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- 2. Outline Business Valuation Introduction Reasons for a Business Valuation Valuation Process and Standards of Value Valuation
- 3. Business Valuations “The act or process of determining the value of a business enterprise or ownership
- 4. What are “Business Valuations?” ASSET APPRAISAL Real Estate Machinery & Equipment Intangible Assets BUSINESS VALUATION Complete
- 5. Reasons for Business Valuations Sale of business or part interest Ownership Disputes Financing Buy-Sell Agreements Employee
- 6. Business Valuation: Common Uses of Business Valuation Tax Estate/Gifts Buy/Sell Agreements Bankruptcy and Litigation Liquidation or
- 7. MAIN VALUATION METHODS
- 8. Standards of Value and Valuation Process
- 9. Business Valuation: Standard of Value Purpose Establish Purpose of the Engagement Estate/Gift, Buy/Sell Agreements, etc. Standards
- 10. Business Valuation: Standards of Value Common Standards of Value Fair Market Value (Tax): Fair market value
- 11. Fair Value (FASB Definition) Fair Value – is defined in this subtopic as the price that
- 12. Fair Value (Legal Definition) Fair Value- is often used in court cases to compensate a party
- 13. General Valuation Objectives There is no one right way to value an asset, and in many
- 14. Misconceptions about Valuation Myth 1: A valuation is an objective search for “true” value Truth 1.1:
- 15. Professional Organizations: The Appraisal Foundation The Appraisal Foundation comprises two independent boards. The Appraiser Qualifications Board
- 16. Standards Business valuation appraisers follow the following standards and guidelines: American Institute of Certified Public Accountant’s
- 17. Revenue Rulings Revenue Ruling 59-60 Outlines the approaches, methods, and factors to be considered in valuing
- 18. RR 59-60 Factors The nature of the business and its history since inception The economic outlook
- 19. National valuation standards of RK 1. Kazakhstan valuation Standard "Valuation of assets acquired and disposed of
- 20. National valuation standards of RK 5. Kazakhstan valuation Standard "Valuation of Intellectual Property and Intangible Assets"
- 21. National valuation standards of RK 10. Kazakhstan valuation Standard "Valuation of movable property" (Стандарт оценки Республики
- 22. Business Valuation: Valuation Process 1.1 Proposal and Engagement Letter 1.3 Establish Valuation Date 1.2 Establish Standard
- 23. Elements of a Business Valuation Packet Engagement Agreement Checklist Site Visit
- 24. Engagement Agreement Rule 201A, Professional Competence, of the AICPA Code of Professional Conduct, states that a
- 25. Engagement Agreement In determining to accept an assignment, an evaluator considers, at a minimum, the following:
- 26. Engagement Agreement Other factors to be considered Objectivity and Conflict of Interest Independence and Valuation Establishing
- 27. Business Valuation: Analyzing Data Researching Economic and Industry Information Economy of Country Local Economy Target Industry
- 28. Business Valuation: Gathering Data Gathering Company Data Articles of Incorporation; Operating Agreement History and Background Products
- 29. Checklist A basic information checklist includes the following: Historical financials of the company Debt schedule Schedule
- 30. Checklist Appraiser should try to derive an answer to the following: How does the company perceive
- 31. Valuation Methodologies
- 32. Balance Sheet-Based Methods (Shareholders’ Equity) These methods seek to determine the company’s value by estimating the
- 33. Balance Sheet-Based Method on the basis of Book Value A company’s book value, or net worth,
- 34. Balance Sheet-Based Method on the basis of adjusted Book Value This method seeks to overcome the
- 35. Book Value and Market Value Figure 1 Evolution of the Price/Book Value Ratio on the British,
- 36. Adjusted Book Value The adjusted balance sheet of the Company A. Table 2.
