PRINCIPLES IN VALUATION

I. INTRODUCTION III. VALUATION PROCESS

A. DEFINITIONS 1) Understanding the business
1) Value - how much an object is worth to one's eyes *Michael Porter's five forces
2) Valution - estimation of an asset's value i. Industry rivalry iv. Supplier power
- professional judgement in forecasts ii. New entrants v. Buyer power
- sensitive and confidential iii. Substitutes & compliments
2) Asset - transac that would yield future econ benefits
3) Maximize shareholder (capital providers) value *To achieve competitive advantage
- most fundamental principle in inv't & bus i. Cost leadership - lowest cost
5) Equation of Value by Alfred Marshall ii. Differentiation - unique product
- return on capital > cost of acquiring capital iii. Focus - specific demographic
2) Forecasting financial performance
B. DEFINITION OF VALUE accor. to CONTEXT i. Top-down ii. Bottom-up
1) Intrinsic Value - based on assumptions; 3) Selecting the right valuation model
-considered "real" by investors 4) Preparing valuation model based on forecasts
*Grossman-Stiglitz paradox - market price = intrinsic value i. Sensitivity analysis - how changes affect outcome
ii. Situational adjustments - firm-specific issues
2) Going Concern Value - for continuing bus 5) Applying valuation conclusions & providing recom
3) Liquidation Value - if bus is terminated
4) Fair Market Value - bet. willing and able buyer & seller
IV. KEY PRINCIPLES IN VALUATION
C. VALUE of ASSET linked to/generated based on 1) Value is defined @ a specific point of time
1) Current Operations 2) Value varies based on ability to generate CF
2) Future prospects 3) Market dictates RoR for investors
3) Embedded Risks 4) Value can be impacted by tangible assets
5) Value is influenced by transferability of future CF
-surivival of company may depend on mgt
II. ROLES of VALUATION in BUSINESS 6) Value is impacted by liquidity
A. PORTFOLIO MANAGER -many buyers, value may rise
1) Fundamental analysts
-rely on fin strength, probability, or risk appetite *Uncertainty
2) Activist investors -possible range of values where real value lies
-taking over companies in distress/under poor mgt -captured in model through CoC/DR
3) Chartists
-rely on trends and metrics (KPIs, etc.)
4) Information traders
-rely on logical concepts in market or through research
*activities through valuation techniques
i. Stock selection
ii. Deducting market expectations

B. BUSINESS TRANSACTIONS/DEALS
1) Acquisition - to determine value of target (for buyer);
- to accept/reject offer (seller)
2) Merger - two companies to one
3) Divesture - sale of major segment
4) Spin-off - separating segment as legal entity
5) Leveraged buyout - acquisition by debt
*considers these factors
i. Synergy - increase in firm value when two merges to one
ii. Control - change in mgt through acquisition

C. COPORATE FINANCE
-managing firm's capital structure to maximize firm value

D. LEGAL & TAX PURPOSES

ASSET BASED VALUATION

I. DEFINTIONS
1) Asset-based Valuation - necessary to value asset to determine 3) Economic Value Added (EVA)
equity value - ability of firm to support its COC w/ its earnings
2) COSO - Committee of Sponsoring Org of Treadway - most conventional way to determine value
Commission -income approach
*Benefits of Sound Enterprise Risk Mgt
i. Increase opp 4) Other Approaches
ii. Identify cost-effect opp a. Earnings accretion/dilution - add'l value for growth
iii. Facilitates mgt&identification of risk factors b. Equity control premium- add'l value for control
iv. Manages the performance variability c. Precedent trans - risks w/c may affect earnings
v. Improve mgt&distribution of resources
vi. Make bus more resilient to changes III. STEPS IN DEVELOPING FIN MODELS
3) Value - dependent on value the asset will generate from now 1) Gather historical&market info&ref
until the future, w/c includes outflows a. Audited FS
4) Green Field investments - from scratch b. Corporate disclosure
5) Brown Field investments - going concern bus opp (GCBOs) c. Contracts & Convenants
*Traits of financial modelers d. Peer info
1) Financial Acumen
2) Research & Analysis *Information necessary for Valuation
3) Market Intuition i. Reliability
ii. Relevance
II. APPROACHES to ASSET-BASED VALUATION
1) DCF Analysis - meticulous but more conservative 2) Establish drivers for growth& assumption
-can cleary demonstrate movement of trans a. GNP & GDP
*most applicable when the ff are available b. Inflation
i. Validated ope&fin info c. Population Growth Rate
ii. Reasonable appropriated CoC/RoR
iii. New quantifiable info 3) Determine reasonable COC
*levels of NCF (based on ope and investing act)
i. NCF to Firm - both to equity and debt 4) Execute the formulae to compute value
ii. NCF to Equity - after deducting debt
*NPV/EV - value of asset (since it is to equity and debt) 5) Make scenarios & sensitivity analysis
*Terminal Value - value of CF assuming growth is stable

