A = L + E (Investment - Withdrawal + Revenue - Expenses)

Net Income = Revenue - Expense

Going Concern = Book Value

Cost XXX
Less: Accumulated Depreciation (XXX)
Book Value / Carrying amount XXX

PORTFOLIO MANAGEMENT (ASSETS AND INVESTMENT)

PAPER MONEY
Stocks
Ordinary Shares
Buyer = Investor > Return > Dividend
JFC - Jollibee 10,000
Metropacific - Maynilad 5,000
SMC - San Miguel 8,000
TEL - PLDT 7,000 30,000 Month

Money Market
Bonds
Treasury Bills

REAL PROPERTY
Land
Buidling
Airbnb 1 - Cubao 54,000.00
Airbnb 1 - Ortigas 54,000.00 108,000.00 Month

BUSINESS
Clothing business 30,000 Month

Monthly 168,000.00

Fundamental Analysts
Stocks
Ordinary Shares
Buyer = Investor > Return > Dividend
JFC - Jollibee 17-Mar-20 15-May-21
Cost per share ₱90.00 ₱223.00 Intrinsic Value
# shares 1000 1000
Total Cost ₱90,000.00 ₱223,000.00 ₱133,000.00

Before pandemic = How much

Activist investor
•Activist investors tend to look for companies with good growth
prospects that have poor management.
 Business
Traditional Method
Start a new business
Kalven Milktea

Unconventional Method
Buy a business
PLDT Manny Pangilinan Telecomunication
Energy distribution (Electricity)
Bought

•Chartists — Chartists relies on the concept that stock prices are significantly influenced by
how investors think and act.

•Information Traders — Traders that react based on new information about firms that are
revealed to the stock market.

·Acquisition — An acquisition usually has two parties: the buying firm and the selling firm.
The buying firm needs to determine the fair value of the target company prior to offering a bid price.
Equitable Bank Buy PCI Bank New Entity Equitable PCI Bank

Firm Value = Net Assets / Equity

150,000.00 50,000.00 100,000.00
Assets Liabilities Equity
Fair Value Fair Value FIRM VALUE
200,000.00 75,000 125,000.00
Fair Market Value of the target company
A Co 150,000 B 170,000

·Merger — General term which describes the transaction wherein two companies had their assets
combined to form a wholly new entity. 
Aunnie Co Opa Co Halmony Co
Associate Company New Company

·Divestiture — Sale of a major component or segment of a business (e.g. brand or product line) to another company.  
Proctor & Gamble San Miguel Corporation
Tide
Ariel
Pampers Sell Pampers

·Spin-off — Separating a segment or component business and transforming this into a separate legal entity. (Company)
Proctor & Gamble Tide Corporation (New Company)
Tide Profitable Incorporate
Ariel
Pampers

·Leveraged buyout — Acquisition of another business by using significant debt which uses the acquired business as a collat
PLDT
Many Pangilinan wants to buy Meralco 10,000,000

Borrowed from Bank (BDO) 10,000,000

Manny Pangilinan Meralco as Collateral

·Synergy — potential increase in firm value that can be generated once two firms merge with each other.
MERGER
Tiger Sugar Gongcha Tiger Gongcha
Aunnie Co Opa Co Halmony Co
Associate Company New Company
A 150,000 250,000 400,000
L 25,000 10,000 35,000
E 125,000 240,000 365,000 Firm Value Customer = Intrigue = Big Sales
Equity = Firm Value
A = L + E (Investment - Withdrawal + Revenue - Expenses)
E = Equity = Firm Value Net Income Potential increase in Firm Value (NET INCOME)

·Control — change in people managing the organization brought about by the acquisition.
BDO Acquired Equitable PCI Bank

1.Understanding of the business 

Industry - Fast Food Chain Kalven Fast Food Chain
Average Firm Value Forecast
A 500,000 A 1,500,000 133,100.00
L 25,000 L 100,000
E 475,000 E (+ R - E) 1,400,000 133,100.00
Firm Value Firm Value

2.Forecasting financial performance (INCOME STATEMENT)

2019 2020 2021 2022
Sales 100,000.00 110,000.00 121,000.00 133,100.00 Cash Sales Sales Credit
Trend 110% 110% Cash (A) Account Receivable (A)
100% 100% Sales (E) Sales (E)
10% 10%
121,000.00 100%
3.Selecting the right valuation model 12,100.00 10%
Calculating the Firm Value A=L+E 133,100.00 110%

