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Valuation Concepts and Methodologies
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Introduction to Financial Management
Module 001 Introduction to Financial

Management
At the end of this module you are expected to:
1. Cognitive: Describe the nature of Financial Management
2. Cognitive: Identify significant concepts in Financial Management
3. Affective: Develop critical thinking in identifying and explaining the
distinction between bonds and stocks
4. Psychomotor: Assess the capability to discuss the general overview of
Financial Management
General Overview of Financial Management
Concept of Finance
Finance, by definition, encompasses various activities. It includes, among others, banking,

credit transactions, leverage or debt management, funds management, capital markets and
investments. As compared with economics and accounting, finance is a more specific
concept. It is said that finance grew out of the concepts of both economics and accounting.
3 Areas of Finance
The following are general areas of finance:
a.) Financial Management – commonly known as corporate finance. Financial management

deals with asset acquisition, capital maximization and capital structure decision making.
Among others, financial management also covers strategic planning with regard to
financial undertakings of an organization, whether a for-profit organization or a not-for-
profit organization, which helps key stakeholders in their financial decision making.
b.) Capital Market – Capital markets cover institutions which provide capital to businesses.
This includes banks, insurance companies, investment banks and more. Capital markets
include the stock market and bond market. As such, capital markets are sometimes
understood as intermediaries which bring buyers and sellers together for trading of
financial instruments.
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c.) Investments – Can be in the form of bonds or stocks. The former refers to a fixed-income
instrument which is issued by a company in the form of debt in exchange for sum of
money which will normally be used by the business in capital maximization. Stocks, on
the other hand, is a form of equity instrument in which a portion, in the form of shares,
of a company is divided among different individuals or entities.
Figure 1. Stocks vs. Bonds

https://www.thebalance.com/the-difference-between-stocks-and-bonds-417069; Accessed May 16, 2022
Forms of Business Organization
The following are the typical business organizations:
a.) Sole Proprietorship – owned by one individual.

Advantages:
a. Easy and economical to form;
b. Lesser government regulations and compliance requirements; and
c. Lower income taxes than other forms of business organization
Disadvantages:
a. Unlimited liability to be borne solely by the proprietor;

b. Expanding the business might result to change in business structure;
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c. Difficulty to obtain loans to expand the business considering that initial capital of most
sole proprietorships is small
b.) Partnership – formed by two or more individuals with the aim to create profit and
divide it among themselves
Advantages:
a. Easy to form as compared to corporations;

b. Partners are given shares in the profits pro rata depending on their capital
contribution;
c. Partners are taxed individually
Disadvantages:
a. General partnerships are exposed to unlimited liability. That is, once the entity has
gone bankrupt, creditors and those who have interest against the entity can go after
individual partners;
b. Disagreements on business decision making among partners;
c. Susceptible to tedious and costly process of entering into a new partnership
agreement upon admission of a new partner or once a partner left the partnership.
c.) Corporation – has its own separate and distinct personality different from its owners,
managers and shareholders.
Advantages:
a. Limits liability of shareholders to the extent of its investment;

b. Perpetual existence unless its article of incorporation provides otherwise;
c. With the amendment brought by Republic Act 11232 on the Corporation Code of the
Philippines, one person corporation can now be incorporated
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Disadvantages:
a. Subject to stringent requirements, rules and regulations sanctioned by the state;

b. Higher income tax rates;
c. Susceptibility to intra-corporate disputes
Primary Goal of Management
The primary goal of the management is shareholder wealth maximization.

Shareholder Wealth Maximization pertains to a corporate norm which encourages the
top management to always take into consideration the best interest of its shareholders
in implementing major financial decisions such as, but not limited to, compensation
policies, dividend policies, investment strategies and other corporate strategies. This,
however, does not mean that management must do everything in its power to
maximize the shareholders’ interests. The principle of shareholder wealth
maximization is subject to certain limitations.
The following are limitations of the principle of Shareholder Wealth Maximization:
a. Business Ethics – Management must always observe ethical standards so as not to

be scrutinized by the public. The management, whilst upholding the best interest
of its shareholders, must be a role model to its stakeholders in observing business
ethics.
b. Laws and regulations – Management must ensure that, in the process of achieving
its primary goal, laws and regulations pertinent to its business are being followed.
This will avoid potential lawsuits which can hinder the achievement of the
business’ primary objective.
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Figure 2. Board of Directors

https://corporatefinanceinstitute.com/resources/careers/jobs/board-of-directors/; Accessed May 16, 2022
The Philippine Stock Exchange
The Philippine Stock Exchange serves as the national stock exchange of the
Philippines. A stock exchange serves as intermediaries between publicly listed
companies and investing public whereby the former issues its own shares to raise
capital in exchange for a shareholding in their company or a share in their profits in
the form of dividends. For some foreign investors, a country’s stock exchange serves
as an indication on how good its economy is. This means that a good performance of a
country’s stock exchange will bring more investors in.
The Philippines Stock Exchange is valued through the aggregate of stock prices of the
top 30 publicly listed companies (commonly known as the blue chip companies). This
is known as the PSE Composite Index or the PSEi. Some of the companies included in
this are the following:
• Banco De Oro
• Meralco
• Metrobank
• Monde Nissin
• San Miguel Corporation
• PLDT
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• Globe Telecom
• SM Investments Corporation
• Aboitiz Equity Ventures, Inc.
• Ayala Land, Inc.
• DMCI Holdings, Inc.
• JG Summit Holdings, Inc.
• Puregold Price Club, Inc.
• Bank of the Philippine Islands
• Ayala Corporation
• Universal Robina Corporation
The PSEi are regularly revisited, at least twice a year, to ensure that it is reflective of
the performance of our country’s stock market.
Figure 3. The Philippine Stock Exchange

https://news.bitcoin.com/philippine-stock-exchange-cryptocurrency-trading-asset-class-cannot-ignore/ ;
Accessed May 16, 2022
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Intrinsic Values and Stock Prices
Figure 4. Stock Prices

https://medium.com/analytics-vidhya/plot-stock-prices-with-r-6bdbaebc8ec1 ; Accessed May 16, 2022
An asset of a company is valued not only through its market value or appraised value
but also includes the present value of the stream of cash flows that the asset will
provide to the company over time. A stock price in the Philippine Stock Exchange may
also be valued not only through the current exchanges of the buyers and sellers but
also based on the expected cash flows in future year.
In the United States, the Dodd-Frank Act was legislated establishing the Financial
Stability Oversight Council and Consumer Financial Protection Bureau. The former
aims to monitor for risks in the Financial System while the latter enforces consumer
protection on financial products
In the Philippines, the Securities and Exchange Commission (SEC) is the governing
body which has oversight over the conduct in the Philippine Stock Exchange. Section
5 of Republic Act 8799 provides, among others, that the Securities and Exchange
Commission shall have the following powers and functions:
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a. Have jurisdiction and supervision over all corporations, partnerships or

associations who are the grantees of primary franchises and/or a license or
permit issued by the Government;
b. Formulate policies and recommendations on issues concerning the securities market,

advise Congress and other government agencies on all aspects of the securities market
and propose legislation and amendments thereto;
c. Approve, reject, suspend, revoke or require amendments to registration

statements, and registration and licensing applications;
d. Regulate, investigate or supervise the activities of persons to ensure compliance;
e. Supervise, monitor, suspend or take over the activities of exchanges, clearing

agencies and other SROs;
f. Impose sanctions for the violation of laws and the rules, regulations and orders
issued pursuant thereto;
g. Prepare, approve, amend or repeal rules, regulations and orders, and issue
opinions and provide guidance on and supervise compliance with such rules,
regulations and orders;
h. Enlist the aid and support of and/or deputize any and all enforcement agencies
of the Government, civil or military as well as any private institution,
corporation, firm, association or person in the implementation of its powers and
functions under this Code;
i. Issue cease and desist orders to prevent fraud or injury to the investing public;
j. Punish for contempt of the Commission, both direct and indirect, in accordance
with the pertinent provisions of and penalties prescribed by the Rules of Court;
k. Compel the officers of any registered corporation or association to call meetings

of stockholders or members thereof under its supervision;
l. Issue subpoena duces tecum and summon witnesses to appear in any

proceedings of the Commission and in appropriate cases, order the examination,
search and seizure of all documents, papers, files and records, tax returns, and
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books of accounts of any entity or person under investigation as may be

necessary for the proper disposition of the cases before it, subject to the
provisions of existing laws;
m. Suspend, or revoke, after proper notice and hearing the franchise or certificate
of registration of corporations, partnerships or associations, upon any of the
grounds provided by law; and
n. Exercise such other powers as may be provided by law as well as those which
may be implied from, or which are necessary or incidental to the carrying out of,
the express powers granted the Commission to achieve the objectives and
purposes of these laws.
Just like the primary objective of the management, investors are very much interested
in maximizing their wealth. With this, investors are looking at the expected cash flows
and risks to determine whether to invest or not. The higher the expected cash flows
and the lower the involved risk, the more attractive it is on the investor. Also, expected
cash flows and risks of an entity are determinant of a stock price.
Expected cash flows may either be true or perceived. In the same vein, risks may be
classified as well as true or perceived. A true expected cash flow and true risk pertain
to the expectation of the investors as to the cash flows and risks of an entity had all
information regarding the business are available to them. Perceived cash flow and
perceived risk exist when only limited information regarding the business is available
to the investors.
The estimate of a stock’s true value is called intrinsic value. Intrinsic value is calculated
by a competent financial analyst who has the best available data to arrive at the
amount of the stock’s intrinsic value. On the other hand, market price is based on the
actual market price which is a perceived price and based only on limited information
as confirmed by a marginal investor which may not that be accurate.
When the intrinsic value is equal to its market price, the stock is said to be in
equilibrium. When equilibrium occurs, there is no pressure to change or adjust the
stock price. In the long run, management’s primary goal is the maximization of the
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company’s intrinsic value and not merely the maximization of the company’s market
price.
Conflicts Between Managers, Stockholders, and Bondholders
Figure 5. Stockholders’ Meeting

https://blog.ipleaders.in/meant-shareholder-meeting/; Accessed May 16, 2022
As previously stated, the primary objective of the management is for the shareholders’
wealth maximization. However, this may not be true when personal interests of
managers are being prioritized over the interests of the shareholders. The following
are some tools that may be implemented by businesses to avoid such scenarios.
a.) Reasonable Compensation Packages – Managers’ compensation in an entity shall

be reasonable enough for them to stay and observe professional judgments on key
decisions that will not prioritize their own interests over that of the shareholders.
b.) Firing of managers who do not perform well – Managers who are underperforming
shall be penalized accordingly. Competence of managers are very important in
running a business in the long-run as the managers set the trend and direction of
an entity in achieving its objectives.
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c.) Threat of hostile takeovers – In a successful hostile takeover, managers can be

given incentives to maximize the stock price.
Stockholders versus Bondholders
Conflicts can also arise between stockholders and bondholders. As compared with the
stockholders, bondholders’ profit from the business are guaranteed and in terms of a
fixed payment regardless of whether the company obtains a profit or not in a given
time. Another scenario wherein a conflict may arise between a stockholders and
bondholders is when a large amount of debt is used in maximizing a company’s assets.
In this case, bondholders are exposed to a higher risk of loss even when value of assets
declines minimally. To address such issue, bondholders normally insist in including in
their agreements with the company a limit on the usage of debt to protect their
interests.
GuideQuestions:
Answer the following to check what you learned from the discussions so far. Check your
answers from the provided answer key at the end of this module. There is no need to
submit your answers to OEd.
1. What is the name of the stock exchange in the Philippines?

2. Who is a marginal investor?
Answers to the Guide Questions
1. The Philippine Stock Exchange

2. A marginal investor is the one who checks a market price based on
perceived but possible incorrect information
References and Supplementary Materials
Books and Journals
1. Lascano, Marvin V., Baron, Herbert C., Cachero, Andrew Timothy L. (2021). Valuation
Concepts and Methodologies
2. Brigham, Eugene F., Houston, Joel F., Jun-Ming, Hsu, Kee, Kong Yoon, Bany-Ariffin A.N
(2019). Essentials of Financial Management
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3. Brigham, Eugene F., Houston, Joel F. (2019). Essentials of Financial Management
Online Supplementary Reading Materials
1. Financial Management: What is it and Why is it Important?; https://www.pfh-

university.com/blog/financial-management-what-is-it-and-why-is-it-
important.html; April 3, 2022
2. Difference Between Shareholder and Bondholder ;
https://askanydifference.com/difference-between-shareholder-and-bondholder/;
April 3, 2022
3. The Gale Encyclopedia of Senior Health: A Guide for Seniors and Their
Caregivers2nded. Farmington Hills, MI: Gale, 2015,
https://go.gale.com/ps/eToc.do?contentModuleId=GVRL&resultClickType=AboutThi
sPublication&searchType=BasicSearchForm&docId=GALE%7C6EUZ&userGroupNa
me=phama&inPS=true&rcDocId=GALE%7CCX3622400293&prodId=GVRL; Accessed
1 May 2022.
4. "Finance and Financial Management." Encyclopedia of Management, 8th ed., vol. 1,
Gale,2019,pp.423-
432. Gale.eBooks, link.gale.com/apps/doc/CX7617900125/GVRL?u=phama&sid=boo
kmark-GVRL&xid=6f377976; Accessed 1 May 2022.
5. Financial Management. (2020). In V. L. Burton, III (Ed.), Small Business
Sourcebook: The Entrepreneur's Resource (37th ed., Vol. 3, pp. 1776-1814).
Gale. https://link.gale.com/apps/doc/CX7632600383/GVRL?u=phama&sid=bookma
rk-GVRL&xid=c4024f45; Accessed 1 May 2022.
6. Stock Market Development in the Philippines: Past and Present;
https://pidswebs.pids.gov.ph/CDN/PUBLICATIONS/pidspjd14-15_stockmarket.pdf;
April 3, 2022
Online Instructional Videos
1. What is Financial Management? Types, Functions, Objectives;

https://www.youtube.com/watch?v=WNm_ez1h7Tc; April 3, 2022
2. MBA 101: Intro to Financial Management 5 Principles of Finance;
https://www.youtube.com/watch?v=WxXCPmKkfUI; April 3, 2022
3. The History of Philippine Stock Market – Philstocks;
https://www.youtube.com/watch?v=b6xdQeqhZKc; April 3, 2022
4. Overview of the Philippine Stock Exchange;
https://www.youtube.com/watch?v=BzezOfh8jAY; April 3, 2022
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Fundamentals of Valuation
Module 002 Fundamentals of Valuation

