Chapter 2 - Asset Based Valuation

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asset

defined by the industry as transactions that would yield future economic benefits because of past transactions

green field investments

started from scratch

brown field investments

opportunities that can be either partially or fully operational and already in the going concern state, as most businesses are in the optimistic perspective that they will grow in the future

going concern business opportunities

GCBOs

advantages of having a sound enterprise-wide risk management

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

asset based valuation

• enables the analyst to validate the firm value through the value of its assets

• focuses on the current and historical value of the assets and will disregard the value it can generate in the future and may not fully represent the true value of the assets

• familiarity with the generally accepted accounting principles is a key attribute for an analyst to enable them to establish the value

• can be used if the basis of the value is concretely established and complete

• total value of the assets, financing structure, classes of equity and other sources of funding

book value method

• value recorded in the accounting records of a company

• the value of the enterprise is based on the book value of the assets less all non-equity claims against it

• provides a more transparent view on firm value and is more verifiable since this is based in the figures reflected in the financial statements

• only reflects historical value and might not reflect the real value of the business now

• offers convenient determination of the company value

book value

• is highly depended on the value of the assets as declared in the audited financial statements, particularly in the balance sheet of the statement of financial position

NBV = total assets - total liabilities / number of outstanding shares

formula for book value method

GCBOs

those businesses that has a long term to infinite operational period

replacement cost

cost of similar assets that have the nearest equivalent value as of the valuation date

replacement value method

• the value of the individual assets shall be adjusted to reflect the relative value or cost equivalent to replace that asset

appraisers

have their own technique to determine the replacement value

insurance companies

use the replacement value in determining the appropriate insurance premium to be charged to their clients

factors that can affect the replacement value of an asset

• age

• size

• competitive advantage

age

important to know how old the asset is

size

important for fixed assets particularly real property where assets of the similar size will be compared

reproduction value

estimate cost of reproducing, creating, developing, or manufacturing a similar asset

reproduction value method

• requires reproduction cost analysis which is normally done by companies especially if the assets are internally developed

• useful when calculating the value of new or start-up businesses, ventures that use specialized equipment or

• assets, firms that are heavily dependent on intangible assets and those with limited market information

• convenient approach

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

replacement value per share = nbv ± replacement adjustment / outstanding shares

formula for reproduction value method

steps in determining the equity value is using the reproduction value method

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

liquidation value method

• equity valuation approach that considers the salvage value as the value of the asset

• assumes that the reasonable value for the company to be purchased is the amount which the investors will realize in the end of its life or the value when it is terminated

• most conservative

• limitation of this approach is that the future value is not fully incorporated in the calculated equity value