ELEC2 - Module 2 - Asset Based Valuation

CHAPTER 2
ASSET-BASED
VALUATION
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Department of Accountancy – MGT7A-Financial Management

LEARNING OUTCOMES
• Enumerate the valuation methods under asset-

based valuation.
• Compute the value of the enterprise using the
valuation methods under asset-based valuation
Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Source: Valuation Concepts and Methodologies
By: Marvin V. Lascano, Herbert C. Baron and Andrew Timothy L. Cachero
LECTURE CONTENTS
• Book Value Method
• Replacement Value Method
• Reproduction Value Method

ASSET-BASED VALUATION
• Asset has been defined by the industry as transactions

that would yield future economic benefits as a result of
past transactions. Hence, the value of investment
opportunities is highly dependent on the value that the
asset will generate from now until the future.
• In practice, valuation is a 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.
• Green field investments are investments that started from

scratch.
➢Value shall be based on pure estimates.
• Brown field investments are those already in the going
concern state, as most businesses are in the optimistic
perspective that they will grow in the future.
➢Opportunities that can be either partially or fully
operational.
➢Considered as going concern business opportunities
(GCBO)
Going Concern Business Opportunities (GCBOs)
These are the businesses that has a long term to infinite
operational period. The risk indicators of GCBOs are
identified easily and can be quantified accordingly.
The Committee of Sponsoring Organization of the
Treadway Commission (COSO) suggests that risk
management principles must be observed in doing
businesses and determining its value.

Sound Enterprise-wide Risk Management allows the
company to:
1. Increase the opportunities;
2. Facilitates the management and identification of the risk
factors that affect the business;
3. Identify or create cost-efficient opportunities;
4. Manages the performance variability;
5. Improve management and distribution of resources
across the enterprise;
6. Make the business more resilient to abrupt changes.

Since the entire company is driven by its asset base, the
value of the company can be best attributed to the value
of assets.
In asset-based valuation, familiarity with the generally
accepted accounting principles is a key attribute for an
analyst to enable them to establish the value.
Among the popular method used to determine the value
using assets as its bases are: (1) book value method; (2)
replacement value method; (3) reproduction value
method; and (4) liquidation value method.

BOOK VALUE METHOD
• Book value can be defined as the value recorded in the
accounting records of the company.
• Book value is highly dependent on the value of the
assets as declared in the audited financial statements,
particularly the balance sheet or the statement of
financial position.
• IAS no.1 requires that the statement of financial
position to summarize the total value of its assets,
liabilities and equity of a firm.

BOOK VALUE METHOD
• Assets are required to be categorized into current and non-
current.
• Liabilities is also categorized as current and non-current.
• Book value method – the value of the enterprise is based
on the book value of the assets less non-equity claims
against it.
• Formula:
𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔 − 𝑻𝒐𝒕𝒂𝒍 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔
𝑵𝒆𝒕 𝑩𝒐𝒐𝒌 𝑽𝒂𝒍𝒖𝒆 𝒐𝒇 𝑨𝒔𝒔𝒆𝒕𝒔 =
𝑵𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝑶𝒖𝒕𝒔𝒕𝒂𝒏𝒅𝒊𝒏𝒈 𝑺𝒉𝒂𝒓𝒆𝒔

BOOK VALUE METHOD
• Illustration: Golden Crown Corp. in the year 2021

presented their statement of financial position with
the following balances: Current Assets – P500 Million;
Non-current Assets – P1 billion; Current Liabilities –
P200 Million; Non-current Liabilities - P700 Million and
the Outstanding shares is 1 Million.

BOOK VALUE METHOD
Current assets P 500,000,000
Non-current Assets 1,000,000,000
Total Assets P1,500,000,000
Current Liabilities P 200,000,000
Non-current Liabilities 700,000,000
Total Liabilities P 900,000,000
𝑷𝟏, 𝟓𝟎𝟎, 𝟎𝟎𝟎, 𝟎𝟎𝟎 − 𝑷𝟗𝟎𝟎, 𝟎𝟎𝟎, 𝟎𝟎𝟎