4.Preparing valuation model based on forecast

5.Applying valuation conclusions and providing recommendation

ØCost leadership — It relates to the incurrence of the lowest cost among market players with quality
that is comparable to competitors allow the firm to price products around the industry average. 
Clothing Kalven Clothing
Per pc Cloth ₱25.00
Sewing Cutting ₱30.00
Packaging ₱10.00
Total Cost 1 Tshirt ₱65.00

Sell ₱150.00
Cost ₱65.00
Gross profit 1 Tshirt ₱85.00
Sell 10,000 pcs T-shirt 10,000
Total Gross ₱850,000.00

ØDifferentiation — Firms tend to offer differentiated or unique product or service characteristics that
customers are willing to pay for an additional premium. 
Iphone Cherry Mobile
Battery life longer Battery life Shorter
Camera HD Camera - Normal
55,000 25,000

ØFocus — Firms are identifying specific demographic segment or category segment to focus on by

using cost leadership strategy (cost focus) or differentiation strategy (differentiation focus) 
Demographic Category
Location Cost Lowest Possible
Target customer ( Adult, young adult Differentation Very unique
Teenager, Kids)
(Electricity)
MERALCO

itable PCI Bank

f the target company

e) to another company.  

ate legal entity. (Company)

e acquired business as a collateral.  

h each other.

tomer = Intrigue = Big Sales

n Firm Value (NET INCOME)

2022
1,633,100
100,000
1,533,100

ount Receivable (A)

121,000.00
110%
133,100.00
Michael Clothing
₱35.00
₱40.00
₱20.00
₱95.00

₱150.00
₱95.00
₱55.00
10,000
₱550,000.00
Income = Cash a. Cash Sales
1,000 1,000 Particulars Debit Credit
2,000 2,000 Asset Cash 1,000
Income Sales 1,000

b. Sales on Accounts - Collection

Particulars Debit Credit Accounts Receivable
Accounts Receivable 2,000 2,000
Sales 2,000 0

Collection
Particulars Debit Credit
Cash 2,000 Sales
Accounts Receivable 2,000

Fraudulent Correct
Income Statement 2021 Income Statement 2021
INCOME INCOME
Sales 1,000,000 Sales 50,000
Gain 25,000 Gain 0
Total Income 1,025,000 Total Income 50,000

EXPENSES EXPENSES
Rent Expense 250,000 Rent Expense 250,000

Net Income 775,000 Net Loss -200,000

On December 31, 2021 cash sales 50,000 Gain is actually non-operating gain
Cash 50,000 Gains that is not from the normal course
Sales 50,000 of business

Accelerated Revenue Recognition

On January 1, 2022 cash sales of 950,000
Cash 950,000
Sales 950,000

Fraudulent Correct
Income Statement 2021 Income Statement 2021
INCOME INCOME
Sales 1,000,000 Sales 1,000,000
Total Income 1,000,000 Total Income 1,000,000

EXPENSES EXPENSES
Insurance Expense 0 Insurance Expense 1,500,000
Depreciation Expense 200,000 Depreciation Expense 1,000,000
Net Income 800,000 Net Loss -1,500,000

December 31, 2021 the company paid for the December Insurance for the amount of 1,500,000 cash
Fraudulent Correct
Particulars Debit Credit Particulars Debit Credit
Prepaid Insurance 1,500,000 Insurance Expense 1,500,000
Cash 1,500,000 Cash 1,500,000

Prepaid Expense - when you paid expenses

in advance for a several period
December 31, 2021 the company paid for 2 years Insurance for the amount 2,400,000

Building amounting to 10,000,000

Fraudulent Correct Life
50 Years 10 Years
Particulars Debit Credit Particulars Debit Credit
Depreciation Expense 200,000 Depreciation Expense 1,000,000
Accumulated Depreciation 200,000 Accumulated Depreciation 1,000,000
(10,000,000/50) (10,000,000/10)

Top-down forecasting approach Bottom-up forecasting approach

Budgeting Department - Top Executive Production Ask Maximum capacity of our machine
They are going to make an estimate and how many can produce
based on the historical perfomance of the
company 80,000 pcs t-shirt
Clothing Industry Marketing Could you s 80,000 pcs t-shirt
2019 2020 2021
T-shirt 100,000 115,000 110,000 Top Management - CEO 80,000 pcs t-shirt
Pcs Pcs Pcs

2022
Average 108,333

Marketing 108,333

Production 108,333

Asset - Liability = Firm Value / Net Assets / Equity

1,000,000 10,000 990,000
900,000 500,000 400,000
1,000,000 950,000 50,000
 Accounts Receivable Cash
2,000 2,000
2,000

Sales
2,000
2,000

e normal course
acity of our machine
y can produce
Net Book Value of Asset= (Total Assets — Total Liabilities)
(Number of Outstanding Shares )

