Learning Outcomes

At the end of this discussion, the students must be able to:

Valuation and the new company
 Define valuation and describe its nature, scope, and objective.
 Understand the importance of business valuation
Principles of valuation
 Describe the purpose and principles of valuation
Valuing the company
 Familiarize with various methods and techniques of business valuation.
 Decide on the most appropriate method(s) of valuation according to the
circumstance, i.e., the purpose for which it is being done.

Define valuation and describe its nature, scope, and objective.

1.1 What is value?
 Value is the worth of a thing, or can also be defined as a bundle of benefits
expected from it. It can be tangible or intangible.
 Value is defined as (i) The worth, desirability, or utility (usefulness) of a thing,
or the qualities on which these depend. (ii) Worth as estimated. (iii) The
amount for which a thing can be exchanged in the market. (iv) Purchasing
power. (v) Estimate the value of, appraise (professionally).
 Valuation is defined as (i) Estimation (esp. by professional valuer) of a thing’s
worth. (ii) Worth so estimated. (iii) Price set on a thing.
Note: Distinct difference between value and valuation
 Value and valuation are two related but distinct concepts in finance and
economics as value can refer to different types of worth or usefulness, such
as intrinsic value, market value, or subjective value, while valuation typically
involves using various methods and techniques to estimate the fair market
value of an asset or investment.
 Suppose you own a vintage car that you believe is valuable because it has
sentimental value to you and is rare and well-preserved. The car may have
value to you because it brings back memories of your childhood or represents
a personal achievement or milestone. However, if you were to try to sell the
car on the open market, you would need to determine its fair market value
 through a process of valuation that takes into account factors such as its age,
condition, rarity, and demand among potential buyers.
1.2 How is value different from cost and price?
 Cost is defined as resources given up to produce or get a thing, (a good or a
service).
 Price is what a seller or service provider charges for a good or service. Many
a time, it is a function of market forces. It frequently depends on market
pressures.
1.3 Who wants to value?
 The following entities may require valuation to be carried out: (i) A buyer or a
seller (ii) A lender (iii) An intermediary like an agent, a broker (iv) Regulatory
authorities such as tax authorities, revenue authorities (v) General public
 Global and corporate investors have raised their standards and their attention
to enhancing business value. The list of investors includes wealthy individuals,
pension funds, investment firms, and hedge funds. They no longer remain
passive investors but are keen followers of a company’s strategies and
actions geared at maximizing and safeguarding the value of their
investments.
1.4 When to value?
 Following the AICPA, valuation is performed for a wide range of purposes,
including transactions, financing, tax planning and compliance,
inter-generational wealth transfer, ownership transition, financial accounting,
bankruptcy, management information, and planning and litigation support.
 For example, the scope of valuation for real estate may include an analysis of
market trends, property location, condition, and amenities. On the other hand,
the scope of valuation for a company may involve analyzing financial
statements, industry trends, management quality, and other factors that affect
its value.
1.5 Who determines value?
 A person known as a valuer can also estimate, evaluate, or decide on value.
Value determination is referred to as valuation. Valuation is an estimation, by
a professional valuer, of a thing’s worth. And a business valuation is the
process of determining the economic value of a business.
1.6 What to value?
  Value all assets and liabilities to know the value of what we own and what we
owe
 Assets will include both the tangibles and intangibles.
 Liabilities will include both the apparent and contingent.
 Objective of valuation- To determine the fair market value of an asset or a
company based on various factors such as financial performance, market
trends, industry analysis, and other relevant factors
Note: The purpose (objective) and scope of valuation can vary depending on
the context in which it is being used.
1.7 How to value? (Methods of Valuation)
 Depending on what is valued, the field of valuation covers a variety of
methods and techniques. These range from simple thumb rules to complex
models. (further discussed by my groupmates)
1.8 Value Classifications
 There are a number of types of values, like the Market Value, Economic
Value, Residual Value, among others. (further discussed by Janine)

Understand the importance of business valuation

1.9 Business Valuation
 The objective of any management today is to maximize corporate value and
shareholder wealth. This is considered their most important task. A company
is considered valuable not for its past performance, but for what it is and its
ability to create value to its various stakeholders in future.
 Generally, we define the value of a business enterprise as the value of its net
working capital plus the value of its fixed and intangible assets. This equates
to the value of the total capital of the business (debt plus equity). We derive
this relationship from the familiar accounting equation:
A = L + SHE
CA + TFA + IA = CL + LTD + SHE
where:
CA = Current Assets
TFA = Tangible Fixed Assets
IA = Intangible Assets
CL = Current Liabilities
LTD = Long-term Debt (defined as all interest-bearing debt)
SHE = Stockholders’ Equity
 Rearranging the above equation, we have:
(CA – CL) + TFA + IA = LTD + SHE
 We define the quantity (CA – CL) as net working capital (NWC), and as
previously defined, the business enterprise value equals net working capital
plus fixed and intangible assets, so that:
Business Enterprise Value = NWC + TFA + IA = LTD + SE
 Thus the business enterprise value equals the value of the company’s debt
plus its equity.

Describe the purpose and principles of valuation

1.10 Principles of Valuation
These principles should be observed when evaluating a fair and reasonable value
of a property.
1. Cost depends upon the supply and demand of the property.
2. Cost depends upon its design, specifications of the materials used, and its
location.
3. Cost varies with the purpose for which valuation is done.
4. In valuation, a vendor must be willing to sell so the purchaser is willing to
purchase.
5. Present and future use of any property should be given due weightage in
valuation.
6. Cost analysis must be based on statistical data as it may sometimes
require evidence in a Court of law.