Chapter 4.

Valuation of intangible assets

(Course: Asset valuation models)

Phuong Le

Faculty of Economic Mathematics

University of Economics and Law
Vietnam National University, Ho Chi Minh City, Vietnam
 Contents

1 Overview of intangible assets

Definition
Characteristics
Classification

2 Purpose and basis of value

Definition and purpose
Basis of value

3 Intangible asset valuation methods

Income approach
Market approach
Cost approach

4 Exercises
 Definition

Definition
• Intangible assets are non-monetary assets and have no physical
form, but can create economic rights and benefits for the owner
through contributions to the process of the production,
distribution or supply of goods or services, and/or the generation
of future benefits.
• Intangible assets include: intangible fixed assets, copyrights,
rights related to copyright, industrial property rights, rights to
plant varieties and other types of intangible assets.
 Definition

Intangible assets must simultaneously satisfy the following conditions:

• Have no physical form (however, some intangible assets may
be contained in or on physical entities, but the value of physical
entities is insignificant compared to the value of intangible
assets);
• Are identifiable and have tangible evidence of the existence of
intangible assets (e.g. contracts, certificates, registration
documents, computer disks, customer lists, financial statements);
• Can generate income for owners;
• The value of intangible assets can be quantified.
 Characteristics

Characteristics of intangible assets

• Intangible assets have unique characteristics that can be
recognized, although they do not have a specific physical form,
cannot be held or grasped, cannot be seen or felt, smell, taste, or
color, but can be felt intuitively.
• Intangible assets are often the product of intellectual labor,
which is a new technique, a new invention, a new composition, a
new work of the author.
• The value of intangible assets can be quantified, however
determining the value of intangible assets is very complicated.
• The useful life (life cycle) of intangible assets is difficult to
predict accurately.
 Classification

By fields of use
• Intangible assets related to marketing are mainly used in
marketing and promotion of products or services, for example:
Brands, trademarks, domain names,. . .
• Intangible assets related to customers or suppliers arise from
relationships with customers or suppliers, e.g. licensing and
royalty agreements, contracts of services, labor contracts,
customer relations or customer lists,...
• Intangible assets related to technology arise from contractual or
non-contractual rights to use technology (with or without
patents), databases, formulas, designs, software, processes or
recipes, etc.
• Intangible assets related to art arise from interest rights such as
royalties from artistic works such as plays, books, films and
music, etc. and from extra-contractual copyright protection.
 Classification

By legal perspectives
• Intangible assets that can be owned and transferred like
intellectual property, and are protected by law from unauthorized
use by others. For example: inventions, trademarks, business
copyright,. . .
• Intangible assets that can be controlled but cannot be
transferred.
• Other intangible assets such as personal relationships, group
relationships, reputation.
 Classification

By characteristics
• Inventions, formulas, processes, models, skills.
• Copyright of literary, musical, and artistic works.
• Trademarks, product labels.
• Business rights, licenses, contracts.
• Methods, programs, systems, procedures, surveys, research,
forecasts, estimates, customer lists, technical data.
• Other types of intangible assets (such as human resources,
business location...).
 Classification

By resources
• Resources that depend on human: general knowledge and
specific knowledge.
• Resources that do not depend on human:
• Organizational capital: Standards and guidelines; databases on
customers and competing firms; cooperation agreements; office
culture;
• Technological capital: Patents; trade secrets; industrial samples
and drawings; copyright;
• Relational capital: Reputation; product labels; tradenames; loyalty,
long-term relationships; distribution channels.
 Definition and purpose

Definition
Valuation of intangible assets is a monetary estimate with the highest
reliability of the benefits that intangible assets can bring to the owner
at a certain time.

Purpose
• For transfer purposes such as franchising products, determining
copyright fees, etc.
• For the financial statements of the enterprise.
• For resolving disputes, litigation, bankruptcy, etc.
• For business acquisitions or mergers.
• For other purposes.
 Basis of value

Basis of value
Following the general principle of valuation, the value of intangible
assets is based on market value and in some cases can be based
on non-market value.

To identify an intangible asset and determine its true market value,

that intangible asset must meet the following four basic criteria:
• Individually identifiable;
• Protected or capable of protection;
• Transferable;
• Natural existence.
 Income approach

Income approach
The value of an intangible asset will be calculated from the economic
benefits that that asset brings in the future. There are two main
approaches: income capitalization and discounted cash flow analysis.

Income capitalization approach: applies to constant cash flows in

perpetuity
I
V = ,
R
where
• V is the present value of the future income stream,
• I is the annual income of the asset,
• R is the capitalization rate.
 Income approach
Discounted cash flow analysis approach: The amounts to be
received are determined for each future period, applying a discount
rate that uses present value techniques.
• Discounting methods are most commonly used for intangible
assets that have a finite economic life. The time period covered
by discount methods is usually shorter than the economic or
legal life of the asset.
• The capitalization rate (discount rate) is determined based on
information from the market and expressed by a price factor
(quoted from trading and business data) or by a rate of return
(considered from alternative investments).
• Benefits or forecasted earnings are converted to value using
calculations that take into accounts the expected growth and
duration of benefits, the risks associated with the stream of
benefits, and the time value of the cash flow. Intangible assets
can generate income streams through the use of the intangible
asset, ownership of the intangible asset (e.g., through the
collection of fees for use of the intangible asset), or restriction of
the use of intangible assets.
 Income approach

The income approach determines the value of intangible assets

through the present value of income, cash flows and cost savings
brought by intangible assets. There are three methods of valuing
intangible assets:
• Royalties (license fees) for using intangible assets,
• Excess profit method (super profit method),
• Excess earnings method.
 Income approach

Royalties for using intangible assets

The value of intangible assets is calculated on the basis of the current
value of the cash flow that the owner receive when allowing other
parties to use intangible assets.
• This method assumes that an organization or individual that
does not own the intangible asset must pay to use it.
• This method is performed by discounting future cash flows as the
amount of money using intangible assets saved minus taxes (if
any).
• Cash flow calculations using intangible assets, taxes,
maintenance costs and other support costs must be consistent.
 Income approach

Information required to apply:

• Royalties for using intangible assets, which can be:
• The actual price for using the intangible asset that the owner of the
intangible asset obtains through transferring the right to use the
intangible asset;
• The assumed intangible asset usage fee that is the hypothetical
amount of money the user must pay to the owner of the intangible
asset.
• There is transaction information of similar assets on rights
protected by law, information on the intangible asset franchise
contract such as fees for using intangible assets and
maintenance costs (e.g advertising, product upgrades, quality
control), date of use, end date of franchise contract.
• Financial statements and related documents.
 Income approach

Applicable cases:
• When there is necessary information and data on the use of
intangible assets of similar intangible assets on the market.
• To calculate the level of compensation in case of any dispute.
• To complement other valuation methods.
 Income approach
Royalty rates are normally agreed upon between companies based
on the following factors:
• Estimated revenue;
• Estimated profit;
• Degree of license exclusivity (exclusivity in a region);
• Territory (nationwide, a region or globally);
• The level of contribution of each party to the copyright transfer,
for example, higher royalties will be paid if the copyright licensor
comes on-site to provide professional advice to the copyright
holder, or paid to nationwide advertising.
• Expected life of the asset (how long does the patent last).
• Future competition (competitors may produce cheaper substitute
products).
The value of royalties may vary over the life of the license; they may
be higher in the early years when the product is exclusive, or they
may be lower if it is expected that it will take some time to reach
required sales.
 Income approach

Excess profit method (super profit method)

The excess profit method estimates the value of intangible assets on
the basis of the difference between a business’s profits when using
and when not using this intangible asset.