Jollibee Food Corporation in the Year 20xx presented their statement of financial position with the following balances:
Current Assets is 500 Million; Non-current Assets is 1 Billion; Current Liabilities ii 200 Million;
Non-current Liabilities is 700 Million and the Outstanding shares is 1 Million. 
Current Assets 500,000,000 Current Liabilities
Non-current Assets 1,000,000,000 Non-current Liabilities
Total Assets 1,500,000,000 Total Liabilities

Outstanding Shares 1,000,000

Net Book Value of Asset= (Total Assets — Total Liabilities) 1,500,000,000

(Number of Outstanding Shares ) 1,000,000

Replacement Value per Share= (Net Book Value ±Replacement Adjustment)

(Outstanding Shares )
Jollibee Food Corporation in the Year 20xx presented their statement of financial position with the following balances:
Current Assets is 500 Million; Non-current Assets is 1 Billion; Current Liabilities ii 200 Million;
Non-current Liabilities is 700 Million and the Outstanding shares is 1 Million. 
Current Assets 500,000,000 Current Liabilities
Non-current Assets 1,000,000,000 Non-current Liabilities
Total Assets 1,500,000,000 Total Liabilities

Outstanding Shares 1,000,000

Suppose that 50% of the non-current assets has an estimated replacement value of 150% of is recorded net book value while
the remaining half has estimated replacement value of 75% of their recorded net book value. With the
given information, the equity value is adjusted: 

1.Calculate the replacement value of the affected items. 

1st NCA 50% 150% 2nd NCA 50% 75%
Non-current Assets (NCA) 1,000,000,000 1,000,000,000
Portion % 50% 50%
Book Value NCA portion 500,000,000 500,000,000
Replacement Value % 150% 75%
Fair Value Replacement Value 750,000,000 375,000,000

2.Add back the unadjusted components 

Total Current Assets 500,000,000
Replacement Value of Total Noncurrent Assets 1,125,000,000
Replacement Value Total Assets 1,625,000,000
3.Apply the Replacement Value Formula
Replacement Value per Share= (Net Book Value ±Replacement Adjustment)
(Outstanding Shares )

Total Asset 1,500,000,000

Less: Total Liabilities 900,000,000
Net Book Value 600,000,000

Adjustment Value
REPLACEMENT VALUE
Replacement Value 150% 750,000,000
Replacement Value 75% 375,000,000
Total Replacement Value 1,125,000,000
Less: Book Value Noncurrent 1,000,000,000
+Increase Adustment Value 125,000,000

Or
Replacement Value per Share= (Replacement Value Total Asset - Total Liabilities)
(Outstanding Shares )

Reproduction Value per Share= (Reproduction Value Total Asset - Total Liabilities)
(Outstanding Shares )

Jollibee Food Corporation in the Year 20xx presented their statement of financial position with the following balances:
Current Assets is 500 Million; Non-current Assets is 1 Billion; Current Liabilities ii 200 Million;
Non-current Liabilities is 700 Million and the Outstanding shares is 1 Million. 
Current Assets 500,000,000 Current Liabilities
Non-current Assets 1,000,000,000 Non-current Liabilities
Total Assets 1,500,000,000 Total Liabilities

Outstanding Shares 1,000,000

Supposed that it was noted that the 80% of the total noncurrent assets are cheaper by 90% of the book value when reprodu
20% of the total noncurrent asset are comprised of goodwill which upon testing was proven to be valued correctly.

1.Conduct reproduction cost analysis to all assets 80% of the Total Noncurrent Assets if reproduced is equal to 90% of its value
Portion 80% Portion 20%
Non-current Assets 1,000,000,000 1,000,000,000
Portion % 80% 20% 100%
Portion Value Book Value 800,000,000 200,000,000
Reproduction Value % 90%
Reproduction Value 720,000,000 200,000,000 Good Will
2.Adjust the book value to reproduction costs  Book Value
Current Assets 500,000,000 Reproduction
Noncurrent Asset Savings
Reproduction Value 720,000,000
Goodwill 200,000,000 920,000,000
Reproduction Value Total Assets 1,420,000,000

3.Apply the replacement value formula using the figures calculated in the preceding step.
Reproduction Value per Share= (Reproduction Value Total Asset - Total Liabilities)
(Outstanding Shares )
th the following balances:

200,000,000
700,000,000
900,000,000

900,000,000 600,000,000 600

1,000,000 1,000,000

th the following balances:

200,000,000
700,000,000
900,000,000

f is recorded net book value while

e. With the

CA 50% 75%
 600,000,000 125,000,000 725,000,000 725
1,000,000 1,000,000

1,625,000,000 900,000,000 725,000,000 725

1,000,000 1,000,000

th the following balances:

