Valuation Methods 1

Prof. Karolina Mazur

 A standard of value - a definition of the type

of value being sought
A premise of value - an assumption as to the
set of actual or hypothetical transactional
circumstances applicable to the subject of
valuation

Value standards
Interested parts

Parts not interested

Fair Market Value

Fair Value

Investment Value

Fundamental Value

Personalized value

Impartial

dr hab. in. K. Mazur, prof. UZ

Standards of Value

Fair market value

Market value
Fair value
Investment value
Intrinsic value

Fair Market Value (FMV)

the amount at which property would change hands
between a willing seller and a willing buyer when neither
is acting under compulsion and when both have
reasonable knowledge of the relevant facts.
(American Society of Appraisers, Business Valuation Standards
Definitions)

The price that a given property or asset would fetch in the

marketplace,
The price is subject to the following conditions:
Prospective buyers and sellers are reasonably knowledgeable
about the asset; they are behaving in their own best interests
and are free of undue pressure to trade.
A reasonable time period is given for the transaction to be
completed
Given these conditions, an asset's fair market value should
represent an accurate valuation or assessment of its worth
(http://www.investopedia.com/terms/f/fairmarketvalue.asp)

Market Value
The most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair
sale, the buyer and seller each acting prudently and knowledgeably,
and assuming the price is not affected by undue stimulus.
Implicit in this definition is the consummation of a sale as of a
specified date and the passing of title from seller to buyer under
conditions whereby:
1. Buyer and seller are typically motivated
2. Both parties are well informed or well advised, and acting in what
the consider their best interests
3. A reasonable time is allowed for exposure in the open market
4. Payment is made in terms of cash
5. The price represents the normal consideration for the property
sold unaffected by special or creative financing or sales
concessions granted by anyone associated with the sale
(Pratt, Niculita, 2008, p. 42-43)

Fair Value
Usually a legally created standard of value that
applies to certain specific transactions
(Pratt, Niculita, 2008, p. 45)

Investment Value
the specific value of an investment to a
particular investor or class of investors based
on individual investment requirements;
distinguished from market value, which is
impersonal and detached. (Pratt, Niculita,
2008, p. 43)

Intrinsic Value (Fundamental Value)

represents an analytical judgment of value based on the
perceived characteristics inherent in the investment, not
tempered by characteristics peculiar to any one investor,
but rather tempered by how these perceived
characteristics are interpreted by one analyst versus
another
(Pratt, Niculita, 2008, s. 43)

The value that an individual may place on the asset based

on their own preferences and circumstances
The actual value of a company or an asset based on an
underlying perception of its true value including all aspects
of the business, in terms of both tangible and intangible
factors.
It may or may not be the same as the current market value.
http://www.investopedia.com/terms/i/intrinsicvalue.asp

Purpose of the Valuation and

Standards
Purpose

Standard

Gift, estate, and inheritance

taxes and charitable
contributions

Fair market value.

Purchase or sale

Generally fair market value, but in many instances

investment value, reflecting unique circumstances or
motivations of a particular buyer or seller.

Buy-sell agreements

Parties can do anything they want. Very important

that all parties to the agreement understand the
valuation implications of the wording in the
agreement

Dissenting stockholder actions

Fair value with some state interpretation

Going private

Fair value in most states; governed by state statutes.

Financial reporting

Fair value

Going-Concern versus Liquidation

Premise of Value
1.
2.
3.

4.

Value as a going concernValue in continued use, as a set of

income-producing assets
Value as an assemblage of assetsValue in place, as part of a set
of assets, but not in current use in the production of income, and
not as a going-concern business enterprise
Value as an orderly dispositionValue in exchange, on a
piecemeal (partial) basis (not part of a mass assemblage of
assets), as part of an orderly disposition (liquidation) - all of the
assets of the business enterprise will be sold individually, and that
they will enjoy normal exposure to their appropriate secondary
market
Value as a forced liquidationValue in exchange, on a piecemeal
basis (not part of a mass assemblage of assets), as part of a forced
liquidation - this premise assumes that the assets of the business
enterprise will be sold individually and that they will experience
less than normal exposure to their appropriate secondary market.

Definition of Valuation
The process of determining the current worth
of an asset or company
(http://www.investopedia.com/terms/v/valua
tion.asp)

Valuation
Methods
Asset
Approach

Income
Approach

Book Value

Cash Flow

Liquidation
method

Dividend

Replacement
Cost

Market
Approach
Multiplies

Other
Mixed
methods
Real options

Asset Approach
The asset-based approach provides an indication
of the value of the business enterprise by
developing a fair market value balance sheet.
All of the assets of the business are identified and
listed on the balance sheet
Types:
Book Value
Liquidation method
Replacement Cost

Income methods
The income methods determine fair market
value by dividing the benefit stream
generated by the subject or target company
times a discount or capitalization rate.

