Multiple Choice (10 pts.
1. A firm's liquidation value is the amount:
A. necessary to repurchase all shares of common stock.
B. realized from selling all assets and paying off its creditors.
C. a purchaser would pay for the firm in bankruptcy.
D. equal to t
2. If the nature of the business implies limited lifetime (e.g. quarry, gravel,
fixed term company etc.), the terminal value must be based on
A. consideration value
B. net present value
C. liquidation value
D. market price
3. What type of assets should be valued by liquidation method as the market
value reduced by costs of sales and taxes
A. non-operating assets
B. operating assets
C. current assets
D. non- current assets
4. This often reflects growth prospects of the company which is a
consideration that liquidation value does not have.
A. salvage price
B. share price
C. market price
D. net income
5. General applications of liquidation value are the following except:
A. Under the standard of objectified value Liquidation valuation must be used
if the business continuity is dependent on contemporary management that
will not stay.
B. If the liquidation value is above income approach valuation (based on
going-concern principle) and liquidation comes into consideration,
liquidation value should be used.
C. 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.
D. The liquidation balance is subject to tax under the tax law
6. When a company is profitable with good industry outlook, the liquidation
will typically be
A. higher than the prevailing market price of the share
B. lower than the prevailing market price of the share
C. lower than the prevailing fair value of the share
D. higher than the prevailing fair value of the share
7. Because liquidation value is higher 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
A. risk arbitrage profit
B. risk capital
C. risk-free arbitrage profit
D. risk- free arbitrage
8. Which of the following cost is necessary to close the operations and
should also be factored in and deducted to arrive at the liquidation value
A. rehabilitation costs
B. settlement costs
C. capitalization costs
D. administrative costs
9. This typically provides the highest valuation of assets although the
measure could be lower than book value if the value of the assets has
decreased due to market demand rather than business use.
A. book value
B. liquidation value
C. market value
D. salvage value
10. Which of the following situations need to be considered in liquidation
value?
A. business failures
B. depletion of scarce resources
C. corporate/project end of life
D. all of the above
Enumeration (20 pts.)
1-3 Types of Liquidation
Answers :
1. Orderly liquidation
2. Forced liquidation
3. Replacement value/cost approach
4-9 Why Do Businesses Go into Liquidation?
Answers :
4. If the business cannot pay the debts as they fall due.
5. Business liabilities exceed total assets.
6. Business is making losses and you do not think you can turn the situation
around.
7. Directors finding it hard to cope with the stress and pressure of trading.
8. Directors are worried that trading is in decline and you will be liable for
wrongful trading if you carry on.
9. Directors would like someone else to deal with the creditors and all their
claims.
10 Give one step of calculating liquidation value
Answers : (any of the three)
10. Get a copy of the latest annual report/ Find the line item assets and
liabilities / Determine the expected liquidation value.
11-13 Situations to consider liquidation value
Answers:
11. Business failures
12. Corporate/Project end of life
13. Depletion of scarce resources
14-17 Types of Business failures and factors causing it.
Answers:
14. Insolvency
15. Bankruptcy
16. Internal factors
17. External factors
18-20 Give 3 general principles on liquidation value.
Answers: Any three of these
18. If the liquidation value is above income approach valuation (based on going
concern principle) and liquidation comes into consideration, liquidation value
should be used.
19. If the nature of the business implies limited lifetime (e.g. 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.
20. Non-operating assets should be valued by liquidation method as the market
value reduced by costs of sales 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.
21. Liquidation value must be used if the business continuity is dependent on
current management that will not stay.
True or False (
1. Due to different circumstances such as economic downturn, bankruptcy,
financial distress, unfavorable regulatory environment and depletion of
limited resources, it may create doubt that going-concern assumption is
still attainable for businesses. TRUE
2. Liquidation value refers to the estimated amounted of money received
when its assets are sold and its debts paid. TRUE
3. The liquidation value denotes the present value of the sums that can be
obtained by disposing of the firm's assets in the most appropriate manner.
TRUE
4. For distressed companies, the liquidation value conveys irrelevant
information as it is typically the lower bound of the valuation range.
FALSE
5. Since assets are listed on the balance sheet at their historical cost, their
value may be higher or lower than market prices. TRUE
6. The book value is the value given to an asset at the end of its useful life; in
other words, this is the scrap value. FALSE
7. The liquidation value is typically less than the book value but greater than
the salvage value. The assets continue to have value, but they must be
sold quickly, so they are sold at a loss. TRUE
8. Low or negative returns are indicators of business failure, which is why it
is the most common or usual reason for a company to close or liquidate.
TRUE
9. Bankruptcy happens when the asset balance become greater than
liabilities. FALSE
10. Mismanagement, poor financial evaluation and decisions, failure to
execute strategic plans, insufficient cash flow planning, or failure to
manage working capital are all examples of internal factors. TRUE
11. External factors include a severe economic downturn, natural disasters or
pandemics, changing customer preferences, and unfavorable government
regulations. TRUE
12. Depletion of Scarce Resources is most relevant in mining and oil, where
the availability of scarce resources influences the firm's value. TRUE
13. Depletion of scarce resources can lead to a sustainable growth. FALSE
