INTRODUCTION

TO VALUATION
CONCEPTS
by Sarah M. Balisacan, CPA
 Valuation
The process of estimating the
worth of an asset or a firm.

“How much is it worth?”

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 Types of Value
The amount of money realized by
selling a firm’s assets and paying
off its liabilities.
The value of a firm as an operating business.

Book value
The accounting value
of a firm or an asset. The transaction price of the
asset in the market place.

The true value of an asset.

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 Market Efficiency
Efficient Market Hypothesis:
Market prices reflect all relevant information.

LESS THAN
PERFECTLY PREFECTLY
EFFICIENT EFFICIENT
Market value and Market value and
intrinsic value are intrinsic value may
equal. differ i.e., mispricing
 Market Efficiency
Managerial Actions, the Economic
Environment, and the Political Climate

“True” Investor “Perceived”

“True” risk “Perceived” risk
Returns Investor Returns

Intrinsic Value Market Price

Market Equilibrium
Intrinsic Value = Stock Price

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Importance of Valuation
Issue
Fairly
securities for
valued?
how much?
BUY?

Maximize SELL?
intrinsic value
Impact of
decisions?

IV > MV Undervalued Buy

IV < MV Overvalued Sell

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 Standard
Approaches
 Discounted Cash Flow Approach
 Relative Value Approach

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Discounted Cash Flow
Intrinsic Value = Present Value of expected future cash flows

Less exposed to market moods Requires lots of inputs (cash flows,

and perceptions discount rate, life of asset)

Designed for: Works best for:

Assets that derive their Investors who have Investors who are
value from their capacity time to wait for the capable of providing
to generate cash flows market to correct the catalyst to move
pricing mistakes price to value
 Relative Value
The value of a financial asset is computed relative to how the market prices similar assets.

 More likely to reflect market moods  Does not provide absolute value
and perceptions which can be an  Assumes that markets are correct
advantage in certain cases in the aggregate
 Requires less explicit information  Uses implicit assumptions

Use When: Works best for investors who:

There are large Serious under or Have relatively Are evaluated Can take
number of overvaluation does not short time based on a relative advantage of
comparable assets prevail in the market horizon benchmark relative mispricing
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 Limitations
Biases 

Bias in choosing a company to value
Bias in the information needed to value a company
 Bias based on market estimates
 Institutional biases e.g. equity research analysts are
more likely to recommend buy than sell
 Bias resulting from reward and punishment structure
associated with finding companies to be under and overvalued
e.g. acquisitions biased upwards

 Estimation uncertainty
 Firm-specific uncertainty
Imprecision/
 Macro-economic uncertainty
Uncertainty
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NETFLIX
Recommendation
MONEYBALL
Beane (Brad Pitt) and assistant GM Peter Brand (Jonah
Hill), faced with the franchise's limited budget for players,
build a team of undervalued talent by taking a
sophisticated sabermetric approach to scouting and
analyzing players.

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