CFA Level I · CFA Level I Exam · Introduction to Equity Valuation
Which of the following is most likely a reason an analyst would use a going-concern assumption rather than a liquidation value when valuing a profitable manufacturing company?
The going-concern assumption fits because the firm is expected to keep operating and generate future cash flows. Going-concern value rests on those ongoing earnings, while liquidation value assumes assets are sold piecemeal and applies only when continued operation is not expected.
- AThe firm is expected to continue operating and generate future cash flows.Correct
- BThe firm's assets will be sold individually to settle liabilities.
- CThe firm's equity is assumed to have no residual claim.
Explanation
Going-concern value assumes the business continues operating, so value derives from future earnings and cash flows. Liquidation value applies when the firm is expected to cease operations and sell assets, which suits options B and C, not a profitable firm.
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