Sr. Jeanette M.

Formentera BSA-4
 Financial
Assets
Financial assets include cash and those assets
that can be easily and quickly converted into known
amount of cash.

Normally, cash, short term investments

(marketable securities) and receivables are
included in the definition of financial assets.
• Financial assets represent
the most liquid assets of the
business.
 The availability of
sufficient financial assets
ensures the strong
liquidity position of the
business.
 Valuation of
financial assets:

Financial assets are shown in

the balance sheet at their
current values. The current
value of each financial asset is
determined differently.
 Valuation of
financial assets:

Cash
It is an asset in which
other liquid assets are
converted so it is shown
in the balance sheet at
face value.
 Valuation of
financial assets:
Marketable securities
are securities or debts that are to
be sold or redeemed within a year.
Are shown at their current market
value. The market value of
marketable securities is affected by
a number of factors such as
interest rates and stock prices.
 Valuation of
financial assets:
Receivables
are shown at their net
realizable value.
Net realizable value is
the estimated collectible
amount of receivables.
Summary
What Is Valuation?

Valuation is the analytical process of

determining the current (or projected) worth of
an asset or a company.

There are many techniques used for doing a valuation.

An analyst placing a value on a company looks at the
business's management, the composition of its capital
structure, the prospect of future earnings, and
the market value of its assets, among other metrics.
Fundamental analysis

is often employed in valuation,

although several other methods may be
employed such as the
capital asset pricing model (CAPM)
or the dividend discount model (DDM).
The Two Main Categories of Valuation Methods

1. Absolute valuation

models attempt to find the

intrinsic or "true" value of an
investment based only on
fundamentals.
The Two Main Categories of Valuation Methods
2. Relative valuation
models, in contrast, operate by
comparing the company in
question to other similar
companies. These methods
involve calculating multiples
and ratios, such as the price-to-
earnings multiple, and
comparing them to the
multiples of similar companies.
 Bond Valuation

Bonds are long-term debt securities

issued by companies or government
entities to raise debt finance.
Investors who invest in bonds receive periodic interest
payments, called coupon payments, and at maturity, they
receive the face value of the bond along with the last
coupon payment.
 Bond Valuation
Bond valuation is a method to determine
the fair value of a bond.

The fundamental principle of bond valuation is that

its value is equal to the sum of present value of its
expected cash flows.
 Bond Valuation Method
The method for valuation of bonds involves three
steps as follows:

• Step 1: Estimate the expected cash flows

• Step 2: Determine the appropriate interest rate that
should be used to discount the cash flows.
• Step 3: Calculate the present value of the expected
cash flows (step-1) using appropriate interest rate
(step- 2) i.e. discounting the expected cash flows
 Let’s expand and understand each step in detail:

STEP 1 – ESTIMATING CASH FLOWS

Cash flow is the cash that is estimated to be
received in future from investment in a bond.

There are only two types of cash flows that can be

received from investment in bonds i.e.

1. coupon payments and

2. principal payment at maturity.
STEP 2 – DETERMINE THE APPROPRIATE
INTEREST RATE TO DISCOUNT
THE CASH FLOWS

The minimum interest rate that an investor

should require is the interest available in the
marketplace for default-free cash flow.
- are cash flows from debt security which are completely
safe and has zero chances default. Such securities are
usually issued by the central bank of a country,
STEP 3 - DISCOUNTING THE EXPECTED
CASH FLOWS

Present Value of a cash flow is the amount of

money that must be invested today to generate
a specific future value.

The present value of a cash flow is more

commonly known as discounted value.
STEP 3 – Cont…

The present value of a cash flow depends on two

determinants:
1. When a cash flow will be received
(i.e. timing of a cash flow)&;
2. The required interest rate, more widely known as
Discount Rate (rate as per Step-2)

 First, we calculate the present value of each expected cash

flow. Then we add all the individual present values and the
resultant sum is the value of the bond.
STEP 3 – Cont…
The formula to find the present value of one cash flow is:
PRESENT VALUE FORMULA FOR BOND VALUATION

Present Value n = Expected cash flow in the period n/ (1+i) n

Here,
i = rate of return/discount rate on bond
n = expected time to receive the cash flow
The next step is to add all individual cash flows.
Bond Value = Present Value 1 + Present Value 2 + ……. +
Present Value n
STEP 3 – Cont…

EXAMPLE
A bond that matures in 4 years, has a coupon
rate of 10% and has a maturity value of P100.
The bond pays interest annually and has a
discount rate of 8%.
STEP 3 – Cont…

