VALUATION CONCEPTS AND METHODOLOGIES

EXERCISES

e or False. Write TRUE if the Statement is true and the word FALSE if
nd the statement inconsistent with the truth.

STATEMENT
ANSWER 1. According to the CFA Institute, liquidation value refers
to the value of a company if it were dissolved and its
assets sold individually.
2. Liquidation value represents the net amount that can be
gathered if the business is shut down and its assets are
sold piecemeal.
3. Liquidation value is the base price or the floor price for
any firm valuation exercise.
4. Liquidation value should
not be used to value profitable
or growing companies as this approach does not

consider growth prospects of the business.

5. Liquidation value should be used for dying or losing
companies where liquidation is imminent to check
whether profits can still be realized upon sale of the
assets owned.
6. A unique callout for liquidation value is if the firm is
operating under aproprietorship or a partnership
model.
7. Business failure is the most common reason why
businesses liquidate. Early symptoms of
close or
business failure are low or negative returns.
8. Insolvency happens when a company cannot pay
liabilities as they come due.
9. Bankruptcy is the most serious type of business failure
as this happens when liabilities become greater than
asset balance.
10. Divestment can be driven by different internal factors
such as mismanagement, poor financial evaluation and
decisions, failure to execute strategic plans, inadequate
cash flow planning or failure to manage working capital.
11. External factors such as severe economic downturn,
occurrence pandemic, changing
of natural calamities or

consumer preferences and adverse governmental

regulations may also contribute to business failure.
12. Most corporations only have finite number of years to
operate as stated in their Articles of Incorporation. This
is also similar in the case of projects like joint ventures
with finite life.

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ANSWER STATEMENT
13. Ifcorporate end of life is already certain, it is more
appropriate to compute terminal value using going
concern value.

14. Once the contract with the government expires or

scarce resource become fully depleted and no new site
is prepared to support operation, this might signal
potential liquidation and valuation should be based on
liquidation value.

15. Liquidation
value is the most appropriate valuation
approach among all as it considers the realizable value
of the asset if it is sold now based on current
conditions.

16. If theliquidation value is above income approach

valuation (based on going-concern principle) and
liquidation comes into consideration, liquidation value
should not be used.

17. If the nature of the business implies limited lifetime (e.g.

a quarry, gravel, fixed-term company etc.), the terminal
value must be based on liquidation. All costs necessary
to close the operations (e.g. plant closure costs,
disposal costs, rehabilitation costs) should also be
factored in and deducted to arrive at the liquidation
value.

18. Non-operating assets should be valued by liquidation

method as the market value reduced by costs of sale
and taxes. Since they are not part of the firm's
operating activities, it might be inappropriate to use the
same going concern valuation technique used for
business operations. If such result is higher than net
present value of cash-flows from operating the asset,
the liquidation value should be used.

19. Liquidation valuation must be used if the business

continuity is dependent on current management that will
not stay.

20. For analysts, liquidation value method can also be used

as benchmark in making investment decisions.

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ANSWER STATEMENT

21. When a company is profitable with good industry

outlook, the liquidation will typically be lower than the
prevailing market price of the share.

22. Share price often reflects growth prospects of the

company which is a consideration that liquidation value
does not have.

23. For firms that experiencing decline or industry is

are

consistently declining, prevailing share prices might be

lower than liquidation value.

24. Because liquidation

value is lower than market price of
share, these corporate investors buy the shares at
prevailing market price and sell the company at the
higher liquidation value. This results in risk-free
arbitrage profit for these corporate investors.
25. The liquidation value considers the present value of the
sums that can be obtained through the disposal (i.e.
sale) of the assets of the firm in the most appropriate
way, net of the sums set aside for the closure costs,
repayment of the debts and settlement of all liabilities,
and net of the tax charges related to the transaction
and the costs of the process of liquidation itself.

26. Liquidation value can be further computed on a per

share basis by dividing total liquidation value by
outstanding ordinary shares.