2) Comparable Co. Analysis IV. COMPONENTS of FINANCIAL MODEL

- to compare co. w/ diff. Size, Strat, Struc of similar co. 1) Title Page - overview, to secure property rights
w/in same industry using relevant driver for growth 2) Data Key Resuts - dashboard to analyze results
*factors to consider: 3) Assumption Sheet - all inputs
i. Comparators of similar ope/indus 4) Pro-forma FS - value compu
ii. Total&Absolute values shouldn't be compared 5) Supporting sched - sub ledger w/ supporting compu
iii. Same variables used for ratio
iv. Comparable period of observation Traits of financial modelers
v. Consider non-quanti factors too 1) Financial Acumen
2) Research & Analysis
a. P/E Ratio - how much the market perceives the value of 3) Market Intuition
the co. vs its earnings (expected returns)

b. B-M Ratio - appreciation of the market to the value of the

company as opposed to its value in SoFP
-limitation is some values doesn't represent
true val of co. (due diligence is imperative)
*BV/sh = BV/outs sh to common/ordinary
* Net BV = TA-TL; represents claim of equity shholders

c. DY Ratio - relationship bet. div rec./sh & appreciation

of the market on the price of the co.

d. EBM -revenue after OPEX bef fin fixed costs & non-cash exp
 ASSET-BASED VALUATION
Discounted Cash Flow Analysis (use numbers beside to follow formula) 2) Terminal Value
0 1 2 3 NCFn -latest net cash flow
Profit bef Tax (1) xx xx xx g -growth rate (if not given, refer to next formula)
Less: Taxes xx xx xx
Add: Dep xx xx xx 3) Growth rate
Add: Interest (only if incurred, not paid; don't re-add if silent) xx xx xx [(NCFn/NCFo)^(1/n-1)]-1
Less: CAPEX (Purchase Price)* NCFn = latest cf
-in Y0 (purchased) or Y1 (to be purchased) (xx) NCFo = first cf
NCF xx xx xx xx n = # of years of CF
-current CF = prev CF * (1 + growth rate)
Add: TV (2) xx 4) Inflation
FCF - Firm xx xx xx xx (CPIn/CPIo)-1 x 100
xDiscount Rate (5) xx xx xx xx CPIn = current year CPI
DFCF xx xx xx xx CPIo = base/prev yr CP
EV/NPV(to equity and debt) xx -can be used for increase/decrease in CAPEX and OPEX
Less: Outstanding Loan xx
Eq V xx 5) Weighted Average Cost of Capital/Required Rate of Return/Discount Rate
/out shs (issued shs to CS only -treasury shs) xx (Ke x We) + (Kd x Wd)
Ke = Cost of Equity
Eq V/share xx *if EqV > price, buy We = Weight of Equity
Kd = Cost of Debt after tax
1) From Rev, Basis of tax (Accrual Basis) Wd = Weight of Debt
0 1 2 3 -to be used as discount rate for discounted cash flow
Rev xx xx xx
Less: OPEX (if silent, w/ dep'n) xx xx xx a. Weight
Ope Profit xx xx xx -Weight of Debt + Weight of Equity = 1
Less: Int xx xx xx Example 1: Debt ratio = 70%
Profit bef Tax xx xx xx Wd 0.7
We 0.3
1) From EBITDA, Basis of Tax (Accrual Basis)
0 1 2 3 b. Cost of Equity/CAPM
EBITDA xx xx xx Rf + b (Rm-Rf)
Less: Dep'n xx xx xx Rf = Risk free rate
Less: Interest xx xx xx Rm = Market rate of return
Profit bef tax xx xx xx b = beta

