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ACCA Applied Skills · Financial Management · Models for the valuation of shares

A company's assets are valued at replacement cost to estimate the value of a business. Which statement describes this approach?

Replacement cost valuation measures assets at what it would cost today to acquire equivalent assets. It suits a buyer deciding whether to buy the business or build a similar one, so it acts as an upper limit on the price.

  1. AIt values assets at the cost of acquiring equivalent assets today, which suits a buyer considering setting up a similar businessCorrect
  2. BIt values assets at the amount obtained if sold quickly in a forced sale
  3. CIt values assets at original historical cost less depreciation
  4. DIt values assets at the present value of dividends discounted at the cost of equity

Explanation

Replacement cost shows what it would cost to rebuild the asset base, giving a ceiling for a buyer's price. Forced sale is net realisable or break-up value, historical cost is book value, and discounting dividends is the dividend valuation model.

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