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CS Professional · Corporate Restructuring, Valuation and Insolvency · Overview of Business Valuation

Kaveri Foods Ltd. has net assets of Rs 40 crore as per its balance sheet. A prospective acquirer values it at Rs 65 crore because of its strong brand and distribution network. Which idea about valuation does this difference best illustrate?

The gap shows that business value reflects future earning capacity and intangibles such as brand and distribution strength, which are not fully captured in recorded net assets. Book value is just one reference point, not a mandated price, so a higher valuation is not an error.

  1. ABook value is always the legally mandated price for acquisition
  2. BValue of a business depends on its future earning potential and intangibles, not only on recorded net assetsCorrect
  3. CThe acquirer has committed an error in valuation
  4. DValuation must always equal paid-up share capital

Explanation

Valuation looks at the worth of the business as a going concern, including brand, goodwill and expected earnings that may not appear fully in the books. The Rs 25 crore gap reflects such value. Book value is only one reference point and is not a mandated price.

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