ASSET-BASED VALUATION

Reporter: Dalipe, Kristine Mae T.

What is an Asset?

Assets are transactions that yield future

economic benefits as a result of past
transactions.

The value of an asset is crucial for determining

the potential return on investment.
Valuation is sensitive and confidential activity in
their portfolio management.

Valuation should be kept confidential to allow the

company to negotiate a better position for them
to acquire an opportunity.
Types of Investment

Green Field Investments- started from scratch,

challenging to value.

Brown Field Investments- partially or fully operational,

easier to value.
What is Going Concern Business Opportunities?

GCBOs are those businesses that has a long term to

infinite operational period.

The advantage of GCBOs is that we already have a

reference for their performance- from its historical
performance or an existing business with a similar
nature.
Committee of Sponsoring Organization (COSO)
Risk management enhances business opportunities and
resilience.

Benefits:
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.
Information required for asset-based valuation:

1. total value of the assets

2. financing structure
3. classes of equity
4. other sources of funding

Methods:

1. Book Value Method

2. Replacement Value Method
3. Reproduction Value Method
4. Liquidation Value Method
BOOK VALUE METHOD

CAMPANILLA
 Book value can be defined as the value
recorded in the accounting records of a company.

Book value is highly dependent on the value

of the assets as declared in the audited financial
statements, particularly the balance sheet on the
statement of financial position.

CAMPANILLA
 Assets are required to be categorized as
current and non-current assets.

Cash and Cash equivalents may also

be included only if it is not restricted.

Current assets are those expected to

be realized within 12 months.

Assets wherein benefits can be realized in more

than 12 months can be known as Non-current assets.

CAMPANILLA
 Liabilities are also categorized as current
and non-current.

Non-current liabilities are expected to be

settled within the company's operating cycle, due to
be settled within 12 months.

Current liabilities are liabilities which are

due to be settled longer than 12 months.

CAMPANILLA
 Total Assets- Total Liabilities
Net Book Value of Assets Number of Outstanding Shares
=

CAMPANILLA
 REPLACEMENT VALUE
METHOD
The value of the individual assets shall be
adjusted to reflect the relative value or cost
equivalent to replace that asset.

way to figure out how much it would cost to

buy new version of something that you
already own.

Castro
 Factors that can affect the
replacement value of an asset

• AGE OF THE ASSET

• SIZE OF THE ASSET
• COMPETITIVE ADVANTAGE OF THE
ASSET
 REPRODUCTION VALUE METHOD
• In some instances, no external information is
available that can serve as basis for
replacement cost of assets that are highly
specialize in nature. In this case, reproduction
value is used instead.

• Reproduction value is an estimate of cost of

reproducing, creating, developing or
manufacturing a similar asset.

DELA CRUZ
 Steps in determining the equity value using the
reproduction value method are as follows;

• Conduct reproduction cost analysis on all assets

• Adjust the book values to reproduction costs

values (similar as replacement value)

• Apply the replacement value formula using the

figures calculated in the preceding step .

DELA CRUZ
 REPRODUCTION VALUE METHOD ILLUSTRATION
The audited financial statements of ABC Co. for the calendar
year ended December 31,2021 showed the following
information
• Total current assets - P300 million
• Total non-current assets - P700 million
• Total current liabilities - P350 million
• Total non-current liabilities-P250 million
• Total ordinary share capital – P100 par, issued and outstanding P200
million;
• Other equity component - P200 million
Supposed that it was noted that the 75% of the Total non-
current assets are cheaper by 80%of the book value when
reproduced while 25% of the total non-current assets are
comprised of goodwill which upon testing was proven to be
valued correctly
 LIQUIDATION VALUE
METHOD
An overview of Salvage Value and its Implications.

DALID
What is the Liquidation Value Method?

A valuation approach that determines a

company's value based on the salvage value of
its assets if the company is terminated.

DALID
HOW IT WORKS?

1. Assess Asset Value: Determine the salvage

value of each asset.

2. Deduct Liabilities: Subtract outstanding

liabilities from the total salvage value.

3. Calculate Equity Value: Result is the

estimated value to shareholders if the company
is liquidated.

DALID
Advantages and Limitations
Advantages:

Conservative Estimate: Provides a safety net

value in case of liquidation.

Clarity: Based on tangible assets and

liabilities.

DALID
Advantages and Limitations

Limitations:

Future Value Exclusion: Does not account

for potential future earnings or growth.

Not Reflective of Going Concern Value:

Ignores the company's ongoing business
operations.

DALID
Summary and Applications

Summary:

The Liquidation Value Method is useful for

assessing the worst-case scenario in
liquidation situations.

Applications:

Useful in financial distress, bankruptcy, or

liquidation scenarios.
DALID
Liquidation Value:
An overview

DATON
What is Liquidation Value?

• Liquidation value is the net amount

that can be gathered if a company is
dissolved and its assets are sold
individually.

• Also known as Net Asset Value in

some texts

DATON
Example: Hotel closure

• When a hotel closes, assets like beds,

chairs, and kitchen equipment are sold.

• These items are sold individually, not as

part of a running hotel, leading to lower
prices.

DATON
What Affects Liquidation Value?

• Loss of synergies: Assets no longer work

together, lowering value.

• Time constraints: Perishable items need

quick sale at a discount.

• Market conditions: Businesses may need to

sell quickly at lower prices.

