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

Rohan Engineering Ltd. is valued by an independent valuer as a going concern at Rs 120 crore. If its assets were sold piecemeal after closing operations, the likely realisation is Rs 85 crore. The company is not in financial distress and will continue operations. Which conclusion is most appropriate for a merger exchange ratio?

Rs 120 crore going concern value is appropriate because the company is healthy and will continue operating. Liquidation value of Rs 85 crore applies only when the business is to be closed or is distressed. Averaging is not required and paid-up capital does not measure worth.

  1. AUse Rs 85 crore because liquidation value is always the conservative basis
  2. BUse the average of Rs 120 crore and Rs 85 crore as a legal requirement
  3. CUse Rs 120 crore because the premise of value is a going concernCorrect
  4. DIgnore both and use paid-up capital

Explanation

The premise of value depends on the facts: a healthy business that will continue is valued on a going concern basis, here Rs 120 crore. Liquidation value applies where the business is to be wound up or is distressed. Averaging is not a legal requirement and paid-up capital is irrelevant to worth.

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