27. Liquidation value per share should be considered

together with other quantitative (e.g. current share
price, going concern DCF) and qualitative metrics to
justify business decisions to be made.

28. Assets are sold strategicallyorderly period to

over an
attract and generate the most money for the assets.
This is called forced liquidation.

29. Orderly liquidation is liquidation process, at which the

asset or assets are sold as quickly as possible, such as
at an auction.

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ANSWER STATEMENT
30. Calculation for liquidation value at closure date is
somewhat like the book value calculation, except the
value assumes a forced or orderly liquidation of assets
instead of book value. Book value should not be used
as liquidation value.

31. Liquidation value can be obtained based on the

potential sales price of the assets being sold instead of
relying on the costs recorded in the books.

32. Even if these assets being liquidated generate lower

than expected return in the present business,
liquidation value should be based on the potential
earning capacity of the individual asset when sold to the
buying party instead of the original capital invested in
the assets.

33. In practice, the liabilities of the business are added from

the liquidation value of the assets at closure to
determine the liquidation value of the business. The
overall value of a business that uses this method
should be lower than going-concern value.

34. Incomputing for the present value of a business or

property on a liquidation basis, the estimated net
proceeds should be discounted at a rate that reflects
the risk involved back to the date of the original
valuation.

35. Estimation of liquidation values will be more complex if

assets can be easily identified or separated; hence,
individual valuation may be impractical.

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 VALUATION CONCEPTS AND METHODOLOGIES

WULTIPLE CHOICE THEORIES. Write the letter of the best answer before
The number of the question or statement being answered.

represents the net that can be gathered if

amount
he business is shut down and its assets are sold piecemeal.
a. Going Concern Value
b. Liquidation Value
c. Bankruptcy Value
d. Closing Value

2 Which statement is not correct about liquidation value?

a. Liquidation value refers to the value of a company if it were

dissolved and its assets sold individually.

b. In some texts, liquidation value is also known as business
closing value.
c. Liquidation value may continue to erode based on the time

frame available for liquidating assets.

d. If liquidation value becomes higher compared against
going concern value, this may signal that a significant
business event transpired which makes the liquidation value
more appropriate in valuation exercise.

These are situation that most likely consider liquidation value,

except
a. Business Failures
b. Divestment

c. Corporate End of Life

d. Depletion of scarce resources

Which of the following is not correct related to liquidation

walue?
a. If the liquidation value is below income approach valuation
(based on going-concern principle) and liquidation comes
into consideration, liquidation value should be used.

b. If the nature of the business implies limited lifetime (e.g. a

quarry, gravel, fixed-term company etc.), the terminal
value must be based liquidation. All costs necessary to
on

close the operations (e.g. plant closure costs, disposal

costs, rehabilitation costs) should also be factored in and
deducted to arrive at the liquidation value.

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 VALUATION CONCEPTS AND METHODOLOGIES

c. Non-operating assets should be valued by liquidation

method as the market value reduced by costs of sale and
taxes. Since they are not part of the firm's operating
activities, it might be inappropriate to use the same going
concern valuation technique used for business operations.
If such result is higher than net present value of cash-flows
from operating the asset, the liquidation value should be
used.
d. Liquidation valuation must be used if the business
continuity is dependent on current management that will
not stay.

5. Which of the following is incorrect statement related to the use

of Liquidation Value in Investment Analysis?
a. Liquidation value method also be used
can as benchmark
in making investment decisions.
b. For firms that experiencing decline or industry is
are

consistently declining, prevailing share prices might be

lower than liquidation value.
c. When liquidation value is lower than market price of share,
these corporate investors buy the shares at prevailing
market price and sell the company at the higher liquidation
value.
d. If the company can be readily liquidated any time, market
price per share should never be below book value per
share if all reported assets in the balance sheet is
accurate.

