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

Sagar Textiles Ltd, a Surat firm, is being valued for a proposed sale. Its sales are stable, but 70% of its revenue comes from one buyer who has announced it will shift to an overseas supplier next year. Which valuation factor is most directly affected by this fact?

The loss of a dominant customer is a customer concentration and business risk factor. It makes future earnings uncertain and reduces projected cash flows or raises the discount rate, so the business value falls. Face value and dividend policy do not capture this risk.

  1. ACustomer concentration and business risk, which lowers the valueCorrect
  2. BCapital structure, which raises the value
  3. CDividend policy, which has no effect on value
  4. DFace value of shares, which determines the price

Explanation

Dependence on a single customer who is leaving increases business risk and makes future cash flows uncertain. A valuer would raise the discount rate or cut projected cash flows, so value falls. Capital structure and face value are unrelated to this fact.

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