At the end of this module, you are expected to:
1. Cognitive: Describe the nature of Financial Valuation
2. Cognitive: Identify significant concepts in Valuation
3. Affective: Develop critical thinking in identifying and explaining the roles
of valuation in business
4. Psychomotor: Assess the capability to discuss the valuation process
Every asset in a sole proprietorship, partnership or corporation can be valued. Its value
depends on numerous factors such as, but not limited to, nature of the specific asset, supply
and demand in the market, company’s financial earnings or performance and many more.
Valuation of an asset is important since it gives stakeholders a perspective on the value of a
business’ entirety.
Most businesses look at its capital as a resource which is scarce. Being a scarce resource,
investors or those who provide capital to a business are very cautious on which business
they will venture into. The capability of a business to maximize its return is one of the major
factors a capital provider will look into. The capability of a business to maximize its return
results in maximizing the shareholders’ value. That is why investors are very much
interested in businesses who can attain this objective. Interestingly, when investors are able
to put their capital in the right businesses it creates as well as huge economic implication, it
provides productivity gains, lowered unemployment rates, higher salaries and higher
economic outputs.
Valuation comes into play in knowing the prevailing value of one’s business in order that
investors or other stakeholders may have a better, sound, and informed financial decision.
The Chartered Financial Institute (CFA) Institute defines valuation as the estimation of an
asset’s value based on either variables perceived to be related to future investment returns
or comparisons with closely similar assets. Since valuation is but a mere estimation of an
asset’s value, it primarily deals with projections and estimates of future events which will
have an impact to the asset’s value.
Different Concepts of Value

Alfred Marshall, a notable figure in the field of economics, believed that a company
only creates value once the return on capital exceeds the costs of its acquisition.
Indirectly, Marshall implies that a business which is surviving on pure costs without
any return on its capital does not have a value. The value of a business has three major
factors:
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(1) Current Operations

Current operations of a business is an indicator of how good a company is performing.
An increasing performance in current operations as compared to its previous
performance is indicative of an increasing value of a business;
(2) Prospective Goal

The long run objectives of a company can also be used in estimating its value. For
example, plans for business expansion, additional capital investments, and reduction
of unnecessary expenses in the future are factors in arriving at the present value of a
business.
(3) Inherent risks

Building a business entail risks. This is what we called business risks which are already
embedded to a business. One concept in business risk is that it is directly proportional
with return in capital. Meaning, the higher the risk, the higher the return. Stated
inversely, the lower the risk, the lower the return. Mitigating these business risks
through proper internal controls and safeguards would add value to a business and
will help investors in trusting more their capital to the business.
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Different definitions of value depending on its objective

(1) Intrinsic value – is the value of an asset which is data and facts driven. It represents
the amount of an asset which is based on the idea that all relevant facts are
gathered to arrive to its value. Once a financial analyst, has gathered all relevant
facts, he will then evaluate the asset based on these presented data and he will
consider it as its “true” or “real value.
(2) Going Concern Value – Just like the concept of going concern in accounting. Going
concern value is the value of an asset under the assumption the business will not
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halt its operations in the future. It is the value of the business after considering
that assets will be realized and contractual obligations will be complied with in
good faith as they fall due.
(3) Liquidation Value – As compared with the going concern value, liquidation value
of a business is evaluated on the assumption that the business will no longer
continue. In this assumption, financial analysts, computes the value of business by
assuming that assets will be sold individually during its liquidation process. Most
companies which use this value are those companies which have seen unfavorable
figures and are in distress.
(4) Fair Market Value – This is the value in the market where a willing buyer and a
willing seller commonly agrees to the value of an asset under the assumption that
they both know all the factors in considering the value of the subject asset.
Roles of Valuation in Business
We have already discussed why valuation is important in a Business and in the

economy. Now, we go to the specific roles of valuation in the business.
(1) Portfolio Management
Investopedia defines portfolio management as the building and overseeing a selection

of investments that will meet long-term financial goals and risk tolerance of a client, a
company, or an institution.
The job of portfolio management usually belongs to a fundamental analyst. As a
fundamental analyst, his or her main job is to check the fundamentals of various
companies. The fundamentals of a company may refer to its liquidity, profitability,
associated business risks and more. After a careful deliberation of the fundamentals,
the fundamental analyst will now decide the portfolio of a business. The portfolio may
or may not include different companies on which a person, company or institution will
invest depending on their risk appetite.
Portfolio management may also belong to activist investors. Activist investors are
those people who scout for companies which are, management wise, financially
distressed. These people see this as an opportunity for growth and investment. They
are of the belief that with proper management, growth, profitability, and sustainability
will necessarily follow. This is the reason that they invest or include these types of
company in their portfolio.
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Chartists or Technical investors are also helpful in portfolio management. Their

investment decisions rely on charts or historical prices or trade volumes. This concept
is very much common for those who are trading in the stock market using technical
indicators. Under this concept, it is believed that participants in the market tend to
behave the same way overtime. It provides investors basis on the next move of stock
prices based on a rational analysis of the historical price movements and volume over
time. Some of the popular technical indicators are the following:
(a) Moving Average Convergence Divergence (MACD);

(b) Relative Strength Index;
(c) Bollinger Bands;
(d) Simple Moving Averages
(e) Fibonacci Retracements
In summary, portfolio management, through the use of valuation techniques and
methodologies, simplify the selection of the right stock to invest in depending on one’s
risk appetite and deduce market expectations
(2) Analysis of Business Transactions and potential deals
Valuation is also important in potential business deals of a company or institution. It

can provide you insights on whether it is a good buy or not. In addition, it sets price
expectations which can be helpful in the negotiation process.
Some of the business deals where valuation could be helpful:
(a) Acquisition – it is the buying out of a company’s entire assets including the
assumption of its existing liabilities. In the point of view of the buyer, valuation
comes into play in determining and assessing the fair market value of a company it
intends to buy. On the side of the seller, valuating its own assets is also important
to assess whether the offer price is sufficient to sell its business.
(b) Merger – This deal happens when two companies decide to pool their assets and
assume their liabilities together while forming a new business entity.
(c) Divestiture – Pertains to the sale of a major component of a business such as its
subsidiary, product line, branch, etc.
(d) Spin-off – Pertains to the separation of segments within one entity to form an
entirely different business entity.
(e) Leveraged buyout - occurs when the buyer of a company takes on a significant
amount of debt as part of the purchase.
(3) Corporate Finance

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As defined by Investopedia, corporate finance deals with how companies address

funding sources, capital structuring, accounting, and investment decisions. It involves
maximizing the firm’s value in the most economical way alongside with the aim of
increasing the shareholders’ value. Valuation is used in arriving at the best corporate
strategy to maximize the firm’s value. This strategy may include, among others,
dropping of unprofitable segment, increasing productivity of profitable segments and
implementing other financial strategies whilst taking into account the risk appetite of
the business.
(4) Legal and Tax purposes
Valuation can also be helpful in statutory requirements especially in estimating future

legal disputes when a company is at risk to incur one. Likewise, valuation can be used
in tax avoidance too help the business in minimizing its tax liabilities.
Valuation Process
The following are the five steps in the valuation process:
(1) Understanding the Business

As discussed in the preceding sections, valuation will depend on different factors
which include, among others, the nature of the business, characteristic of the asset
being evaluated and the embedded business risks. Understanding the business is a
preliminary step in ascertaining which methodology is best in terms of valuation. It
gives the analyst the opportunity to prepare material facts, appropriate assumptions
and other factors that can best give the reasonable value of a business.
The Porter’s Five Forces model is a tool used by most analysts in understanding one’s
business:
(1) Competition in the Industry -this pertains to the rivalry among market players in
the industry. The intensity of rivalry is directly proportional to the number of
market players. Meaning, the higher the number of market players, the higher the
intensity of rivalry is. Stated inversely, the lower the number of market players, the
lower the intensity of rivalry.
(2) New Entrants in the industry – New entrants in the industry is a barrier to the
profitability of a company belonging to the same industry. However, this barrier is
reduced by entry costs entailed to new entrants and will lessen the competition in
the industry.
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(3) Power of Suppliers – Suppliers drive up input costs and lessens the potential of
profitability to companies. It includes, among others, prices of alternative inputs,
relationship-specific investments, supplier concentration, supplier switching costs
and more.
(4) Power of Customers – As compared to the preceding number, this refers to the
demand of your product or service in the market. The higher the demand for your
product or service, the more profitable your company or business become.
(5) Threat of substitutes and opportunity for complements – Substitutes are products
that can be used to replace an existing one. This can be considered as a threat since
it can drive the profitability down should the price of the substitute is more
attractive to the market. On the other hand, complements are products that can be
used together with another one. This can be considered as an opportunity in
increasing a company’s profitability since the sale on the complementary product
may be used to offset unnecessary or high costs of the main product.
(2) Forecasting Financial Performance

The second stage in the valuation process is forecasting financial performance. It is
the process of estimating, predicting or evaluating the value of the business in the
foreseeable future. The following are the two approaches normally used in forecasting
financial performance:
(1) Top-down approach – This approach starts on a macro level perspective. In

performing the forecasting of financial performance, analysts generally look first
in a pool of companies on a specific industry then breaks it down into a more
specific pool which comprises only of those relevant to the business. In this kind of
approach, analysts normally look into inflation projections, GDP performance,
foreign exchanges rates and more. As an end result, analysts will come up with a
sales or revenue forecast for the business.
(2) Bottom-up approach- The second approach is the bottom-up approach. In this
forecasting strategy, analysts normally look into different revenue producing
segments of the business and analyze which of the following will provide more or
less profitability for the business in the future.
(3) Selecting the appropriate valuation model

The next step in the valuation process is selecting the right valuation model for the
business. This step highly depends on the nature, characteristic, risks and other
relevant factors which may affect the value of one’s business.
(4) Preparation of Valuation Model

After deciding which valuation model is appropriate, analysts are now incorporate its
forecasts to the selected valuation model. Analysts consider sensitivity analysis and
situational adjustments or scenario modeling.
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Sensitivity analysis refers to the determination on how target variables will be affected
by the input variables. Simply stated, it is the processing of various assumptions by
considering different variables which may affect the forecasted data.
Situational adjustments or scenario modeling, on the other hand, pertains to the
process of predicting the value outcome of one variable after having experienced
changes in market conditions.
(5) Applying valuation conclusions and providing recommendations.

The last step in the valuation process is presenting to management the computed
value, after considering different scenarios or assumptions, to top management. This
will help them to have an informed decision which will cater to the company’s success.
Guide Questions:
1. What is the valuation process?
2. What are the two approaches in financial forecasting?
1. The Valuation process includes the following, understanding the business,

forecasting financial performance, selecting the appropriate valuation
model, preparation of valuation model, and applying valuation conclusions
and recommendations
2. The two approaches in financial forecasting are top-down and bottom-up
approach.
Books and Journals
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1. Valuation Methods;
https://corporatefinanceinstitute.com/resources/knowledge/valuation/valuation-
methods/; Accessed 1 May 2022.
2. Valuation Concepts – 5 Most Important Valuation Concepts;
https://www.bbalectures.com/valuation-concepts/; Accessed 1 May 2022.
3. Accounting and Business Valuation Methods;
https://www.elsevier.com/books/accounting-and-business-valuation-
methods/howard/978-0-7506-8468-2; Accessed 1 May 2022.
4. Edey. (2014). Business Valuation, Goodwill and the Super-Profit Method*. In H. C.
Edey, Routledge Library Editions: Accounting Vol. 27. Accounting Queries (pp. 97-
113).
Routledge. https://link.gale.com/apps/doc/CX3614800017/GVRL?u=phama&sid=
bookmark-GVRL&xid=33210a32. Accessed 1 May 2022.
5. "Porter's Five-Forces Model." Encyclopedia of Management, 8th ed., vol. 2, Gale,
2019, pp. 876-880. Gale
eBooks, link.gale.com/apps/doc/CX7617900250/GVRL?u=phama&sid=bookmark-
GVRL&xid=761e58f0. Accessed 1 May 2022.
6. "Portfolio Management and Optimization." Gale Business Insights Handbook of
Innovation Management, edited by Miranda Herbert Ferrara, Gale, 2013, pp. 93-
101. Gale Business Insights. Gale
GVRL&xid=eab55455. Accessed 1 May 2022.
1. Valuation Methods; https://www.youtube.com/watch?v=cVWpVKvX0BQ; May 1,

2022
2. Session 1: Introduction to Valuation;
https://www.youtube.com/watch?v=znmQ7oMiQrM; May 1, 2022
3. Top 5 Portfolio Management Techniques;
https://www.youtube.com/watch?v=ornAXWzIgxE; May 1, 2022
Valuation of Stocks
Module 003 Valuation of Stocks
1. Cognitive: Describe the rights and privileges of a stockholder

2. Cognitive: Identify significant concepts in stocks valuation
difference between a stock price and its intrinsic value
4. Psychomotor: Assess the capability to discuss the models used in
estimating a stock’s intrinsic value
Stockholders’ Rights and Privileges
A stockholder is one of the most powerful stakeholders. As stated in the previous course
modules, stockholders are, in effect, legal owners of the firm. As such, they are entitled to certain
rights and privileges which majorly affect the firm or business. A common stockholder has the
power and right to elect a firm's directors. After being elected, these directors will elect among
themselves officers who will directly manage the business. Interestingly, stockholders also have
the power to remove a director from his office.
In the Philippines, Republic Act No. 11232 or the Revised Corporation Code governs
corporations' conduct and stockholders' rights and privileges. The governing body that oversees
corporations' conduct is the Securities and Exchange Commission.
Figure 1. The Securities and Exchange Commission
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Valuation of Stocks
https://www.sec.gov.ph/about-us/the-sec-logo/; Accessed June 23, 2022
Section 23 of the said code discusses the right of the stockholder to elect a director in
office. It provides that an exception when stockholders cannot nominate a director to be elected
is when such right is exclusively reserved for holders of the founder's shares.
In addition, during elections of directors or trustees, the shareholders must be present to

cast their votes or through their authorized representative called the proxy. In keeping with
recent times, the Revised Corporation Code now allows to be present in the meeting in absentia
or through remote communication, provided that such is allowed by the corporation's by-laws.
As an exception, shareholders may still vote in absentia or by remote communication even in the
absence of a provision in the by-laws of the corporation invested in the shareholder is vested
with the public interest.
Figure 2. Proxy Voting
https://www.azeusconvene.com/articles/annual-stockholders-meetings-in-absentia-
cumulative-voting; Accessed June 23, 2022
Consequently, section 27 of the Revised Corporation Code gives the stockholders a right
to remove a director from its office. The said provision states that a vote of 2/3 of the
stockholders representing the outstanding capital stock in a stock corporation or 2/3 of the
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Valuation of Stocks
members entitled to vote in a nonstock corporation may remove a director from its office
provided that the removal shall take place in a meeting called for that purpose.
The Revised Corporation Code also encompasses proprietary rights entitled to a

stockholder. The following are some proprietary rights found in the said Code:
a. The right to participate in the distribution of dividends

b. Appraisal right, which is the right of a stockholder to dissent and to is paid the fair
market value of their shares in the following instances:
i. Amendment of the articles of incorporation, which would restrict the rights of
any stockholders;
ii. Extending or shortening the life of the corporation;
iii. In case of a sale, lease, exchange, transfer, mortgage, pledge, or other
disposition of all or substantially all of the corporate assets;
iv. Merger and consolidation;
v. Investment of corporate funds for any other purpose other than its primary
purpose;
c. The right to the issuance of a stock certificate for fully paid shares
d. Participation in the distribution of the corporate’s assets during liquidation
e. Pre-emptive right or sometimes called the right of first refusal. Section 38 of the
Revised Corporation Code provides that all stockholders of a corporation shall enjoy
the preemptive right to subscribe to all issues or disposition of shares of any class, in
proportion to their respective shareholdings, unless such right is denied by the
articles of incorporation or amendment thereto: Provided, that such preemptive right
shall not extend to shares issued in compliance with laws requiring stock offerings or
minimum stock ownership by the public; or to shares issued in good faith with the
approval of the stockholders representing two-thirds of the outstanding capital stock
in exchange of property needed for corporate purposes or in payment of previously
contracted debt.
Types of Common Stocks