6. Assets sold strategically over an orderly

are period to attract
and generate the most money for the assets.
a. Orderly Liquidation
b. Forced Liquidation
c. Divestment
d. Bankruptcy

7. Liquidation process, at which the asset or assets are sold as

quickly as possible, such as at an auction.
a. Orderly Liquidation
b. Forced Liquidation
c. Divestment

d. Bankruptcy

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 VALUATION CONC
EPTS AND METH
ODOLOGIE S
8. This liquidation process will expo
market, with a reasonab se assets for sale on
le time allowed to fin the open
buyer and seller having kn d a purchaser, bo
owledge of the uses and purposes th
which the asset is adapted an to
d for which it is capable of
used, the seller being comp being
elled to sell and the buyer
willing, but not compelled, to buy. being
a. Orderly Liquidation
b. Forced Liquidation
c. Divestment
d. Bankruptcy

9. Liquidation is done immediately especially

if creditors have
sued or a bankruptcy is filed. Assets are sold
in the market at the
soonest time possible which result in
lower prices because of the
rush sale. This ultimately drives down liqui
dation value.
a. Orderly Liquidation
b. Forced Liquidation
c. Divestment

d. Bankruptcy

10. Which of the following statements is incorrect?

a. Determining the type of liquidation that will occur is

important because it will affect the costs connected with
liquidation of the property, including commissions for
those facilitating the liquidation (lawyers, accountants,
auditors) and taxes at the end of the transaction.
b. Calculation for liquidation value at closure date is
somewhat like the book value calculation, except the
value assumes a forced or orderly liquidation of assets
instead of book value.
c. Liquidation value can be obtained based on the on the
costs recorded in the books.

d. the liabilities of the business are deducted

In practice,
from the liquidation value of the assets at closure to
determine the liquidation value of the business.

11. This is the situation where liquidation value is considered

when Insolvency happens which means when a company cannot
pay liabilities as they come due.
a. Business Failures
b. Divestment

c. Corporate End of Life

d. Depletion of scarce resources
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 VALUATION CONCEPTS AND METHODOLOGIES

12. This is the situation where liquidation value is considered

when the number of years the company can operate Is not
extended particularly when the primary objective is reach like in
cases of Partnership and Join Ventures.
a. Business Failures
b. Divestment
c. Corporate End of Life
d. Depletion of scarce resources

liquidation value is considered for

13. This is the situation where
industries which purpose are related to highly regulated by the
government which are normally limited like mining and oil.
a. Business Failures
b. Divestment

c. Corporate End of Life

d. Depletion of scarce resources

14. the nature of the business implies limited lifetime (e.g. a

If
quarry, gravel, fixed-term company etc.), the terminal value must
be based on liquidation. All costs necessary to close the
operations (e.g. plant closure costs, disposal costs, rehabilitation
costs) should also be factored in and deducted to arrive at the
liquidation value.
a. Statement is True

b. The underline word or term should be liquidation value to

make the statement correct.
c. The underline word or term should be bankruptcy value to
make the statement correct.
d. The underline word or term should be salvage value to
make the statement correct.

15. Statement A. In computing for the present value of a business

or property on a liquidation basis, the estimated net proceeds
should be discounted at a rate that reflects the risk involved back
to the date of the original valuation.

Statement B. This is important to ensure that all assumptions are

aligned. Liquidation value can be used as basis for terminal cash
flow (instead of going concern terminal cash flow) in a DCF
calculation in order to compute firm value in case there are years
that the firm will still be operational prior to liquidation.

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 VALUATION CONCEPTS AND METHODOLOGIES

a. Both Statements are correct

b. Onlly Statement A is correct
c. Only Statement B is correct
d. Both Statements are incorrect.

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 VALUATION CONCEPTS AND METHODOLOGIES

MULTIPLE CHOICE PROBLEM. Write the letter of the best answer before
the number of the question or statement being answered.