200,000,000
700,000,000
900,000,000

of the book value when reproduced.

n to be valued correctly.

oduced is equal to 90% of its value  

1,000,000,000
 800,000,000
720,000,000 90%
80,000,000 10% It is cheaper by this amount

1,420,000,000 900,000,000 520,000,000 520

1,000,000 1,000,000
Illustrative Example 1 
Pavement Company reported below balances based on its accounting books records. Pavement Company has 250,000 ou
Pavement Company
December 31, 2019
(in ‘000 Philippine Pesos)
Assets Liabilities
Cash  100,000 Notes Payable
Accounts Receivable (A/R) - Net  800,000 Other Liabilities
Inventories 3,500,000 Total liabilities
Prepaid Expenses 100,000
Property, Plant and Equipment (PPE) — Net  4,500,000
Total Assets  9,000,000

Pavement Company is undergoing financial problems and management would like to assess liquidation value as part of the
If assets will be sold/realized, they will only realize amount based on below table. 

Asset Valued At Amount Present Value

Cash 100% 100,000 100,000

A/R – net 85% 800,000 680,000
Inventories 60% 3,500,000 2,100,000
Prepaid Expenses 25% 100,000 25,000
PPE – net 60% 4,500,000 2,700,000
9,000,000 5,605,000

Present Value of Sale of Asset 5,605,000

Less: Present Value of Cost for termination
and settlement for Liabilities 2,000,000
Less: Present Value of Tax Charges for
the Transactions and Other Liquidation Costs 0 2,000,000
Total Liquidation Value 3,605,000

Liquidation Value Per Share Liquidation Value 3,605,000 14.42

Outstanding Shares 250,000

Jollibee
Kalven 1,000 ₱90 ₱90,000.00
Liquidation 1,000 ₱14.42 ₱14,420.00 returned to me

Illustrative Example 2 
Golda Company, which is a company specifically created for a joint venture agreement to extract gold, will end its corpora
expected during the years it still operate is at Php3,000,000 per year. At the end of its life, Golda estimates to incur Php10
rehabilitation costs for its mining site and other costs related to the liquidation process. Cost of capital is set at 10%. Rem
corporate life will be bought by another company for Php 30,000,000 ang remaining debt of Php 4,000,000 will be fully pa
happens now, compute for the value of Golda Company.  10%
100%
110%
Year 1 1.10
 Year 2 1.10
Year 3 1.10
Present Value of Sale of Asset
30,000,000 X 0.7513 22,539,000
Less: Present Value of Cost for termination
and settlement for Liabilities
4,000,000 X 0.7513 3,005,200
Less: Present Value of Tax Charges for
the Transactions and Other Liquidation Costs
10,000,000 X 0.7513 7,513,000 10,518,200
Total Liquidation Value 12,020,800

Illustrative Example 3 
Droid Company’s balance sheet revealed total assets of Php3 million, total liabilities of Php1 million, and 100,000 shares o
Upon checking with potential buyers, the assets of Droid can be sold for Php1.8 million if sold today. Additional Php300,00
liquidation expenses. How much is the liquidation value of Droid Company per share? 

Present Value of Sale of Asset 1,800,000

Less: Present Value of Cost for termination
and settlement for Liabilities 1,000,000
Less: Present Value of Tax Charges for
the Transactions and Other Liquidation Costs 300,000 1,300,000
Total Liquidation Value 500,000

Liquidation Value Per Share Liquidation Value 500,000 5

Outstanding Shares 100,000
Company has 250,000 outstanding shares.

Notes Payable 1,200,000

Other Liabilities 800,000
Total liabilities 2,000,000

dation value as part of their strategy formulation.

gold, will end its corporate life in 3 years. Net Cash Flow
estimates to incur Php10,000,000 for closure and
capital is set at 10%. Remaining assets by end of the
p 4,000,000 will be fully paid off by then. If the Valuation

1 0.9091 (1/1.10)
 0.9091 0.8264 (0.9091/1.10)
0.8264 0.7513 (0.8264/1.10)

on, and 100,000 shares of outstanding ordinary shares.

day. Additional Php300,000 will also be incurred to cover
WACC = (ke x we) + (kd x wd)
ke = cost of equity Dividend rate of return CAPM ke = Rf + β (Rm – Rf)
kd = cost of debt after tax Interest rate after tax
we = weight of the equity financing %
wd = weight of the debt financing %
Asset = Liabilities + Equity
Cash 100,000 = 100,000 Investment Kalven 100,000 in cash
Building 150,000 150,000 Cash 100,000
250,000 150,000 100,000 Kalven Capital