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Valuation of Stocks
Figure 3. The Basics of Common Stocks
https://www.investopedia.com/terms/c/commonstock.asp; Accessed June 23, 2022
Normally, a firm does not classify its shares and has only one class of shares. However,
for one reason or another, a firm classifies its shares as either "Class A," "Class B," and so
on. One of the common reasons is to segregate those shares which may or can be owned
by the public and those which can be owned only by those owning the controlling share
of a firm. Ultimately, it is up to the management or the corporation on how many classes
they want to structure the company and what privileges or benefits come with it.
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Valuation of Stocks
Figure 4. Google IPO
https://www.businessinsider.com/google-ipo-how-much-would-you-have-made-
2016-8; Accessed June 23, 2022
As an example, when Google went public, it sold Class A shares to the stock exchange,
while company insiders predominantly hold its Class B shares. The main distinction
between the two lies in voting rights. Those holding Class A shares are given only one
vote per share, while those who are holding the Class B shares have 10 votes per share.
Founders' shares are those shares that are solely owned by the founder of the
company and are designated as such to maintain control in the corporation since they are
given certain rights and privileges over other classes of shares. Typically, Class B shares
are also founders' shares. As discussed earlier, the holder of founder shares may have the
right to be the only person be elected as a director of the firm. The Revised Corporation
Code, however, provides a limitation to such right. That is, where such exclusive right to
be elected in the election of directors is given to holders of founders' shares, such must
be limited only for a period not exceeding five years from the date of incorporation.
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Valuation of Stocks
Some financial management books may also mention the following as different kinds
of stocks, but not necessary types of common stocks:
a.) IPO Stocks – These are stocks bought during an initial public offering or when the
stock was introduced to the public.
b.) Dividend Stocks – Stocks that are earning dividends on a timely basis.
c.) Value Stocks - These are stocks of a company that is on sale, which means that
their cost per share is underpriced despite having good fundamentals.
d.) Growth Stocks – These are companies whose revenues and profits are relatively
increasing as compared with other market participants.
e.) Small-Cap Stocks - Companies with a small market capitalization
f.) Mid-Cap Stocks – Companies with a not that huge but not relatively small market
capitalization
g.) Large-Cap Stocks – Companies with a huge amount of market capitalization
h.) Penny Stocks – these are stocks that have weak fundamentals and usually rely on
speculations for their stock price to go up. Its share cost is typically low compared
to a blue-chip stock.
i.) Blue Chip Stocks- these are normally large companies with huge market
capitalization and have acquired being called blue-chip stocks because they have
established their names through a long period of time with outstanding
performance and preference from the public. In the Philippines, the blue-chip
stock companies comprise the Philippine Stock Exchange Index.
Stock Price and Intrinsic Value

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Valuation of Stocks
As a recap of what we have discussed in the previous modules, stock price pertains to
the current price in the market or simply the market price. For publicly traded companies,
the stock price may be referenced to the current market price of a stock in the Philippine
Stock Exchange. It is that price where a buyer is willing to buy such stock and likewise
that price where a seller is willing to sell such stock. On the contrary, intrinsic value is far
more complexed. It pertains to the 'true' value of the stock. Despite being the 'true' value
of a stock, the intrinsic value cannot directly be derived from a financial institution,
broker, or any financial intermediaries. It is instead being estimated through different
valuation techniques. It is to be noted that the market is said to be in equilibrium when
the market price is equal to its intrinsic value. However, this is a very rare occasion to
happen.
It is said that an investor is keen to know a stock’s intrinsic value rather than its stock
price or market price. Their goal is to buy an undervalued stock or those stocks whose
intrinsic value is higher than its current market price and to avoid stocks that are
overvalued or stocks which has a lower intrinsic value than their market value.
Figure 5. Stock’s Intrinsic Value
https://www.clydebankmedia.com/definitions/finance/intrinsic-value; Accessed
June 23, 2022
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Valuation of Stocks
There are two basic models which are used in arriving at the estimated intrinsic price
of a stock, the discounted dividend model and the corporate model. The former uses
dividends of a company in estimating its intrinsic price, while the latter uses beyond
dividends and may include the sales, cost of sales, and cash flows of a company in arriving
at the intrinsic price.
These models are also helpful tools in the decision-making process of a company's
management team. Based these models give a high-level overview of whether the
company is currently overvalued or undervalued. From this, the management may take
corrective actions and key decisions which will be helpful and insightful to key
stakeholders.
Guide Questions:
1. Which regulatory body oversees corporations in the Philippines?
2. What are the two basic models for estimating the intrinsic value of a firm?
1. It is the Securities and Exchange Commission

2. The two basic models for estimating the intrinsic value of a firm are the
discounted dividend model and the corporate model.
Books and Journals
1. Lascano, Marvin V., Baron, Herbert C., Cachero, Andrew Timothy L. (2021).
2. Brigham, Eugene F., Houston, Joel F., Jun-Ming, Hsu, Kee, Kong Yoon, Bany-Ariffin
A.N (2019). Essentials of Financial Management
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Valuation of Stocks
1. "Shareholder Rights." Gale Encyclopedia of Everyday Law, edited by Donna

Batten, 3rd ed., vol. 1: American with Disabilities Act to First Amendment Law,
Gale, 2013, pp. 145-151. Gale
eBooks, link.gale.com/apps/doc/CX2760300038/GVRL?u=phama&sid=bookmar
k-GVRL&xid=1f9195d0; Accessed June 23 2022.
2. "Preemptive Right." Gale Encyclopedia of American Law, edited by Donna Batten,
3rd ed., vol. 8, Gale, 2010, p. 67. Gale
k-GVRL&xid=01a6565e. Accessed June 23 2022.
3. Akel, Veli, et al. "Dynamic Relationship between Stock Prices and Exchange Rates
in Emerging Markets: Evidence from Fragile Five Economies." Handbook of
Research on Strategic Developments and Regulatory Practice in Global Finance,
edited by Özlem Olgu, et al., Business Science Reference, 2015, pp. 166-181.
Advances in Finance, Accounting, and Economics. Gale
k-GVRL&xid=f96a54e0. Accessed June 23 2022.
4. Lerner, Joel. "Stock Indexes." Encyclopedia of Business and Finance, 3rd ed., vol. 2,
Macmillan Reference USA, 2014, pp. 706-708. Gale
k-GVRL&xid=a15f138a. Accessed June 23 2022.
5. "Valuation and Its Methods." Gale Business Insights Handbook of Investment
Research, edited by Miranda Herbert Ferrara, Gale, 2013, pp. 242-244. Gale
Business Insights. Gale
k-GVRL&xid=96f239c2. Accessed June 23 2022.
1. Corporations 7: Stockholders – Rights, Powers & Liabilities;

https://www.youtube.com/watch?v=W2NLHSO_b_M; June 23, 2022
2. Securities and Exchange Commission;
https://www.youtube.com/watch?v=haVNMQ_AYus; June 23, 2022
3. Understanding the Intrinsic Value of a Stock;
https://www.youtube.com/watch?v=y7X8_58rUkU; June 23, 2022
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Asset-Based Valuation
Module 04 Asset Based Valuation
1. Cognitive: Describe the nature of an asset

2. Cognitive: Identify significant concepts in asset-based valuation methods
distinction between asset-based valuation methods
4. Psychomotor: Assess the capability to compute for problem-solving
questions in asset-based valuation
Asset Based Valuation
Asset
Figure 1. Assets
https://marketbusinessnews.com/financial-glossary/asset/; Accessed July 23, 2022
An asset is a resource that provides future economic benefits to an entity as a result of

historical or past transactions. In valuation, it is the most important resource as it gives a
glimpse of investment opportunities that could flow to an entity. The value of its assets best
reflects the total value of an entity. It is why it is important to have a proper valuation
method for a stakeholder to make a better, informed decision.
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Figure 2. Asset Based Valuation Method
https://www.wallstreetmojo.com/asset-based-valuation/; Accessed July 23, 2022
In asset-based valuation, it is important that the analyst computing for the value has an
excellent grasp of the basic accounting concepts and principles as it is key in arriving at a
more accurate value. In using asset-based valuation methods, the following is information
which are and will be helpful to the designated analyst:
(1) Value of total assets;

(2) Financing structure which includes the firm’s liabilities and equity;
(3) Sources of firm’s funding; and
(4) Classes of Equity
The following are common methods of valuation using the asset-based technique:
(1) Book value method;

(2) Replacement value method;
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(3) Reproduction value method; and

(4) Liquidation value method
The Book Value Method
Figure 3. Book Value Method
https://www.slideshare.net/anjanavivek/valuation-1954535; Accessed July 23, 2022
As defined by Investopedia, book value is the accounting value of the company's assets
less all claims senior to common equity. This means that the book value is highly
dependent on the value of a firm's assets. The value of a firm's assets can be referenced
in the audited financial statements. An audited financial statement comprises the
balance sheet, income statement, statement of cash flows, statement of changes in
equity, and the notes to the financial statement. Among these components, the balance
sheet is essential in the book value method since it is where the value of assets can be
seen. In the Philippines, a financial statement is audited to provide reasonable
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assurance that these components are free from material misstatements affecting
stakeholders in their financial decisions.
International Accounting Standards 1 or IAS 1 requires that assets shall be classified

as current or non-current. Per the same standards, current assets are assets that are
expected to be realized in the entity's normal operating cycle, those held for trading,
expected to be realized within 12 months from the reporting period, and cash and
cash equivalents. On the other hand, non-current assets are those assets that will not
fall under the definition of current assets.
In the same vein, liabilities are also classified between current and non-current. As
per IAS 1, current liabilities are those expected to be settled within the entity's normal
operating cycle, held for the purpose of trading, due to be settled within 12 months
and for which the entity does not have the right at the end of the reporting period to
defer settlement beyond 12 months.
In valuing the firm using the book value method, the value of a firm’s assets is
deducted by all liabilities which are non-equity in nature. Hence, the following
formula is used:
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝑇𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

𝑁𝑒𝑡 𝑏𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡𝑠 (𝑁𝐵𝑉𝐴) =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑠ℎ𝑎𝑟𝑒𝑠
Putting the formula into the application, let us say, for example, that ABC Company in
the year 2022 presented its financial position with the following balances: Current
Assets at Php 400 Million, Non-Current Assets at Php 800 million, Current Liabilities
at Php 100 million, Non-Current Liabilities at Php 500 million. ABC Company has
500,000 outstanding shares
In the above example, the Net Book Value of Assets of ABC Company is Php
1,200/share. We arrived at this amount through the below solution:
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Current Assets Php 400,000,000
Non-Current Assets Php 800,000,000
Total Assets Php 1,200,000,000
Current Liabilities Php 100,000,000
Non-Current Liabilities Php 500,000,000
Total Liabilities Php 600,000,000
𝑃ℎ𝑝 1,200,000,000 − 𝑃ℎ𝑝 600,000,000

500,000 𝑠ℎ𝑎𝑟𝑒𝑠
𝑃ℎ𝑝 600,000,000
𝑁𝑒𝑡 𝑏𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡𝑠 (𝑁𝐵𝑉𝐴) = 𝑃ℎ𝑝 1,200/𝑠ℎ𝑎𝑟𝑒
Many companies are using the book value method as it reflects an entity's historical
price or value. They can easily be computed since values to arrive at the such amount
is available through the Financial Statements. However, some analysts opine that one
of the disadvantages of using the book value method is that it only reflects historical
prices or value and may not be indicative of the real value of an entity.
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The Replacement Value Method
Figure 4. Replacement Cost
https://www.educba.com/replacement-cost/; Accessed July 23, 2022
In the Replacement Value Method, the valuation used in arriving at an entity's value
is not as straightforward as the book value method. It cannot be simply computed by
looking at the Statement of Financial Position of the company. In this method,
individual assets are valued at their respective relative value or equivalent to the cost
to replace the individual asset. A relative value is being computed in this method
because an asset's value is susceptible to being different from its book value due to
some factors. The following are factors that affect the replacement value of an asset:
a.) Asset’s age – assets are susceptible to wear and tear due to the passage of time.
The age of an asset affects the replacement value as it is a useful gauge of how
the valuator will see how much the value of that specific asset is if placed and
lined up with similar assets in the present.
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b.) Asset Size – Analysts and appraisers usually inspect the size of an asset,
particularly non-current assets, and compare it with assets bearing the same
size. Further, it is indicative of how much volume of materials, products, or
inventory an asset can produce.
c.) Assets edge in the market - In the present times, technological advancements
provide an edge in the market. Among other things, it lengthens the useful life of
an asset and increases its efficiency. An asset's competitive advantage over
similar assets in the market is given credence and weight by valuators when
computing an asset's replacement value.
In computing for the replacement value method, the below formula is being used:
𝑁𝑒𝑡 𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒 + 𝑜𝑟 − 𝑟𝑒𝑝𝑙𝑎𝑐𝑒𝑚𝑒𝑛𝑡 𝑎𝑑𝑗𝑢𝑠𝑡𝑚𝑒𝑛𝑡𝑠

𝑅𝑒𝑝𝑙𝑎𝑐𝑒𝑚𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 (𝑅𝑉𝑃𝑆) =
𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑠ℎ𝑎𝑟𝑒𝑠
Gleaning on the above formula, it is important to know how to arrive at the Net Book
Value as discussed in the preceding method. Thus, the following steps are followed in
arriving at the final replacement value per share:
a.) Adjust items to their replacement value;

b.) Include the unadjusted components or those which do not need to be
adjusted to their replacement value;
c.) Compute for the Net Book Value; and
d.) Use the Replacement Value per Share Formula
Putting it into perspective, let us assume that Angat Buhay Corporation has total
assets of Php 500,000,000. Of these total assets, Php 100,000,000 is Current Assets,
and the rest is Non-Current Assets. The total liabilities of Angat Buhay Corp. are Php
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384,000,000. Of these total liabilities, the amount of current and non-current

liabilities are of equal balance. Angat Buhay Corporation wants to compute its
Replacement Value per share, so it consulted its long-time appraiser. According to the
appraiser, 40% of Angat Buhay’s non-current assets have a replacement value of
120% of its recorded net book value, while the remaining of its non-current assets are
valued at 80% of its recorded net book value. Currently, the corporation has 200,000
outstanding shares.
Following the discussed steps, the total replacement value per share is __________ which
is computed as follows:
Step 1: Adjust to its replacement value.
a.) 40% of Angat Buhay’s non-current assets have a replacement value of 120% of its
recorded net book value
40% Unadjusted Non-Current Assets Php 160,000,000
120%
Premium on Replacement
Php 192,000,000
40% Adjusted Non-Current Assets
60% Unadjusted Non-Current Assets Php 240,000,000
80%
Discount on Replacement
Php 192,000,000
40% Adjusted Non-Current Assets Php 192,000,000
Php 192,000,000
Php 384,000,000
Total Replacement Value of Non-Current
Assets
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b.) Include the unadjusted components or those which do not need to be adjusted to
their replacement value
Total Replacement Value of Non-Current Php 384,000,000