- 37. Liquidation Value This is the company’s value if it is liquidated, that is, its assets are
- 38. Substantial Value The substantial value represents the investment that must be made to form a company
- 39. Income Statement-Based Methods Income Statement-Based Methods are based on the company’s income statement. They seek to
- 40. Value of Earnings According to this method, the equity’s value is obtained by multiplying the annual
- 41. Sometimes, the relative PER is also used, which is simply the company’s PER divided by the
- 42. Value of the Dividends Dividends are the part of the earnings effectively paid out to the
- 43. Business Valuation: Weighted Average Cost of Capital Weighted Average Cost of Capital (WACC) WACC = Weight
- 44. Sales Multiples This valuation method, which is used in some industries with a certain frequency, consists
- 45. Other Multiples In addition to the PER and the price/sales ratio, some of the frequently used
- 47. Business Valuation: Cash Flow Discounting Approaches
- 48. Business Valuation: Cash Flow Discounting Approaches Cash Flow Discounting-based methods seek to determine the company’s value
- 49. Business Valuation: Cash Flow Discounting Approaches Cash flow discounting-based valuation methods are valuation techniques that provides
- 50. Business Valuation: Cash Flow Discounting Approaches Discounted Cash Flow Analysis The different cash flow discounting-based methods
- 51. Business Valuation: Cash Flow Discounting Approaches Although at first sight it may appear that the above
- 52. Business Valuation: Cash Flow Discounting Approaches The main idea behind a DCF approach is relatively simple:
- 53. Business Valuation: Cash Flow Discounting Approaches For example: A company with strong competitive advantages may grow
- 54. Business Valuation: Cash Flow Discounting Approaches Main questions that must be asked of any discounted cash-flow
- 55. Cash Flow Discounting Approaches: discount rates In cash flow discounting-based valuations, a suitable discount rate is
- 56. Cash Flow Discounting Approaches: The Free Cash Flow The Free Cash Flow The free cash flow
- 57. Cash Flow Discounting Approaches: The Free Cash Flow Company’s free cash flow must not include any
- 58. Cash Flow Discounting Approaches: The Free Cash Flow For example the below table gives the income
- 59. Cash Flow Discounting Approaches: The Free Cash Flow Free cash flow can be obtained from earnings
- 60. Cash Flow Discounting Approaches: The Free Cash Flow WCR = Cash + Accounts Receivable + Inventories
- 61. Cash Flow Discounting Approaches: The Free Cash Flow Balance sheet of a Company X at 01/01/2010.
- 62. Cash Flow Discounting Approaches: The Free Cash Flow WCR = Cash + Accounts Receivable + Inventories
- 63. Cash Flow Discounting Approaches: The Free Cash Flow The below table shows how the free cash
- 64. Cash Flow Discounting Approaches: The Free Cash Flow Calculating the Value of the Company Using the
- 65. Cash Flow Discounting Approaches The Free Cash Flow
- 66. Cash Flow Discounting Approaches: The Equity Cash Flow The Equity Cash Flow The equity cash flow
- 67. Cash Flow Discounting Approaches: The Equity Cash Flow The Equity Cash Flow
- 68. Cash Flow Discounting Approaches: The Equity Cash Flow Example:
- 69. Cash Flow Discounting Approaches: The Equity Cash Flow This cash flow assumes the existence of a
- 70. Cash Flow Discounting Approaches: The Equity Cash Flow Calculating the Value of the Company’s Equity by
- 71. Cash Flow Discounting Approaches: The Equity Cash Flow The required return to equity can be estimated
- 72. Cash Flow Discounting Approaches: The Equity Cash Flow For example, if a share’s price is 200
- 73. Cash Flow Discounting Approaches: The Equity Cash Flow 2. Cost of Equity: Capital Asset Pricing Model
- 74. Cash Flow Discounting Approaches: The Equity Cash Flow Cost of Equity: Capital Asset Pricing Model (CAPM).
- 75. Cash Flow Discounting Approaches: The Equity Cash Flow Cost of Equity: Capital Asset Pricing Model (CAPM).
- 76. Cash Flow Discounting Approaches: The Equity Cash Flow Cost of Equity and Leverage Companies with more
- 77. Cash Flow Discounting Approaches: The Equity Cash Flow Cost of Equity: Build-up For smaller closely-held companies
- 78. Cash Flow Discounting Approaches The Capital Cash Flow
- 79. Cash Flow Discounting Approaches: The Capital Cash Flow The Capital Cash Flow Capital cash flow (CCF)
- 80. Cash Flow Discounting Approaches: The Capital Cash Flow Calculating the Company’s Value by Discounting the Capital
- 81. Cash Flow Discounting Approaches: The Capital Cash Flow Cost of Debt Cost of Debt Based on
- 82. Cash Flow Discounting Approaches: The Free Cash Flow Balance sheet of a Company X at 01/01/2010.