Information required to apply:

• Expected profits, cost savings and future income streams
generated for a business when using intangible assets and not
using intangible assets.
• The appropriate discount rate to forecast future earnings.
 Income approach
Example: Appraisal company ABC valuates the intellectual property
rights of a type of packaging that has a unique, popular design and
has been registered for a patent of Paper Manufacturing Company
Alpha. Based on the analysis of collected data, ABC makes the
following comments:
• The expected economic life of the patent is 7 years, starting from
2006;
• Using new packaging increased Alpha’s profits by 25%
compared to when new packaging was not used.
• The discount rate is 17% calculated on the basis of adding the
average profit margin of the tissue paper manufacturing industry
of 16%/year and the risk surcharge for generating profits from
the new packaging design of 1%.
Based on the above investigation and assessment, ABC estimates
the additional profit due to using new packaging for 7 years of Alpha
company and calculates the current value of the new packaging
which is shown in the following table:
 Income approach
Year Profit after tax Excess profit Discount Present value
(not using after tax factor (value in 2006)
new packaging) (using)
2006 50.000 12.500 0,8547 10.684
2007 100.000 25.000 0,7305 18.263
2008 200.000 50.000 0,6244 31.219
2009 300.000 75.000 0,5337 40.024
2010 400.000 100.000 0,4561 45.611
2011 500.000 125.000 0,3898 48.730
2012 550.000 137.000 0,3332 45.814
TÍng 240.344
Where the discount factor of year i (i = 1, 2, 3, . . . , 7) is

(1 + 0, 17) i .

ABC appraisal company concluded: at the time of appraisal (2006),

the intellectual property value of the new packaging type of Alpha
company was 240.3 million VND.
 Income approach

Applicable cases:
• This method can be applied to both intangible assets that
generate additional income and intangible assets that help save
costs.
• This method can be used as a supplementary method along with
other valuation methods.
In practice, applying this method faces many difficulties. The biggest
difficulty is determining excess profits, because it is difficult to get
accurate information about the total profits brought by the brand, and
it is also difficult to find businesses selling similar products without a
brand.
 Income approach

Excess earnings method

The excess earnings method determines the value of an intangible
asset as the present value of the cash flows that arise from the
contribution of the intangible asset excluding the cash flows arising
from contributions of other assets.
The excess earnings method is implemented as follows:
• Estimate the expected cash flows generated from the use of
intangible assets by deducting from the total cash flow the
contribution created from the use of tangible assets, financial
assets and other intangible assets (collectively referred to as
contributed assets).
• The contribution of contributed assets is the reasonable income
generated by the contributed assets, including the profit from the
contributed assets and compensation for the initial investment
due to decrease in value of assets over time.
 Income approach
Reasonable income for contributed assets is calculated through the
following steps:
1 Identify assets that contribute to income cash flow;
2 Estimate the value of these contributed assets;
3 Determine income of contributed assets on the basis of
reasonable profit margin and value of contributed assets.
The remainder of the expected cash flow after deducting the
contribution generated by the use of the contributed assets is
discounted to present value. The total present value of this adjusted
cash flow is the value of the intangible asset subject to valuation.

In cases where intangible assets that need to be appraised are

allowed to be depreciated according to the provisions of accounting
law, the value of the intangible assets that need to be appraised is
added by the expected benefit from not having to pay income tax on
the depreciated value of the intangible asset.
 Income approach

Data required to apply:

• The enterprise’s cash flow generated by the intangible assets to
be appraised, including income streams and expenses
associated with the intangible assets to be appraised;
• Costs of using auxiliary assets necessary and associated with
the effective use of intangible assets to be appraised;
• The appropriate discount rate to convert to the present value of
the intangible asset to be appraised;
• Related costs or benefits (e.g tax rates applicable to the use of
the intangible asset to be appraised).
 Income approach

Applicable cases:
• When valuing intangible assets, they are combined with other
assets in an asset group to create cash flow. In particular, the
intangible assets that need to be appraised have a major impact
on the income stream, the contribution from other assets is not
major.
• Can be used as a supplementary method to other valuation
methods.
 Market approach

Market approach
The market approach valuation method is performed by comparing
the asset to be valued with similar intangible assets, or benefits of
owning intangible assets and securities that have been sold on the
market.
Two data sources are commonly used:
• Markets in which similar intangible assets are traded,
• Previous transactions in ownership of intangible assets.
 Market approach

When applying this method, the following conditions must be met:

• There must be a reasonable basis for comparison between the
intangible asset being valued and similar intangible assets.
• Data of intangible assets used for calculation must be accurate.
• Pricing data must be current at the time of pricing and
representative of the market at that time.
• Appropriate adjustments make similar intangible assets and
intangible assets subject to appraisal more comparable.
• When using previous transactions in intangible assets,
necessary adjustments should be made for changes in time,
changing circumstances in the economy, in the industry and in
intangible assets.
 Market approach
Reference information when applying the market approach:
• The successful transaction price, asking price, biding price... of
the intangible assets which are similar to the intangible asset that
needs to be appraised.
• Location and market conditions at the time of the transaction,
buyer and seller motives, payment terms and other factors
related to the transaction.
• Necessary adjustments to prices and adjustment factors to
reflect differences between the intangible asset subject to
valuation and similar intangible assets for comparison.
This method is superior to the cost-based or income-based valuation
method, because it is more objective, more reliable and has evidence
of market price.

However, in practice it is difficult to find similar intangible asset

transactions on the market and reliable information about them.
 Cost approach
Cost approach
The cost-based valuation method is based on the principle of
substitution, which means that the upper limit of an asset’s value
does not exceed the cost of acquiring an equivalent asset. The cost
approach estimates the value of intangible assets based on the cost
of reproducing an intangible asset similar to the asset that needs to
be valuated or the replacement cost to create a similar intangible
asset which has the same functions at current market prices.

Estimated Value of Intangible Asset = Reproduction Cost

(Replacement Cost) – Accumulated Depreciation + Manufacturer’s
Profit

The cost approach includes two main methods:

• Reproduction cost method,
• Replacement cost method.
 Cost approach
Decreased value due to depreciation of intangible assets:
Depreciation of intangible assets mainly includes the decrease in
value due to functional, technological, and economic obsolescence.
Physical depreciation does not apply to most intangible assets.
• Functional obsolescence occurs when an intangible asset no
longer fulfills the original function it was created to perform.
Functional obsolescence can occur due to internal causes or due
to changes in the external environment.
• Technological obsolescence occurs when the functions the
intangible asset was originally created to perform are no longer
needed, even though the intangible asset is still performing that
function.
• Economic obsolescence exists when an intangible asset does
not generate a reasonable rate of return for the owner when
compared to the average rate of return in the industry in which
this intangible asset plays an important role.
 Cost approach
When estimating the depreciation of intangible assets, the following
factors should be considered:
• Difference in research and development costs (mainly related to
the reproduction cost method): the difference between the costs
for research and development of intangible assets at the time of
valuation compared to the time of creation of intangible assets.
• Operating cost difference: the difference between the cost of
maintaining and using the intangible asset at the time of
valuation compared to the time the intangible asset begins to be
put into use. This cost should be calculated over the remaining
economic life of the intangible asset.
• Economic obsolescence of an intangible asset: the difference in
economic efficiency (income) from the use of the intangible asset
at the time of valuation compared to the time the intangible asset
was initially used.
• Remaining economic life of intangible assets.
 Cost approach

The valuation method based on reproduction costs:

• The reproduction cost method determines the value of an
intangible asset through calculating the cost of creating another
asset identical to the intangible asset that needs to be valued at
the current market price. This method identifies and synthesizes
past costs that have arisen in the process of creating assets (for
example, costs for research), the total costs are considered as
the value of that asset.
• This method has a basic limitation: to a certain extent, the asset
value is derived from its potential or the economic benefits it
brings in the future, not from its costs. The cost to create an
asset usually differs greatly from its market value.
 Cost approach
The valuation method based on replacement costs:
• The replacement cost method is used to value intangible assets
which can be replaced. Accordingly, it is necessary to determine
and synthesize the costs necessary to recreate the asset that
has the ability to generate future economic benefits similar to the
asset being valued. The replacement cost method determines
the value of an intangible asset by calculating the cost of
replacing that asset with another asset with similar functions at
the current market price.
• When determining the value of intangible assets using the
replacement cost method, the appraiser needs to consider the
following: different characteristics of the replacement asset and
the appraised asset; time to evaluate replacement costs
compared to time of value appraisal.
Theoretically, this method is more accurate than the valuation method
based on reproduction costs. However, in reality it is difficult to
objectively estimate the current replacement cost for an intangible
asset.
 Cost approach

Example: Company A purchased a business management software

designed specifically for A by information technology company MVS
in February 2009. In February 2011, company A used this software,
which is operating very successfully at company A, as capital
contribution to establish company C with a similar business model of
company A. Appraisal company X is hired to calculate the value of
this business management software. Because this software is
relatively unique compared to other business management software
traded on the market, appraisal company X decided to use the cost
method.