c. Cost of Debt
(Rf + DM) x (1-T)
Rf = Risk Free rate
DM= Debt Margin
T = Tax Rate
 ASSET-BASED VALUATION
*Profit bef Tax (w/ Collected and Paid on next yr) RATIOS MV/sh
Receipts (Cash Collected) 1) PE RATIO
Basis: Rev xx xx xx MV/SH PE
Current xx xx xx EPS x EPS
In Arrears - xx xx
Total xx xx xx 2) B-M RATIO
BV/SH BV/SH
Payments (Cash Paid) MV/SH B-M
OPEX (if silent, w/ dep) xx xx xx
Less: Dep (xx) (xx) (xx) 3) D-Y RATIO
Basis: OPEX excl Dep xx xx xx DV/SH DV/SH
Current xx xx xx MV/SH D-Y
In Arrears - xx xx
Total xx xx xx 4) EM
Profit bef Tax = Receipts less Payments xx xx xx MV/SH EM
EB/SH x EB/SH

ECONOMIC VALUE ADDED

Earnings (Recomputed), not projected xx
- (Investment x Cost of Capital%) (xx)
Economic Value Added xx
4) Tadokoro Corp.
MV/sh 13.5
/EPS 2.5
PE RATIO 5.4

10) Yoshino Corp

Earnings 750,000
Less: COC 5,000,000
*10% 500,000
EVA 250,000

11) Aldini Inc.

>TV is normally high amount due to going concern

13) Satoshi Inc.

EPS 25
xP/E multiple 2
MV/SH 50

26) E. Nakiri Inc.

BV/SH 6.25
/B-M RATIO 0.68
MV/SH 9.191176471

27) Assuming the required return is 10%, the enterprise value of the company
CF 250 300 350
xDF (10%) 0.91 0.83 0.75
DCF 227.5 249 262.5
NCF 739

29) Marui Corp.

EPS 14.25
x# of shares outstanding 1,000,000
Net Income 14250000

1 2 3
Net Income (g=10%) 14,250,000 15675000 17242500
Add: Depreciation 500,000 500,000 500,000
NCF 14,750,000 16,175,000 17,742,500
Less: Cost of Asset -20,000,000
FCF-Firm -5,250,000 16,175,000 17,742,500
Multiply: DF (8%) 0.93 0.86 0.79
DCF-Firm -4882500 13910500 14016575
Enterprise Value/NPV ₱ 23,044,575.00

15675000 17242500 18966750

500,000 500,000 500,000
-20,000,000
-20000000 16175000 17742500 19466750
1.00 0.93 0.86 0.79
-20000000 15042750 15258550 15378733
25680032.5
For Shokugeki Corp.
3) EBITDA MULTIPLE
Operating Income (725,000 x 60%) 435,000 MV/SH
Add: Dep'n 10,000 /EBITDA/SH
EBITDA 445,000 EBITDA MULTIPLE
/shares oustanding 100,000
EBITDA/SH 4.45

1 2 3 4
Revenue 725,000.00 775,750.00 830,050.00 888,150.00
Operating Expense 0.40 290,000.00 310,300.00 332,020.00 355,260.00
Operating Profit 435,000.00 465,450.00 498,030.00 532,890.00
Less: Taxes 0.30 130,500.00 139,635.00 149,409.00 159,867.00
NCF 304,500.00 325,815.00 348,621.00 373,023.00
Add: TV
NCF-Firm 304,500.00 325,815.00 348,621.00 373,023.00
XDF 0.10 0.91 0.83 0.75 0.68
DNCF 277,095.00 270,426.45 261,465.75 253,655.64
Enterprise Value 4,845,296.57
Less: Loans 500,000.00
Equity Value 4,345,296.57
/shares outstanding 100,000
Equity Value/sh 43.45

5) 15)
[(NCFn/NCFo)^(1/n-1)]-1 mv/sh 43.45
[(950,320/725,000)^(1/5-1)]-1 0.0699 eps 3.05
pe 14.270267875

