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CA Final · Advanced Financial Management · Business Valuation

Which statement about the liquidation (break-up) value approach is correct when valuing a company for equity holders?

The liquidation approach values assets at expected disposal proceeds net of selling costs, on the assumption that the business will not continue as a going concern. Liabilities and liquidation expenses are then settled from these proceeds, and the remainder is attributable to equity holders.

  1. AIt values assets at their expected disposal proceeds net of selling costs, assuming the business will not continue as a going concernCorrect
  2. BIt values assets at historical cost less depreciation, assuming continuity of business
  3. CIt adds capitalised future earnings to net assets to arrive at goodwill
  4. DIt is the appropriate basis whenever a profitable company is acquired as a going concern

Explanation

Liquidation value assumes the entity is wound up and assets are sold, so realisable amounts net of selling costs and liquidation expenses are used, then liabilities are settled. Historical cost and going-concern earnings capitalisation relate to other methods.

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