The appraisal of the value of business management software A is

conducted according to the cost method in 2011 as follows:
 Cost approach

Determine the cost of building and maintaining business

management software A:
• License cost for software design tools: 300,000,000 VND.
• Cost of software customization (labor costs, hiring consultants, ...
to develop and test the software: 700,000,000 VND.
• Implementation costs (training for customers, ...): 300,000,000
VND.
• Other costs (management costs, warranty costs, backup
costs,...): 200,000,000 VND.
• Expected profit of software development company: 20%.
Therefore, the total software development cost is:
120%⇥(300.000.000+700.000.000+300.000.0000+200.000.000) =
1.800.000.000 (VND).
 Cost approach

After carefully checking the operation of business management

software that needs to be appraised, and asking for expert opinions,
appraisal company X found this intangible asset:
• has no functional obsolescence because data and management
documents are always updated regularly, meeting the functions
of enterprise A’s management at the present time.
• has no technological obsolescence because the software
solutions being used are still the latest and commonly used.
• has negligible economic obsolescence.
So the value of this business management software according to the
cost method in 2011 is 1,800,000,000 VND (i.e., 1.8 billion VND).

(Value of business management software = Total software

development cost – Reduced value due to obsolescence = 1.8 billion
VND – 0 VND = 1.8 billion VND).
 Exercises
Problem 1. Valuate the copyright value of a book that has just been
published recently, given that:
- The book is translated from the original English version, the
copyright cost is 100 million VND.
- Translation and editing costs are 21 million VND.
- Other costs (management, publishing license, media) are 26 million
VND.
- The publisher’s expected profit is 20%.

Problem 2. Estimate the value of a patent used by a business.

- Expected life of the patent is 5 years.
- If the patent is not used, the company’s profit forecast next year will
be 1 billion VND and increase by 100 million VND each year.
- Using the patent increases profits by 30% per year in the first 2
years and 20% per year in the next 3 years.
- The industry average rate of return is 10% and the risk premium for
generating profits from the patent is 1%.
 Exercises
Problem 3. Using a new patent brings an exceed profit to a
pharmaceutical business in the first year of 1 billion VND, but this
exceed profit gradually decreases by 200 million VND in each
subsequent year. Evaluate the patent, assuming a discount rate of
10%.

Problem 4. An intangible asset brings long-term income to the

business, in which the first year’s income is 100 million VND and
gradually decreases by 5% in each subsequent year. Value this
asset, using a discount rate of 10%.

Problem 5. A fashion store is currently generating an income of 400

million VND each year. The store owner decided to buy the right to
use the ABC fashion chain brand for 3 years. How much will the
business that owns the ABC brand license the brand? Statistics show
that using the ABC brand doubles the income of each store and the
franchise fee is equal to 32.4% of the exceed income. Suppose that
the 1-year, 2-year, and 3-year interest rates are 9%, 10% and 8%
respectively.
Chapter 5. Valuation of enterprises
(Course: Asset valuation models)

Phuong Le

Faculty of Economic Mathematics

University of Economics and Law
Vietnam National University, Ho Chi Minh City, Vietnam
 Contents

1 Value of enterprises
Enterprises and their value
Purpose of enterprise valuation
Factors affecting enterprise value

2 Enterprise valuation methods

Net asset value method
Method of discounting future financial resources
Stock valuation method
Method of discounting net profits
Method of discounting and capitalizing net cash flows
Goodwill quantitative method
Method based on P/E ratio

3 Exercises
 Enterprises and their value

Enterprises
An enterprise is an economic unit that uses financial, material,
technical and human resources to carry out production activities and
provide goods and services on the basis of meeting consumer needs,
thereby maximizing the owner’s benefits, while combining certain
social goals.
An enterprise can be organized in the form of:
• one-member limited liability company,
• LLC with two or more members,
• joint stock company,
• partnership company,
• private business.
In addition, enterprises can join together to form groups of companies
in the form of economic groups, corporations, parent companies and
subsidiaries.
 Enterprises and their value

Enterprise value
Enterprise value is the monetary expression of the income that the
enterprise brings to its investors during the business process.
Two approaches to assessing enterprise value:
• Assess the value of input factors including assets and non-asset
factors such as organization, relationships, advantages,...;
• Assess the value of output factors in the form of quantifying the
income that the enterprise brings to its investors.
 Enterprises and their value

Characteristics of enterprise value

• Enterprise value is a fundamentally different concept from the
selling price of an enterprise on the market.
• Enterprise value is not simply a concept used in evaluating the
income that the enterprise can bring to investors, but enterprise
value is also a concept used and determined even when there
are no business sale or transfer.
• Enterprise value is influenced by many complex factors and
difficult to quantify.
 Purpose of enterprise valuation

Valuation of enterprises
Enterprise valuation is the most reliable estimate of the income that
an enterprise can generate during its operations, as a basis for
normal market transactions.

Purpose of enterprise valuation

• For buying and selling, mergers, consolidation, separation,
equitization, dissolution, liquidation of businesses,...
• For investment and management decisions,
• For evaluating the business reputation, financial capacity and
credit position of the enterprise,
• For providing information for macroeconomic management
activities.
 Factors affecting enterprise value
Factors outside the enterprise
Factors of the macroeconomic environment:
• Macroeconomic status
• Political and legal status
• Completeness, uniformity, clarity and consistency of the legal
system
• The State’s views and policies on investment and business
activities through legal documents follow the direction of respecting
and encouraging business freedom or restricting them.
• The legal capacity of the State and the public’s awareness of law
observance
• Cultural and social status
• Lifestyle, ideology, ethics, customs, traditions, language,...
• Size, structure and density of the population, population growth,
gender, age, income level of the population,...
• Environmental pollution, depletion of natural resources,...
• The development of science and technology.
 Factors affecting enterprise value

Factors of the microeconomic environment:

• Customers: Customer loyalty and attitudes; quantity and quality
of customers; reputation, relationships and ability to develop
relationships; current and future market share; scale and
improvement of sales;. . .
• Suppliers: Abundance of supplies; volume, type, list of materials
that can be substituted for each other; stable and timely supply
ability; quality, supply price and ability to compete with other
suppliers.
• Competitors: price, product quality and accompanying services;
product promotion and introduction programs; number of
competitors, strengths and weaknesses of each competitor;
Factors that can give rise to new competitors; ability to address
competitive pressures.
• State management agency.
 Factors affecting enterprise value

Factors inside the enterprise

• Asset situation of the enterprise
• Business location
• Business reputation
• Technology level and worker skills
• Business administration capacity.
 Net asset value method

Basis of the method

• Enterprises are considered a special type of asset, their
existence and development is based on investment and holding
a certain amount of assets. These assets constitute the entity of
the enterprise and are a clear and specific presence of the
enterprise’s existence.
• Enterprise assets are formed from the investment and capital
funding of investors when established and can be additionally
funded during its operations. The investment and capital
financing of investors in an enterprise is the legal basis for
investors to hold control over the enterprise’s assets and the right
to enjoy the benefits arising from the use of those assets.
The net asset value method is also known as the “intrinsic value
method”. In this method, enterprise value is measured by the market
value of the assets that the enterprise is currently using for its
operations.
 Net asset value method
Content of the method
During operations, in addition to capital financed by owners,
enterprises often have to mobilize other sources of capital such as
loans, bond issuance capital, debt payments, and cash advances of
customers,... thereby forming two groups of investors including
owners and creditors of the enterprise.

