Chapter 5 Market Value Valuation Activities

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TRUE OR FALSE. Write TRUE if the statement is true and the word FALSE if you find the statement
inconsistent with the truth. – 30 pts.
________1. The idea behind the market approach is that the value of the business can be determined by
reference to reasonably comparable guideline companies for which transaction values are known.
________2. In Market Approach, the values may be known because these companies are publicly traded
or because they were recently sold, and the terms of the transaction were disclosed.
________3. The income-based valuation approach offers the view of business market value that is both
easy to grasp and straightforward to apply.
________4. Market approach is a relative valuation approach as it values a business or an intangible asset
relative to other actual valuation transactions.
________5. The mechanics of market 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.
________6. All business valuation methods under market approach fall within one or more of the
following categories. It is either based on statistics/empirical and/or heuristics and/or combination of
these methods.
________7. Heuristic Pricing Model uses expert opinions of professional teachers.
________8. Comparative private company sales data is formerly known as comparative transaction
method.
________9. The guideline private company method involves identifying a comparable company and
obtaining the stock price for the company’s listed securities.
________10. The prior transaction method involves looking up historical transactions in securities of the
business under valuation.
________11. The market 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.
________12. The major advantage with the market approach is finding sufficient private company market
data to reach a valid valuation conclusion.
________13. A key difference between the various market-based business valuation methods is how
these pricing multiplies are determined.
________14. Market approach-based valuation methods rely on the so-called pricing multiples which
determine a relationship between the business economic performance, such as its revenues or profits,
and its potential selling price.
________15. In Market Approach, sales of business which closely resemble the business being valued are
most commonly used to estimate the pricing multiples.
________16. To calculate value or price of a company, in simple terms, uses pricing multiple derived from
a particular financial ratio of the company or average of similar companies where the subject company
is being compared.
________17. Market Approach has 2 methods: Empirical/Statistical and Heuristics. Empirical/Statistical
Approaches composed of 3 methods dependent on the sources of comparable data: Comparative
private company sales data, Guideline public company data and Prior transactions method.
________18. The advantage of this Guideline Public Company Data is that there are plenty of transaction
data available from the public capital markets.
________19. Comparable company analysis is a technique that uses relevant drivers for growth and
performance that can be used as proxy to set a reasonable estimate for the value of an asset or
investment prospective.
________20. P/E ratio sends the signal on how much the market perceives the value of the company as
compared to what it actually earns.
________21. Book-to-Market Ratio is used to determine the appreciation of the market to the value of
the company as compared to the value it reported under its Statement of Financial Performance.
________22. If Book-to-Market Approach is used for comparable company analysis, the key component
of the financial statement needed is the Balance Sheet.
________23. Dividend Yield Ratio describes the relationship between the dividends received per share
and the appreciation of the book value of the company.
________24. Dividend-Yield Ratio is also known as dividend multiple and is a pricing multiple.
________25. Indirectly, EBITDA can be computed from net income plus depreciation and amortization
and incorporating working capital adjustments.
________26. EBITDA can serve as a proxy of cash flows from operating activities before tax.
________27. EBITDA per share is derived by dividing EBITDA by outstanding share for total equity shares.
________28. Book Value per share can be derived by dividing the net book value to the number of
outstanding shares available to ordinary and preference shares.
________29. Net book value is the difference of the total assets and the total liabilities. This represents
the claim of the equity shareholders and creditors of the company.
________30. Market Value Approach follows the concept that the value of the business can be
determined by reference to reasonably comparable guideline companies for which transaction values
are known.
PROBLEMS. Instruction: Read and solve the following problems below. Write your final answers on the
space provided after each question or statement. Provide your solutions. No solution, no points. 75 pts.
1. If Mercury Inc.’s market value per share is ₱275 million. The EPS it generated is ₱12.50 with
outstanding shares of 1,000,000. What is the P/E ratio? _________________
2. Tiger Inc., a listed corporation, reported the following information: EPS is ₱25 per share while P/E
Multiple is 2. How much is MVPS? ________________________
3. Lowkey Inc. declared its dividend at ₱1.25 per share. The company’s shares were last traded at ₱45
per share. The dividend yield of the company is ___________________
4. ABC Holdings Inc. reported its EBITDA margin at 25% when their revenues are ₱30,000,000. JVL
Holdings has outstanding shares of 1,000,000. The company would like to sell its shares, upon doing
research the firms similar to JVL Holdings disclosed the following EBITDA multiple:
DEF Corp. @ 8.00
GHI Corp. @ 7.50
JKL Inc. @ 6.25
Using the average EBITDA multiple, the potential market value per share of ABC Holdings is
__________________
5. Based on ABC Holdings information above, except that the cost of capital is raised to 15%, the
economic value added to breakeven should be _____________________
6. Roxas Corp. estimated its terminal value on the 5th year of operations from the time of the valuation
to be ₱825 million. Using the discount rate of 5%, the present value of the terminal value is
_________________
7. Rolls-Royce Inc. has outstanding shares of 1,500,000 and market value per share of ₱22.50 with a P/E
ratio of 4. The company has sustained it net income margin at 25%. The revenue of Rolls-Royce Inc.
should be _________________
8. Rolls-Royce Inc. has outstanding shares of 1,500,000 and market value per share of ₱22.50 with a P/E
ratio of 4. The company has sustained it net income margin at 25%. The company’s reported EBITDA
Margin is 40%. The EBITDA of BMV Inc. should be ___________________.
9. San Rafael Corp., a company with outstanding common shares of 1,000,000 and 10% preferred shares
amounting to ₱1,000,000. Reported net income of Raphael Marco is at ₱7,250,000. The firms similar
to San Rafael is having a P/E Multiple of 4. How much is the reasonable market value per share of San
Rafael Corp.? _________________
10. Eli Fat Inc. (EFI) has a market capitalization of ₱4,760,680,000 and EBITDA multiple of 4.0. Historically,
the company has a after tax profit margin of 20%, before tax profit margin of 30%, EBITDA margin of
50%. EFI's Net Income before tax is about ₱ _______________?
Items 11-15 are based on the following information:

Balance Sheet2
Total Liabilities – P9,000,000
Income Statement
Sales – P20,000,000
Gross profit – P5,000,000
Operating expenses – P2,000,000
Financial Ratios
Debt to Equity Ratio – 3:1
Dividend Yield Ratio – 10%
Dividend Pay-out Ratio - .20:1
Cruz Family Inc. is planning to sell 20% of its business and would like to calculate the value of its business
using various valuation methods.
11. How much is the value of 20% of the business using Book Value Method? _________________
12. How much is the value of 20% of the business using Dividend Paying Capacity? _____________
13. How much is the value of 20% of the business using Multiplies of Earning Valuation Method assuming
appropriate multiplier of 1.5? ___________________
14. Bebeko, Inc. has a ten-year history of weighted profits of P1,000,000. Its weighted average dividend
payout percentage over the last ten years has been 30 percent. The company has valued its business
using dividend paying capacity method and would like to sell 20% of its business at an amount of
P750,000. What is the average Dividend yield rate of the company for the past 10 years?
________________
15. Momola Inc. as of year-end of 2019 has a total working capital of P3,000,000 and with a current ratio
of 2:1. Noncurrent asset balance is P2,000,000 comprised of fixed asset. There is no long-term debt
with debt ratio of only .25:1. Using Book Value Method, what is the minimum value it can sell for the
15% of the business? ___________________
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Name: Date:

Instructor: Score: /105

Items 11-15 are based on the following information:

--- NOTHING FOLLOWS ---

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