Assets
Php 100,000,000
Add: Total Current Assets
Php 484,000,000
Total Replacement Value of Total Assets
c.) Compute for the Net Book Value
Total Replacement Value of Total Assets Php 484,000,000
Php 384,000,000
Less: Total Liabilities
Php 100,000,000
Total Replacement Value with adjustments
d.) Use the Replacement Value per Share Formula
𝑁𝑒𝑡 𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒 + 𝑜𝑟 − 𝑟𝑒𝑝𝑙𝑎𝑐𝑒𝑚𝑒𝑛𝑡 𝑎𝑑𝑗𝑢𝑠𝑡𝑚𝑒𝑛𝑡𝑠

𝑃ℎ𝑝 100,000,000
𝑅𝑒𝑝𝑙𝑎𝑐𝑒𝑚𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 (𝑅𝑉𝑃𝑆) = 𝑃ℎ𝑝 500 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
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Guide Questions:
1. What is the method which is commonly used for the highly specialized
industry?
2. Define what an asset is.
The Reproduction Value Method
Figure 5. Reproduction Cost Analysis.
https://www.fourriverslaw.com/blog/2020/july/reproduction-cost-analysis-how-to-
calculate-the-/; Accessed July 23, 2022
The reproduction value pertains to estimating the cost of reproducing, creating, or

manufacturing a similar asset. The reproduction value method's peculiarity is that it
is highly used for businesses that are specialized by nature, like mining, insurance,
etc., or uses specialized assets because it is required for the product the company is
producing. It requires analysis of the company's reproduction costs, mainly internally
computed or analyzed, particularly if the assets are developed within the entity and
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not outsourced from other businesses. Albeit this method is cost and convenient to
use, the challenge is the available information in the market because of the limited
benchmark data the company can use. Below is the formula used in arriving at the
Reproduction Value per share:
𝑁𝑒𝑡 𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒 + 𝑜𝑟 − 𝑟𝑒𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑎𝑑𝑗𝑢𝑠𝑡𝑚𝑒𝑛𝑡𝑠

𝑅𝑒𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑉𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 (𝑅𝑉𝑃𝑆) =
Below is the step-by-step procedure to be followed in arriving at the Reproduction

Value per share:
a.) Adjust items to their reproduction value;

b.) Include the unadjusted components or those which do not need to be adjusted to
their replacement value;
c.) Compute for the Net Book Value; and
d.) Use the Reproduction Value per Share Formula
Basically, the above steps are similar to the steps discussed in the preceding method.
1. The Reproduction Value Method.

2. An asset is a resource that provides future economic benefits to an entity
as a result of historical or past transactions.
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Books and Journals
1. Reproduction Value Method; https://www.valupaedia.com/index.php/business-

dictionary/432-reproduction-cost-valuation-
method#:~:text=The%20Reproduction%20Cost%20Valuation%20Method%20is%2
0one%20of,original%20intellectual%20property%20based%20on%20current%20p
revailing%20prices.; July 23 2022.
2. Replacement Value Method of Equity Valuation; Replacement Value Method of Equity
Valuation: Formula, Calculation, & .. (efinancemanagement.com); July 23 2022.
3. "Book Value." Gale Encyclopedia of American Law, edited by Donna Batten, 3rd ed., vol.
2, Gale, 2010, p. 81. Gale eBooks,
link.gale.com/apps/doc/CX1337700584/GVRL?u=phama&sid=bookmark-
GVRL&xid=8be66d2a. Accessed July 23 2022.
4. "Assets." Encyclopedia of Small Business, edited by Virgil L. Burton, III, 5th ed., vol. 1,
Gale, 2017, pp. 68-69. Gale eBooks,
GVRL&xid=d5c921ab. Accessed July 23 2022.
5. "Valuation." Encyclopedia of Small Business, edited by Virgil L. Burton, III, 5th ed., vol.
2, Gale, 2017, pp. 1131-1133. Gale eBooks,
GVRL&xid=b5595c9c. Accessed July 23 2022.
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1. Reproduction Value Method; https://www.youtube.com/watch?v=EeNMPrcUIqY; July

23, 2022
2. Asset Based Valuation; https://www.youtube.com/watch?v=0XbhZl8qRzE; July 23,
2022
3. Asset Based Valuation using Book Value & Replacement Value Methods;
https://www.youtube.com/watch?v=OboXdl_apCo; July 23, 2022.
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1
Asset Based Valuation (Liquidation)
Module 005 Asset Based Valuation

(Liquidation)
1. Cognitive: Describe the nature of the Liquidation Value Method
2. Cognitive: Identify significant concepts and principles of Liquidation
value
distinction among different types of liquidation
4. Psychomotor: Assess the capability to compute the liquidation value
Liquidation Value Method
Figure 1. Liquidation Value

https://www.wallstreetmojo.com/liquidation-value/; Accessed August 9, 2022
Concept of Liquidation Value Method
The liquidation value method is defined as an equity valuation approach that considers
the salvage value as the asset's value. It is typically based on the value the business would
immediately receive upon selling the asset on the open market. Salvage value, on the other
hand, is defined as the cost of disposing of the asset or salvage value or disposal value.
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2
Liquidation value pertains to the value of a company, had it been dissolved, and its assets are
sold individually. It represents the amount that can be gathered if the business is closed for
some reason and its assets are sold one by one. As defined by Investopedia, It is the total
worth of a company’s assets if it were to go out of business and its assets sold.
Consider this as an example: a restaurant recently shut down due to bankruptcy. The hotel's
assets (e.g., bed, chairs, kitchen equipment) can be sold as part of a package or on their own.
These assets' value, if sold separately, is significantly reduced as there is no guarantee that
they can generate future cash flows compared to when it was used in the restaurant. This is
because when a business closes, the synergies between assets when working together are
lost. As such, the enterprise loses its value.
The liquidation Value Method is typically used in circumstances that bring about doubts
about a business's ability. Stated otherwise, Liquidation Value is used on a dying or losing
business where liquidation is apparent. A good accountant should know the factors that
signal a dying business and check if there are profits that can be realized upon the sale of the
assets which the company once owned. Furthermore, think of Liquidation value as the floor
price in evaluating the business. It should not be used to value profitable or growing
businesses as this valuation does not consider the growth of an enterprise. In other words,
it cannot go lower than that the floor price.
Course Module
3
Things to consider in Liquidation Value
1. Business Failures
Figure 2. Going Out of Business

https://www.invoicera.com/blog/entrepreneurship/ways-to-avoid-business-
failure/; Accessed August 9, 2022
A lot of factors cause business failures. It may be internal (i.e., mismanagement, poor
financial evaluation, and decisions); or external (i.e., economic factors), which may
cause disastrous consequences to the company itself. Among others, the key things to
consider are low returns and consistent operating losses. These often impact the
company's image and will eventually reduce the firm's value.
2. Corporate or Project End of Life
Figure 3. Business Life Cycle

https://www.wallstreetmojo.com/business-life-cycle/; Accessed August 9, 2022
This is due to the expiration of the lifetime of a corporation or a project/business
venture. The moment the corporation reaches its maximum number of years to
operate, liquidation takes place after due process.
Course Module
4
3. Depletion of Scarce Resources
Figure 4. Scarcity
https://examples.yourdictionary.com/examples-of-scarcity.html; Accessed August 9,
2022
Like corporate expiration, depletion of scarce resources calls for a liquidation process.
The moment the corporation's resource depletes, and it can no longer obtain such
resources may be a sign of potential liquidation.
General Principles on Liquidation
As provided in the book of Lascano, Baron, and Cachero; the general concepts
considered in liquidation values are as follows:
• If the liquidation value is above income approach valuation and liquidation

comes into consideration, liquidation value should be used;
• If the nature of the business implies a limited lifetime, the terminal value must be
based on liquidation. All costs necessary to close the operations should also be
factored in and deducted to arrive at the liquidation value;
• Non-operating assets should be valued by liquidation method as costs of sale and
taxes reduce the market value;
Course Module
5
• Liquidation valuation must be used if the business continuity is dependent on

current management that will not stay.
In addition, remember that the Liquidation Value Method can be used as a powerful
tool in making investment decisions. If a company is profitable, the liquidation is
generally lower than the prevailing market price of the share. This is a good signal
for accountants to consider in procuring assets or shares in a company, as when
there is a low liquidation, a company is on the right track. It is considered profitable,
which will benefit the purchaser in the long run.
The same is true and vice versa. If a company's prevailing market price is lower than
the liquidation, such a company may be considered in decline. Hence, it is generally
considered not a good investment.
GuideQuestions:
1. What is the Compulsory Liquidation?

2. What is orderly liquidation?
Types of Liquidation
Figure 5. Types of Liquidation
https://efinancemanagement.com/corporate-restructuring/liquidation; Accessed August 9, 2022

Course Module
6
There are several kinds of Liquidation, namely: (1) Compulsory Liquidation; (2)
Member’s Voluntary Liquidation; (3) Creditor’s Voluntary Liquidation; (4) Orderly
Liquidation; and (5) Forced Liquidation.
Compulsory Liquidation takes place when creditors or lenders petition to liquidate a

business when their debts are not paid within a short period of time, which in turn
forces a business to sell its assets to pay back its creditors.
Members’ Voluntary Liquidation happens even if the company is solvent. This is

known as solvent liquidation, which means that a company is able to pay its debts in
full, together with interest. This is used when the shareholders of a company wish to
retire and realize their investment.
Creditor’s Voluntary Liquidation happens when a company director realizes that they
won't be able to pay its debts on time or when the liabilities exceed the asset value.
Here, the directors appoint a liquidator to settle their debts, after which they are to
cooperate with the process to pay back their debts.
Orderly Liquidation occurs when assets are sold strategically over a period to attract
and generate the most money. This liquidation puts up assets on the open market
within a reasonable time allowed to find a purchaser, where the seller is compelled
to sell, and the buyer is willing but not compelled to buy.
Forced Liquidation occurs when the assets are sold as quickly as possible, much like
an auction. In this kind of liquidation, the process is done immediately, especially if
creditors have sued or when a bankruptcy is filed. Here, assets are sold in the market
as soon as possible, which results in lower prices because of the rush sale.
Do note that it is important to know the type of liquidation that is applicable in such
cases as it will affect the costs connected with the liquidation of the property, taxes,
and also with regard to those facilitating the liquidation. All of these affect the final
value of the business.
Course Module
7
Calculating Liquidation Value
The basic formula to be followed in computing the liquidation value is as follows:
Present value of Asset XXX
Less: Present value of Cost for (XXX)
termination and settlement
for liabilities
Less: Present value of tax charges (XXX)
for the transactions and other _______________
liquidation costs
Liquidation value = XXX
Example:
Shelby Company reported the following on its accounting book records. In addition
to this, Shelby Company has 250,000 outstanding shares.
Shelby Company
December 31, 2019
(in '000 Philippine Peso)
Assets
Cash 100,000
Accounts Receivable (A/R) – Net 800,000
Inventories 3,500,000
Prepaid Expenses 100,000
Course Module
8
Property, Plant, and Equipment (PPE) – Net 4,500,000
Total Assets 9,000,000
Liabilities
Notes Payable 1,200,000
Other Liabilities 800,000____
Total Liabilities 2,000,000
Asset Valuation
Cash 100%
A/R 85%
Inventories 60%
Prepaid
Expenses 25%
PPE 60%
Shelby Company is undergoing a shake-up and is experiencing financial problems.

The management would like to assess liquidation value as part of their strategy
formulation. As their accountant, you are tasked to compute for the liquidation
value.
Solution: To compute the adjusted value of the assets, the current book values
should be multiplied by the assumed realizable value if liquidated. After which, the
liabilities should be deducted from the asset-adjusted value to arrive at the
liquidation value.
Asset in Php Book value Valued at Asset adjusted value

Cash 100,000 100% php 100,000
A/R 800,000 85% php 680,000
Inventories 3,500,000 60% php 2,100,000
Prepaid Expenses 100,000 25% php 25,000
PPE 4,500,000 60% php 2,700,000
Total Assets 9,000,000 5,605,000
Course Module
9
Asset Adjusted Value 5,605,000
Less: Total liabilities to be settled 2,000,000
Liquidation value – Shelby Company 3,605,000
Number of Outstanding Shares 250,000___
Liquidation Value Per Share 14.42
1. Compulsory Liquidation takes place when creditors or lenders petition to

liquidate a business when their debts are not paid within a short period of
time, which in turn forces a business to sell its assets to pay back its
creditors.
2. Orderly Liquidation occurs when assets are sold strategically over a period
to attract and generate the most money.
Course Module
10
Books and Journals
1. Liquidation Value; https://www.investopedia.com/terms/l/liquidation-value.asp;

August 9, 2022
2. Types of Liquidation; https://liquidationsonline.co.uk/types-of-liquidation; August 9,
2022
3. "Liquidation and Liquidation Values." Encyclopedia of Small Business, edited by Virgil
L. Burton, III, 5th ed., vol. 2, Gale, 2017, pp. 680-682. Gale eBooks,
GVRL&xid=24425ea6. Accessed August 9 2022.
4. "Wind Up." Gale Encyclopedia of American Law, edited by Donna Batten, 3rd ed., vol.
10, Gale, 2010, pp. 424-425. Gale eBooks,
GVRL&xid=aa44b920. Accessed August 9 2022.
5. "Bankruptcy." Personal Finance, edited by Miranda Herbert Ferrara and Michele P.
LaMeau, Gale, 2015, pp. 178-183. Life and Career Skills Series Vol. 1. Gale eBooks,
GVRL&xid=4037677a. Accessed August 9 2022.
1. Liquidation-Based Valuation Method Computation;

https://www.youtube.com/watch?v=PQ-3_y0MMP4; August 9, 2022
2. Liquidation Value – Business Finance Glossary;
https://www.youtube.com/watch?v=wzjgyBayVck; August 9, 2022
3. What is Liquidation of a company;
https://www.youtube.com/watch?v=A2wNy3I60p0; August 9, 2022
4. What are the types of liquidation; https://www.youtube.com/watch?v=i5kKILBl5M0;
August 9, 2022
Course Module
1
Income Based Valuation
Module 006 Income-Based Valuation