Therefore, when determining the value to carry out business

purchase and sale transactions, one must determine the net asset
value belonging to the owner according to the formula:

V0 = VT VN ,

where
• V0 : Net asset value belonging to the enterprise owner,
• VT : Total value of assets of the enterprise being used for
enterprise,
• VN : Value of debt.
 Net asset value method
Method for determining net asset value based on data in the
balance sheet: Based on the data on assets and capital on the
balance sheet at the time of assessment, V0 is determined by
subtracting the total value of debts from the total value of assets.
• This method requires the enterprise to organize accounting
records to fully reflect arising economic operations, and to
comply well with accounting regimes to ensure the reliability of
data.
• This method allows stakeholders to see the valuation of the
enterprise based on the value of the existing assets in the
enterprise.
Because accounting data is recorded in the past and depends on
accounting methods, so there can be quite a difference between the
book value and the market value of the asset. Therefore, the
enterprise value determined by this method is only for reference to
supplement other methods.
 Net asset value method
Method for determining net asset value based on market price:
Remove from the assessment list assets that are unnecessary or no
longer capable of meeting the enterprise and production
requirements of the enterprise; Then evaluate the value of the
remaining assets at the time of valuation using market prices.
• Fixed assets: determine value according to formula
(Actual value of fixed assets) = (Original price calculated
according to market price) x (Remaining quality)
• Inventory:
• For finished products, goods, and supplies with market prices,
determine their value according to the market price at the time of
valuation according to the formula:
(Actual value of finished products, goods, supplies) = (Quantity) x
(Unit price) x (Remaining quality).
• For finished products, goods, and supplies that do not have a
market price, their value can be determined according to the
formula:
(Actual value of finished products, goods, supplies) = (Original
price recorded in accounting books) x (Remaining quality).
 Net asset value method
• Cash and cash equivalents: these are assets that can exist in
different forms such as cash, bank deposits, short-term financial
investments, etc.
• Cash on hand is determined by checking the fund;
• Deposits are determined by reconciling account balances;
• Valuable papers are determined according to the market value; if
there are no transactions, they are determined according to their
face value;
• Foreign currency is converted into domestic currency at the market
exchange rate at the time of evaluation;
• Gold, silver, metals, gems... are calculated according to the market
price at the time of valuation.
• Accounts receivable: This is a debt that the enterprise is
responsible for collecting in the future. However, the ability to
collect receivables depends on many factors and can have many
different levels. To determine value, we review and compare
debts, verify the legality of debts, evaluate the reliability and
collectability of each receivable to eliminate bad or irrecoverable
receivables.
 Net asset value method
• Deposits: are determined according to the actual balance on the
accounting books that has been compared and confirmed at the
time of valuation.
• Investments to outside the enterprise: It is necessary to
comprehensively evaluate the value for the enterprise currently
using those investments. However, if these investments are not
large in scale, we often directly rely on their market price in the
form of securities or on the data of the joint venture partner to
determine.
• Rental assets and real estate lease rights: Determined according
to the method of discounting future income streams. If the
enterprise has paid rent once for many years, the value of the
leased asset will be recalculated according to the market value at
the time of valuation.
• Intangible assets: In this method, we only recognize the value of
intangible assets that have been determined in accounting books
and usually do not take into account the value of the enterprises’
goodwill.
 Net asset value method

Based on the results of determining and evaluating the value of each

group and type of asset, the net asset value of the enterprise is
calculated as follows:
(Net asset value of the enterprise) = (Total value of assets) -
(Liabilities) - (Tax calculated on the increased value of reassessed
assets).
 Net asset value method
Example. At the time of valuation, ABC Company had the following
documents:

Asset Amount Capital Amount

A. Current assets 600 A. Liabilities 1,300
1. Cash and cash equivalents 50 1. Short-term loans 560
2. S-t financial investments 120 2. Accounts payable 40
3. Accounts receivable 150 3. Long-term loans 700
4. Inventory 250
5. Other short-term assets 30
B. Fixed assets B. Equity 1,200
and long-term investments 1,900 1. Investments of
1. Res. value of fixed assets 900 owners 1,000
2. Financial lease fixed assets 200 2. Undistributed
3. Investments in company N profits 200
(2200 shares) 220
4. Joint venture capital 400
5. Fixed assets for lease 180
Total assets 2,500 Total capital 2,500
 Net asset value method
The reassessment of the enterprise’s assets shows the following
changes:
• Some uncollectible receivables are 30 million VND.
• Inventory of poor quality that do not meet production
requirements has a reduced value according to accounting
books of 50 million VND.
• Tangible fixed assets are revalued according to the market price
increased by 150 million VND.
• ABC Company has to pay rent for fixed assets for 10 years, 30
million VND per year. If one wants to rent a fixed asset with
similar conditions at the current time, they usually have to pay 35
million VND per year.
• The stock price of company N at the Stock Exchange at the time
of valuation is 110,000 VND/share.
• The re-evaluated joint venture capital contribution increased by
40 million VND.
• According to the company’s asset lease contract, the lessee
must pay in installments over 20 years, each year paying an
equal amount of 15 million VND.
 Net asset value method

Based on the above data and situation, one can re-evaluate the value
of some assets of ABC Company as follows:
• Determining the advantageous value of asset lease rights:
Assuming the discount rate is 20%, the advantage value of asset
lease rights is calculated by the present value of the saved cash
flow for 10 years
10
X 35 30
= 20.96 million VND.
(1 + 20%)t
t=1

• For investment in company N: The market value of 2,200 shares

invested in Company N calculated at the time of valuation is:
2,200 shares x 110,000 VND/share = 242 million VND.
 Net asset value method

• Value of leased assets under contract: Calculated by the present

value of the annual cash flow received. Long-term rental property
value
X20
15
= 73.044 million VND.
(1 + 20%)t
t=1

The total value of the enterprise’s assets after reassessment is:

VT = 2,500 - 30 - 50 + 150 + 20.96 + (242 - 220) + 40 + (73,044 -
180) = 2,546,004 million VND.

Assuming ABC Company does not have to pay tax on the increased
value after re-evaluating assets at market prices, the company’s net
asset value is:

2, 546.004 1, 300 = 1, 246.004 million VND.

 Net asset value method

Advantage
• The net asset value method is implemented easily and simply,
without requiring complex calculation techniques.
• This method is based on evaluating the value of specific, existing
assets of the enterprise. This is a specific, clear legal basis for
the assets and income that the buyer will definitely receive when
owning an enterprise.
 Net asset value method

Disadvantage
• Valuing an enterprise using the net asset method is often
time-consuming and costly.
• This method is calculated by total market price of all assets of the
enterprise at a certain time. Therefore, this method is not
consistent with a strategic vision of the enterprise and does not
consider the enterprise buyer’s motivation to enjoy the future
earnings that the enterprise will bring.
• This method does not provide the necessary information for
relevant parties to evaluate the profitability prospects of the
enterprise. This method also ignores most non-material factors
such as management level, worker skill level, reputation, market
share, brand,... of the enterprise.
• In some cases, determining net asset value can become too
complicated and inaccurate.
 Net asset value method

Applicability
• For determining a low price for negotiation.
• Basic standards for determining enterprise value for small
businesses, with a small number of assets, the value of
intangible factors is insignificant, enterprises with unclear
business strategies, lack of basis to determine future income or
have negative future cash flow, potentially going bankrupt.
• When a combination of different valuation methods must be used
to calculate the average value, the net asset value method is
often chosen to be used with the highest weight.
• The net asset value method can also be used when the
discounted cash flow method results in an enterprise value that
is lower than the value of the enterprise’s net tangible assets.
 Method of discounting future financial
resources

Basis of the method

The value of a enterprise is measured by the size of the income that
the enterprise can bring to investors in the future

n
X CFt
V0 = ,
(1 + i)t
t=1

where
• V0 : Enterprise value,
• CFt : Income brought to investors in year t,
• i: Discount rate,
• n: Duration to receive income (in years).
 Stock valuation method

Basis of the method

Enterprise value is measured by the total value of the enterprise’s
outstanding shares.