1. WW Inc. recently has had financial difficulty and is being liquidated The
firm has a liquidation value of Php 2,000,000 Php 800,000 from the
-

fixed assets that served as collateral for the mortgage bonds and Php
1,200,000 from all other assets (all prior claims have been satisfied). The
firm's current capital structure is as follows:

Unsecured bonds Php 1,000,000

-

Mortgage bonds Php 800,000

-

Preference shares Php 200,000

-

Ordinary shares Php 500,000

-

How much will the ordinary shareholders from the liquidation?

a. Php 1,000,000
b. Php 666,667
c. Php 396,000

Php 0
d.
2. Tang Mining is considering the acquisition
of Zang Mining at a cash
price of Php 6,000,000. The primary motivation for Tang's purchase of
Zang is for a special piece of drilling equipment that it believes will
generate after-tax cash flows if Php 2,000,000 per year during the next 5
years. Zang Mining has liabilities of Php 9,000,000 and Tang estimates
that it can sell the remaining assets Php 6,500,000. Tang will use a 15
percent cost of capital for evaluating the acquisition. Based on this
information, what is the net value of the special drilling equipment?

a. Php 1,795,690
[Link] 1,500,000
c. Php (1,795,690)

d. Php (1,500,000)

3. At year end, Lysle Company balance sheet showed total assets of Php
50 million, total liabilities of Php 30 million, and 500,000 shares of ordinary
shares outstanding. If Lysle could sell its assets for Php 40 million, Lysle
liquidation value per share of ordinary share is
a. Php 40.00
b. Php 20.00
c. Php 10.00
d. Php 5.00

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 VALUATION CONCEPTS AND METHODOLOGIES

4. A firm reported current assets ofPhp 1,000,000, which can be

iquidated at 80 percent of book value. Total liabilities, including
preferred stock, equal Php 270,000. The firm has 20,000 shares of
common stock outstanding. What is the liquidation value per share
of common stock?
a. Php 50.00
b. Php 40.00
c. Php 36.50
d. Php 26.50

5. Kristine, a shareholder, received P10 per share as liquidation

value for the 1,000,000 shares of Cathy Company that she owned.
Kristine owned 10% ownership stake in Cathy Company. How
much was the liquidation value of the Cathy Company?
a. Php 10 million

b. Php 50 million
c. Php 100 million
d. Php 124 million

6. Magic Homes is to be liquidated. All creditors, both secured and

unsecured, are Php 2 million. Administrative costs of
owed
liquidation and wages payments are expected to be Php 500,000.
A sale of assets is expected to bring Php 3 million after all costs
and taxes. What is the liquidation value of Magic Homes?
a. Php 3,000,000

b. Php 2,000,000
c. Php 1,000,000

d. Php 500,000

7. The PQ Partnership is not going well, and the partners have

decided to liquidate the business. The partners share income and
loss in a ratio of 2:1. PQ Partnership reported cash of Php 50,000
and building valued at Php800,000. They owe Php 500,000 to
various creditors. Upon checking with realtors, they can sell the
building at Php 600,000 based on current prices. How much is the
liquidation value of PQ Partnership?
a. Php 350,000
b. Php 150,000
c. Php 850,000

d. Php 650,000

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8. Leth Company is currently undergoing liquidation proceedings

and is consulting with potential buyers about the amount it can
recover from the sale of its assets with book value of P7,000,000.

Based on the quotations, the assets can fetch price of P6,000,000 if

it will be sold within one year as negotiations and bidding will allow
interested buyers to compete for the purchase. An interested buyer
is willing to pay for P4,000,000 to purchase the assets now. Leth
Company has liabilities to settle amounting to P2,000,000. How
much is the orderly liquidation value of Leth Company?
a. Php 6,000,000

b. Php 5,000,000
c. Php 4,000,000

9. Refer to Leth Company. How much is the forced liquidation value

of Leth Company?
a. Php 6,000,000
b. Php 5,000,000
c. Php 4,000,000
d. Php 2,000,000

10. A firm's common stock currently sells for Php 75 per share. The
firm has total assets of Php 1,000,000 and total liabilities, including
preferred stock, of Php 350,000. If the firm has 10,000 shares of
common stock outstanding, how much is the liquidation value per
share is this approximates book value?
a. Php 100

b. Php 75
c. Php 65

d. Php 35

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