24-02-2025

Liquidation Value

• This is the value that the entity shall realize

on liquidation after incurring all incidental
costs-the value when a business entity
goes out of the business or ceases to exist.
• This value also normally increases with the
time assuming inflationary pressures, but
it decreases with use of plant and
machinery, building, and furniture.
• It has been observed that the liquidation
value moves along with the replacement
cost of the assets.
• Hence, the value of a business according to
the liquidation concept depends more on
realizable or replacement value of its
underlying assets rather than the earning
Valuation Methods potential of the business.

Compiled and edited by Dr. Dipti Saraf

Concept Market value

• It is often argued that no rational buyer would pay more for an asset
than its true worth.
• It is for valuation of listed
• The logic one is referring to is the cash flows one expects from the
companies, and that is
business post deal, but much also depends on the bargaining power
the market price of the
of the acquirer and the target.
shares of the entity.
• Since business is based on dynamic considerations, valuation • It is more or less
becomes a dynamic process. governed by market
• As a result, the same deal would be valued differently by the same sentiments and the forcs
player at different times or by different players at the same time. of demand and supply.

Compiled and edited by Dr. Dipti Saraf

Fundamental Factors to be considered for valuation

Concepts
• The nature of the business and its operating history
• The stage of evaluation of the target company, i.e., whether the target is
• Going Concern Value profitable company or is in the early stage of technology development, etc.
• It assumes that a business entity has infinite life and • The industry/sector dynamics
shall continue to exist irrespective of the life of the • The economic outlook and market sentiments
promoter.
• The book value and financials of the entity
• For this reason, one argues that the value of business,
on the basis of going concern concept, increases with • The entity’s earnings and dividend-paying capacity
time and finally becomes perpetual annuity. • The value of entity’s intangible assets such as quality of management,
• The value of a business on going basis will be the especially knowledge based or intellectual property-based business
present value of perpetual annuity, with or without
• Market value of other entities based engaged in similar business
growth.
• Tin short, the value of a business under this concept is • Identifying whether the target is healthy or financially troubled
based on the earning potential of the entity. • Potential liabilities of the company such as environmental claims, tax
demands, off balance sheet liabilities
• Sources of bias in valuation
 24-02-2025

Book Value
Things to be consider:
Market Value Consider all tangible and intangible asset
Intrinsic value
Basic Concepts Liquidation value
Ignore fictious asset (pre exp, u/w expanse)

to value a Value of goodwill should be consider as per the current value and the amount
Replacement value recorded in the books of account is not relevant
company All outstanding liabilities are to be considered at the value payable at the date of
Salvage value valuation
Any provision for tax, prov. for bad debts, any arrear of dividend are also be
Value of goodwill considered
Fair value From net asset deduct pref. cap and pref. div payable to arrive at net assets
available to equity shareholder.
Compiled and edited by Dr. Dipti Saraf Compiled and edited by Dr. Dipti Saraf

Approaches/Method of Practice Problem 1

Valuation Following is the balance sheet of Hypothetical Company Limited as on March 31, current year: (Rs lakh)
Liabilities Amount Assets Amount
Share capital Fixed Asset 150
40000 11% pref. share of Rs.
Asset based Valuation 100 each, fully paid up 40 Less Depreciation 30 120
Rs 100 each fully paid up
120000 equity shares of Rs 100
each, fully paid up 120 Stocks 100
Earning Based Valuation Profit & Loss 23 Debtors 50
10% Debenture 20 Cash And Bank 10
• Capitalization of earning Sundry creditors
Provision for Income tax
71 Preliminary exp
8
2

Total 282 Total 282

Relative Valuation Additional Information:

(i) A firm of professional valuers has provided the following market estimates of its various assets: fixed assets Rs 130
lakh, stocks Rs 102 lakh, debtors Rs 45 lakh. All other assets are to be taken at their balance sheet values.
Cash Flow based Valuation (ii) The company is yet to declare and pay dividend on preference shares.
(iii) The valuers also estimate the current sale proceeds of the firm’s assets, in the event of its liquidation: fixed assets Rs
105 lakh, stock Rs 90 lakh, debtors Rs 40 lakh. Besides, the firm is to incur Rs 15 lakh as liquidation costs.
Fair Value method
You are required to compute the net asset value per share as per book value, market value and liquidation value bases.
Compiled and edited by Dr. Dipti Saraf