1. Cognitive: Describe the nature of Income based valuation method.
2. Cognitive: Identify significant concepts and principles of Economic Value
Added.
capitalization in the earnings method.
4. Psychomotor: Assess the capability to compute using the discounted
cash flows model and method.
Figure 1. Income Approach

https://mercercapital.com/article/understanding-the-income-approach-
in-a-business-valuation/; Accessed August 18, 2022
Income-based valuation is one where a business is valued based upon the business's past,
current, or future cash flows and the risks that the business may not produce the desired
return. In other words, it is valued based on the returns it will yield or generate. Income,
Course Module
2
being the important factor here, is generally based on the amount of money the business will
generate as it continues to operate and is reduced by the costs incurred by the business.
Figure 2. Dividend Irrelevance Theory

http://www.umsl.edu/~kummerd/PPT/Chap15/sld005.htm; Accessed
August 18, 2022
In using Income Based Valuation, accountants or investors consider two theories;
(1) The Dividend Irrelevance theory; where posits that the stock prices are not affected by
dividends or the returns on the stock but rather by the ability and sustainability of the asset;
and (2) The Dividend Relevance Theory; where proposes the exact opposite of the
Irrelevance theory and postulates that dividend or capital gains have an impact on the price
of the asset.
In addition to this, according to the book of Lascano, Baron, and Cachero, upon valuing the
asset, investors are also taking into consideration different factors, it may be (1) the asset’s
accretion or dilution; (2) its equity control premium; and (3) other precedent transactions.
Course Module
3
Asset accretion is considered the additional value which would increase the firm's value due
to other attributes, namely; growth, increase in prices, and even operating efficiencies.
Dilutions, on the other hand, reduce the firm's value due to other circumstances that may
counter its growth.
Equity Control Premium is the premium that is added to the firm's value. It refers to the
premium that potential buyers are willing to pay to acquire a controlling stake in the equity
of a business.
Lastly, Precedent Transactions are past deals or transactions that can be similar to the
investment being evaluated. They are considered risks that may further affect the business's
ability to earn its projected earnings.
Key Thing to Consider in Income-Based Valuation
Figure 3. Weighted Average Cost of Capital

https://efinancemanagement.com/investment-decisions/weighted-
average-cost-of-capital-wacc; Accessed August 18, 2022
Course Module
4
In Income Based Valuation, the cost of capital is considered in using this approach. The
Cost of Capital can be computed through (1) Weighted Average Cost (WACC) or (2)
Capital Asset Pricing Model (CAPM).
Formula:
WACC = (Ke x We) + (Kd x Wd)
Ke = Cost of Equity
We = Weight of the equity financing
Kd = Cost of debt after tax
Wd = Weight of the debt financing
*To Compute Cost of Equity using CAPM
Ke = Rf + β (Rm – Rf)
Rf = Risk Free Rate
Β = Beta
Rm = Market Return
*To Compute Cost of Debt
Kd = Rf + DM
Rf = Risk Free Rate
DM = Debt Margin
Example:
(1) Compute the Cost of Equity (Ke) using the following values provided: the risk-
free rate = 5%, the market return = 11.91%, and the beta is 1.5.
Course Module
5
Solution:
5% + 1.5(11.91% - 5%) = 15.365%
(2) Compute the Cost of debt (Kd) using the following values provided: Risk-free
rate = 5%, debt premium = 6%.
Solution:
5% + 6% = 11%
(3) Compute for the WACC using the values provided: Share of financing = 30%
equity and 70% debt; Tax rate = 30%; Cost of equity = same as above (number 1)
Cost of debt = same as above (number 2)
Solution:
WACC = (Ke x We) + (Kd x Wd)
= (15.365% X 30%) + (11% X (1- 30%) X 70%)
= 4.61% + 5.39%
WACC = 10%
GuideQuestions:
Answer the following to check what you have learned from the discussions so far. Check
your answers from the provided answer key at the end of this module. There is no need
to submit your answers to OEd.
1. What is the Discounted Cash flow method?

2. What is Economic Value Added?
Course Module
6
Economic Value Added (EVA)
Figure 4. Economic Value Added

https://efinancemanagement.com/investment-decisions/economic-value-
added-eva-the-measure-of-real-wealth-creation; Accessed August 18,
2022
Economic Value Added, as defined by Investopedia, is the measure of a company's

financial performance based on the residual wealth calculated by deducting its cost of
capital from its operating profit, adjusted for taxes on a cash basis. It is also known as
economic profit, for it attempts to capture the true economic profit of a company. EVA
is a convenient way to evaluate investment as it quickly measures the ability of the
firm to support its cost of capital using its earnings. To put it simply, EVA is the excess
of the company earnings after deducting the cost of capital, and the higher the excess
earnings, the better it is for the firm.
Formula:
EVA = Earnings – Cost of Capital
Cost of Capital = Investment value x Rate of Cost of Capital
Example:
Course Module
7
Compute for the EVA. The board decided to sell the company for 1.5 billion with a
cost of capital appropriate for this type of business at 10%. Stark Industries
projected earnings are to be Php 350 million per year.
Solution:
[Php 350 – (PHP 1,500 x 10%)]
EVA = Php 200 million.
Capitalization of Earnings Method
As defined by Investopedia, capitalization of earnings is a method of determining the

value of a business by calculating the worth of its anticipated profits based on the
current earnings and expected future performance. It consists of calculating the value
of a company by discounting future profits with a capitalization rate adjusted to the
determining date for a valuation. Here, the value of the asset or the investment is
determined using the company's anticipated earnings divided by the capitalization
rate.
Formula
Future Earnings
Equity Value = ----------------------------------
Required Return
NOTE: Future earnings may either be fixed or variable. If the future earnings are fixed,
apply them directly. However, if the earnings vary from year to year, the proper
approach is to determine the average earnings of all the anticipated cash flows.
Course Module
8
Example:
Cheri Mobile Inc expects to earn Php 450,000 per year, expecting a return of 12%.
Compute for the equity value.
450,000 / 12% = php 3,750,00
Another example with future variable earnings. Cheri Mobile Inc projects the
following net cash flows in the next 5 years with the required return of 12%.
Net Cash
Year Flow
1 450,000
2 500,000
3 650,000
4 700,000
5 750,000
The first step is to get the average earnings of all the anticipated cash flows by adding
all of the cash flows from years 1 to 5, then divide it by the number of years. After that,
proceed to compute the equity value. You will get PHP 610,000.
Future Earnings - 610,000
Equity Value = --------------------------------------------
Required Return - 12%
Equity Value = Php 5,083,333
Course Module
9
Do note, however, that while this method is simple and convenient, it is limited by the
following:
(1) this method may not fully account for the future earnings or cash flows which
may result in over or undervaluation;
(2) this method is limited by its inability to incorporate contingencies; and
(3) assumptions used to determine cashflows may not hold true as the projections
are based on a limited time frame.
Discounted Cashflow Method
Figure 5. Discounted Cash Flow Analysis

https://www.smartsheet.com/content/discounted-cash-flow-pros-cons;
Accessed August 18, 2022
Investopedia defines this method as a valuation method used to estimate an

investment's value based on its expected future cash flows. It attempts to figure out
the value of an investment today based on projections of how much money it will
generate in the future.
Course Module
10
Different professionals widely use this as the most sophisticated approach to

determine corporate value. It is also more auditable as it allows for a more detailed
approach to valuation.
Here, this method calculates the equity value by determining the present value of the
projected net cash flows of the business. This may also assume a terminal value that
would serve as a representative value for the cash flow beyond the projection. This
method will be further discussed entirely on the next module.
1. It is a valuation method used to estimate an investment's value based on

its expected future cash flows.
2. It is the measure of a company's financial performance based on the
residual wealth calculated by deducting its cost of capital from its
operating profit, adjusted for taxes on a cash basis.
Books and Journals
Course Module
11
1. Income-Based Valuation Methods – Explained;

https://thebusinessprofessor.com/en_US/business-personal-finance-
valuation/income-based-valuation-approaches; August 18, 2022
2. Economic Value Added;
https://www.investopedia.com/terms/e/eva.asp#:~:text=Economic%20value%20a
dded%20(EVA)%20is,taxes%20on%20a%20cash%20basis.; August 18, 2022
3. "Discounted Cash Flow." Encyclopedia of Small Business, edited by Virgil L. Burton,
III, 5th ed., vol. 1, Gale, 2017, pp. 348-350. Gale eBooks,
GVRL&xid=c83d0389. Accessed August 18, 2022.
4. Tennent, John. "Investors." The Economist Guide to Financial Management, Profile
Books, 2013, pp. [77]-104. Gale eBooks,
5. Tennent, John. "Investors." The Economist Guide to Financial Management, Profile
Books, 2013, pp. [77]-104. Gale eBooks,
1. Income Based Valuation; https://www.youtube.com/watch?v=zQ7gzIZK36c; August

18, 2022
2. How to Value a Business – Income Approach Part I;
https://www.youtube.com/watch?v=K4vPuTRbxuw; August 18, 2022
3. How to Value a Business – Income Approach Part II;
https://www.youtube.com/watch?v=CZop2YxdMqA; August 18, 2022
4. Discount Cash Flow | DCF Model Step by Step Guide;
https://www.youtube.com/watch?v=gLULdxrS-CU; August 18, 2022
5. Economic Value-Added EVA; https://www.youtube.com/watch?v=LHXOIHQcyOw;
August 18, 2022
Course Module
1
Discounted Cash Flows Method
Module 07 Discounted Cash Flows Method
At the end of this module you are expected to:
1. Cognitive: Describe the nature of net cash flows

2. Cognitive: Identify significant concepts of terminal value
discounted cash flow analysis
4. Psychomotor: Assess the capability to compute for problem solving
questions involving discounted cash flow method
Figure 1. Discounted Cash Flow Technique

https://slideplayer.com/slide/15173159/; Accessed August 19, 2022
Investopedia defines this method as a valuation method which is used to estimate the value
of an investment based on its expected future cash flows. It provides an information as to
Course Module
2
how much is the value of an investment today while considering the projections the money
it will generate in the future. This is widely used by different professionals as this is the
most sophisticated approach to determine the corporate value of an enterprise. This
approach also gives a more comprehensive audit trail which can be useful to auditors as it
allows for a more detailed approach in valuation.
Here, this method calculates the equity value by determining the present value of the
projected net cash flows of the business. The Net Cash Flow is the amount of cash available
for distribution to both the debt and equity claims of an enterprise, and is calculated from
the net cash generated from the operations and for investment over time.
So, when do we use Net Cash Flow? According to the book of Lascano, Baron, and Cachero,
Net Cash Flow is the preferred basis of valuation if any of the following are present:
(1) When the company does not pay dividends;

(2) When the company pays dividends but the amount paid out significantly differs
from its capacity to pay dividends;
(3) When the Net Cash Flows and profits are aligned within a reasonable forecast
period; and
(4) When an investor has a control perspective. This happens if an investor is in charge
of a company, wherein dividends can be adjusted based on the decision of the
controlling investor.
Furthermore, analyzing cash flows and its sources is important as it is helpful when it
comes to understanding the source of financing of a business, the business’s reliance on
debt financing, and finally, the quality of earnings of ones’ business. Cash flows and
valuation to be used are of great importance to a wide variety of stakeholders, it provides
confidence in key business decisions that these stakeholders will be making.
3
Levels of Net Cash Flow
Figure 2. Net Cash Flow

https://www.wallstreetmojo.com/net-cash-flow-formula/; Accessed August 19, 2022
There are different levels of Net Cash Flow that will be discussed here, they are: (1) Net Cash
Flow to the Firm; and (2) Net Cash Flow to Equity.
(1) Net Cash Flow to the Firm – This represents the cash flow from operations available for
distribution after accounting or paying all of the necessary expenses in the operation of business;
these include taxes, depreciation expenses and many more. Net Cash Flow to the firm is also
considered cash flow coming from operating activities of an enterprise which is allocated to pay
the required return of fund providers. Do note that Net Cash Flow captures only items that are
directly related to the operating and investing activities of an enterprise, and it excludes items
associated with financing activities. Hence, it excludes in the analysis any financing activity that a
business may have undertaken in a period of time. Financing activities such as, but not limited to,
payment of debts, capital lease obligations, and payment of dividends are outside the concept of
the Net Cash Clow to the Firm.
Course Module
4
So, how do you compute Net Cash Flow to the Firm? The formula for computing NCF to the firm is
as follows:
BASED FROM NET INCOME:
Net Income Available to Common shareholders Php xxx

Add: Non-Cash charges (net) xxx
Add: interest Expenses (net of taxes) xxx
Add/Less: Adjustment in Working Capital xxx
Less: Net Investment in Fixed Capital (purchases - sales of Fixed Capital Investment) xxx
Net Cash Flow to the Firm Php xxx
• Net Income Available to Common Shareholders – This refers to the amount left for the
common shareholders when the costs, expenses depreciation, interest, taxes and dividends are
deducted.
• Non-cash charges – these are non-cash items that are included in the computation of net
income. Common non-cash items includes: Depreciation and amortization, Restructuring
charges, and provisions for doubtful accounts.
• Interest Expenses – this is considered as cash flow intended for the debt providers.
• Working Capital Adjustment – this refers to the net investment in current assets and the like,
and inventory (reduced by liabilities).
• Net Investment in Fixed Capital – this refers to cash outflows made to purchase or pay for
capital expenditures required to support current and upcoming operating needs.
BASED FROM STATEMENT OF CASH FLOWS
Cash flow from Operating Activities Php xxx

Add: Interest Expense (net of taxes) xxx
Less: Cash flow from investing activities xxx
Net Cash Flows to the Firm Php xxx
*Only if deducted from the operations
5
• Cash flow from Operating Activities – this can be regarded as the amount of cash the company
has generated from its operation, how much cash is received, and how much cash outflows are
to be paid.
• Cash flow from investing activities – this refers to the amount of cash disbursed for
investments in long-term assets. Note however, if the cash flow involves transactions in
financial assets, Cash flow from investing activities should be excluded.
(2) Net Cash Flow to Equity – The Net Cash Flow on Equity is all about the availability of cash for
common equity participants or shareholders after payment of operating expenses, satisfying
operating and fixed capital requirements and settling cash flow transactions involving debt
providers and preferred shareholders. This method shows the level of available cash that an
enterprise is able to and can willingly declare as dividends to its common shareholders. This
formula is commonly used by investors who are interested in knowing the capability of a company
to declare and later on distribute dividends.
To compute for the Net Cash Flow to Equity:
Net Cash Flows to the Firm Php xxx

Add: Proceeds from Borrowings xxx
Less: Debt Service xxx
Add: Proceeds from Preferred Shares Issuance xxx
Less: Dividends of Preferred Shares xxx
Net Cash Flows to the Equity Php xxx
• Proceeds From Borrowing – this is the amount of cash received by the enterprise which comes
from long-term debt borrowing.
• Debt Service – refers to the amount used to service the loans/debt financing.
• Proceeds from Preferred Shares Issuance – this refers to cash flows arriving through issuance
of preferred shares.
• Dividends of Preferred Shares – This refers to the income generated by the issued preferred
shares.
Course Module
6
NOTE: using the above formula, the Net Cash Flow to Equity can be determined by using these
different approaches:
A. BASED FROM NET INCOME
Net Income Available to Common Shareholders Php xxx

Add: Non-cash charges (net) xxx
Add: Interest Expense (net of taxes) xxx
Add/Less: Adjustment in Working Capital xxx
Less: Net Investment in Fixed Capital (Purchases - Sales of Fixed Capital Investment) xxx
Net Cash Flows to the Firm xxx
Add: Proceeds from Borrowing xxx
Add Proceeds from Preferred Shares Issuance xxx
Less: Dividends on Preferred Shares xxx
B. FROM STATEMENT OF CASH FLOWS
Cash Flows from Operating Activities Php xxx

Add: Interest Expense (net of Taxes) * xxx
Less: Cash Flows from Investing Activities xxx
C. FROM EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION
EBITDA, Net of Taxes Php xxx