6)
BV/SH 4.5 20)
MV/SH 43.45 dv/sh 2.5
B-M RATIO 0.1035603 mv/sh 43.45
DY 0.0575

31)
NCF5 399,134.40 25)
/G% 7% equity value 4,345,296.57
5701920 /shares 100,000
 43.45

30)
ENTERPRISE VALUE 4,845,296.57
/SHARES 100,000
48.45
 43.45
4.45
9.7647113888

5
950,320.00
380,128.00
570,192.00
171,057.60
399,134.40
5,701,920.00
6,101,054.40
0.62
3,782,653.73
 1 2 3 4 5
Sales 1,500 1,700 2,000 2,500 2,750
Less: OPEX 6) Y5 OPEX w/o Dep 60% 900 1020 1200 1500 1650
Less: Interest 50 50 50 50 50
Earnings Bef Tax 550 630 750 950 1,050
Less: Tax Expense 30% 165 189 225 285 315
Net Income after Tax 3) Y4 NIAT 385 441 525 665 735
Add: Depreciation 10 10 10 10 10
Add: Interest 50 50 50 50 50
Net Cash Flow 445 501 585 725 795
Add: Terminal Value 7500
Free Cash Flow - Firm 445 501 585 725 8,295
x Discount Rate 10% 0.9091 0.8264 0.7513 0.683 0.6209
Discounted FCF 1) Y3 DCF 405 414 440 495 5151
Enterprise Value 5) EV 6904
Less: Outstanding Debt 3000
Equity Value 4) Eq V 3904
1640

0.9091 0.8264 0.7513 0.6830 0.6209

0.9091
Chap 3
14) NPV PV CF 1450
Investment -500
NPV 950

0 1 2 3 4 5
NCF 10% 25 27.5 30.3 33.3 36.6
15) TV Add: TV 366
Less: CAPEX -100
FCF -100 25 27.5 30.3 33.3 403
DF 8% 1 0.93 0.86 0.79 0.74 0.68
DCF -100 23.1 23.6 24 24.5 274
16) NPV NPV 269
Debt 60% 60
17) EQV Eq 209

0 1 2 3 4 5
NCF 5% 30 31.5 33.1 34.7 36.5
18) TV TV 729
CAPEX -120
FCF -120 30 31.5 33.1 34.7 766
DF 10% 1 0.91 0.83 0.75 0.68 0.62
DCF -120 27.3 26 24.8 23.7 475
19) NPV NPV 457
Debt 70% -84
20) EQV EQ 373
EM = 4 mv 4,760,680
ebitda 1,190,170 50%
nibt 714102 30%

mv 4,760,680
e 1,120,160
pe 4.25

m 30
b 3.5
mb 8.57

market 12
risk free 5
risk prm 7.00

capm 4% + 1.5 * 5%
 ror 11.50%

p 50
e (250/5) 5
pe 10

pe 10 mv 22
eps 2.2

div po 75% dps 1.65

eps 2.2

dps 1.65
mv 22
dy 7.5%

ebit 4400
int -200
ebt 4200
add to re 1260
 roa 10% ni 25
ta 250

ncf 10% 20.0 22.00 24.20

tv 266.2
fcf 20 22 290
df 0.93 0.86 0.79
dcf 18.52 18.86 230.53
npv 267.91

ncf 55,000 57,750 60,637.50

capex -125,000
fcf -70,000 57,750 60,638
df 14% 0.877193 0.7694675285 0.674971516202
dcf -61403.5 44436.749769 40928.5853137
npv 23961.83
debt -62500
eq -38538.2
a 10 40% 4
b 12 40% 4.8
c 15 20% 3
wagr 11.8

capm 6% + 2*4%
14.00%

p 20
e 25
pe 0.800

d 1.4
 m 17.5
dy 0.080

earn - coc 750 - (5000*12%)

eva 150

1 2
niat 500
dep 75
ncf 575 632.5

s 3500*140% 4900
e 60% -2940
ebit 1960
int -200
ebt 1760
tax 40% -704
NI 1056
 ca 240
cl 120
current 2