Asset Based Valuation Practice Problem 3

Following is the balance sheet of Hypothetical Company Limited as on March 31, current year: (Rs lakh)
• In asset-based valuation, you value a business by valuing its individual Liabilities
Share capital
Amount Assets
Fixed Asset 200
Amount

assets. These individual assets can be tangible or intangible 50000 11% pref. share of Rs.
100 each, fully paid up 50 Less Depreciation 50 150
• According to this Approach the Net asset (total asset-external Liab.) are 150000 equity shares of Rs 100
determined & dividing that by no. of share gives you value per share. each, fully paid up
Profit & Loss
150
50
Stocks
Debtors
150
100
10% Debenture 20 Cash And Bank 60
• :
.
Sundry creditors 150 Preliminary exp 10
Provision for Income tax 50
Total 470 Total 470

Additional Information:
(i) A firm of professional valuers has provided the following market estimates of its various assets: fixed assets Rs 130
lakh, stocks Rs 102 lakh, debtors Rs 45 lakh. All other assets are to be taken at their balance sheet values.
(ii) The company is yet to declare and pay dividend on preference shares.

BOOK VALUE OF THE MARKET VALUE OF THE LIQUIDATION VALUE OF (iii) The valuers also estimate the current sale proceeds of the firm’s assets, in the event of its liquidation: fixed assets Rs
105 lakh, stock Rs 90 lakh, debtors Rs 40 lakh. Besides, the firm is to incur Rs 15 lakh as liquidation costs.
ASSET ASSET THE ASSET
You are required to compute the net asset value per share as per book value, market value and liquidation value bases.
Compiled and edited by Dr. Dipti Saraf
 24-02-2025

Practice Problem 2 Practice Problem 1

Balance sheet of a corporate as on March 31, current year is as follows:
Liabilities Amount Assets Amount
• From the following data, determine the value of goodwill of a firm:
Share capital (of Rs 1 crore) 200 Land and buildings 250 • (i) Funds invested Rs 100 crore
Reserves and surplus 180 Plant and machinery 150
12% Debenture 150 Inventory 80
• (ii) Normal rate of return (expected) 10 per cent
Sundry creditors 35 Debtors 60 • (iii) Profits after taxes (current year) Rs 14 crore which are likely to continue
other Liablities 15 Cash And Bank 40
for next 4 years only
Total 580 Total 580

The market value of its assets as assessed by professional valuer is as follows: (Rs
crore) Plant and machinery 180 Land and building 300 The current resale value of
the remaining assets are as per their book values.
You are required to compute the value of equity share on the basis of
net assets method (book value and market value).

Practice Problem 2
The following particulars are available in respect of a corporate:
(i) Capital employed, Rs 500 million.
(ii) Operating profits, after taxes, for last three years are: Rs 80 million, Rs
100 million, Rs 90 million; current year’s operating profit, after taxes, is
Rs 105 million.

Goodwill (iii) Riskless rate of return, 10 per cent.

(iv) Risk premium relevant to the business of corporate firm, 5 per cent.
You are required to compute the value of goodwill, based on the present
value of the super profits method. Super profits are to be computed on the
basis of the average profits of 4 years. It is expected that the firm is likely to
earn super profits for the next 5 years only.

Compiled and edited by Dr. Dipti Saraf Compiled and edited by Dr. Dipti Saraf

Valuation of Goodwill S2
• Goodwill will be the present value of super profits earned for n years Determination of goodwill, using super profit method :
discounted by the expected rate of return. • Average profits (Rs 80 million + Rs 100 million + Rs 90 million + Rs 105
• Super profits are profit earned in excess of normal profit. million = Rs 375 million)/ 4 years 93.75
• Less: Normal profits (Rs 500 million × 0.15) 75.00
• Super profits 18.75
• Multiplied by the PV of annuity for 5 years at 15% (×) 3.352
• PV of super profits/Value of goodwill 62.85

Compiled and edited by Dr. Dipti Saraf