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Module 2

This document discusses various asset-based valuation methods. It begins by defining assets and how their value is dependent on future economic benefits. It then discusses different types of investments like greenfield, brownfield, and going concern business opportunities. It proceeds to explain valuation methods like book value, replacement value, and reproduction value. For each method, it provides the formula used to calculate value and illustrates the application of the method with an example company. The key points of each method and steps to apply them are outlined.

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165 views

Module 2

This document discusses various asset-based valuation methods. It begins by defining assets and how their value is dependent on future economic benefits. It then discusses different types of investments like greenfield, brownfield, and going concern business opportunities. It proceeds to explain valuation methods like book value, replacement value, and reproduction value. For each method, it provides the formula used to calculate value and illustrates the application of the method with an example company. The key points of each method and steps to apply them are outlined.

Uploaded by

joahn.rocreo1234
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Asset

Based
Valuation
MODULE 2

PREPARED BY: NIKKA S. ASIDERA, CAT, RCA, MICB


Asset Based Valuation
Asset has been defined by the industry as transactions that would yield future economic benefits as
a result of past transactions. Hence, the value of investment opportunities is highly dependent on the value
that the asset will generate from now until the future.

In practice, valuation is a sensitive and confidential activity in their portfolio management. Valuation
should be kept confidential to allow the company to negotiate better position for them to acquire an
opportunity.

PREPARED BY: NIKKA S. ASIDERA, CAT, RCA, MICB


Asset Based Valuation
◦ Green Field Investments – are investments that started from scratch

◦ Brown Field Investments – are opportunities that can be either partially or fully operational. It is already in
the going concern state, as most businesses are in the optimistic perspective that they will grow in the
future. Therefore, they can be considered as going concern business opportunities (GCBOs).

◦ Going concern business opportunities - are those businesses that has a long term to infinite operational
period.

PREPARED BY: NIKKA S. ASIDERA, CAT, RCA, MICB


GCBOs
◦ The advantage is that we already have a reference for their performance – from its historical performance
or an existing business with a similar nature. With this, the risk indicators can be identified easily and can
be quantified accordingly.

PREPARED BY: NIKKA S. ASIDERA, CAT, RCA, MICB


Asset Based Valuation
◦ The Committee of Sponsoring Organization of the Treadway Commission (COSO) suggests that risk management
principles must be observed in doing businesses and determining its value. It was noted in their report that the
benefits of having a sound Enterprise-wide Risk Management allows the company to:

1. Increase 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;

6. Make the business more resilient to abrupt changes

PREPARED BY: NIKKA S. ASIDERA, CAT, RCA, MICB


Book Value Method
◦ It is the value recorded in the accounting records of the company.

◦ The value of the enterprise is based on the book value of the assets less all non-equity claims against it.
Hence the formula is as follows:

PREPARED BY: NIKKA S. ASIDERA, CAT, RCA, MICB


Book Value Method
To illustrate, Grape and Vines Corp. in the year 2021 presented their statement of financial position with the
following balances: Current Assets is Php 500 million; Non-current assets is Php 1 Billion; Current Liabilities
is Php 200 million; Non-current Liabilities is Php 700 million and the Outstanding Shares is 1 million.

With the given information, the NBV of the assets is:

PREPARED BY: NIKKA S. ASIDERA, CAT, RCA, MICB


Book Value Method
◦ The advantage of book value method is that it provides a more transparent view on firm value and is more
verifiable sine this is based in the figures reflected in the financial statements. However, the book value
only reflects historical value and might not reflect the real value of the business now.

PREPARED BY: NIKKA S. ASIDERA, CAT, RCA, MICB


Replacement Value Method
◦ The National Association of Valuators and Analysts has defined the replacement cost as the cost of similar
assets that have the nearest equivalent value as of the valuation date.

◦ The following are the factors that can affect the replacement value of the asset:

1. Age of the Asset

2. Size of the Assets

3. Competitive Advantage of the Assets

PREPARED BY: NIKKA S. ASIDERA, CAT, RCA, MICB


Replacement Value Method
◦ Appraisers have their own technique to determine the replacement value. Insurance companies use the
replacement value. Insurance companies use the replacement value in determining the appropriate
insurance premium to be charged to their clients.

◦ The value of the equity using the replacement value method is computed using the formula:

PREPARED BY: NIKKA S. ASIDERA, CAT, RCA, MICB


Replacement Value Method
To illustrate, following through the given information for Grapes and Vines Corp., suppose that 50% of the
non-current assets has an estimated replacement value of 150% of its recorded net book value while the
remaining half has estimated replacement value of 75% of their recorded net book value. With the given
information, the equity value is adjusted:

1. Calculate the replacement value of the affected items

2. Add back the unadjusted components

3. Apply the replacement value formula

PREPARED BY: NIKKA S. ASIDERA, CAT, RCA, MICB


1. Calculate the replacement value of the affected items

PREPARED BY: NIKKA S. ASIDERA, CAT, RCA, MICB


1. Calculate the replacement value of the affected items

PREPARED BY: NIKKA S. ASIDERA, CAT, RCA, MICB


2. Add back the unadjusted components

PREPARED BY: NIKKA S. ASIDERA, CAT, RCA, MICB


3. Apply the Replacement Value Formula

PREPARED BY: NIKKA S. ASIDERA, CAT, RCA, MICB


Reproduction Value Method
◦ Reproduction value is an estimate of cost of reproducing, creating, developing or manufacturing a similar
asset.

◦ It requires reproduction cost analysis which is internally done by companies especially if the assets are
internally developed.

◦ The challenge of using this is the ability to validate reasonableness of the value calculated since there are
only limited sources of comparators and benchmark information that can be used.

PREPARED BY: NIKKA S. ASIDERA, CAT, RCA, MICB


Reproduction Value Method
◦ Steps in determining the equity value using the reproduction value method are as follows:

1. Conduct reproduction costs analysis on all assets

2. Adjust the book values to reproduction costs values

3. Apply the replacement value formula using the figures calculated in the preceding step.

PREPARED BY: NIKKA S. ASIDERA, CAT, RCA, MICB


Reproduction Value Method
◦ To illustrate using the information of Grapes and Vines Corp., supposed that it was noted that the 80% of
the total non-current assets are cheaper by 90% of the book value when reproduced. 20% of the total non-
current assets are comprised of goodwill which upon testing was proven to be valued correctly.

PREPARED BY: NIKKA S. ASIDERA, CAT, RCA, MICB


1. Conduct Reproduction cost analysis to all assets

80% of the total non-current assets if reproduced is equal to 90% of its value.

Since the remaining 20% or Php 200 Million is goodwill and already in its proper value, it will not be
adjusted.

PREPARED BY: NIKKA S. ASIDERA, CAT, RCA, MICB


2. Adjust the book value to reproduction costs

PREPARED BY: NIKKA S. ASIDERA, CAT, RCA, MICB


3. Apply the replacement value formula

PREPARED BY: NIKKA S. ASIDERA, CAT, RCA, MICB


END OF MODULE 2 PART 1

PREPARED BY: NIKKA S. ASIDERA, CAT, RCA, MICB

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