Content of the method

Stock valuation is the determination of the theoretical value of stocks
according to appropriate methods. The value of a stock is determined
as the current value of the entire income that the investor receives
from investing in stocks within a certain period of time.
 Stock valuation method
Valuation of preferred shares
Preferred stock is a type of stock that the issuing joint stock company
commits to pay dividends at a fixed annual rate and does not declare
a maturity date.
Valuation formula:
Dp
V = ,
rp
where
• Dp : Annual dividend of preferred stock;
• rp : Discount rate or investor’s required rate of return.
Example. ABC Joint Stock Company issues preferred shares with a
par value of 10,000 VND paying a dividend of 10% and investors
expect a profit rate of 15%. The theoretical value of a share is:

10, 000 ⇥ 10%

V = = 6, 666.67 (VND).
15%
 Stock valuation method

Common stock valuation

Common stock is a type of stock that a joint stock company issues
without pre-fixing the dividend amount to be paid to shareholders, but
the dividend depends on the operating results and dividend payment
policy of the company.
Valuation of common stocks when investors implement the
strategy of permanently holding stocks to enjoy dividends:
1
X Dt
V = ,
(1 + re )t
t=1

where
• Dt : Dividends received in year t;
• re : Discount rate or required rate of return of investors.
 Stock valuation method
Valuation of common stocks when an investor follows the
strategy of holding the stocks for n years, then reselling it at an
expected price of Pn :
n
X Dt Pn
V = + .
(1 + re ) t (1 + re )n
t=1

Applying the above two formulas will encounter 3 basic difficulties:

• it is difficult to forecast income (Dt ) and the value of resale
shares or the value of shares at the time of liquidation or
bankruptcy of the enterprise in the future;
• It is difficult to find the appropriate discount rate, because
investing in stocks is a type of investment that carries a lot of risk
and uncertainty about future income;
• It is difficult to determine the time of dividend payment.
To overcome the above difficulties, we can find rules to determine
income streams from stocks through the rule of dividend payments.
 Stock valuation method

Valuation of common stocks according to the dividend discount

model (from the perspective of minority investors): This model is
based on the following assumptions:
• Forecast in advance dividend growth: Assuming this year’s
dividend payment is D0 , the dividend growth rate of the following
years is forecast to be g1 , g2 ,...
• The discount rate can be determined in advance: suppose the
present rate is re .
• The discount rate is greater than the dividend growth rate:
re > g1 , g2 ,...
Valuation formula:
1 1
X Dt X D0 (1 + g1 )(1 + g2 ) · · · (1 + gt )
V = = .
(1 + re ) t (1 + re )t
t=1 t=1
 Stock valuation method
In practice, forecasting dividend growth is complicated, so to be able
to describe and model it, we often consider dividend growth through a
number of special cases as follows:
• In case the dividend growth rate remains constant over the years
(gi = g):

D0 (1 + g)t
1
X D1 D0 (1 + g)
V = = = .
(1 + re )t re g re g
t=1

• Where the dividend growth rate changes over each period.

Example 1: The dividend of ABC stock in the current year is 5,500
VND, this dividend growth rate is expected to be 8%/year in the
future. What is the price of this stock if investors require a profit rate
of 14%/year?

D0 (1 + g) 5.500(1 + 8%)
V = = = 99.000 (VND).
re g 14% 8%
 Stock valuation method
Example 2: There is information about shares of company ABC as
follows:
• The dividend growth rate from year one to year two is g1
• The dividend growth rate from year three to year five is g2
• The dividend growth rate from the sixth year onwards is g3 .
Then:
1 5
X Dt X Dt D6
V = = + .
(1 + re ) t (1 + re )t (re g3 )(1 + re )5
t=1 t=1

Note: The dividend discount model can be applied to stock valuation

in cases where the dividend growth and discount rate are identified.
However, this model cannot be applied in cases where the company
retains all profits for reinvestment and does not pay dividends to
shareholders. In this case, investors still accept to buy stocks with the
goal of enjoying price differences, not dividends.
 Stock valuation method
Valuation of common stocks using the discounted cash flow
(DCF) model (from the perspective of the majority investor):
From the perspective of the majority investors, in addition to the goals
of enjoying shares dividends and stock price differences, they also
aim at opportunities to increase control of the enterprise. Valuation
formula:
n
X CFt Vn
V = + ,
(1 + r )t (1 + r )n
t=1

where
• V : Enterprise value;
• CFt : Net income of the enterprise in year t;
• Vn : Estimated enterprise value at the end of the operating cycle
or the end of the analysis cycle;
• r : Discount rate;
• n: Number of operating years or years of analysis period.
 Stock valuation method

When valuing stocks from the perspective of the majority of investors,

we usually proceed in the following steps
1 Implement long-term forecasts of future cash flows: forecast
revenue, costs, investment capital and withdrawals of investment
capital from annual operations; forecast of the investment cycle
(n) and the enterprise’s investment at the end of the investment
cycle.
2 Determine the appropriate discount rate: we should express the
time value of money and take into account the risk factor.
Normally, we use the average cost of capital, which is the
opportunity cost of capital invested in the enterprise.
3 Determine the present value of the net cash flows at the selected
discount rate.
 Stock valuation method

Example: Information about cash flow, discount rate and ABC

enterprise valuation content are as follows:

Financial Indicators (Unit: billion VND)

Indicators Year 1 2 3 4 5 Final value
1. Revenue 100 120 150 130 110
2. Total costs 60 70 80 78 73
3. Depreciation 10 10 10 8 8
4. Interest 5 5 5 5 5
5. Taxable income (1-2-3-4) 25 35 55 40 25
6. Corporate income tax (5×20%) 5 7 11 8 5
7. After-tax income (5-6) 20 28 44 32 20
8. Cash inflow (3+4+7) 35 43 59 44 32
9. Investment in fixed assets (7) (6) (4)
10. Change in working capital (5) (5) (5) (2)
11. Net cash flow (8-9-10) 23 38 48 38 32 320
12. Discount rate 10% 10% 10% 10% 10% 10%
13. Present value 20.91 31.4 36.06 25.95 19.87 198.69
14. Present value of liabilities 12.5
15. Enterprise value 320.2
 Stock valuation method

Where
• The continuing value of the enterprise is the expected value at
the end of the investment cycle (end of year 5), usually
calculated by the present value of the enterprise’s net cash flow
stabilized from year 5 onwards:

32
V5 = = 320.
10%
• With the assumption that the enterprise’s current debts is 12.5
billion VND, the value of ABC enterprise is:

(20, 91+31, 4+36, 06+25, 95+19, 87+198, 69) 12, 5 = 320, 2

(billion VND).
 Stock valuation method

Advantages of stock valuation method

• The stock valuation method allows direct access to income in the
form of dividends to determine corporate value.
• This method is especially suitable for minority investors’ views
and assessments of corporate value.
• This method appears to be quite suitable for enterprises whose
shares are listed and traded on the stock market, or when
determining net asset value is difficult and the enterprises with
insignificant tangible assets but highly valued intangible values,
such as those operating in the fields of consulting, services,
finance, banking, and insurance. ..
 Stock valuation method

Limitations of stock valuation methods

• Determining the real value of a stock based on a dividend stream
forecast is often not easy.
• To determine the dividend stream, one must also know the future
dividend policy.
• Assuming predetermined parameters makes modeling easy, but
is generally not close to reality.
 Method of discounting net profits
Basis of the method
According to the principle of income distribution of the enterprise,
based on the revenue achieved during the period, the enterprise will
use it to offset costs and fulfill tax obligations to the State, and the
remainder is net profit (net profit) which belongs to the enterprise
owner. Therefore, the value of a enterprise is measured by the
magnitude of the net profits that the enterprise can bring to the owner
during the existence and operation of the enterprise.
Method content
n
X Prt
V0 = ,
(1 + i)t
t=1

where
• V0 : Enterprise value
• Prt : Net profit of the enterprise in year t
• i: Discount rate
• n: Number of years receiving profit.
 Method of discounting net profits
Determining net profit: we often do not use the enterprise’s net
profit data in the financial statements but must make certain
adjustments as follows:
• Depreciation of fixed assets: Valuation experts often have to
recalculate depreciation deductions for fixed assets because the
enterprise always depreciates according to the original cost on
accounting books, which has not been re-evaluated at the time of
valuation of the enterprise.
• Unusual excess expenses: For some expenses such as salaries
of private business owners, excess bonuses of some business
leaders, from an accounting perspective, these expenses have
been allowed by tax authorities to be included in deductible
expenses. However, from a financial perspective, if these
expenses are larger than normal and have exceeded their nature
as expenses, then the excess expenses should be considered as
income - included in net profit of the enterprise.
 Method of discounting net profits