Add: Tax Savings on Non-cash Charges xxx
Add/Less: Working Capital Adjustments xxx
Less: Investment in Fixed Capital xxx
7

Less: Debts Service xxx
Figure 3. Terminal Value

https://efinancemanagement.com/investment-decisions/terminal-value; August 19, 2022
Terminal Value
As defined by Investopedia, Terminal Value is the value of an asset, business or project beyond the
forecasted period when future cash flows can be estimated. This assumes a business will grow at a
given growth rate forever after the forecast period. In short, Terminal Value can be defined as the
value of the company in perpetuity. This value of an asset has no regard as to the possibility of a
business closing down and positively assumes that the business will continue growing at a certain
growth rate.
There are ways to determine the Terminal Value, among them are Liquidation Value (which was
previously discussed) and Estimated Perpetual Value (which is the focus of our discussion in this
module).
Course Module
8
Formula:
𝐶𝐹𝑛 + 1
𝑇𝑉 =
𝑟−𝑔
Where:
TV = Terminal Value
CFn+1 = Farthest net cash flow
r = cost of capital
g = growth rate*
*To compute for the growth rate:
1
𝑁𝐶𝐹𝑛 𝑛−1
𝑔 = [( ) ] − 1 𝑥 100%
𝑁𝐶𝐹𝑜
Where:
NCFo = net cash flows at the beginning
NCFn = Latest net cash flows
n = latest time
Take this as an example, KPB Corporation is expecting for 15% returns for a venture and assumes
that their net cash flows for the next five years are as provided below. Compute for the Terminal
Value.
9
Year Net Cash Flows (in million)

1 5
2 5.50
3 6.05
4 6.66
5 7.32
Solution:
• To get the Terminal Value, we must first compute the growth rate.
1
7.32 5−1
𝑔 = [( ) ] − 1 𝑥 100%
5.00
g = (1.10 – 1) x 100%
g = 10%
• Thereafter, we apply the growth rate to the Terminal Value formula
𝑃ℎ𝑝 8.05
𝑇𝑉 =
15% − 10%
𝑃ℎ𝑝 8.05
𝑇𝑉 =
5%
𝑇𝑉 = 𝑃ℎ𝑝 161
Note: This is the simplest example to convey the concept of Terminal Value. For more examples,
and for an in-depth explanation, consult the book of Lascano, Baron, and Cachero.
Course Module
10
Discounted Cash Flow Analysis (Financial Models)
Figure 4. Discounted Financial Model

https://www.wallstreetmojo.com/dcf-discounted-cash-flow/; August 19, 2022
One of the most difficult and is often time the most confidential activity in a company is the
creation of Financial Model. The confidentiality of this activity shall be highly respected as
financial information contained in such model can break a company when a competitor of a
company has been in a position to know such financial model. As a result, companies often
procure the services of professionals (mainly economists, financial managers and accountants)
to create a Financial Model or assist them in determining the value of GCBOs or other
opportunities.
11
Finally, the readers (and soon to be accountants) should be keen to keep in mind the steps
needed to develop a financial model. As provided by the book of Lascano, Baron, and Cachero,
these are:
1. To gather historical information and references;

2. To establish drivers for growth and assumptions;
3. To determine the reasonable cost of capital;
4. To apply the formulate to compute for the value; and
5. To make scenarios and sensitivity analysis based on the results.
Components of a Financial Model
Figure 5. Types of Financial Model

https://www.wallstreetmojo.com/types-of-financial-models/; August 19, 2022
For there to be a good financial model, it must be understandable, printable, and auditable. It must
be designed in such a way that the investors or other people interested with such information
must be able to understand and take a full grasp of the information that is inside the financial
model. As provided in the book of Lascano, Baron, and Cachero, to develop a good financial model,
the following components must be present:
Course Module
12
1. Title page – this is an overview of the project being valued or assessed. This may
include important information to secure the proprietary rights of the modeler or the
firm the modeler is working for. It sets the tone as to what the reader can expect from
the financial model based on a concise and clear title page.
2. Data Key Results – this is the summary of the results of the study, this enables modelers
to analyze the results and to afford the readers a better appreciation on the results of
the project. A good data key results must be easily understandable. Some of the
common financial model uses graphs, charts and other tools which can help the readers
easily grasp in a nutshell a voluminous data.
3. Assumption Sheet – this includes the summary of all of the assumptions used in the
model. Information provided here must be linked to all the output sheets like pro-forma
financial statements, supporting schedules and data key results.
4. Pro-forma Financial Statements – Here, the three components of the financial

statements must be present. These are; (1) the income statement; (2) statement of
financial position; and (3) statement of Cash Flows. Here, key financial ratios (those
that have something to do with financial performance and efficiency ratios) are found.
5. Supporting Schedules – much like a subsidiary ledger, this provides supporting

computation to the components of the pro forma financial statements.
GuideQuestions:
1. What is a Data Key Results?

2. What are the types of Financial Models?
13
1. It is a summary of the results of the study which enables modelers to

analyze the results and to afford the readers a better appreciation on the
results of the project
2. Discounted cash flow model, leveraged buyout model, mergers and
acquisitions model, and comparable company analysis model.
Books and Journals
1. DCF Model Training; https://www.wallstreetprep.com/knowledge/dcf-model-

training-6-steps-building-dcf-model-excel/. Accessed August 19, 2022
2. What is Terminal Value (TV)? Definition, Benefits and Estimation;
https://www.indeed.com/career-advice/career-development/terminal-value.
3. "Discounted Cash Flow." Encyclopedia of Small Business, edited by Virgil L. Burton,
III, 5th ed., vol. 1, Gale, 2017, pp. 348-350. Gale
GVRL&xid=c83d0389. Accessed 18 Aug. 2022.
4. "Mergers and Acquisitions." Encyclopedia of Small Business, edited by Virgil L. Burton,
III, 5th ed., vol. 2, Gale, 2017, pp. 722-724. Gale
GVRL&xid=198f275a. Accessed 19 Aug. 2022.
5. Worrell, David. "Cash Flow Statement Basics." The Entrepreneur's Guide to Financial
Statements, Praeger, 2014, pp. [107]-121. The Entrepreneur's Guide. Gale
GVRL&xid=cad473e4. Accessed 19 Aug. 2022.
Course Module
14
1. What is Terminal Value?; https://www.youtube.com/watch?v=2e8C3m59qtY; August

19, 2022
2. What is Discounted Cash Flow (DCF)?;
https://www.youtube.com/watch?v=HRwK3cbkywk; August 19, 2022
3. Cash Flows Explained; https://www.youtube.com/watch?v=hefAHWvrFDQ; August
19, 2022
4. Cash Flow Statement Basics Explained;
https://www.youtube.com/watch?v=hMBN6yTIDb0; August 19, 2022
5. DCF Model: Discounted Cash Flow Model;
https://www.youtube.com/watch?v=M8cuAJYYnTM; August 19, 2022
1
Market Value Approach
Module 008 - Market Value Approach

1. Cognitive: Describe the empirical or statistical approach

2. Cognitive: Identify significant concepts in comparable company analysis
heuristic pricing rules method
4. Psychomotor: Assess the capability to conduct a comparable company
analysis
Figure 1. Market approach
https://corporatefinanceinstitute.com/resources/knowledge/valuation/market-approach-valuation/; Accessed
August 19, 2022
As defined by the Corporate Finance Institute, Market Approach Valuation is a valuation

method used to determine the appraisal value of a business, intangible asset, business
ownership or interest, or security by taking into consideration the market prices of
comparable assets or businesses that have been sold recently or those that are still available.
Here, utilization of price-related indicators (sales, book value, price-to-earnings, etc.) is of
utmost importance.
Course Module
2
The gist behind this approach is that the value of one’s business may be determined by cross-
referencing one company against another comparable or similar companies in which
transaction values are known. Oftentimes, this is used by business owners, potential
investors, or other business advisors to determine if the business is worth investing in or
not. In using this approach, the valuation may fall into different categories, which will be
discussed in the subsequent sections of this module. They may be; (1) statistical/empirical,
(2) Comparable, and finally, (3) Heuristic.
Empirical / Statistical Approach
Empirical research is based on the observation and measurement of different variables. This
approach makes full use of different research and database processing to produce a
conclusion and recommendation. In addition to research, this approach requires a reference
from different companies and to use these references to support the business's valuation.
This approach is classified into three kinds, namely: (1) Comparative Private Company Sales
Data; (2) Guideline Public Company Data; and (3) Prior transactions method.
Figure 2. Comparable Company Analysis
https://www.wallstreetprep.com/knowledge/comparable-company-analysis-comps/; Accessed August 19,

2022
Course Module
3
1. Comparative Private Company Sales Data – This involves looking for previous
transactions (i.e., mergers and acquisitions, divestiture, etc.) of similar companies acquired
through looking for companies in the same industry and comparing it with that of the
company being valued. Such data can be obtained through different intermediaries that
publish, collect and disseminate information with regard to the transaction of a business.
In this method, the size of the company and the magnitude of the valuation stake are to be
considered. The readers should be keen to take this approach and remember its advantages
and disadvantages. For one, this approach is reliable, and comparable data includes sales of
small businesses, which is the same as the business in question. On the downside, there is
insufficient market data in certain industries, and as such, it will require a more careful
selection and analysis of data.
Figure 3. Guideline Public Company Method

https://slideplayer.com/slide/12711750/; Accessed August 19, 2022
2. Guideline Public Company Data – This involves comparing the company being valued
against a similar company listed publicly on the Philippine Stock Exchange. Publicly Listed
Companies, as the name implies, are companies that are listed on the Philippine Stock
Exchange, to which the company's shares are being offered to the public for investment
opportunities.
Course Module
4
Similar to the previous method, the reader should also remember this method's advantages
and disadvantages. In this approach, plenty of data is available from the public capital
markets. In addition to this, the data reporting is generally consistent, reliable, and is
accessible to the public. However, its limitation lies in relevancy. Small businesses, when
compared to businesses listed in the PSE, may not hold water and may be considered
irrelevant. The data generally involves sales of non-controlling business ownership interest,
and such data requires adjustment as it lacks marketability.
Figure 4. Prior Transaction Method

https://www.slideserve.com/elie/valuing-private-companies-factors-and-approaches-to-consider; Accessed
August 19, 2022
3. Prior Transaction Method – As the name implies, this method requires research of
historical transactions in securities of the business in question. Such valuation may be that
of a historical stock quote from a listed stock exchange or a merger and acquisition of a
business. Good accountants should also consider the economic situation or the timeline of
such transactions, as these may have a big impact on the company's life. This method relies
heavily on data, which means that the findings may not produce good results in the absence
of reliable data.
Comparable Company Analysis
Course Module
5
This method deals with different tools to assess and analyze different businesses. These tools
give the analyst a better understanding of the business as a whole and are used mainly to set
a reasonable estimate in valuing an asset or investment. This method, even though it is
comprehensive, has some factors that need to be considered to take full advantage of its
benefits. As mentioned in the book of Lascano, Baron, and Cachero, in using the Comparable
Company Analysis, the following factors must be considered:
(1) Comparators must be at least with similar operations or in a similar industry;

(2) Total or absolute values should not be compared;
(3) Variables used in determining the ratios must be the same;
(4) Period of observation must be comparable; and
(5) Non-quantitative factors must also be considered.
In this module, the tools that will be discussed are as follows: (1) P/E Ratio; (2) Book to
Market Ratio; (3) Dividend Yield Per Share; and finally, (4) EBITA Multiple.
P/E Ratio
As defined by Investopedia, P/E Ratio, or Price to Earnings Ratio, is the ratio for valuing a
company that measures its current share price relative to its earnings per share. P/E Ratio
signifies how much the market perceives the value of a company as compared to what it
actually earns. Investors mainly use this to determine the relative value of a company's share
as compared to another company or against its own.
Do note that earnings are important when valuing a company's stock as investors want to
know how profitable a company is and how well it will perform in the future. In the same
vein, the P/E ratio can be interpreted as the number of years it will take for the company to
pay back the amount paid for each share.
Course Module
6
Formula:
𝑀𝑎𝑟𝑘𝑒𝑡 𝑉𝑎𝑙𝑢𝑒 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒

𝑃𝑟𝑖𝑐𝑒 𝑡𝑜 𝐸𝑎𝑟𝑛𝑖𝑛𝑔 𝑅𝑎𝑡𝑖𝑜 =
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
Example: Shelby Co., a publicly listed company with a market value per share of Php 12 and
earnings per share of Php 4. Compute for the P/E Ratio.
12
𝑃𝑟𝑖𝑐𝑒 𝑡𝑜 𝐸𝑎𝑟𝑛𝑖𝑛𝑔 𝑅𝑎𝑡𝑖𝑜 =
4
=3
Using the formula above, the P/E Ratio is 3. This signifies that Shelby Company can create
three times the value of what it earns.
Figure 5. Book to Market Ratio
https://www.wallstreetmojo.com/book-to-market-ratio/; August 19, 2022
Book-to-market ratio
As defined by Investopedia, the Book-to-market ratio is where such ratio compares a firm's
book value to its market value. A company's book value is calculated by looking at the
company's historical cost. It is the difference of the total assets and the total liabilities. On
the other hand, the company's market value is determined by its share price in the Stock
Market and the number of shares it has outstanding.
Course Module
7
Investors typically use this ratio to show the market's perception of a particular stock's
value. This method's main use lies in the valuation of insurance and financial companies, real
estate companies, and investment trusts. On the downside, it does not work well for
companies with mostly intangible assets.
In interpreting the ratio derived from the formula, generally, a low ratio (less than 1) could
indicate that a business is undervalued and may indicate that there may be something wrong
with the company. On the other hand, a higher ratio (more than 1) could mean the opposite.
As such, it is overvalued and is performing well.
Formula:
𝑁𝑒𝑡 𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒

𝐵𝑜𝑜𝑘 𝑡𝑜 𝑀𝑎𝑟𝑘𝑒𝑡 𝑅𝑎𝑡𝑖𝑜 =
Example: Shelby Co, a publicly listed company, has a BV per Share of Php 35 and a Market
Value per share of Php 12.50, Compute to the Book Value.
35
𝐵𝑜𝑜𝑘 𝑡𝑜 𝑀𝑎𝑟𝑘𝑒𝑡 𝑅𝑎𝑡𝑖𝑜 =
12.5
𝐵𝑜𝑜𝑘 𝑡𝑜 𝑀𝑎𝑟𝑘𝑒𝑡 𝑅𝑎𝑡𝑖𝑜 = 2.80
Thus, for every Php 35 share owned by a Stockholder, it is 2.8x larger than its value in the
market.
Dividend Yield Ratio
Corporate Finance Institute defines the Dividend Yield Ratio as the financial ratio that
measures the annual value of dividends received relative to the market value per share of
security. This calculates the percentage of a company's market price of a share that is paid
to shareholders in the form of dividends.
Note that a high or low yield depends on a lot of factors, such as the industry and the business
life cycle of a company. For one, it may be in a rapid-growing company's best interest not to
Course Module
8
pay dividends. This is because that money might be of better use in reinvestment to further
the growth of the company. The converse is true for a mature company. A mature company
may report a higher yield due to a relative lack of future high growth potential. The yield
ratio does not necessarily indicate a good or bad company. Rather, think of it as a tool used
to determine which stocks align with an investor's strategy.
To calculate for the Dividend Yield Ratio, the formula to be used is:
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑌𝑖𝑒𝑙𝑑 𝑅𝑎𝑡𝑖𝑜 =
Example: Shelby Company, a publicly listed company, trades for Php 45. Over the course of
one year, the company paid consistent quarterly dividends of Php 0.30 per share. Compute
for the dividend yield ratio.
Dividend Yield Ratio = 0.30 + 0.30 + 0.30 + 0.30 / 45 = 0.02666
Dividend Yield Ratio = 2.7%
Thus, the dividend yield ratio for Shelby Company is 2.7. As such, each investor would earn
2.7% on shares of Shelby Company in the form of dividends.
EBITDA Multiple
As defined by the Corporate Finance Institute, the EBITDA multiple is a financial ratio that
compares a company's Enterprise Value to its annual EBITDA. This is mainly used to
determine the value of a company and compare it to the value of other relative businesses.
Course Module
9
Candidate's EV/EBITDA multiple of about 8x can be considered a broad average for public
companies in some industries, while a 4x or lower average applies to a private company.
Generally, businesses with a low EBITDA multiple can be good acquisition candidates.
The EBITDA Multiple is obtained through this formula:

𝐸𝐵𝐼𝑇𝐷𝐴 𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑒 =
𝐸𝐵𝐼𝑇𝐷𝐴 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
*In computing for the EBITDA per share, the EBITDA must be divided by the outstanding common/ordinary
shares.
Example: Shelby Co, a publicly listed company, reported EBITDA per share of Php 6, and
the market value per share of Shelby Co is Php 12. Compute the EBITDA per share.