ca-inv 180
cl 120
quick 1.5

cogs 480 60%

inv (240-180) 60
ITO 8

sales 800 100%

ncf 15
capex 9
npat 24
p 25
e 1.25
pe 20

p 22.5 e (5.625*1500) 8437.5 30%

eps 5.625 rev 28,125.00 100%
pe 4

ni 25
sh 6
eps 4.17
div 3
ni 16%
mv 18.75

75% 2.5/75%
full cap 3.333333
rev 50,000
exp -35,000
dep -4200
niat 62.00% 6696
dep 4200
CF from ope 10896
ncf 12% 20.0 22.40 25.09
tv
fcf 20.00 22.40 25.09
df 0.93 0.86 0.79
dcf 18.52 19.20 19.92
npv 57.639

ncf 55,000 57,750 60,637.50

capex/tv -125,000 673,750
fcf -70,000 57,750 734,388 ncf
df 14% 0.8771929825 0.7694675285 0.6749715162 capex
dcf -61403.508772 44436.749769 495690.64435 fcf
npv 478,723.89 df
dcf
npv
earn - coc 375 - (5000*10%)
eva -125
 55,000 57,750 60,637.50
-125,000
-70,000 57,750 60,638
14% 0.8771929825 0.7694675285 0.6749715162
-61403.50877 44436.749769 40928.585314
23,961.83
 -125,000

###
-125,000
 55,000 57,750 60,637.50
673,750
55,000 57,750 734,388
0.87719298246 0.7694675285 0.6749715162
48245.6140351 44436.749769 495690.64435
463,373.01
-62500
400,873.01
 LIQUIDATION-BASED VALUATION
I. LV & LV/sh II. COMPANY VALUE
PV of Sale of Assets xx LV xx
Less: PV of Closure Costs (xx) Add: PV of CF during yrs of Ope xx
PV of Debt (xx) Value of Company xx
Tax Charges & Other Liquidation Costs (xx)
PS (xx)
LV xx
Divide by: Outs Share /xx
LV/sh xx
*CoC = reflects risk on orig value date
*Int assets are offset against SHE
- can't be reliably measured

LIQUIDATION VALUE/NET ASSET VALUE

- val of co. if dissolved and assets are sold individually (piecemeal)
- base/floor price for valuation
- lower than val of assets working together w/ human capital
- no synergies nor managerial skills
- in proprier/p'ship, value separately the GW attrib to partner

GENERAL PRINCIPLES on LV
- most conservative valuation approach
- considers the RV of A if sold now based on current conditions
- captures markdowns/ups that potentional buyer negotionate

1) Use LV if LV > income approach val (going-concern)

*Risk-free arbitrage profit
- buying sh @ MV and selling @ higher LV
2) TV based on LV if co. w/ limited life (factor in all costs)
3) Non-ope assets are valued by liquidation method
- MV is reduced by CTS & tax
4) LV used if bus continuity is dependent on current mgt that
will not stay

SITUATIONS TO CONSIDER LV
1) Business Failures a. Insolvency - liquidity problems, A > L,
- low/negative returns but CA < CL
- RoR < CoC b. Bankruptcy - L > A

2) Corporate/Project End of Life

- finite # of yrs to operate
- if not extended, due process takes place to end life

3) Depletion of Scare Resources

- for mining/oil co.
- highly regulated by gov't, with expiration

CALCULATING LV
1) Orderly Liqui
- sold strategically over an orderly period to generate most money
- expose assets on the open market, w/ reasonable time

2) Forced Liqui
- lower prices due to rush sale (auction)
- occurs if creditors have sued or bankruptcy is filed
 EARNINGS VALUATION
I. CAPITALIZING PAST EARNINGS APPROACH II. DISCOUNTED FUTURE EARNINGS APPROACH
Future net earnings (of Co.) Discounted future earnings xx
(CF less expenses) xx Discounted terminal value (multiples approach)
/Capitalization rate (of Basis) (farthest year * multiple) xx
(Return of Basis/Basis investment) /% xx
xx

MARKET VALUATION
A. EMPIRICAL/STATISTICAL APPROACH
I. COMPARATIVE PRIVATE CO. SALE DATA III. PRIOR TRANSACTIONS
- for minority and majority - for minority and majority
- for similar co. in same industry - not much appropriate since 100% is more valuable

