Valuation


What is Valuation?

Knowing what an asset is worth and what determines that value is a pre-requisite for intelligent decision making - in choosing investments for a portfolio, in deciding on the appropriate price to pay or receive in a takeover and in making investment, financing and dividend choices when running a business. The premise of valuation is that we can make reasonable estimates of value for most assets, and that the same fundamental principles determine the values of all types of assets, real as well as financial. Some assets are easier to value than others, the details of valuation vary from asset to asset, and the uncertainty associated with value estimates is different for different assets, but the core principles remain the same. This introduction lays out some general insights about the valuation process and outlines the role that valuation plays in portfolio management, acquisition analysis and in corporate finance. It also examines the three basic approaches that can be used to value an asset.

 

Perceptions of value have to be backed up by reality, which implies that the price we pay for any asset should reflect the cashflows it is expected to generate. Valuation models attempt to relate value to the level of, uncertainty about and expected growth in these cashflows. There are many aspects of valuation where we can agree to disagree, including estimates of true value and how long it will take for prices to adjust to that true value. But there is one point on which there can be no disagreement. Assets prices cannot be justified by merely using the argument that there will be other investors around who will pay a higher price in the future.

 

Approaches to Valuation

In general terms, there are three approaches to valuation. The first, discounted cashflow valuation, relates the value of an asset to the present value of expected future cashflows on that asset. The second, relative valuation, estimates the value of an asset by looking at the pricing of 'comparable' assets relative to a common variable like earnings, cashflows, book value or sales. The third, contingent claim valuation, uses option pricing models to measure the value of assets that share option characteristics. While they can yield different estimates of value, one of the objectives of discussing valuation models is to explain the reasons for such differences, and to help in picking the right model to use for a specific task.

 

At Financial Consultants for Marketable Securities, Dr. A.M Hegazy-Horwath our task will be limited to estimating the degree to which the fair value of the company’s shares fluctuates according to the following valuation methods:

     - Book value

     - Replacement cost

     - Discounted Future Cash Flow or Discounted Future Profit Figures

     - Profit multiplier

 

When valuing fixed assets and other related account (such as work in progress, inventory, and real estate investments…..etc), the fair value of the client company shares will depend on technical reports prepared by independent engineering offices. The company will be responsible for providing all the necessary documents, records, and information, as well as facilitating all meetings to be held with different managerial levels responsible for the company’s activities and in our opinion is important for the study. The client company will be responsible for providing approved financial statements for a period of 3 years before the date of valuation, in addition to financial statements approved at the date of valuation. Those financial statements should be classified in accordance with the Egyptian Accounting Standards or the International Financial Reporting Standards (IFRS).