Unit 1 – Foundation and
Concepts of Valuation
After successful completion of this lesson, you should be able to:
1. Describe the use and importance of valuation
2. Illustrate Porter’s Five Forces
3. Enumerate the principles and processes in creating value
It is the estimation of an asset’s value based on variables
perceived to be related to future investment returns, on
comparison with similar assets, or when relevant, on
estimates of immediate liquidation proceeds, says CFA
1) Intrinsic Value – refers to the value of any asset based on the assumption assuming there is
a hypothetically complete understanding of its investment characteristics. It is the value that
an investor considers, on the basis of an evaluation or available facts, to be the “true” or
“real” value that will become the market value when other investors reach the same
2) Going Concern Value – the going concern assumption believes that the entity will continue
to do its business activities into the foreseeable future.
3) Liquidation Value – the net amount that would be realized if the business is terminated and
the assets are sold piecemeal. It is particularly relevant for companies who are experiencing
severe financial distress.
4) Fair Market Value – the price, expressed in terms of cash equivalents, at which property
would change hands between a hypothetical willing and able buyer and a hypothetical willing
and able seller, acting at arm’s length in an open and unrestricted market, when neither is
under compulsion to buy or sell and when both have reasonable knowledge of the relevant
ROLES OF VALUATION IN
• Fundamental Analyst – these are persons who are interested in understanding and
measuring the intrinsic value of a firm. Fundamentals refer to the characteristics of an
entity related to its financial strength, profitability or risk appetite.
• Activist Investors – activist investors tend to look for companies with good growth
prospects that have poor management. Activist investors usually do “takeovers” – they
use their equity holdings to push old management out of the company and change the
way the company is being run.
• Chartists – they rely on the concept that stock prices are significantly
influenced by how investors think and act and on available trading KPIs
such as price movements, trading volume, short sales – when making their
• Information Traders – they react based on new information about firms
that are revealed to the stock market. The underlying belief is that
information traders are more adept in guessing or getting new information
about firms and they can make predict how the market will react based on
VALUATION TECHNIQUES IN
Stock selection – An active portfolio management technique that focuses
on advantageous selection of particular stock rather than on broad asset
Deducing market expectations
an acquisition usually has two
the buying firm that needs to
determine the fair value of the target
company prior to offering a bid price
and the selling firm who gauge
reasonableness of bid offers.
transaction of two
companies’ combined to
form a wholly new
sale of a major
component or segment
of a business to another
separating a segment or component
business and transforming this into a
separate legal entity whose
ownership will be transferred to
acquisition of another business by
using significant debt which uses the
acquired business as a collateral
UNDERSTANDING THE BUSINESS
It includes performing industry and competitive analysis and
analysis of publicly available financial information and corporate
disclosures. An investor should be able to encapsulate the
UNDERSTANDING THE BUSINESS
One of the most common tools used in encapsulating industry is
Porter’s Five Forces:
UNDERSTANDING THE BUSINESS
Generic Corporate Strategies to achieve Competitive Advantage
Cost leadership – incurring the lowest cost among market players with
quality that is comparable to competitors allow the firm to be price
products around the industry average.
Differentiation – offering differentiated or unique product or service
characteristics that customers are willing to pay for an additional premium.
Focus – identifying specific demographic segment or category segment
to focus on by using cost leadership strategy or differentiation strategy.
can be looked at two perspectives:
on a macro perspective viewing the economic environment and industry
where the firm operates in and micro perspective focusing in the firm’s
financial and operating characteristics.
Approaches of Forecast Financial Performance
Top down forecasting approach – international or national macroeconomic projections with utmost
consideration to industry specific forecasts.
Bottom-up forecasting approach – forecast starts from the lower levels of the firm and builds the
forecast as it captures what will happen to the company.
SELECTING THE RIGHT
It depends on the context of the
valuation and the inherent
characteristics of the company being
PREPARING VALUATION MODEL
BASED ON FORECASTS
common methodology in
valuation exercises wherein
multiple other analyses are
done to understand how
changes in an input or
variable will affect the
firm specific issues that affects
firm value that should be
adjusted by analysts since
these are events that are not
quantified if analysts only look
at core business operations.
Presentation title 23
KEY PRINCIPLES IN
• The value of a business is defined only at a specific point
• Value varies based on the ability of business to generate
future cash flows.
• Market dictates the appropriate rate of return for investors.
• Firm value can be impacted by underlying net tangible
• Value is influenced by transferability of future cash flows.
• Value is impacted by liquidity.
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