Price (on prev. acquisition) xx Value of Minority (on prev. acquisition) xx

/Sales (on prev. acquisition) /xx /interest % (prev. on acquisition) /%
P to S ratio xx xx
*Sales (current) *xx
/interest %(on prev. acquisition) /% IV. USING PARAMETERS
xx 1) Based on Gross Revenue (inclusive of Debt)
Price/MV (of basis) xx
II. GUIDELINE PUBLIC CO. DATA /Gross Revenue (of basis) /xx
- for minority only (based on stock price) *Gross Revenue (of co.) *xx
- not for private/not publicly-traded/small co. EV/MVIC (MV of invested cap) xx
-if to be used for private, proper adj for size, marketabilty, Less: Debt (of Co.) (xx)
etc., should be done Eq/MVeq (MV of Equity) xx
*% of shholdings to be issued *%
1) Average/Median values Reasonable Min Price of % issued xx
a. Using P/E ratio
Average P/E ratio (of comparable co.) xx 2) Based on NI (exclusive of Debt)
*NI (current) *xx Price/MVIC (of basis) xx
Less: Debt (xx) Less: Debt (of basis.) (xx)
xx MVEq (of basis) xx
b. Using EV/EBITDA multiple /NI (of Basis) /xx
Average EV/EBITDA Multiple xx *NI (of Co.) *xx
*EBITDA (current) *xx MVEq (of basis) xx
 *Adj. factor *xx ? *% of shholdings to be issued *%
Less: Debt (xx) Reasonable Min Price of % issued xx
*xx
2) Most similar values MVEq (of basis) xx
-indirectly adjusts value to acc for diff. in size, control, etc. Add: Debt (of Co.) xx
MVIC/EV xx
*Justified value is w/in the range of Private and Public
B. HEURISTIC PRICING MODEL
-using expert opinions
1) Collateral for mort 800k HM to Ord Shares? LV 2000
Other assets 1200k Collateral for mort -800
LV 2000k PS -200
Unsecured bonds -1000
Unsecured bonds 1000 OS 0
Mort bonds 800
Pref shares 200
Ord shares 500

2) T is considering the acqui of Z @ cash price of 6000k. NV of drill? PV of CF 6704.4

Drill will generate after-tax CF of 2M/yr for 5 yrs. CAPEX -6000
Z has liab of 9000k and T could sell assets for 6500k A 6500
15% CoC L -9000
NV -1795.6 c

3) L co showed TA 50M, TL 30M, 500 sh out. LV/sh of Ord Sh? A @ SP 40

L could sell assets for 40M TL -30
Sh out 0.5
LV/sh 20 b

4) CA 1000k can be liquidated @ 80% of BV LV/sh of CS? A @ SP 800

TL, inclu PS, is 270k. 20k CS outs. TL & PS -270
Sh Out 20
LV/sh 26.5 d

5) A shholder received 10/sh as LV for the LV of Co.? LV/sh 10

1000k sh of the Co. the shholder owned Sh Out 1000
10%. % interest 10%
LV 100,000 c

6) Co. owed 2M to both secured & unsecured LV of Co.?

creditors. Admin cost of liquidation and wage A 3000
payments are expected to be 500k. Sale of L -2000
assets is expected to bring 3M after costsand tax Liqui Cost& Wages -500
LV 500 d

7) P'ship reported cash of 50k and Building valued LV of P'ship? Build @ SP 600
@ 800k. They owed 500k to creditors. Building Cash 50
can sell at 600k. L -500
LV 150 b

8) Co. can sell assets at 6M if sold w/in 1 yr. An Orderly LV? Sold w/in 1 yr 6000
- 9) interested buyer is willing to pay for 4M now. L -2000
Co. has 2M liab. LV 4000 c

Forced LV? Sold now 4000

L -2000
LV 2000 d

10) Co.'s CS sells for 75/sh, has TA of 1M & TL (w/ PS) LV/sh? A 1000
of 350k, 10k sh of CS outs. L w/ PS -350
LV 650
Sh out 10
LV/sh 65 d
 if w/ recomputed, average all earnings

20 100 100
20% 80 125
-100
25