• Cost allocation: Whether net profit in accounting is high or low

depends on the method of allocating costs to inventory at the
end of the accounting period. Therefore, it is necessary to adjust
the cost allocation criteria or methods to be consistent between
different business periods, to correctly determine the true profit of
the enterprise.
• Unusual expenses and income: These are expenses that arise
beyond the control of the enterprise and do not accurately reflect
the general trend of the enterprise’s activities, so they also need
to be excluded to ensure objectivity and not being influenced by
unusual factors of the enterprise.
• Tax: Each of the above adjustments changes the corporate
income tax. Therefore, it is necessary to recalculate the amount
of income tax. This recalculated tax acts as a theoretical tax and
is used to recalculate net profit every year.
 Method of discounting net profits

After making adjustments to past net profits, we often apply the

arithmetic average or weighted average method to determine future
net profits as follows:
• Calculating arithmetic average: Based on adjusted net profit to
calculate according to the simple arithmetic average method.
• Calculating weighted average: This method is based on the
argument that the profits of years closer to the present time, the
more accurately they reflect the current capacity of the
enterprise, so the higher the weight must be given. The choice of
weights depends entirely on the subjectivity of the evaluator.
 Method of discounting net profits

Determining the discount rate: should reflect the time value of

money, the opportunity cost of capital and the level of risk that buyers
must bear when investing capital in the enterprise.

In practice, we often choose the discount rate as the Treasury bond

interest rate or long-term loan interest rate or is calculated as the
inverse of the PER ratio (P/E Ratio). Depending on the type of
business, the discount rate usually fluctuates between 20% - 30%.

Example. The net income of Company A is expected to be 3 billion

VND per year in the future, with a capitalization rate of 12% per year.
Calculate the value of the company.
Solution: 3/(12%) = 25 billion VND.
 Method of discounting net profits

Advantage
• This method is often used for enterprises that do not have many
assets to depreciate, the ability to accumulate capital from
depreciation and retained profits is insignificant, and enterprisees
that do not find future investment opportunities, so most of the
profit after tax will be used to pay dividends to investors.
• According to this method, forecasting the parameter Pr (net
profit) is always easier than forecasting the dividend income
stream, because one does not need to take into account the
dividend policy of the enterprise.
• For enterprisees that find it difficult to find new investment
opportunities, using this method will further help experts evaluate
with high accuracy the business cycle of the enterprise, by
relying on average depreciation time of fixed assets, instead of
assuming n.
 Method of discounting net profits

Limit
• This method may not be suitable for both minority and majority
investors when the applicable conditions are not fully satisfied.
• Adjusting past data to draw the regularity of future profits is also
not consistent with the strategic view of the enterprise. Especially
for newly established enterprises, past data is not enough to
evaluate.
• Similar to the stock valuation method, assumption on n is not
appropriate in practice.
 Method of discounting and capitalizing

Basis of method
The cash flow that the company generates during the period will be
used for different purposes such as paying interest, debt, paying
taxes,... and related to many different entities such as creditors,
government agencies, investors, etc. In the process of dividing the
cash flow that the company generates, the owner will be the last to
receive the income. Therefore, if you can determine the cash flow for
the owner or the cash flow for both owners and creditors, you can
completely determine the value of the enterprise.

Method content
According to this method, there are two cases of estimating
enterprise value by capitalizing or discounting cash flows: based on
equity value and based on the value of the entire enterprise (including
common equity, preferred shares, bonds, etc.).
 Method of discounting and capitalizing

Determine the value of enterprise equity

The value of enterprise equity is determined by discounting the net
cash flow of equity (this is the remaining cash flow after deducting all
costs, taxes, interest and principal) based on cost of capital or
required rate of return of shareholders
n
X FCFEt
V0 = ,
(1 + re )t
t=1

where
• V0 : Present value of equity cash flows;
• FCFEt : Expected net cash flow to equity in year t;
• re : Cost of equity capital.
 Method of discounting and capitalizing

Free Cash Flow to Equity (FCFE) is the remaining cash flow after
deducting interest payments, debt, capital expenditures and new
asset investments for future growth of the enterprise:
FCFE = (Net profit) + (Depreciation) - (Net fixed asset expenditures) -
(Changes in working capital) - (Principal repayments) + (New debts).
Determining enterprise value based on FCFE can be conducted
according to the following two basic models:
 Method of discounting and capitalizing
Steady growth of equity net cash flow model:

FCFE1
V0 = ,
re g

where
• V0 : Current equity value of the enterprise.
• FCFE1 : Expected equity cash flow in the first year.
• re : Cost of using equity capital of the enterprise.
• g: Stable FCFE growth rate.
Example: Company ABC has an expected net cash flow of equity
next year of 180 billion VND, the company’s cost of equity capital is
12%/year, the net cash flow growth of equity is stable at 5%/year.

At that time, the company’s equity value is:

180
V0 = = 2571, 43 billion VND.
12% 5%
 Method of discounting and capitalizing
Multi-period growth equity net cash flow model: This is a model
that estimates the equity value of an enterprise with a FCFE growth
rate that is expected to grow rapidly during the first stage and reach
stable growth in the next stage (2 stages) or then gradually decrease
to stable growth (3 stages).
n
X FCFEt Vn FCFEn+1
V0 = + , where Vn = ,
(1 + re )t (1 + re )n re g
t=1

where
• V0 : Current equity value of the enterprise.
• FCFEt : Expected equity cash flow in year t.
• re : Cost of using equity capital of the enterprise.
• Vn : Expected equity value at the end of year n.
• g: Stable FCFE growth rate after year n.
 Method of discounting and capitalizing
For example: Company ABC has an expected net cash flow of equity
in the first year of 180 billion VND, the company’s cost of equity is
12%/year, the growth rate in years 2 and 3 is 5%, year 4 and 5 is 3%
and from year 6 onwards growth is stable at 2%/year.

Then, the company’s equity value is determined:

FCFE1 = 180 billion VND
FCFE2 = 180(1 + 5%) = 189 billion VND
FCFE3 = 189(1 + 5%) = 198, 45 billion VND
FCFE4 = 198, 45(1 + 3%) = 204, 404 billion VND
FCFE5 = 204, 404(1 + 3%) = 210, 535 billion VND
FCFE6 = 210, 535(1 + 2%) = 214, 746 billion VND
214, 746
V5 = = 2147, 46 billion VND
12% 2%
FCFE1 FCFE2 FCFE3 FCFE4
V0 = + 2
+ 3
+ +
1 + 12% (1 + 12%) (1 + 12%) (1 + 12%)4
FCFE5 + V5
= 1927, 703 billion VND.
(1 + 12%)5
 Method of discounting and capitalizing

Determine the value of the entire enterprise

The value of the entire enterprise (V) is determined by the discounted
method of the enterprise’s expected net cash flow (remaining cash
flow after deducting taxes and operating expenses but not yet
deducting debt payment obligations) according to the weighted
average cost of capital according to the proportion of the market
value of each factor
n
X FCFFt
V = ,
(1 + WACC)t
t=1

where
• V : Value of the entire enterprise.
• FCFFt : Free Cash Flow to the Firm in year t.
• WACC: Weighted average cost of capital of the enterprise.
 Method of discounting and capitalizing

