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

Mahesh Engineering Ltd has gone into liquidation and its assets must be sold quickly. A valuer is asked for the realisable amount from an orderly disposal of assets, less liabilities. A second valuer proposes capitalising maintainable future profits instead. Which approach correctly fits the premise, and why?

An asset-based liquidation value fits, because the business is being wound up and will not continue as a going concern. The value is the net realisable amount from selling assets after liabilities, whereas profit capitalisation or discounted cash flow methods assume ongoing operations that no longer exist.

  1. ACapitalising future profits, because all valuations use going-concern premise
  2. BAsset-based liquidation value, because the business will not continue as a going concernCorrect
  3. CMarket multiple of peer firms, because liquidation ignores asset values
  4. DDiscounted cash flow, because liquidation produces perpetual cash flows

Explanation

When a business is not a going concern, future profits are not the basis; realisable asset values net of liabilities are. Going-concern methods such as profit capitalisation or DCF assume continuing operations, which is contradicted here.

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