𝐸𝐵𝐼𝑇𝐷𝐴 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
12
6
𝐸𝐵𝐼𝑇𝐷𝐴 𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑒 = 2
Thus, the value of Shelby Co to the market is 2x every peso of EBITDA earned.
Heuristic Pricing Rules Method
As defined by the Corporate Finance Institute, Heuristics are problem-solving techniques

that result in a quick and practical solution. Although it may not result in the most optimal
and ideal solution, it allows companies to speed up their decision-making process and
achieve an adequate solution for the short term.
This mostly involves consultation with an expert. Here, analysts use business pricing
formulas developed based on professionals' expert opinions. The boon of this method is that
pricing multiple based on the expert opinion of active market participants is readily made
Course Module
10
available. In addition, practitioners and clients often rely on pricing formulas when pricing a
deal.
On the other hand, this method, being reliant mainly on the opinion of experts, pricing
multiples may not be sufficiently backed by rigorous statistical analysis and the ever-
looming concern on the availability of information for other business deals.
In summary, good accountants should take into consideration all of these tools when valuing
a company. These tools enable analysts to determine the company's value based on the
behavior of one business against another similar business. Keep in mind that mastery of all
of these tools and a better understanding of a business sector is also key to a better valuation
and appreciation of a business.
Guide Questions:
1. What do you mean by Heuristics?

2. What is Market Value Approach Valuation?
1. Heuristics are problem-solving techniques that result in a quick and

practical solution.
2. It is a valuation method used to determine the appraisal value of a
business, intangible asset, business ownership or interest, or security by
considering the market prices of comparable assets or businesses that
have been sold recently or are still available.
Course Module
11
Books and Journals
1. Market Valuation Approach;

https://corporatefinanceinstitute.com/resources/knowledge/valuation/market-
approach-valuation/; Accessed August 19, 2022
2. Price Earnings Ratio;
https://corporatefinanceinstitute.com/resources/knowledge/valuation/price-
earnings-ratio/; Accessed August 19, 2022
3. "Price/Earnings (P/E) Ratio." Encyclopedia of Small Business, edited by Virgil L.
Burton, III, 5th ed., vol. 2, Gale, 2017, pp. 835-836. Gale eBooks,
GVRL&xid=74d8d97f. Accessed August 19 2022.
4. "Market Value." Gale Encyclopedia of American Law, edited by Donna Batten, 3rd ed.,
vol. 6, Gale, 2011, p. 467. Gale eBooks,
GVRL&xid=055a2029. Accessed August 19 2022.
5. Worrell, David. "Making a P&L Work for You." The Entrepreneur's Guide to Financial
Statements, Praeger, 2014, pp. [43]-53. The Entrepreneur's Guide. Gale eBooks,
GVRL&xid=9977bcd5. Accessed August 19 2022
1. Book to Market Ratio; https://www.youtube.com/watch?v=B7AGzVMbRHA; August

19, 2022
2. Price Earnings (P/E) Ratio; https://www.youtube.com/watch?v=tQFGSfK4iZQ;
August 19, 2022
3. Heuristic Evaluation Report; https://www.youtube.com/watch?v=6AnfC8OT-sw;
August 19, 2022
4. Market Approach Valuation; https://www.youtube.com/watch?v=tNxvpZCecvk;
August 19, 2022
5. How to Value a Business | EBITDA Multiples;
https://www.youtube.com/watch?v=cImdu2yy4jg; August 19, 2022
Course Module
1
Bonds and Its Valuation
Module 009 - Bonds and Its Valuation

1. Cognitive: Describe what is a bond

2. Cognitive: Identify key characteristics of bonds
3. Affective: Develop critical thinking in identifying persons who are
qualified to issue bonds
4. Psychomotor: Assess the capability to conduct Bonds valuation
Bonds
Figure 1. Bonds
https://investinganswers.com/dictionary/b/bond; August 19, 2022
Bonds are fixed-income instruments that represent a loan made by an investor to a

borrower, wherein such a loan gives the investor a fixed rate of return. Typically, in a bond,
a borrower uses the money to fund its operation, and the investor receives interest on the
investment as a form of payback for the loan issued. As defined in the book of Brigham and
Houston, a bond is a long-term contract under which a borrower agrees to make payments
of interest and principal on specific dates to the holders of the bond. By this definition, one
can already infer that the key thing to remember when it comes to bonds is; "time." Bonds
can be short, intermediate, or long. Long-term Bonds are generally issued by corporations
and government agencies who are looking for long-term debt capital for a period of more
than ten (10) years; short-term bonds are typically issued for a period of less than five (5)
Course Module
2
years; and lastly, intermediate-term bonds are typically issued for a period of five (5) to ten
(10) years.
Figure 2. Types of Bonds
https://efinancemanagement.com/sources-of-finance/bonds-and-their-types; August 19, 2022.
Bonds fall into different kinds, namely; (1) Treasury, (2) Corporate; (3) Municipal; and (4)
Foreign Bonds.
(1) Treasury Bonds – (T-Bonds) are also called government bonds, as the name
implies. These are bonds issued by the government. These are considered the
safest among all the bonds as the government guarantees them, and because of
that, they tend to offer a lower rate of return. Do note that the prices of these
bonds tend to decline when the interest rate rises. As such, a good accountant
should keep this in mind when investing in T-Bonds.
Course Module
3
(2) Corporate Bonds – are bonds issued by a business firm (corporation). Unlike
government bonds, corporate bonds are typically risky as they are exposed to risk
whenever the issuing company is also at risk. As such, they offer a higher rate of
return as compared to that Treasury Bonds.
(3) Municipal Bonds – are bonds issued by the state and local governments. Like
corporate bonds, municipal bonds are also exposed to some risk, but they offer an
advantage over other bonds. Here, the interest earned on these bonds is exempt
from taxes if the holder is a resident of the issuing government.
(4) Foreign Bonds – are bonds issued by a foreign government or a foreign

corporation. These bonds are also subject to risks as it is exposed to several
factors which may affect the growth of the foreign government or the foreign
corporation.
Key Characteristics of a Bond
Figure 3. Advantages and Disadvantages of Bond
https://www.investopedia.com/terms/b/bond.asp; Accessed August 19, 2022
Course Module
4
Different bonds have different distinguishing characteristics. That is one of the key concepts
when it comes to bonds and bond valuation. An example of this is a "call" feature, where a
corporate bond allows the issuer to pay them off early. However, while there are some key
differences, there are also similarities in these characteristics. To understand more about
bonds, it is important to know the terms mentioned below:
(a) Par Value – This is also known as the nominal value. This is the face value of a bond and
is the amount of money that the bond issuers promise to repay bondholders at the bond's
maturity date.
(b) Coupon Interest Rate – this is the nominal yield (annual payment) paid by the issuer
relative to the bond's par value. The coupon interest rate is set at the time the bond is
issued and remains in force during the bond's life.
(c) Maturity Date – this is the date on which the principal amount of a bond becomes due. In
other words, this is the date of termination on which a loan must be paid back in full. This
is generally printed on the certificate of the instrument.
(d) Call Provision – call provision is a stipulation on the contract for a bond that allows the
issuer to repurchase and retire the debt security. Here, it states that the issuer must pay
the bondholder an amount greater than the par value once called. This gives the issuer
the right to call the bonds for redemption. There is also a "call premium," which is
generally an additional sum that is often equal to one year's interest. The call premium is
the amount over the par value of callable debt security that is given to holders when the
security is redeemed early by the issuer. Do note that while, in most cases, bonds are
immediately callable, some bonds are not callable until several years have passed after
the issue (generally 5 to 10 years). This is known as a "deferred call."
(e) Sinking Fund Provision – a sinking fund may be considered a means of repaying funds
borrowed through a bond by periodic payments to a trustee who retires part of the issue
by purchasing the bonds in the market. This help facilitates the orderly retirement of the
bond issue. In simple terms, a sinking fund is a pool of money reserved by a corporation
Course Module
5
to help repay previous issues and keep the company financially stable as it sells bonds to
investors.
Who issues bonds?
In the issuance of bonds, there are always 2 parties involved; (1) the Issuer or the “Borrower”
and the (2) the purchaser or the “Bondholder”. In this relationship, when the bond reaches
maturity, it is expected that the purchaser repays the bondholder the value of the bond. In
the Philippines, there are different types of bond issuers; they may be from the private sector
(firms), and from the public sector (government), and they may also come from other
supranational entities.
Firms are the most common issuers of bonds, and they typically issue different classes of
bonds with different bond characteristics. Bonds coming from firms are generally
considered risky as they are susceptible to external and internal factors that may affect the
firm. The government is the second most common type of bond issuer. Unlike private
ownership firms, the government is a public entity. As such, the bonds issued are rated
relatively high compared to those issued by a firm. These bonds are also considered the
safest among all of the bonds as the government itself guarantees them, and due to this,
government-issued bonds tend to offer a lower rate of return. Foreign entities
(supranational entities) also issue the bond. These are global entities that are not based in a
specific nation and typically have members in multiple countries. A supranational entity may
issue bonds to fund its operations and payout coupon payments through operational
revenue.
Course Module
6
Bond Valuation
What is the value of a financial asset? Simply put, it is the present value of the cash flows the
asset is expected to produce. In addition to this, the cash flow for a standard coupon-bearing
bond consists of interest payments during the bond's lifetime plus the amount borrowed
(generally the par value) when the bond matures. On the other hand, when it comes to
floating-rate bonds, the interest payments vary over time, and for zero coupon bonds, there
are no interest payments, so the only cash flow is the face amount when the bond matures.
So, how do you compute the bond valuation? Bond valuation is used to determine the fair
price of the bond.
Price of the bond = (Present Value of Bond Repayment) + (Present Value of Interest Payments)
To compute for the price of the Bond, there are five simple steps to follow:
(1) Convert Interest Rates and repayment period;

(2) Calculate Interest Paid;
(3) Calculate Present Value of Interests Payment (Annually);
(4) Calculate Present Value of Bond (single sum);
(5) Calculate the bond’s price by adding steps 4 and 5.
Example:
On January 1, 2014, Shelby Bank of Birmingham issued 1000 bonds worth Php 2000 each at
a stated rate of 10%. At present, the market is selling these bonds at 12%. The bond must be
paid back by January 1, 2024. Interest is paid semi-annually beginning June 30. 2014.
Compute for the price of the bond.
Solution:
Course Module
7
*Following the aforementioned step, we must first convert the interest rate and repayment
method. Since it is paid semi-annually, the stated interest rate and the effective interest rate
must be divided by 2.
State interest rate: 10/2 = 5%
Effective Interest rate: 12/2 = 6%
10 years (2014 up to 2024) will turn to 20 periods as it is being paid 2x every year
*For the second step, take your stated interest rate of 5% and multiply it by the bond's face
value. (1000 x PHP 2000)
5% * 2,000,000 = Php100,0000 (so, twice a year, you pay php 100,000 worth of
interest)
*For the third step, take the interest payment (100,000) and discount that value to the sum
of what it is now. (see figure below)
Figure 4. Present Value of Ordinary Annuity
Course Module
8
https://www.accountingexplanation.com/present_value_of_ordinary_annuity_table.htm; Accessed August 19, 2022
= 100,000 * 11.46992 = Php 1,1446,992
*For the fourth step, we go the present value table.
Figure 5. Present Value of $1
https://www.myaccountingcourse.com/accounting-dictionary/present-value-table; Accessed August 19, 2022
= Php 2,000,000 * 0.31180 = Php 623,600
*Then finally, add steps 3 and 4
= Php 1,1446,992 + Php 623,600 = Php 1,770.592
Things to consider/remember:
• Sometimes, bonds are sold for more or less than they are stated. If it is sold for more, it
is called "Selling the bond at a premium," If it is sold for less, it is called "selling the bond
at a discount."
Course Module
9
• There are 2 kinds of interest here, the Effective Rate (Market Rate) and the Stated Rate.
Remember these when you see the effective rate and the stated rate:
Effective Rate > Stated Rate = Discount

Effective Rate < Stated Rate = Premium
GuideQuestions:
1. What is a bond?
2. Give one advantage of a bond.
1. Bonds are fixed-income instruments that represent a loan made by an

investor to a borrower, wherein such a loan gives the investor a fixed rate
of return.
2. You can receive income through interests.
Course Module
10
Books and Journals
3. Brigham, Eugene F., Houston, Joel F. (2019). Essentials of Financial Management.
1. Bond; https://www.investopedia.com/terms/b/bond.asp; Accessed August 19, 2022

2. 4 Basic Things To Know about Bonds;
https://www.investopedia.com/articles/bonds/08/bond-market-basics.asp;
3. Oliverio, Mary Ellen, and Allie F. Miller. "Bonds." Encyclopedia of Business and Finance,
3rd ed., vol. 1, Macmillan Reference USA, 2014, pp. 58-61. Gale eBooks,
GVRL&xid=2367d26a. Accessed August 19 2022.
4. "Bonds." Encyclopedia of Small Business, edited by Virgil L. Burton, III, 5th ed., vol. 1,
Gale, 2017, pp. 104-105. Gale eBooks,
GVRL&xid=08d20052. Accessed August 19 2022.
5. "Present Value." Encyclopedia of Small Business, edited by Virgil L. Burton, III, 5th ed.,
vol. 2, Gale, 2017, pp. 831-832. Gale eBooks,
GVRL&xid=30f4d7b5. Accessed August 19 2022.
1. Investing Basics: Bonds; https://www.youtube.com/watch?v=IuyejHOGCro;

