP 1 VALUATION GROUP 1 VALUATION GROUP 1 VALUATION GROUP 1 THANK YOU RESOURCE PAGE