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

Sundaram Textiles Ltd is being valued for a proposed sale. Its reported profit is steady, but a single customer contributes 70% of revenue and the contract expires next year without assurance of renewal. How should this fact generally affect the valuation?

Customer concentration with an uncertain contract renewal raises risk to future earnings, so the valuer applies a higher discount rate or lower multiple, which lowers the business value. Valuation looks at sustainable future cash flows, not only past stable profits.

  1. AIt increases value because revenue is high
  2. BIt has no effect, as past profits are stable
  3. CIt lowers value, as customer concentration raises risk and the discount rate or multiple is adjustedCorrect
  4. DIt affects only the book value of assets

Explanation

Valuation depends on the sustainability of future earnings. Heavy dependence on one customer with an uncertain contract raises business risk, so a higher discount rate or lower multiple is applied. Relying on stable past profits ignores this forward-looking risk.

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