𝑵𝑩𝑽 𝒐𝒇 𝑨𝒔𝒔𝒆𝒕𝒔 =
𝟏, 𝟎𝟎𝟎, 𝟎𝟎𝟎 𝒔𝒉𝒂𝒓𝒆𝒔
𝑷𝟔𝟎𝟎,𝟎𝟎𝟎,𝟎𝟎𝟎
𝑵𝑩𝑽 𝒐𝒇 𝑨𝒔𝒔𝒆𝒕𝒔 =
𝟏,𝟎𝟎𝟎,𝟎𝟎𝟎 𝒔𝒉𝒂𝒓𝒆𝒔
NBV of Assets = P600/share

REPLACEMENT VALUE METHOD
• Replacement cost – the cost of similar assets that have

the nearest equivalent value as of the valuation
date.(National Association of Valuators and Analysts)
• Replacement value method – the value of the
individual assets shall be adjusted to reflect the
relative value or cost equivalent to replace that asset.

Factors that can affect the replacement value of an asset:
• Age of the asset – enable the valuator to determine the
costs related in order to upkeep a similarly aged asset and
whether assets with similar engineering design are still
available in the market.
• Size of the asset – is important for fixed assets particularly
real property where assets of the similar size will be
compared.
• Competitive advantage – assets which have distinct
characteristics are hard to replace. However, the
characteristics and capabilities of the distinct asset might
be found in similar, separate assets.
Formula:
𝑵𝒆𝒕 𝑩𝒐𝒐𝒌 𝑽𝒂𝒍𝒖𝒆 ± 𝒓𝒆𝒑𝒍𝒂𝒄𝒆𝒎𝒆𝒏𝒕 𝒂𝒅𝒋𝒖𝒔𝒕𝒎𝒆𝒏𝒕
𝑹𝒆𝒑𝒍𝒂𝒄𝒆𝒎𝒆𝒏𝒕 𝑽𝒂𝒍𝒖𝒆 𝒑𝒆𝒓 𝒔𝒉𝒂𝒓𝒆 =
𝑵𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝑶𝒖𝒕𝒔𝒕𝒂𝒏𝒅𝒊𝒏𝒈 𝑺𝒉𝒂𝒓𝒆𝒔
Illustration: Following through the given information for

Golden Crown Corp., suppose that 50% of the non-
current assets has an estimated replacement value of
150% of its recorded net book value while the remaining
half has a estimated replacement value of 75% of their
recorded net book value. With the given information,
the equity value is adjusted:

1. Calculate the replacement value of the affected
items.
50% of Non-current Assets -150% of the net book value
Non-current Assets P1,000,000,000
% of affected item 50%
50% of the Non-current Assets P 500,000,000
Premium on Replacement 150%
Adjusted Non-Current Assets (A) P 750,000,000

items.
50% of Non-current Assets -75% of the net book value
50% of the Non-current Assets P 500,000,000
Discount on Replacement 75%
Adjusted Non-Current Assets (B) P 375,000,000

items.
Total Adjusted Non-current Assets
Adjusted Non-Current Assets (A) P 750,000,000
Adjusted Non-Current Assets (B) 375,000,000
Total Adjusted Non-Current Assets P1,125,000,000

2. Add back the unadjusted components
Total Adjusted Non-Current Assets P1,125,000,000
Add: Current Assets 500,000,000
Total Assets – Replacement Value P1,625,000,000
3. Apply the Replacement Value Formula
𝑷𝟏, 𝟔𝟐𝟓, 𝟎𝟎𝟎, 𝟎𝟎𝟎 − 𝑷𝟗𝟎𝟎, 𝟎𝟎𝟎, 𝟎𝟎𝟎
𝑹𝒆𝒑𝒍𝒂𝒄𝒆𝒎𝒆𝒏𝒕 𝑽𝒂𝒍𝒖𝒆 =
𝟏, 𝟎𝟎𝟎, 𝟎𝟎𝟎 𝑺𝒉𝒂𝒓𝒆𝒔
𝑷𝟕𝟐𝟓, 𝟎𝟎𝟎, 𝟎𝟎𝟎
𝑹𝒆𝒑𝒍𝒂𝒄𝒆𝒎𝒆𝒏𝒕 𝑽𝒂𝒍𝒖𝒆 =
𝟏, 𝟎𝟎𝟎, 𝟎𝟎𝟎 𝑺𝒉𝒂𝒓𝒆𝒔
Replacement value = P725 per share

REPRODUCTION VALUE METHOD
• Reproduction value is an estimate of cost of reproducing,
creating, developing or manufacturing a similar asset.
• Reproduction value method requires reproduction cost
analysis which is internally done by companies especially if
the assets are internally developed.
• this method is useful in calculating the value of new start-
up businesses, ventures that use specialized equipment or
assets, firms that are heavily dependent on intangible
assets and those with limited market information.