Solution:
The cash flow of this bond is:
YEAR CASH FLOW
1 P 10
2 P 10
3 P 10
4 P 110
STEP 3 – Cont…
The present value of each cash flow is:
Year 1 – Present Value (PV1) = P10/ (1.08)1 = P9.26
Year 2 – Present Value (PV2) = P10/ (1.08)2 = P 8.57
Year 3 – Present Value (PV3) = P10/ (1.08)3 = P 7.94
Year 4 – Present Value (PV4) = P110/ (1.08)4 = P 80.85

Now adding all cash flows:

Thus, Present Value of Bond = 9.25+8.57+7.94+80.85
= P106.62
Why Bond Valuation?
There are many factors such as inflation, credit rating of
the bonds, etc. that affect the value of bonds. Furthermore,
there are many features of the bond itself determines its
intrinsic value.

Bond valuation tries to take into consideration all the

features to determine an accurate present value. This
present value can be very helpful for investors & analysts
to make an informed investment decision.
 Shares Capital Valuation
Valuation of shares is the process of knowing
the value of company’s shares. Share valuation is
done based on quantitative techniques and share
value will vary depending on the market demand
and supply.
 When is Valuation of shares required?
Listed below are some of the instances where valuation of shares is important:
• One of the important reason is when you are about to sell your business and
you wanted to know your business value
• When you approach your bank for a loan based on shares as a security
• Merger, acquisition, reconstruction, amalgamation etc – valuation of shares
is very important
• When your company shares are to be converted i.e. from preference to equity
• Valuation is required when implementing an employee stock ownership plan
(ESOP)
• For tax assessments under the wealth tax or gift tax acts
• In case of litigation, where share valuation is legally required
• Shares held by an Investment company
• Compensating the shareholders, the company is nationalized
 How to choose the share valuation method?

1. Assets-Based Approach

This approach is based on the value of company’s

assets and liabilities which includes intangible assets
and contingent liabilities.

If a company is a capital-intensive company and invested

a large amount in capital assets or if the company has a
large volume of capital work in progress then asset-
based approach can be used.
Cont.
Following are some of the important points to be considered while
valuing of shares under to this method:
• All the asset base of the company including current assets and
liabilities such as receivables, payables, provisions should be
considered.
• Fixed assets have to be considered at their realizable value.
• Valuation of goodwill as a part of intangible assets is important
• Even unrecorded assets and liabilities to be considered
• The fictitious assets such as preliminary expenses, discount on
issue of shares and debentures, accumulated losses etc. should
be eliminated.
 Cont.
For determination of the net value of assets, deduct all the external
liabilities from the total asset value of the company. The net value
of assets so determined has to be divided by the number of equity
shares for finding out the value of the share.
The formula used is as follows:
2. Income-based

This approach is used when the valuation is

done for a small number of shares.

A common method used is the

estimate of a business’s value by
dividing its expected earnings by a
capitalization rate.
Cont…
Value per share is calculated on the basis of profit of the
company available for distribution. This profit can be
determined by deducting reserves and taxes from net profit.

Listed below are the steps to determine the value per share
under the income-based approach:
•Obtain the company’s profit (available for dividend)
•Obtain the capitalized value data
•Calculate the share value ( Capitalized value/ Number of
shares)
Cont…

Capitalized Value is calculated as follows:

3. Market-based

The market-based approach generally uses

the share prices of comparable public traded
companies and the asset or stock sales of
comparable private companies.

What is more important is how to choose the

comparable companies.
Cont…
There are two different methods when using the yield method
(Yield is expected rate of return on an investment)
they are explained below:
1. Earning Yield
Shares are valued on the basis of expected earning and the normal rate
of return. Under this method, value per share is calculated using the
below formula:
Cont…

2. Dividend Yield
Under this method, shares are valued on the
basis of expected dividend and the normal rate of
return. The value per share is calculated by
applying following formula:
 Decisions on Ordinary Share
(Common Stock) value
Pros & Cons of Issuing
Common Stock
Issuing common stock helps a corporation
raise money.

However, whether issuing common stock is really worth it.

Issuing additional shares into the financial markets dilutes
the holdings of existing shareholders and reduces their
ownership in the corporation.
Offerings

Common stocks are ordinary shares that companies issue as an

alternative to selling debt or issuing a different class of shares
known as preferred stock.

The first time that a company issues common stock into the
public markets, it does so via an initial public offering.

Following an IPO, subsequent common stock offerings may be

accomplished with a follow-on offering, which raises the total
number of outstanding shares in the markets for investors to buy
and sell.
Bankruptcy

In the event that a company becomes financially

distressed and enters bankruptcy, it has the least
obligation to common stock investors.

While a bankruptcy in itself is generally a negative

development, having fewer preferred creditors
can help.
Thank you!