Market approach
the business appraiser will seek data on
transactions of comparable businesses

Basic Elements of the Valuation

Assignment
1.
2.
3.
4.
5.
6.
7.

Name of the client and of the appraiser

Definition of the legal interest or interests to be appraised
Valuation date(s) (the date as of which the appraisers opinion of
value applies)
Purpose or purposes of the appraisal (the use to which the
valuation exercise is expected to be put)
Applicable standard (or definition) of value
Going-concern versus liquidation premise of value
Description of the specific ownership characteristics:
a)
b)

8.
9.

Size of interest relative to total

Degree of marketability (e.g., public, private, and related matters)

Form and extent of written and/or oral report

Special requirements, contingent or limiting conditions, or special
instructions for the professional appraiser

Process of Valuation
1.
2.

Planning and preparation

Adjusting the financial statements and
strategic data
3. Choosing the business valuation methods
4. Applying the selected valuation methods
5. Reaching the business value conclusion

NAVCA Professional Standards

PREAMBLE, GENERAL, AND ETHICAL STANDARDS

1.1 Preamble
1.2 General and Ethical Standards
MEMBER SERVICES
2.1 Valuation Services
2.2 Other Services
DEVELOPMENT STANDARDS
3.1 General
3.2 Expression of Value
3.3 Identification
3.4 Fundamental Analysis
3.5 Scope Limitations
3.6 Use of Specialist
3.7 Valuation Approaches and Methods
3.8 Rule of Thumb
3.9 Financial Statement Adjustments
3.10 Earnings Determination
3.11 Capitalization/Discount Rate
3.12 Marketability, Control, and Other Premiums
and Discounts
3.13 Documentation

REPORTING STANDARDS
4.1 General
4.2 Form of Report
4.3 Contents of Report
4.4 Litigation Engagements Reporting Standards
OTHER GUIDELINES AND REQUIREMENTS
5.1 Other Requirements
5.2 International Glossary of Business Valuation
Terms
EFFECTIVE DATE
6.1 Effective Date
APPENDIX

NACVA, National Association of Certified Valuation Analyst,

19
Professional Standards: http://www.nacva.com

INCOME APPROACH

Procedure of DCF method

Stage 1

Financial Analysis
Strategic Analysis

Stage 2

Estimation of free cash-flow

Stage 3

Estimation of doscount rate

Stage 4

Calculation of PV of CF
Calculation of PV of TV

Stage 5

Interpretation of results

Panfil 2011, p. 295

dr hab. in. K. Mazur, prof. UZ

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Major income methods

Income/cash-flow

For Equity

For Firm

Model
FCFE

Model
FCFF

Discounted
dividends

Model CFF
dr hab. in. K. Mazur, prof. UZ

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Decisions

Types of methods by stage

Model

Description

One stage

Stable growth

Two stage

Stage 1 high growth

Stage 2 stable growth

or =

=
=1

or:

=
=1

Three stage

Stage 1- high growth,

Stage 2 - transition
Stage 3 stable growth

=
=1

6
1
+

1 + (1 + )6

6
1
+

(1 + )6
1+

+
1+

=4

9
1
+

1 + (1 + )9

or:
3

=
=1

+
1+

dr hab. in. K. Mazur, prof. UZ

=4

9
1
+

(1 + )9
1+

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FCFE
+/_

Net Income

Depreciation

Investment expenditure

The change of net working capital

Financial in-flows

Financial ou-tflows

FCFE
dr hab. in. K. Mazur, prof. UZ

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FCFF
EBIT

Adjusted Tax

NOPLAT (Net Operating Profit Less Adjusted Tax)

Depreciation

Investment expenditure

The change of net working capital

FCFF
dr hab. in. K. Mazur, prof. UZ

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The assesment of TV
Time of forecast min 75 years, TV=0
The Gordon Model
(1 + )
=

FCFT- CF in last year of forecast, g- growth rate, FCF, r-discount rate, g<r
Model with factors of value creation

+1 (1
)

=

NOPLAT- net operating profit less adjusted tax , WACC Weighted Average Cost of
Capital, RONIC-ecpested rate of return of new inwestment, oczekiwana stopa
zwrotu z nowych inwestycji (kapita wasny ksigowy i kapita obcy odsetkowy) , ggrowth rate of NOPLAT
Model based on economic income

+1
+1

=
+

EPT+1 normalized economic income in the first year of particular forecast
Liquidation model Liquidation value
Others inne
dr hab. in. K. Mazur, prof. UZ

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