DATON
 Liquidation vs. Going Concern
Value

• Going concern value reflects a profitable

business with future cash flows.

• Liquidation value is used when the business is

no longer viable.

• If liquidation value is higher, it signals a major

business issue

DATON
Appropriate Use of Liquidation
Value

• Best for failing or dying companies.

• Not suitable for profitable or growing

companies.

• Consideration for sole proprietorships or

partnerships: Adjust for goodwill.

DATON
 Key
Takeaways;
• Liquidation value is a crucial concept in
business valuation

• It sets the floor price but should not be

used for healthy businesses.

• Important in understanding the financial

health of struggling companies.

DATON
SITUATION TO CONSIDER
LIQUIDATION VALUE

DELSOLOR
BUSINESS FAILURES

Business failures is the most common

reason why business close or liquidate.

DELSOLOR
External Factors that Would Attribute to
Business Failures:

1. Severe economic down-turn

2. dynamic consumer preferences
3. material adverse governmental action or regulation
4. Occurrence of natural disasters or calamities
5. Occurrence of pandemic or general health hazards

DELSOLOR
Corporate or Project end of Life

Most corporations only have finite

number of years to operate as stated in their
Articles of Incorporation.

DELSOLOR
Depletion of Scarce Resources

In some industries like mining and oil,

availability of scarce resources significantly
influences firm value.

DELSOLOR
GENERAL PRINCIPLES
ON
LIQUIDATION VALUE

DELOSREYES
Liquidation Value is the most
conservative valuation approach
among all as it considers the
realizable value of the asset if it is
sold now based on current
condition.
General concepts considered in liquidation value
are as follows:

• If the liquidation value is above income

approach valuation and liquidation comes into
consideration, liquidation value should be used.

• If the nature of the business implies limited

lifetime the terminal value must be based on
liquidation. All cost necessary to close the
operations should also be factored in and
deducted to arrive at the liquidation value.
• Non-operating assets should be valued by liquidation
method as the market value is reduced by costs of sales
and taxes. SInce they are not part of the firm’s operating
activities, it might be inappropriate to use the same going
concern valuation technique used for the business
operations.

• Liquidation valuation must be used if the business

continuity is dependent on current maagement that will
not say.
Liquidaion value can also be used as benchmark in
making investment decisions. When a company is
profitable with good industry outlock, the liquidation will
typcallly be lower than the prevailing market price of the
share.

For firms that are experiencing decline or industry is

consistently declining, prevailing share prices might be
lower than liquidation value. If this happens, the rational
decision for the business is to permanently close the
business and liquidate its assets. Some corporate
investors tend to look for companies whose shares exhibit
this characteristic.
 Types of Liquidation

Key Concepts and Processes

Reporter: Carandang, Charmae M.

Importance of Liquidation Type

The type of liquidation affects costs, commissions,

and taxes, impacting the final value of the business.
Orderly Liquidation Overview

Assets are sold strategically over time to

maximize value.

Process of Orderly Liquidation

Involves selling on the open market with

reasonable time for buyers and sellers to
negotiate.
Forced Liquidation Overview

Assets are sold quickly, often through

auctions, usually under financial pressure.

Process of Forced Liquidation

Sales occur immediately, often at lower

prices, due to urgency, reducing overall
liquidation value.
Conclusion

The choice between orderly and forced liquidation

significantly influences financial outcomes.
Calculating
Liquidation Value

CAÑETE
The liquidation value considers the present value of the
sums that can be obtained through the disposal (i.e. sale)
of the assets of the firm in the most appropriate way, net of
the sums set aside for the closure costs, repayment the
debts and settlement of all liabilities, and net of the tax
charges related to the transaction and the costs of the
process of liquidation itself.

Liquidation value can be further computed on a per share

basis by dividing total liquidation value by outstanding
ordinary shares, Liquidation value per share should be
considered together with other quantitative (e.g. current
share price, going concern DCF) and qualitative metrics to
justify business decisions to be made.
CAÑETE
Note:

Calculation for liquidation value at closure date is somewhat

like the book value calculation, except the value assumes a
forced or orderly liquidation of assets instead of book value.
Book value should not be used as liquidation value.
Liquidation value can be obtained based on the potential sales
price of the assets being sold instead of relying on the costs
recorded in the books. Liquidation value is far more realistic as
compared to the book value method. Even if these assets
generate lower than expected return in the present business,
liquidation value should be based on the potential earning
capacity of the individual asset when sold to the buying party
instead of the original capital invested in the assets.

CAÑETE
• In computing for the present value of a business or property
on a liquidation basis, the estimated net proceeds should be
discounted at a rate that reflects the risk involved back to the
date of the original valuation. This is important to ensure that
all assumptions are aligned. Liquidation value can be used
as basis for terminal cash flow (instead of going concern
terminal cash flow) in a DCF calculation in order to compute
firm value in case there are years that the firm will still be
operational prior to liquidation.
• Special consideration should be emphasized for intangible
assets like patents and internally developed software
programs which are often unsaleable. When takeover
occurs, it is usual that goodwill is recognized as part of the
transaction, Monetary equivalent specific for intangible
assets cannot be reliably and separately measured. Instead,
intangible assets are offset against shareholder’s equity to
come up with a conservative liquidation value.

• Estimation of liquidation values will be more complex if

assets cannot be easily identified or separated; hence,
individual valuation may be impractical.

CAÑETE