- 84. Business Valuation: Cash Flow Discounting Approaches The DCF model that we will talk about in this
- 85. Business Valuation: Cash Flow Discounting Approaches Capitalization of Earnings Approach Single Period Discounted Cash Flow Analysis
- 86. Business Valuation: Market Approach Publicly-Traded (Guideline) Comparable Company Analysis The Guideline Publicly Traded Company Method indicates
- 87. Business Valuation: Market Approach Publicly-Traded (Guideline) Comparable Company Analysis Enterprise Multiples Enterprise Value = (Stock Price
- 88. Business Valuation: Market Approach Publicly-Traded (Guideline) Comparable Company Analysis Other Multiples EV / R&D Expenses; #
- 89. Business Valuation: Market Approach Market Transaction (M&A) Approach In the Guideline Merged and Acquired Company Method,
- 90. Business Valuation: Market Approach Market Approach Adjustments Most Companies Differ from the Subject Company Need to
- 91. Business Valuation: Reconciling Items Reconciling Items and Adjustments Appropriate Weighting Value Conclusions from Different Approaches Non-Operating
- 92. Discounts and Premiums Control Premium Lack of Control/Minority Discounts Lack of Marketability/Illiquidity Discounts Others Discounts
- 93. Business Valuation: Lack of Marketability Discounts Let the Fireworks Begin!! Often subject to wide disparity among
- 94. Business Valuation: Lack of Marketability Discounts Lack of Marketability Discounts (LOM) Marketability (liquidity) is valuable. Other
- 95. Business Valuation: Lack of Marketability Discounts Lack of Marketability Discounts The highest discount that the Tax
- 96. Business Valuation: Lack of Marketability Discounts Lack of Marketability/Illiquidity Discount for Minority Interest Restricted Stock Studies
- 97. Business Valuation: Lack of Marketability Discounts Restricted Stock Studies General Findings Show that restricted shares are
- 98. Business Valuation: Lack of Marketability Discounts Pre-IPO Stock Studies A pre-IPO transaction is a transaction involving
- 99. Business Valuation: Lack of Marketability Discounts Other Studies Modified put option model (i.e. Finnerty and Chaffee)
- 100. Business Valuation: Lack of Marketability Discounts Factors Affecting Discounts for Lack of Marketability Company’s Financial Performance
- 101. Business Valuation: Lack of Marketability Discounts Lack of Marketability/Illiquidity Discounts for Controlling Interests Still a controversial
- 102. Business Valuation: Control Premium and Minority Discount Control Premium Other things equal, an interest with control
- 103. Business Valuation: Control Premium and Minority Discount Control Premium Common Prerogatives of Control Elect directors and
- 104. Business Valuation: Control Premium and Minority Discount Control Premium Database Control Premia Based on Market Transactions
- 105. Business Valuation: Control Premium and Minority Discount Lack of Control/Minority Discount Some feel that the control
- 106. Business Valuation: Control Premium and Minority Discount Lack of Control/Minority Discount Supermajority Requirement – About a
- 107. Business Valuation: Other Discounts Other Discounts Key Person Discount Measure potential negative impact to the projected
- 108. Business Valuation: Other Discounts Other Discounts Voting vs. Non-Voting If a company has both voting and
- 109. Business Valuation: Discounts and Premiums Common Errors in Applying Discounts and Premiums Greed produces inconsistencies with
- 110. Business Valuation: Discounts and Premiums Common Errors in Applying Discounts and Premiums Using synergistic acquisition premia
- 111. References Brealey, R.A. and S.C. Myers (2000), “Principles of Corporate Finance,” 6th edition, McGraw- Hill, New
- 112. References Fernández, Pablo (2001c), “Valuing real options: frequently made errors,” SSRN Working Paper n. 274855. Fernández,
- 113. termins Patent infringement is the commission of a prohibited act with respect to a patented invention
- 114. An engagement letter defines the legal relationship (or engagement) between a professional firm (e.g., law, investment
- 115. Corporate spin-off, a type of corporate transaction forming a new company or entity
- 116. Everything You Should Know Understand the Standard of Value Involve the Appraiser Early on Distinguish Between
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