Chapter 2

• Valuation is the process by which an estimate of value is made
• Asset is defined by the industry as transactions that would yield future economic benefits as a result of past transactions.
• The value of investment opportunities is highly dependent on the value that the asset will generate from now until the future and should also include all cash flows that will be generated until the disposal of the asset.
• Valuation is a sensitive and confidential activity in their portfolio management and 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.
• Brown field investments are opportunities that can be either partially or fully operational and are those already in the going concern state, as most businesses are in the optimistic perspective that they will grow in the future.
• Going concern business opportunities are those businesses that have a long term to infinite operational period.
• Advantage of going concern business opportunities is that we already have a reference for their performance – from its historical performance or an existing business with a similar nature.
• Through GBCOs, risk indicators can be identified easily and can be quantified accordingly.
• Committee of Sponsoring Organization of the Treadway Commission (COSO) suggests that risk management principles must be observed in doing businesses and determining its value.
• The liquidity value method has a limitation in that the future value is not fully incorporated in the calculated equity value.
• The reasonable value for the company to be purchased is the amount which the investors will realize in the end of its life or the value of when it is terminated.
• The value provided by the liquidity value method is the most conservative.
• Having a sound Enterprise-wide Risk Management can increase the opportunities, facilitate management and identification of the risk factors that affect the business, identify or create cost-efficient opportunities, manage performance variability, improve management and distribution of resources across the enterprise, and make the business more resilient to abrupt changes.
• Identifying risks enables investors to quantify the impact of the risk and/or the cost of managing these risks.
• Asset value is dependent on the economic benefits it gives.
• Asset-based valuation enables the analyst to validate the firm value through the value of its assets.
• Asset-based valuation focuses on the current and historical value of the assets and disregards the value it can generate in the future.
• Familiarity with the GAAP is a key contribute for an analyst to enable them to establish the value (asset-based valuation).
• Asset-based valuation can be used if the basis of the value is concretely established and complete.
• Information required for asset-based valuation includes total value of assets, financing structure (Total liabilities and equity), classes of equity, and other sources of funding.
• Methods used to determine the value using assets as its bases include book value method, replacement value method, reproduction value method, and liquidation value method.
• Book value is 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 SFP).
• Book value offers a convenient determination of the company value.
• Book value does not account for the full value of the net assets now that would result for overage or understatement of value of the net assets recorded in the books.
• Advantage of book value is that it provides a more transparent view on firm value and is more verifiable since this is based in the figures reflected in the financial statements.