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

Meridian Pharma Ltd is considering buying a competitor. The directors say, 'The balance sheet shows net assets of Rs 80 crore, so that is what the business is worth.' Which is the best comment on this view in valuation terms?

Business value is not the same as book net assets. Valuation depends on purpose and can reflect earning capacity, intangibles and market conditions, so book figures are only one input. Relying on market price alone would also be wrong.

  1. ACorrect, since value always equals net assets in the books
  2. BIncorrect, because business value is a judgement based on the purpose and may reflect earning capacity and intangibles beyond book net assetsCorrect
  3. CCorrect, because valuation is prohibited from exceeding book value
  4. DIncorrect, because valuation must always be based only on market price

Explanation

Book net assets are historical and omit goodwill, brands and future earnings. Valuation is purpose-specific and uses approaches such as asset, income and market. It is not limited to book value, nor must it rely only on market price.

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