ACCA Applied Skills · Financial Management · Models for the valuation of shares
Which of the following is the main weakness of valuing a going-concern company on its net asset value alone?
Net asset valuation ignores future earnings potential and unrecognised intangibles such as internally generated brands and goodwill. It looks at what the company owns, not what it can earn, so it often undervalues a profitable going concern.
- AIt ignores the future earnings potential and intangible assets not on the statement of financial positionCorrect
- BIt requires forecasting dividend growth rates
- CIt depends on the cost of equity estimated using CAPM
- DIt cannot be calculated for a company with debt
Explanation
Asset-based values reflect assets less liabilities, so they omit the earning power, goodwill and internally generated intangibles such as brands. The other options describe features of dividend valuation or are false, as debt is simply deducted.
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