Free Cash Flow to the Firm (FCFF) is the total cash flow of all entities
with rights to the enterprise’s assets, including owners and
bondholders. FCFF can be determined in one of two ways:
1 Add up all the cash flows of the entities that have rights to the
enterprise’s assets:
FCFF = FCFE + (Interest expense) x (1-Tax rate) + (Principal
repayments) - (New debts) + (Preferred stock dividends)
2 Using Earnings Before Interest and Taxes (EBIT) as a basis for
calculation:
FCFF = EBIT x (1-Tax rate) + (Depreciation expense) - (Capital
expenditure) - (Change in working capital)
On the basis of determining FCFF, it is possible to apply stable
growth rate models or multi-stage growth rate models as stated in the
section on determining equity value according to FCFE above to
determine the value of the entire enterprise.
 Method of discounting and capitalizing
Advantages and limitations
• Advantages: The model for determining the value of the entire
enterprise has the advantage of allowing the assessment of
enterprise value on the basis of discounting future benefit
streams belonging to each group of entities with rights to
enterprise assets, meaning enterprise value only includes the
value of useful assets and the value of cash flows belonging to
subjects with rights to the enterprise’s assets.
• Limitations: This model can only be applied when the net cash
flow of equity (FCFE) or net cash flow of the enterprise (FCFF)
and appropriate discount rate can be determined. This model
appears to be inappropriate for enterprises that are in the
process of restructuring because it cannot estimate cash flow,
and is also not appropriate for enterprises that are not listed on
the stock market because the coefficients cannot be calculated.
The enterprise’s risk cannot be determined by an appropriate
discount rate.
 Goodwill quantitative method

Basis of method
Businesses with commercial advantages such as better business
location, higher product quality, better management level, etc. will
gain outstanding profits. Goodwill is an intangible asset that can bring
income to an enterprise. Therefore, enterprise value will include the
value of tangible assets and the value of intangible assets such as
goodwill.

Method content
V0 = ANC + GW ,
where
• V0 : Enterprise value
• ANC: Net asset value of the enterprise
• GW : Value of intangible assets, or value of goodwill.
 Goodwill quantitative method

GW is determined as follows:
n
X Bt rAt
GW = ,
(1 + i)t
t=1

where
• Bt : Profit in year t.
• At : Value of assets put into business in year t.
• r : Normal rate of return of assets put into business.
• r .At : Normal return of asset in year t.
• Bt r .At : Super profit in year t.
• i: Discount rate.
 Goodwill quantitative method

Views on selecting parameters BT , AT and r

UEC method (European Association of Accounting Experts):
This method selects parameters on the basis that the enterprise’s
assets are also funded by debt.
• r : Average cost of capital of medium and long-term capital
sources (WACC)
• Bt : Earnings before interest and taxes (EBIT)
• At : Total asset value (regardless of which source the asset is
financed).
Anglo - Saxons method: This method selects parameters with
emphasis on risk factors.
• r : Cost of equity (re )
• Bt : Net profit
• At : Net asset value (equity) revalued.
 Goodwill quantitative method

CPNE method (regular capital needed for business): This method

considers an enterprise as an available investment project aimed at
achieving super profits.
• r : Average cost of capital of medium and long-term capital
sources (WACC)
• Bt : Profit after tax before interest on medium and long-term loans
• At : Regular capital funded by stable sources (equity capital,
medium and long-term loans).
Each method of selecting different parameters will produce a different
intangible asset value. That difference comes from investors’ different
perceptions of opportunity costs.
 Goodwill quantitative method

To simplify the calculation, the researchers recommend that one can

choose:
• The "normal" return rate of assets is equal to the average profit
rate of businesses in the same industry, or equal to the inverse of
the PER ratio of similar businesses listed on the stock market.
• The value of assets put into business (At ) can be revalued at
market price and determined according to the net asset value
method.
• The discount rate is determined based on the Government bond
interest rate, then plus a risk premium.
 Goodwill quantitative method
Example. Company ABC has the following information:
• The company’s net asset value is assessed at 200 billion VND.
• Net profit adjusted and calculated according to the simple
arithmetic average method of the last 3 years is 50 billion VND.
Net profit is estimated to increase by an average of 8% per year
in the next 5 years.
• Dividend payout ratio is stable at 40% of net profit.
• The average profit margin of enterprises with similar production
and business conditions is 15%.
• Government bond interest rate is 10%, average risk rate on the
stock market is 2%. The agreed discount rate is the Government
bond interest rate plus the risk level of the stock market.
Based on the above information, GW in 5 years can be calculated as
follows:
Discount rate = government bond interest rate + risk premium
= 10% + 2% = 12%.
 Goodwill quantitative method

Financial Indicators (Unit: billion VND)

Indicators Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
1. Net profit: increasing 8% annually 50 54 58.32 62.99 68.02 73.47
2. Dividend payout (40%) 21.6 23.33 25.19 27.21 29.39
3. Retained earnings added to assets (1-2) 32.4 34.99 37.79 40.81 44.08
4. Initial net asset value 200
5. Net asset value per year 232.4 267.39 305.18 346.00 390.08
6. Normal profit of assets (5 x 15%) 34.86 40.11 45.78 51.90 58.51
7. Supernormal profit (1-6) 19.14 18.21 17.21 16.12 14.95
8. Discount factor 1/(1+12%) 0.89 0.80 0.71 0.64 0.57
9. Present value of supernormal profit 17.09 14.52 12.25 10.25 8.49

Based on the results in the table above, it can be determined:

GW = 17.09 + 14.52 + 12.25 + 10.25 + 8.49 = 62.59 billion VND.
ABC corporate value:

ANC + GW = 200 + 62, 59 = 262, 59 billion VND.

 Goodwill quantitative method
Advantages of Goodwill quantitative method
• The Goodwill quantitative method is the method with the most
solid theoretical basis because this method represents a
combination of valuing an enterprise’s existing assets according
to the net asset value method with the valuation of existing
assets of a enterprise according to the net asset value method
and valuation of intangible factors or commercial advantages that
can bring value to an enterprise.
• In this method, errors in asset valuation can be compensated for
each other.
• This method creates a basis for people to analyze the impact of
business risk factors and interest rate risk on enterprise value.
• This is a enterprise valuation method that takes into account both
the interests of buyers and sellers.
• If the data information bases achieve the necessary reliability to
calculate the parameters, the GW quantitative method always
brings higher reliability than other methods.
 Goodwill quantitative method
Limitations of the Goodwill quantitative method
• Estimating super profits will lack a basis for forecasting time
parameters (n) and a lack of basis to build hypotheses about
future profits.
• This method represents a combination of the net asset value
method and the method of realizing super profits. Therefore, it
also encounters limitations in current asset valuation (such as:
valuation of special assets, assets not for sale on the market,
obsolete assets, etc.), parameters governed by subjective factors
(such as: Future profits, current rate,...).
• According to the calculation formula, assets put into business
(At ) are amplified according to the normal profit rate (r ), meaning
GW varies inversely with r . Therefore, the smaller the choice r
is, the larger the value of GW will be. However, the choice of r is
often not well-founded or careless, easily leading to mistakes or
inaccuracies in the value of GW .
 Method based on P/E ratio

P/E ratio
The price to earning ratio of a share, abbreviated as PER or P/E, is
P
determined by the ratio EPS , in which
• P: price of the share,
• EPS: net income of the share.
Assuming annual net earnings per share (EPS) are constant, the
price of the stock can be determined by the capitalization formula

EPS P 1
P= ) = .
r EPS r
Therefore the P/E ratio is the inverse of the current ratio (r ). P/E
represents the correlation between the stock trading price on the
market and the net profit that the enterprise can bring to investors or
also reflects the market price for the amount of income it can receive
from the enterprise.
 Method based on P/E ratio

Basis of method
The P/E ratio shows how much the market is willing to pay for a unit
of net income from a stock. Therefore, the P/E ratio is considered a
coefficient that converts income into capital according to market
acceptance, or a coefficient to evaluate the potential level of income
capitalization of an enterprise.
• The P/E will be higher the greater the prospect of increasing
annual profits of the enterprise and the lower the level of risk to
profits.
• When the P/E ratio of business A is higher than that of business
B, it proves that business A is considered by the market to have
higher profit growth prospects than business B.
 Method based on P/E ratio

Method content
If the stock market operates perfectly, the P/E ratio will accurately
reflect the correlation between the fair value of a stock and the
average net profit per share of the enterprise. Then, the enterprise
value can be estimated according to the formula:

(Enterprise value) = (Expected profit) x (P/E).

