Welcome to

Certificate Course on Valuation

Organized by

Corporate Laws &

Corporate
Governance
Committee
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 12 Approaches 2 Value
A Conceptual &
Practical
Foundation
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Part I
 Reality of Real Estate
Township value A real estate developer is contemplating to
buy a strip of land adjoining his vast tract
of land which he has acquired for his
township project. Though the
price/value/cost has been ascertained for
the big land, he wants to know what value
will be for the small vis-à-vis the big one?
Can You value ?
What will be your price (not your fees)?
What shall be the cost (not your expense)?

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 Value Advise

1. The real estate developer is more interested in the

adjoining strip of land as it will be add brand value to
his whole project holistically.
2. This is a unique situation where he may be the only
buyer interested in acquiring that strip of land.
3. Value is different for vast tract vs. small strip of land.
4. Therefore his consideration will not be counted for
the computing its (small strip of land) market value in
all fairness
4 5. This means are you wrong?
 Are you right?

1. You are hypothetical.

2. You have given your judgment.
3. You have given your opinion.
4. Then anybody can do so?
5. Is it so?
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 Price – Cost – Value

Price Cost

Value

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 Price vs Cost vs Value

Price is what you pay

&
Cost is what is
7 required &
 Concept of Value
Wisdom begins with
calling things by their
right names
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 Fair Investment Fair
12 Market

Intrinsic Value in Goodwill

Exchange
Concepts

Going Book value Liquidation

of concern

Insurable Replacement Salvage

Value
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 1. What is FMR?

It is the amount expressed in cash or

equivalent at which property or any
other asset would exchange between a
willing buyer and willing seller each
having reasonable knowledge of all
pertinent facts, neither being under
compulsion to buy or sell and with
10 equity or both.
 Facts & Truths about FMR
facts truths
Parties in FMR are FMR is not about
not particular buyer fairness
and seller FMR is more or
They are less an ‘as is value’
hypothetical FMR is
FMR is most likely determined as of a
‘transaction price’ specific date
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 2. Investment value
Perceived synergy
Value creation opportunities
F
A Buyer’s desire to enter into a
C new market
T Perception of risk
O Volatility of earning power of
R asset
S Tax status of buyer
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Optimism of the buyer
 FMR vs Investment Value

1. They are related; but seldom equal

2. Techniques and approaches used
to estimate both values are the
same
3. Assumptions differ

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 3. Fair Value
This will be discussed separately under
ifrs.

Is it
Fai
r?
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 4. Intrinsic Value
Used as an value in respect of security
It is determined based on earnings power and
earnings quality
Earnings power in terms of entity’s capability
to constantly increase profitability and rate of
return
Earnings quality is assessed in terms of
customer base, satisfaction, risk, employee
satisfaction, earnings forecasts
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 What is intrinsic value?

It is the present value of the

future earnings stream
discounted at the current
market yield
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 Intrinsic vs. Investment Value
• Intrinsic value is often confused with
investment value.
• Value perceived by a specific buyer in the light
of specific set of circumstances at a specific set
of time is investment value.
• intrinsic value is typically viewed as value of a
going concern to a particular owner regardless
of its marketability.
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 How 2 use intrinsic value?

• If the market value of security is

above its intrinsic value, it is good
for ‘sell”
• Conversely, it is good for “buy”

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 5.Value-in-use and Value-in-exchange

Value in-use is not a type of value

It is a condition under which certain assumption
are made in valuing assets which are productive
in use
Value-in-exchange is the opposite of value-in-use
It relates to value of a property or asset as
exchanged by itself separate from an operating
entity. For example, teller counters/ATM
machines have less value if sold separately than
if sold as a part of the total branch itself.
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 6. Goodwill Value
The sum total of imponderable qualities
which attract customers to a business. In
essence it is the expectancy of continued
patronage for whatever reason.
From a M & A perspective, value of goodwill
is the difference between the price paid for
an acquired business and fair market value
of the assets acquired (both tangible and
separately identified intangible assets)

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 7. Going concern value
It is somewhat a misnomer as it is not a standard of
value.
Consider the following statements and which is
correct?
The going concern value of XYZ Ltd
is rupees 500 million
The Fair Market Value of XYZ Ltd
as a going concern is rupees 500
million
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 The correct statement would
be…..

The Fair Market Value of XYZ

Ltd as a going concern is rupees
500 million
The difference is minor, semantic
but subtle is understanding to
valuation.
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 8. Book Value
An accounting and tax concept and not
a valuational or economic one
Otherwise , known as net worth or book
equity.
Assets – liabilities = enterprise book
value
Though useful in M & A, it can generate
misleading information
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 9. Liquidation Value
It is not a separate value by itself, but a
condition under which value is
estimated.
It is the net amount that can be realized
when business is terminated.
It is the lowest value
However in practice, the term
liquidation value is used for simplicity.
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 10. Insurable Value
It is the value of destructible
portions of an asset that will be
insured to indemnify the owner in
the event of loss.
Very little relevance except for
insurance related matters.

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 11. Replacement Value
It is the cost of acquiring a new asset of
equal utility
Replacement value is not the same as
reproduction value.
Reproduction cost is the cost of duplicate
asset based on current prices.
Mostly the term is used in relation to
tangible assets such as furniture,
equipment and fixtures.
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 12. Salvage Value
That value realizable upon sale or
other disposition of an asset after it is
no longer useful to the current owner
and the asset is to be taken out of
service.
The value is different from scrap
value which assumes the asset is no
longer useful to anyone for any
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purpose.
 What is an valuation?
It is an economic
concept aligned to the
legal concept of
property.
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 Valuation Theory

principles

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 Then, what is after all
valuation?

It is an inexact science
It requires judgment, assumptions and opinion.
Value estimate is an opinion of value.
Yet two appraisers easily arrive at to different
and yet supportable value estimates for same
asset or property.
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 I value your patience!
I value your listening!
I value you for not questioning!
Commonsense is a sense which is
not common. That is why
valuation!
Thank You

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