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CS Professional · Corporate Restructuring, Valuation and Insolvency · Valuation of Business and Assets for Corporate Restructuring

In a proposed amalgamation, the valuer for Ganga Pharma Ltd, a company holding mostly patents and brands with few physical assets, notes that its balance-sheet net asset value is far below the price at which similar companies trade. What is the most appropriate observation about relying on the net asset method here?

The net asset method is unsuitable as the sole basis for Ganga Pharma. Its internally generated patents and brands are not recorded in the balance sheet, so book-based asset value understates the business, and income or market approaches should be used with it.

  1. AIt is unsuitable as the sole method because unrecorded intangibles and earning power are not captured in book assetsCorrect
  2. BIt is the best method because balance-sheet values are audited and therefore reliable
  3. CIt is preferable because intangible-heavy firms always trade at book value
  4. DIt should be used with liquidation value only, ignoring all other methods

Explanation

The NAV method reflects recorded asset values and often misses internally generated intangibles such as brands and patents, so it understates value for asset-light, knowledge-based firms. Income or market approaches should be considered alongside. Audited status does not make unrecorded intangibles appear.

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