August 19, 2022
2. Bond Characteristics; https://www.youtube.com/watch?v=cu-qL060-8Q;
August 19, 2022
3. Types of Bonds; https://www.youtube.com/watch?v=p8JuvUuM2U4;
August 19, 2022
4. How To Calculate the Present Value of an Annuity;
https://www.youtube.com/watch?v=RU-osjAs6hE; August 19, 2022
5. Present Value of a Single Cash Flow;
https://www.youtube.com/watch?v=vJRD2q9kFeQ; August 19, 2022
Course Module
1
Other Valuation Concepts and Methodologies
Module 010 - Other Valuation Concepts and

Methodologies
1. Cognitive: Describe other valuation concepts and methodologies

2. Cognitive: Identify significant concepts in due diligence, mergers and
acquisitions, and divestitures
3. Affective: Develop critical thinking in differentiating due diligence,
mergers and acquisitions, and divestitures
4. Psychomotor: Assess the capability to explain other valuation concepts
and methodologies
In accounting, or better yet, in the field of Business, the valuation of an enterprise takes
precedence. This is often the most important thing to consider by finance experts as this will
make or break a firm's financial status. Aside from those mentioned methods in the previous
discussions, there are other methodologies and valuation strategies that accountants may
apply; these are (1) Due Diligence, (2) Mergers and Acquisition, and (3) Divestiture. These
three will be the main focus of this module and will be discussed respectively.
Course Module
2
(1) Due Diligence
Figure 1. Benefits of due diligence

https://www.nsktglobal.com/usa/Due-Diligence-services.php; Accessed August 20, 2022
Investopedia defines Due Diligence as an investigation, audit, or review performed to

confirm facts or details of a matter under consideration. The main goal in examining the
company's financial records is to have risks mitigated and losses prevented. This method
requires thoroughly examining financial records before entering into a proposed
transaction with another firm/party.
Due Diligence became a common practice in the USA with the passage of the Securities
Act of 1933. In the said law, securities dealers and brokers are held fully responsible for
disclosing material information about the instruments they intend to sell. Failure to
disclose such information to investors will definitely be subject to criminal prosecution.
Think of this as a way to protect investors whenever they are investing in a business and
prevent economic sabotage. After all, it would be best to know something about the
business you will put your money on.
In our jurisdiction, we also have our own version of securities protection. This is found
in Republic Act 8799 or better known as the Securities Regulation Code. Under the said
law, it enumerates all the necessary information that is needed to be disclosed by
companies and the frequency to enable the commission to monitor the operations of all
partnerships and corporations in the Philippines.
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3
Figure 2. Types of Due Diligence
https://efinancemanagement.com/corporate-restructuring/due-diligence; Accessed August 19, 2022
Types of Due Diligence
• Diligence According to the Executor:
o Corporate Due Diligence – Better known as a corporation's diligence

conducted or commissioned. This is generally handled by external experts
such as financial experts, lawyers, and auditors.
o Private Due Diligence – As the name implies, this is diligence conducted by
an individual or at least a few individual investors that are yet to be
incorporated.
o Government Due Diligence – As the name also implies, this refers to
diligence conducted by the government. This is generally for government
investment or regulatory purposes.
Course Module
4
• Diligence According to the subject:
o Hard Due Diligence – This kind of diligence focuses on the data and hard
evidential information. Here, lawyers, accountants, and other facilitators
actively engage in the dealings. Some examples of Hard Due Diligence are
reviewing and auditing financial statements, validating the projections for
future performance, and assessing subcontract and other third-party
relationships. As you can see, Hard due diligence is founded upon by
mathematics and legalities. These are concrete evidence, hence the term
"hard." While one can be faulted for thinking this is the best form of
diligence as it is based on mathematics and legalities. There are still
disadvantages present in this kind of due diligence; for one, the downside
of this due diligence is that it is prone to unrealistic and biased
interpretations.
o Soft Due Diligence – on the other hand, focuses on the internal affairs of the
company's internal organization. This kind of due diligence is based on the
qualitative factors that affect the realization of returns and is generally
considered incapable of mathematical measurement and is not concrete
evidence; hence the term "soft." Some examples of Soft Due Diligence are
organizational review, competency assessment, and quality assurance on
processes.
o Combined Due Diligence – Also known as Comprehensive Due Diligence,

this refers to the due diligence which covers both quantitative and
qualitative areas of a firm.
FACTORS TO CONSIDER IN DUE DILIGENCE:
(1) Market Capitalization;

(2) Performance/Profitability Trend Analysis;
(3) External Environment Analysis;
Course Module
5
(4) Management and Share Ownership;

(5) Financial Statements;
(6) Stock Price History;
(7) Stock Dilution Possibilities;
(8) Market Expectations;
(9) Long- and Short-Term Risks
(2) Mergers and Acquisitions
Figure 3. Mergers and Acquisitions

https://www.patriotsoftware.com/blog/accounting/mergers-vs-acquisitions/; Accessed August 20,
2022
This refers to the consolidation of companies or assets through various types of financial
transactions, including mergers, acquisitions, consolidations, offers, purchase of an asset,
and different corporate acquisitions. This strategy allows a company to combine its
assets with another or to acquire a new company; in addition, M&A is often used to
expand one business or as a form of salvation to rescue a dying company. Among others,
Course Module
6
the main reasons a company chooses to enter into M&As are expansion and growth,
widening its access to the industry, and diversification.
Note that these terms (merger and acquisition) are often used interchangeably; however,
they have slightly different meanings. It is called a merger when two firms of
approximately the same size join forces to move forward as a single new entity. On the
other hand, it is called acquisition when one company takes over another and establishes
itself as the new owner.
As provided in the book of Lascano, Baron, and Cachero, in order for there to be Merger
and Acquisition, the following requisites must concur: (1) the company must be willing
to take the risk and vigilantly make investments to benefit fully from the merger; (2)
multiple bets must be made to maximize the opportunities; and (3) the acquiring firm
must be patient in the realization of its investment.
Stages of Merger and Acquisition:
(1) Pre-acquisition Review – This is the first step in conducting the internal
evaluation. This is the stage wherein an investment opportunity is determined
worthy of the investment.
(2) Investment Opportunity Scanning – Once a firm passes the first stage, the next
step is to scan whether there is an opportunity for any potential parties. Here
lies the opportunity to gather risk indicators surrounding the business, and
this is also where due diligence may begin.
(3) Valuation of Target investment - this stage involves a more exhaustive

valuation and a sensitivity analysis. Here, the offer's value is determined and
considered whether relevant, realistic, and reasonable.
Course Module
7
(4) Negotiation – This is where the true nature of business comes into play. Here,
the selling price is determined and negotiated. (i.e., how much is X Company
willing to sell, and how much is X company willing to buy?).
(5) Integration – The final stage is where the blending of companies actually
happens, and this is where the execution of an agreement and reincorporation
is needed. Since there will be a new company, observation of protocols in the
creation of a new company must be observed, which means there must be
disclosures, notification to the PSE and SEC, and many more requisites.
Things to consider to Maximize Mergers and Acquisition:
- According to the book of Lascano, Baron, and Cachero, the

following are the things to consider to Maximize M&A opportunity:
• Determine the objective behind the acquisition and the

benefits expected by both the acquiring and the target
company;
• Understand the industry of which both the target and
acquiring company is a part of;
• Identify the key operational advantages of the acquiring and
the target company;
• Check whether the acquiring company acts with a hostile
approach or friendly;
• Analyze pre-merger operating and financial performance of
acquiring company and the target company through key
ratios such as return on equity, gross profit margins, etc.;
• Evaluate the tax position of both companies and determine
if there are losses and taxes which carry forward in their
books.
Course Module
8
Reasons for the failure of M&A:
Like any other business, Mergers and Acquisition is not immune from failure,
and not all of these ventures succeed. Among others, the reasons for the failure
of M&A may be any of the following: (1) Poor strategic fit; (2) Poorly executed
integration phase; (3) Inadequate Due Diligence; and (4) Aggressive Projections
and Estimates.
(3) Divestitures
Figure 4. Divestitures
https://efinancemanagement.com/corporate-restructuring/divestitures; Accessed August 20, 2022
The Corporate Finance Institute enunciates Divestiture as the disposal of a company’s

asset or a business unit through a sale, exchange, closure, or bankruptcy. Divestiture,
there are 2 kinds, and it can either be partial or full disposal. It just really depends on the
reason as to why management opts to sell or divest its business resources.
This can also be used as a strategy in managing a firm's portfolio and is most commonly
used to cease the operation of a business unit that is not part of a company's competency
(if they are not in line with the goals of a business). Try to relate this with the previous
discussion in Merger and Acquisition. Divestiture may also occur when a business unit is
deemed "redundant" after such a Merger and Acquisition. A company would have no
Course Module
9
choice but to remove that redundant business as it will only be detrimental to them if
they opt to support a business unit already existing. As a result, such disposal of a
redundant unit will inevitably increase the value of the firm's competency.
Do note that it is not the end of the world for the divested business unit, as there are
divested business units that are converted into their own companies.
Some reasons as to why companies opt for divestiture (and many more external and
internal factors):
Figure 5. Reasons for Divestiture
https://dealroom.net/faq/divestiture-guide; Accessed August 20, 2022
1. Selling redundant business units – as mentioned above, companies sell off a part
of their operation if they are not performing well / profitable or when there is an
existing business unit upon the merger and acquisition.
2. To generate funds – sometimes as a strategy, businesses sell their units as a source

of income without a binding financial obligation.
Course Module
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3. To increase resale value – whenever a company sells a business unit, a company's

individual asset liquidation value exceeds that of the market value of its combined
assets. As a result, there are more gains realized in liquidation than when a
company chooses to retain its existing assets.
4. To ensure an enterprise's stability – as cliché it may sound, there are times when
letting go is the better option than retaining something. The same can be said true
in the field of business. When faced with financial difficulties, selling a business
unit may be better than declaring a loss or bankruptcy.
5. In compliance with regulators, a court order may be presented to a company and

require the sale of a business unit to improve market competition.
How is Divestiture carried out? Types of Divestitures:
• Partial sell-offs – In partial sell-offs, a divesting company only sells a portion of a

business so that funds can be raised and used as a future business investment.
• Spin-off demerger is a strategy where a company's division is separated and

made into an independent company.
• Split-up demerger – this is a form of dissolution of a company, where a company

splits up into one or more independent companies; the parent company is
dissolved.
• Equity carve-out is a corporate approach wherein the company sells a portion of

its wholly-owned subsidiary through an IPO and retains full management and
control.
Course Module
11
GuideQuestions:
1. What is due diligence?

2. Give one reason for divestiture.
1. It is an investigation, audit, or review performed to confirm facts or details

of a matter under consideration.
2. Lack of internal talent for business
Books and Journals
1. Divestiture;
https://corporatefinanceinstitute.com/resources/knowledge/finance/divestiture-
overview/; Accessed August 20, 2022
2. Mergers and Acquisitions;
https://corporatefinanceinstitute.com/resources/knowledge/deals/mergers-
acquisitions-ma/; Accessed August 20, 2022
3. "Due Diligence." Encyclopedia of Small Business, edited by Virgil L. Burton, III, 5th ed.,
vol. 1, Gale, 2017, pp. 360-362. Gale eBooks,
GVRL&xid=1f54a7f2. Accessed August 19 2022.
Course Module
12
4. "Mergers and Acquisitions." Gale Encyclopedia of American Law, edited by Donna

Batten, 3rd ed., vol. 7, Gale, 2010, pp. 46-51. Gale eBooks,
GVRL&xid=515304f2. Accessed August 19 2022.
5. "Divestiture." International Encyclopedia of the Social Sciences, edited by William A.
Darity, Jr., 2nd ed., vol. 2, Macmillan Reference USA, 2008, pp. 420-421. Gale eBooks,
GVRL&xid=fec451ce. Accessed August 19 2022.
1. Due Diligence Explained; https://www.youtube.com/watch?v=_RO7P4uQr1k; August

20, 2022
2. What does “Merger & Acquisitions” mean?;
https://www.youtube.com/watch?v=S7DoKFPOhZk; August 20, 2022
3. What are Mergers and Acquisitions (M&A)? Types, Form of Integration;
https://www.youtube.com/watch?v=gup4KmPirLQ; August 20, 2022
4. Understanding Divestiture; https://www.youtube.com/watch?v=WWUwSIg4QeY;
August 20, 2022
5. Divestiture – defined; https://www.youtube.com/watch?v=vhGvU54x1fk; August 20,
2022
Course Module

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Valuation Concepts and Methodologies

Module 001 Introduction to Financial

General Overview of Financial Management

Finance, by definition, encompasses various activities. It includes, among others, banking,

The following are general areas of finance:

a.) Financial Management – commonly known as corporate finance. Financial management

Figure 1. Stocks vs. Bonds

Forms of Business Organization

The following are the typical business organizations:

a.) Sole Proprietorship – owned by one individual.

a. Unlimited liability to be borne solely by the proprietor;

a. Easy to form as compared to corporations;

a. Limits liability of shareholders to the extent of its investment;

a. Subject to stringent requirements, rules and regulations sanctioned by the state;

Primary Goal of Management

The primary goal of the management is shareholder wealth maximization.

The following are limitations of the principle of Shareholder Wealth Maximization:

a. Business Ethics – Management must always observe ethical standards so as not to

Figure 2. Board of Directors

The Philippine Stock Exchange

Figure 3. The Philippine Stock Exchange

Intrinsic Values and Stock Prices

Figure 4. Stock Prices

a. Have jurisdiction and supervision over all corporations, partnerships or

b. Formulate policies and recommendations on issues concerning the securities market,

c. Approve, reject, suspend, revoke or require amendments to registration

e. Supervise, monitor, suspend or take over the activities of exchanges, clearing

k. Compel the officers of any registered corporation or association to call meetings

l. Issue subpoena duces tecum and summon witnesses to appear in any

books of accounts of any entity or person under investigation as may be

Conflicts Between Managers, Stockholders, and Bondholders

Figure 5. Stockholders’ Meeting

a.) Reasonable Compensation Packages – Managers’ compensation in an entity shall

c.) Threat of hostile takeovers – In a successful hostile takeover, managers can be

Stockholders versus Bondholders

1. What is the name of the stock exchange in the Philippines?

Answers to the Guide Questions

1. The Philippine Stock Exchange

References and Supplementary Materials

Books and Journals

3. Brigham, Eugene F., Houston, Joel F. (2019). Essentials of Financial Management

Online Supplementary Reading Materials

1. Financial Management: What is it and Why is it Important?; https://www.pfh-

Online Instructional Videos

1. What is Financial Management? Types, Functions, Objectives;

Module 002 Fundamentals of Valuation

Different Concepts of Value

(1) Current Operations

(2) Prospective Goal

(3) Inherent risks

<Figure 1. This is a sample caption>

Different definitions of value depending on its objective

Roles of Valuation in Business

We have already discussed why valuation is important in a Business and in the

(1) Portfolio Management

Investopedia defines portfolio management as the building and overseeing a selection

Chartists or Technical investors are also helpful in portfolio management. Their

(a) Moving Average Convergence Divergence (MACD);

(2) Analysis of Business Transactions and potential deals