(Liabilites/Asset)X100 (Equity/Assets)X100 Kalven bought a building 150,000 on

150,000 60 100,000 40 Building 150,000
250,000 250,000 Accounts Payable
100
CAP Model
ke = cost of equity
ke = Rf + β (Rm – Rf)
Rf = risk free rate Govt
β = beta
Rm = market return  Banks

CAP Model
kd = cost of debt after tax
Kd = ((Rf + DM)(1-Tax Rate))
Kd = risk free rate
DM = debt margin 

CAPM
COST OF EQUITY
To illustrate, the risk-free rate is 5% while the market return is roving around at 11.91%, the beta is 1.5.
ke = cost of equity
ke = Rf + β (Rm – Rf)
ke = 0.05 + 1.50 (0.1191 - 0.05) 0.069100 0.045 1.75
ke = 0.05 + 1.50 (0.1191 - 0.05) 1.50
ke = 0.05 + 1.50 (0.691) 0.1036500
ke = 0.05 + 0.10365 0.05
ke = 0.05 + 0.10365 0.1536500
ke = 0.15365 or 15.365%

COST OF DEBT
To illustrate, the risk-free rate is 5% and in order to borrow in the industry, a debt premium is considered
to be about 6%.
Kd = Rf + DM
Kd = 0.05 + 0.06
Kd = 0.11 or 11%

WACC
Assuming using the same cost of debt and equity in the preceding example. The share of financing is 30% equity
and 70% debt, and the tax rate is 30%.
ke = 0.15365 or 15.365%
Kd = 0.11 or 11%
WACC = (ke x we) + (kd x wd) Bld
WACC = (0.15365 x 0.30) + ((0.11)(1-.30) x 0.70) Rental Property 1,000,000
WACC = (0.15365 x 0.30) + ((0.11)(1-.30) x 0.70) Rate of return should higher than the WACC
WACC = (0.15365 x 0.30) + ((0.11)(0.70)) x 0.70) Annual Rental Income 1,000,000 15%
WACC = (0.15365 x 0.30) + (0.077) x 0.70) Interest Expense 1,000,000 10%
WACC = (0.15365 x 0.30) + (0.0539) Rental Income
WACC = (0.15365 x 0.30) + (0.0539)
WACC = 0.046095 + 0.0539
WACC = 0.046095 + 0.0539
WACC = 0.099995 or 9.9995% or 10%

EVA = Earnings - Cost of Capital

Cost of Capital = Investment value x Rate of Cost of Capital
Annual Share in the Net Income (Dividend Income) 500,000
Investment 1,000,000
WACC = Rate of cost of capital 10%

Cost of Capital = Investment value x Rate of Cost of Capital

1,000,000 X 10% 100,000

EVA = Earnings - Cost of Capital

Earnings 500,000
Less: Cost of Capital 100,000
Earnings Value Added 400,000

Future earnings Forecasted Net Income (Budgeted Financial Statement)

Equity Value=
Required return Desired rate of return

Estimate - Using Earnings (Net Income)

Asset = Liabilities + Equity
3,750,000
For example, Mobile Inc. expects to earn Php450,000 per year expecting a return at 12%.
Future earnings 450,000 3,750,000
Equity Value=
Required return 12%

For example, Mobile Inc. projects the following net cash flows in the next five years, with the required return of 12%.
Year Net Cash Flows (in Php)
1 450,000
2 500,000
3 650,000
4 700,000
5 750,000
Following through the information of Mobile Inc. with the calculated equity value of Php5,083,333, assume that
there is an idle asset amounting to Php1,350,000. This value should be included in the equity value but on top
of the capitalized earnings.
Step1: Average Net Cash Flow or Average Net earnings
Year Net Cash Flows (in Php)
1 450,000
2 500,000
3 650,000
4 700,000
5 750,000
Total 3,050,000
Divide 5
Average 610,000

Step2: Compute the equity Capitalized Earnings

Future earnings 610,000 5,083,333 Equity that is associated to your income
Equity Value=
Required return 12% generating assets
Idle Asset add if it is not included arrive
Capitalized Earnings 5,083,333 at the total equity value
Idle Assets 1,350,000 Idle Asset if it is included = total equity value
Total Equity Value 6,433,333
Kalven 100,000 in cash

100,000

ght a building 150,000 on account

150,000

0.12 0.045 0.075 0.13125

g is 30% equity
 WACC - LOAN
10%
15%
150,000
100,000
50,000

uired return of 12%.

3, assume that
ue but on top
 d to your income

ot included arrive

ed = total equity value