In particular, the commonly used P/E is that of large companies that
are regularly announced on the stock market or uses the average P/E
of businesses in the same business sector with securities traded on
the market.
 Method based on P/E ratio

Example. Company ABC has 1,000,000 common shares outstanding

and has an average net profit of 1,500 million VND. Current stock
selling price is 30,000 VND. If the net profit of the enterprise expected
to be achieved in the coming years is 1,800 million VND, the
enterprise value is calculated as follows:
• Average earning per common share: EPS =
1,500,000,000/1,000,000 = 1,500 VND/share
• Past P/E ratio: 30,000/1500 = 20
• Estimated enterprise value: 1,800 x 20 = 36,000 million VND
• Estimated value of one share: 36,000,000,000/1,000,000 =
36,000 VND.
 Method based on P/E ratio

Example. The information of 3 enterprises B, C, D operating in the

same industry as enterprise A is as follows:

Criteria B C D
Revenue 27,000,000 13,500,000 9,200,000
Net profit 2,500,000 1,500,000 700,000
Depreciation + Net profit 3,500,000 2,500,000 1,200,000
Number of shares outstanding 1,200,000 3,200,000 500,000
Market share price 12 3 8

In recent years, enterprise A has achieved an average revenue of 25

billion VND, net profit of 1.8 billion VND and annual depreciation of
fixed assets of 1.2 billion VND. Estimate the value of enterprise A
based on the information of the 3 enterprises B, C, D mentioned
above.
 Method based on P/E ratio

Based on the above information, we can calculate relevant indicators

to estimate the value of enterprise A as follows:
Indicators B C D Average
1. Revenue 27,000,000 13,500,000 9,200,000
2. Net profit 2,500,000 1,500,000 700,000
3. Depreciation + Net profit (CF) 3,500,000 2,500,000 1,200,000
4. Number of shares 1,200,000 3,200,000 800,000
5. Revenue per share 22.5 4.219 11.5
6. Net profit per share 2.083 0.468 0.875
7. CF per share 2.916 0.781 1.5
8. Market price per share 12 3 8
9. Price/revenue (8x4/1) 53.33% 71.11% 69.57% 64.67%
10. P/E ratio (8/6) 5.76 6.41 9.14 7.10
11. Price/CF (8x4/3) 4.114 3.84 5.333 4.429
 Method based on P/E ratio

Estimated value of enterprise A is as follows:

• Estimated by revenue: 25 x 64.67% = 16,167 billion VND
• Estimated by P/E ratio: 1.8 x 7.1 = 12.78 billion VND
• Estimated by CF: (1.8 + 1.2) x 4,429 = 13,287 billion VND.
The value of enterprise A is the average value of the estimated
results according to the above indicators:

16, 167 + 12.78 + 13, 287

= 14, 078 billion VND.
3
 Method based on P/E ratio

Advantages of the P/E ratio valuation method

• The method of valuing a enterprise using the P/E ratio can be
done quickly and easily because the valuer can easily collect the
necessary information on the stock market.
• When the stock market operates stably and speculative factors
can be reduced to the lowest level, this method will become a
very popular evaluation method, not only for businesses with
securities traded on the market.
 Method based on P/E ratio
Limitations of the P/E ratio valuation method
• The method of using the P/E ratio to value an enterprise is a
method with an unclear theoretical basis and is based on
experience.
• Relying on the P/E ratio will not be able to explain the difference
in stock prices between similar businesses participating in
transactions on the stock market. This means that with the same
level of EPS achieved, the P/E ratio can be very different.
• This method also does not provide the basis for analysis and
assessment of growth potential and risks affecting enterprise
value.
• The ratios of businesses used to compare with the enterprise
that need to be valued may also be inaccurate when the stock
market overvalues or undervalues these businesses. Besides,
this method cannot be applied to enterprises that do not have
shares traded on the stock market.
 Exercise

Exercise 1
Enterprise XYZ has the following documents:
Balance Sheet (Unit: 1,000,000 VND)
Assets Amount Liabilities and Equity Amount
A: Current Assets 500 A: Liabilities 600
1. Cash 30 1. Short-term loans 170
2. Short-term securities 120 2. Short-term payables 30
3. Short-term receivables 100 3. Long-term loans 400
4. Inventory 200
5. Other current assets 50
B: Long-term Assets 1500 B: Owner’s Equity 1400
1. Residual value of fixed assets 500 1. Owner’s invested capital 1150
2. Leased fixed assets 200 2. Retained earnings 250
3. Investment in ABC company 220
(2200 shares)
4. Joint venture capital 400
5. Long-term leased assets 180
Total assets 2000 Total liabilities and equity 2000
 Exercise
When re-evaluating all existing assets of the enterprise, some
changes are shown as follows:
• Some receivables that cannot be collected are 30 million VND,
the remaining amount is classified as hard to collect. The debt
trading company said they are willing to buy back this debt for an
amount equal to 30% of the value of the debt.
• Raw materials in inventory were of poor quality, and according to
re-evaluation results, their value was reduced by 50 million VND.
• Tangible fixed assets re-evaluated at market price increased by
120 million VND.
• Enterprise XYZ also has to pay rent for fixed assets for 10 years,
30 million VND each year. If you want to rent a fixed asset with
similar conditions at a current time, you usually have to pay 35
million VND per year.
• The stock price of ABC company at the Stock Exchange at the
time of evaluation was 110,000 VND/share.
• The capital contribution to the joint venture was re-evaluated to
increase by 10 million VND.
 Exercise
• According to the property lease contract, the lessee must also
pay the rent in installments over 20 years, each year paying an
equal amount of 15 million VND.
• The average return on capital in the market is 20%/year.
Estimate the value of XYZ using the net asset value method.
Exercise 2
MNP Joint Stock Company is circulating 70,000 shares with a market
price of 90,000 VND/share. The portion of profit after tax reserved for
paying dividends to shareholders in year N is 350 million VND. In the
coming years, the company estimates that dividend payments to
shareholders will increase at a rate of 3%/year. The average rate of
return on investment capital in the market is determined to be
12%/year.
• From the perspective of a minority investor, estimate the real
value of a share of MNP company and comment on the price of
MNP’s shares currently trading on the market.
 Exercise
• Mr. A and Ms. B are considering investment opportunities in
MNP company. Mr. A’s minimum required rate of return is 9%,
Ms. B’s is 10%. What are decision they should make when the
company’s stock price drops to 70,500 and 80,000 VND/share?
Exercise 3
Company XYZ has the following documents:
 Exercise

Additional information:
• Income from financial activities and other activities that arise are
of an unusual nature, beyond the business’s ability to forecast.
• The enterprise is at the end of the investment cycle, depreciation
is insignificant.
• The survey results show that economic experts evaluate the
profitability weight of the years: N 2, N 1 and N compared to
the future as: 1, 2 and 3 respectively.
• The average cost of capital in the market is 12%/year.
Estimate the value of ABC Company according to the Method of
discounting net profits.
 Exercise
Exercise 4
Thang Long Mechanical Company is a one-member LLC owned by
the State and is in the process of converting into a joint stock
company, with the following documents:
 Exercise
Original price and accumulated depreciation of each group of fixed
assets as of December 31, 2019:
Group of fixed assets Original cost Accumulated depreciation
Houses, structures 850 400
Machinery, equipment 580 350
Transport 250 160
Management tools 120 80
Other fixed assets 70 30
Total 1,870 1,020

According to the document guiding re-evaluation of inventory and

fixed assets dated December 31, 2019:
• The revaluation coefficient of fixed assets: Houses and
architectural objects is 0.8; Machinery and equipment is 0.9;
Transport is 0.7; Management instrument is 0.8; Other fixed
assets are 0.7.
• The residual value coefficient for inventory is 0.9.
• Other assets and liabilities remain unchanged.
 Exercise

Statistics on capital and profit after tax in recent years:

Criteria N–3 N–2 N–1 N
Profit after tax 115 112 118 120
Capital 1,650 1,680 1,750 1,790

The average ratio of profit after tax on capital in the field is 12%.

Estimate the value of Thang Long Mechanical Company using the

GW method.