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LESSON 1 VALUATION.pptx

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LESSON 1 VALUATION.pptx

  1. 1. VALUATION METHODS
  2. 2. OVERVIEW OF VALUATION CONCEPTS AND METHODS Lesson 1 Unit 1 – Foundation and Concepts of Valuation
  3. 3. OBJECTIVES: After successful completion of this lesson, you should be able to: 1. Describe the use and importance of valuation 2. Illustrate Porter’s Five Forces 3. Enumerate the principles and processes in creating value
  4. 4. VALUATION It is the estimation of an asset’s value based on variables perceived to be related to future investment returns, on comparison with similar assets, or when relevant, on estimates of immediate liquidation proceeds, says CFA Institute. 4
  5. 5. OBJECTIVE OF THE VALUATION EXERCISE
  6. 6. 6 1) Intrinsic Value – refers to the value of any asset based on the assumption assuming there is a hypothetically complete understanding of its investment characteristics. It is the value that an investor considers, on the basis of an evaluation or available facts, to be the “true” or “real” value that will become the market value when other investors reach the same conclusion. 2) Going Concern Value – the going concern assumption believes that the entity will continue to do its business activities into the foreseeable future. 3) Liquidation Value – the net amount that would be realized if the business is terminated and the assets are sold piecemeal. It is particularly relevant for companies who are experiencing severe financial distress. 4) Fair Market Value – the price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.
  7. 7. ROLES OF VALUATION IN BUSINESS 7 Portfolio Management • Fundamental Analyst – these are persons who are interested in understanding and measuring the intrinsic value of a firm. Fundamentals refer to the characteristics of an entity related to its financial strength, profitability or risk appetite. • Activist Investors – activist investors tend to look for companies with good growth prospects that have poor management. Activist investors usually do “takeovers” – they use their equity holdings to push old management out of the company and change the way the company is being run.
  8. 8. • Chartists – they rely on the concept that stock prices are significantly influenced by how investors think and act and on available trading KPIs such as price movements, trading volume, short sales – when making their investment decisions. • Information Traders – they react based on new information about firms that are revealed to the stock market. The underlying belief is that information traders are more adept in guessing or getting new information about firms and they can make predict how the market will react based on this. 8
  9. 9. VALUATION TECHNIQUES IN PORTFOLIO MANAGEMENT  Stock selection – An active portfolio management technique that focuses on advantageous selection of particular stock rather than on broad asset allocation choices.  Deducing market expectations 9
  10. 10. BUSINESS DEALS FOR ANALYSIS 10
  11. 11. ACQUISITION 11 an acquisition usually has two parties: the buying firm that needs to determine the fair value of the target company prior to offering a bid price and the selling firm who gauge reasonableness of bid offers.
  12. 12. MERGER 12 transaction of two companies’ combined to form a wholly new entity.
  13. 13. DIVESTITURE 13 sale of a major component or segment of a business to another company
  14. 14. SPIN-OFF 14 separating a segment or component business and transforming this into a separate legal entity whose ownership will be transferred to shareholders
  15. 15. LEVERAGE BUYOUT 15 acquisition of another business by using significant debt which uses the acquired business as a collateral
  16. 16. 16 VALUATION PROCESS Understandin g the business Preparing valuation model based on forecasts Selecting the right valuation model Forecasting financial performance Applying valuation conclusions and providing recommendatio n
  17. 17. UNDERSTANDING THE BUSINESS 17 It includes performing industry and competitive analysis and analysis of publicly available financial information and corporate disclosures. An investor should be able to encapsulate the industry structure.
  18. 18. UNDERSTANDING THE BUSINESS 18 One of the most common tools used in encapsulating industry is Porter’s Five Forces:
  19. 19. UNDERSTANDING THE BUSINESS 19 Generic Corporate Strategies to achieve Competitive Advantage Cost leadership – incurring the lowest cost among market players with quality that is comparable to competitors allow the firm to be price products around the industry average. Differentiation – offering differentiated or unique product or service characteristics that customers are willing to pay for an additional premium. Focus – identifying specific demographic segment or category segment to focus on by using cost leadership strategy or differentiation strategy.
  20. 20. FORECASTING FINANCIAL PERFORMANCE 20 can be looked at two perspectives: on a macro perspective viewing the economic environment and industry where the firm operates in and micro perspective focusing in the firm’s financial and operating characteristics. Approaches of Forecast Financial Performance Top down forecasting approach – international or national macroeconomic projections with utmost consideration to industry specific forecasts. Bottom-up forecasting approach – forecast starts from the lower levels of the firm and builds the forecast as it captures what will happen to the company.
  21. 21. SELECTING THE RIGHT VALUATION MODEL 21 It depends on the context of the valuation and the inherent characteristics of the company being valued.
  22. 22. PREPARING VALUATION MODEL BASED ON FORECASTS 22 SENSITIVITY ANALYSIS common methodology in valuation exercises wherein multiple other analyses are done to understand how changes in an input or variable will affect the outcome. SITUATIONAL ADJUSTMENTS firm specific issues that affects firm value that should be adjusted by analysts since these are events that are not quantified if analysts only look at core business operations.
  23. 23. APPLYING VALUATION CONCLUSIONS AND PROVIDING RECOMMENDATION Presentation title 23
  24. 24. KEY PRINCIPLES IN VALUATION • The value of a business is defined only at a specific point in time. • Value varies based on the ability of business to generate future cash flows. • Market dictates the appropriate rate of return for investors. • Firm value can be impacted by underlying net tangible assets. • Value is influenced by transferability of future cash flows. • Value is impacted by liquidity. 24
  25. 25. THANK YOU

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