CMA Final · Strategic Performance Management and Business Valuation · Corporate Failure
A firm in financial distress has a going-concern value of ₹8 crore if reorganised, while its assets would fetch ₹6.5 crore on liquidation after costs. Which decision is economically rational and why?
Reorganise the firm, because its going-concern value of ₹8 crore exceeds the ₹6.5 crore net liquidation value by ₹1.5 crore. Creditors and owners together are better off continuing the business than selling the assets piecemeal.
- ALiquidate, because liquidation value is certain
- BReorganise, because going-concern value exceeds liquidation value by ₹1.5 croreCorrect
- CLiquidate, because the difference of ₹1.5 crore is the cost of reorganisation
- DReorganise only if liquidation value exceeds going-concern value
Explanation
A distressed firm should be reorganised when its value as a going concern exceeds its net liquidation value. Here 8 - 6.5 = ₹1.5 crore in favour of continuing. Treating the difference as a cost of reorganisation has no basis in the data.
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