Steps in determining the equity value using the
reproduction value method are as follows:
1. Conduct reproduction costs analysis on all assets
2. Adjust the book values to reproduction costs values
(similar as replacement value)
3. Apply the replacement value formula using the
figures calculated in the preceding step

Illustration: Using the information of Golden Crown

Corp., supposed that it was noted that the 80% of the
total non-current assets are cheaper by 10% of the book
value when reproduced. 20% of the total non-current
assets are comprised of goodwill which upon testing was
proven to be valued correctly.

1. Conduct reproduction cost analysis to all assets
80% of the Total Non-current Assets if reproduced is
equal to 90% of its value
P 800,000,000
➢ Since the remaining 20% or P200 million is
Goodwill and already in its proper value, it will not
be adjusted.

2. Adjust the book value to reproduction costs
80% of the Total Non-current Assets if reproduced is equal to
90% of its value
Non-current Assets P 800,000,000
Reproduction Cost Estimate % 90%
Reproduction Cost P 720,000,000
Non-Current Assets – Reproduction cost P720,000,000
Add: Goodwill 200,000,000
Total Non-Current Assets P920,000,000
Add: Current Assets 500,000,000
Total Assets P1,420,000,000

3. Apply the replacement value formula using
the figures calculated in the preceding step
𝑷𝟏, 𝟒𝟐𝟎, 𝟎𝟎𝟎, 𝟎𝟎𝟎 − 𝑷𝟗𝟎𝟎, 𝟎𝟎𝟎, 𝟎𝟎𝟎

𝑹𝒆𝒑𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒐𝒏 𝑽𝒂𝒍𝒖𝒆 =
𝟏, 𝟎𝟎𝟎, 𝟎𝟎𝟎 𝑺𝒉𝒂𝒓𝒆𝒔
𝑷𝟓𝟐𝟎, 𝟎𝟎𝟎, 𝟎𝟎𝟎
𝑹𝒆𝒑𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒐𝒏 𝑽𝒂𝒍𝒖𝒆 =
𝟏, 𝟎𝟎𝟎, 𝟎𝟎𝟎 𝑺𝒉𝒂𝒓𝒆𝒔
Reproduction Value = P520/share

LIQUIDATION VALUE METHOD
• Liquidation value method is an equity valuation approach that

considers the salvage value as the value of the asset. This
assumes that the reasonable value for the company to be
purchased is the amount which investors will realize in the end
of its life or the value of the business when it is terminated.
This method will be further discussed in the next chapter.

THANK YOU
STAY SAFE
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Department of Accountancy – ELEC2

ELEC2 - Module 2 - Asset Based Valuation

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CHAPTER 2

This Photo by Unknown Author is licensed under CC BY-SA

Department of Accountancy – MGT7A-Financial Management

• Enumerate the valuation methods under asset-

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

• Asset has been defined by the industry as transactions

• Green field investments are investments that started from

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

• Illustration: Golden Crown Corp. in the year 2021

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

𝑷𝟏, 𝟓𝟎𝟎, 𝟎𝟎𝟎, 𝟎𝟎𝟎 − 𝑷𝟗𝟎𝟎, 𝟎𝟎𝟎, 𝟎𝟎𝟎

NBV of Assets = P600/share

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

• Replacement cost – the cost of similar assets that have

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Illustration: Following through the given information for

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Replacement value = P725 per share

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Illustration: Using the information of Golden Crown

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

𝑷𝟏, 𝟒𝟐𝟎, 𝟎𝟎𝟎, 𝟎𝟎𝟎 − 𝑷𝟗𝟎𝟎, 𝟎𝟎𝟎, 𝟎𝟎𝟎

Reproduction Value = P520/share

Department of Accountancy – ELEC2 –Valuation Concepts and Methods

• Liquidation value method is an equity valuation approach that

This method will be further discussed in the next chapter.

This Photo by Unknown Author is licensed under CC BY-SA

Department of Accountancy – ELEC2

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