Valuation Analysis

Value as a function of risk and return is a simple concept and the related financial modeling is straightforward. Together they provide a structure for evaluating the alternatives for increasing shareholder value. Determining the appropriate cash flows and risk complicates the analysis. For example, a bank's intrinsic value can be determined from its strategic plan but its acquisition price must reflect the acquirer's expected cash flows and perceived risk.

Bank management is commonly involved in determining the relevant inputs to be used in the financial model. As a result, presenting the analysis and conclusions is generally less formal when the valuation is for management's internal use. A formal presentation may be required for shareholders not involved in the process. This would include a thorough discussion of the facts and assumptions underlying the analysis; market data and pricing multiples for comparison purposes; and reconciliation of the determined value to a variety of benchmarks.

In addition to these details, a formal appraisal would include background information on the bank's history, ownership, markets, and other pertinent facts. It commonly addresses the full range of valuation concepts used by the appraisal profession and relevant legal concepts when applicable.

Value as a function of risk and return is the foundation for all financial theory and applications taught by the business schools; used by corporate managers, security analysts, and investment bankers; and accepted by the valuation profession. The analysis is the same for management, shareholders, and third parties.

The documentation is tailored to the audience. People using the valuation must be satisfied that it provides a sound basis for their decisions. Effective communication establishes that the determined value is objective, well-reasoned, and appropriate for its intended use.

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