VALUATION:

CONCEPTUA
L OVERVIEW
MS. MOMENA K.
LAMPATAN, CPA
What is Valuation?
What is the valuation of a Car Rental Company?

Interest Rate 5%

ANNUAL PROFIT P100,000

What is that amount that would be invested to earn

P100,000 annually in an investment that earns 5%
interest.?
Valuation = P100,000/5% = P2,000,000
 What is Valuation?
“Some startup companies have ZERO revenues, make massive losses (with no timelines of ever
making profits) and yet have massive valuations and or get acquired for mind boggling sums of
money.”

Why and How is that possible?

REFERENCE: https://therodinhoods.com/post/basic-valuations-
funding-concepts/
SUBJECTIVE
VALUATION
POTENTIAL:
REASONS A zero-revenue company may have
the business metrics and proof to generate
substantial profits in the future that justify high
valuations in the present.

Example.
SUBJECTIVE
VALUATION
REASONS
INNOVATION AND CATEGORY
CREATION
Whatsapp, Instagram, Uber, Youtube have
created new consumers habits. Changing
consumer habits is one of the hardest things
you can do. If a business owns and dominates
such
CASE: behavior, then it can command
INTEGRATION AND SALE a very
large “subjective
Existing Valuation.
Companies need new businesses
they can acquire and plug into their
monetization machine. The Youtube
acquisition by Google is one great example.
Valuations of such companies then become
STRATEGIC
based on what the
IMPORTANCE
new business can become
Companies
vs. what is. may be acquired for the
technology (that may take the acquiring
company years to replicate), for their
geographic importance, or even to acquire
and then close down (to eliminate
 Philosophical basis for Valuation
Many investors believe that the pursuit of 'true value'
based upon financial fundamentals is a fruitless one in
markets where prices often seem to have little to do with
There
value.have always been investors in financial markets who
have argued that market prices are determined by the
perceptions (and misperceptions) of buyers and sellers, and not
by anything as prosaic as cashflows or earnings.
rceptions matter, but they cannot be all that matter.
GREATER FOOL THEORY
• The Greater Fool Theory simply states that there will always be
a “greater fool” in the market who will be ready to pay a price
based on higher valuation for an already overvalued security.

Markets are affected by a lot of

irrational beliefs and expectations of
market participants. Based on that
premise, the greater fool theory states
that there will always be an investor,
i.e. a “greater fool”, who will
foolishly pay a higher price than the
REFERENCE:
https://corporatefinanceinstitute.com/resources/knowledge/trading-
intrinsic worth of a security.
investing/greater-fool-theory/
Asset Bubble
An asset bubble is when assets such as
housing, stocks, or ​gold dramatically rise in
price over a short period that is not
supported by the value of the product. The
hallmark of a bubble is 
irrational exuberance—a phenomenon when
everyone is buying up a particular asset.
When investors flock to an asset class, such
as real estate, its demand and price
increases.
REFERENCE: https://www.thebalance.com/asset-bubble-causes-
examples-and-how-to-protect-yourself-3305908
 Basis for all valuation approaches
Undervalued or Overvalued?
Efficient Market Hypothesis
A perception that markets are inefficient and make
mistakes
An assumption in assessing
about how and value
when these
inefficiencies
In an efficientwill get corrected
market, the market price is the
best estimate of value. The purpose of any
valuation model is then the justification of
thisEfficient
The value.Markets Hypothesis (EMH) is an investment
theory primarily derived from concepts attributed to Eugene
Fama’s research as detailed in his 1970 book, “Efficient Capital
Markets: A Review of Theory and Empirical Work.” Fama put
forth the basic idea that it is virtually impossible to consistently
“beat the market” – to make investment returns that outperform
oratefinanceinstitute.com/resources/knowledge/trading-investing/efficient-markets-hypothesis/
the overall market average as reflected by major stock indexes
such as the S&P 500 Index.
 Approaches to Valuation
1. ASSET
APPROACH
The Adjusted Net Asset Method is the commonly
used asset-based approach to valuation. Its focus is
on the balance sheet in which the book value of
assets and liabilities of a company are adjusted to
their fair market value.

2. INCOME
Income-based approach of valuing a business
APPROACH
company includes capitalization of cash flow
method and discounted cash flow method. These
methods value a company based on the expected
future income.
 
Approaches to Valuation
3. MARKET
APPROACH
Market based approach is based on the pricing
multiples of similar companies that are publicly
traded. The primary market-based approach used in
valuing business companies are the Guideline
Transaction Method and The Guideline Public
Company Method.
Guideline Transaction Method – is a valuation of a
subject business company according to the pricing
multiples using the sales of other similar companies.

Guideline Public Company Method - uses trading

multiples of publicly traded companies similar to the
subject company.
Valuation Techniques
1. COMPARABLE
COMPANY ANALYSIS
A valuation techniques used to determine the company values based on traded values of similar
(comparable) companies. It is a market-based valuation analysis relying on current market prices for
publicly traded companies. It revolves around either the Enterprise Value or the Market Value of the
company, depending on the multiples being used. This valuation uses the ratios of public companies
that are similar to derive the value of another company.

