1. What is Value?
Value refers to the worth of something, whether measured in monetary terms or its significance to an
individual. It is a broad concept that can be applied in various contexts and perceived differently by
different people.
As a 4th-year accountancy student, I see immense value in opportunities that enhance my accounting
knowledge and pave the way for my future career. What I consider a highly valuable opportunity might
seem insignificant to others. This personal perspective highlights how value can be subjective and
context-dependent.
In the accounting and business world, value is a critical concept. It pertains to the worth of an asset or
entity from the viewpoint of stakeholders. Various assets can be valued, though the effort required may
differ depending on the specific case. Understanding and accurately determining value is essential for
making informed financial decisions. Value in this realm encompasses both tangible and intangible
assets. For example, tangible assets like equipment, machinery, buildings, and inventory are valued
based on their physical presence and utility. Intangible assets, such as patents, copyrights, trademarks,
and goodwill, require a more complex approach to valuation due to their non-physical nature.
In summary, value represents the worth of something, be it in terms of money or importance. Its
application is critical in accounting and business for assessing assets and making strategic decisions.
2. What is Valuation?
Valuation is the analytical process of determining the current or projected worth of an asset. It involves
estimating an asset's value based on factors related to future investment returns, comparisons with
similar assets, or potential immediate liquidation proceeds. By using forecasts, valuation aims to provide
a reasonable estimate of an entity's assets or equity.
Valuation is essential to various decisions within a firm, whether explicitly or implicitly. While valuation
techniques may vary across different assets, they all adhere to fundamental principles that guide these
approaches. Professional judgment plays a crucial role in valuation, as it involves projecting future events
and balancing different assumptions.
In essence, valuation determines the economic worth of something, making it vital for financial analysis
and decision-making. It provides a clear picture of an asset's value, which is essential for both financial
reporting and making sound business choices.
3. Factors in Value of a Business
Three key factors determine a company's worth: how well it's running now (current operations), its plans
for the future (future prospects), and the potential challenges it faces (embedded risk).
Current Operations: This refers to the recent operating performance of the firm. It includes analyzing
financial statements, revenue generation, profit margins, and operational efficiency. As firms evolve and
adapt to new technologies, assessing current operations becomes increasingly challenging compared to
the past.
Future Prospects: This involves evaluating the long-term strategic direction of the company. It includes
growth potential, market expansion plans, and innovation strategies. Projecting future macroeconomic
indicators is more difficult due to constant changes in the economic environment and continuous
innovation by market players.
Embedded Risk: This encompasses the business risks involved in running the company. It includes
market risk, operational risk, financial risk, and competitive risk. New risks and competitors constantly
emerge, so identifying these uncertainties is vital for accurate valuation.
In conclusion, while these factors are solid concepts in determining a business's value, the rapid turnover
of technologies and globalization make the business environment more dynamic. This necessitates a
more adaptive and forward-looking approach to valuation.
4. Definitions of Value
Intrinsic Value:
Intrinsic value represents the genuine worth of an asset based on comprehensive fundamental analysis,
disregarding its current market price. It is the value an investor believes to be the true worth of the
asset, considering its financial health and potential future cash flows. Since perfect information about an
asset is impossible, investors estimate intrinsic value based on their assessment of the asset's real worth,
which often differs from its market price.
Going Concern Value:
Going concern value is the valuation of a business assuming it will continue its operations indefinitely.
This approach considers the company's ability to generate future earnings and sustain its business
activities in the long term. It reflects the ongoing operational value of the business, unlike scenarios
where the business is expected to cease operations.
Liquidation Value:
Liquidation value is the net amount expected to be realized if a business is terminated and its assets are
sold individually. This valuation assumes the company will be dissolved and its assets disposed of
separately, often resulting in a lower value due to the absence of operational synergy and potential
distress. Liquidation value is particularly relevant for businesses facing severe financial challenges and
imminent dissolution.
Fair Market Value:
Fair market value is the price at which an asset would be exchanged between a willing buyer and a
willing seller, both fully informed and neither under any compulsion to act. This value assumes both
parties have reasonable knowledge of all pertinent facts and are transacting in an open and unrestricted
market. Fair market value is commonly used in tax assessments and legal valuations, providing a
standardized measure of an asset's worth.
5. Roles of Valuation in Business
a. Portfolio Management
b. Analysis of Business Transactions
c. Corporate Finance
d. Legal and Tax Purposes
e. Other Purposes
6. The Valuation Process and Definition (Understanding of the business, Forecasting financial
performance, Selecting the right valuation model, Preparing valuation model based on forecasts,
Applying valuation conclusions and providing recommendation)
7. Make a flow chart of the Valuation process
8. Key Principles in Valuation
I. The Value of a Business is Defined Only at a specific point in time
II. Value varies based on the ability of businesses to generate future cash flows
III. Market dictates the appropriate rate of return for investors
IV. Firm value can be impacted by underlying net tangible assets
V. Value is influenced by transferability of future cash flows
VI. Value is impacted by liquidity
9. Risks in Valuation