Comparable Company Analysis is usually used for Initial Public Offerings (IPOs), Follow-on
offerings, Merger and Acquisition Advisory, Fairness Opinions, Restructuring, Share Buybacks,
Terminal Value in a DCF model.
Valuation Techniques
2. DISCOUNTED CASH
FLOWS
A company(DFC)
is valued through the projection of its unlevered Free Cash Flow (FCF) and the Net
Present Value (NPV) method of valuing the company. The value of an asset is the present value of
ANALYSIS
the expected cash flows on the asset, discounted using a rate that reflects the risk tied into the said
cash flows.

In DCF analysis, company value is equal to the current value of the cash that the company will
generate in the future. DFC is the most precise valuation technique and is considered to be
theoretically the most appropriate method.
Valuation Techniques
3. PRECEDENT TRANSACTION ANALYSIS (Comparable
Transaction/M&A Comps)
This valuation technique uses Merger and Acquisition (M&A) transactions to value a comparable
business. It relies on and looks at the available information about recent historical M&A activity
involving similar companies to get a range of valuation multiples. This valuation method is
commonly use to value an entire business company as part of a merger or acquisition. Analysts
from investment banks, private equity and corporate development are usually the ones who prepare
this valuation.
Valuation Techniques
4. LEVERAGE BUYOUT ANALYSIS (LBO) – Ability to Pay
Analysis
Leverage buyout is the acquisition of a public or private company with a significant amount of
borrowed funds. LBO acquirers are typically Private Equity sponsors. Private Equity firms acquire
companies at lower value with the hopes of selling them at profit after several years. Borrowed
capital or debt financing is used to fund the acquisition to maximize returns. In turn, it minimizes
the amount of equity capital or equity financing that must be invested by the private equity firm. If
the investment earns profit, the debt leverage maximizes the return for the investors of the private
equity firm.

LBO revolves around the Enterprise Value of the company, because the entire business will be
acquired and all (or essentially all) of the pre-existing Debt will be paid off.
 
    
Enterprise Value
Enterprise Value, also referred to as EV is the
core building block used in financial modeling that
represents the entire value of a company’s net
operating assets. It is basically the value of the entire
company.

Equity Value, also known as the Market Value

or Market Capitalization of a company is a residual
that represents the value of a company after the
deduction of the value attributed to other stakeholders
other than the owners. It represents the value in
money of the issued common equity shares of a
company. It is computed by multiplying the
outstanding common shares by the current share
price.
Enterprise Value
Core Assets – these are the assets that are primarily used in the business operations – Fixed Assets,
Accounts Receivable, etc.

Non-Core Assets – these are assets other than the core assets, which are not critical to the business
operations such as Derivatives, Currencies, Real Estates, Commodities, Stock Options, etc.
Cash is considered as non-core asset unless the business needs it to operate (bills in the registers
at a retail operations). Cash considered as non-core asset is not used to generate profit in the
operation of the business and is not included in the calculation of the Enterprise Value.
Other non-core assets are not also included in the calculation of the Enterprise Value if they can be
sold for cash without harming the business operations. These can be real estate and commodities
that can be sold separately for cash without affecting the company’s cash-generating operations.

Marketable Securities, which earns profit out of cash, is also considered as non-core assets
because they do not affect the business operations of the company. These are also not included in
the calculation of the Net Debt.
Enterprise Value
Primary Components of Net Debt
 
(+) Short-Term Debt: Debt with less than to one-year maturity.
(+) Long-Term Debt: Debt with maturity period of more than one year.
(+) Debt Equivalents: Operating Leases and Pension Shortfalls.
(-) Cash and Cash Equivalents: Cash, Money Market Securities and Investment Securities.
 
Cash and cash equivalents are deducted from the calculation because they are anti-Debt.
Debt may be classified into short-term and long-term.
Enterprise
Value
•Valuation techniques related
to the value available to
shareholders focus on the
Market Value (of Equity),
while the valuation
techniques that are related to
the value available to all
Enterprise Value = Operating Value = Net Value of all the Claims on
stakeholders focus on the Company’s Assets
Enterprise Value. (Excluding Excess Cash)
Enterprise Value
Debt – the company’s borrowed money from another person or institution. Creditors or debt holders
have a higher priority with their claims to the assets of the company and its value. They will be paid
first before the equity holders. Debt must be added to the Market Value of the company’s equity to get
the Enterprise Value (EV).

Cash – the money owned by the company. If it is not needed in the business operations, it could be
used to pay off existing debt or repurchase outstanding shares of the company. When a company has
higher cash balance, it must have a lesser operating value or worth of operations.
 
 Enterprise Value

Minority Interest – is a “liability account”. It exists

when a corporation (parent company) has an
ownership interest in another corporation, called
as the subsidiary company. It means that the
parent company owns most, but not all of the
subsidiary company.

“Minority Interest” represents the value of shares

of other individuals or companies in the
subsidiary. Thus, it is treated like debt.
Examples:
1. Compute for the Enterprise Value of a company that has cash of P200,000, debt of P400,000 and
Equity of P1,600,000.
 
EV = Market Value of Equity + Debt – Cash
EV = P1,600,000 + P400,000 – P200,000 = P1,800,000
End.
Thank you for
listening.