Seminar 11 Questions

1. Comparable (Guideline) companies and transactions method generally have the following traits:

a. They are in the same or similar industry. True

b. They are the same in size. False

c. They should not be more than 10 times the revenue size of the subject company. False

d. They should have similar capital structures. False

e. They should have similar profit margins. False

f. They must be publicly traded. False

g. Sufficient information should exist for the guideline company for it to be used as a primary value
indicator. True

2.“The application of the comparable (guideline) company method results in a control value.”
Explain why or why not.

False. Result in Minority Interest value

3.“Any valuation methods that use stock or sales prices of businesses, such as the market approach,
are prospective in nature.” Is this statement true or false? Please explain.

True. Going concern.

4.Which of the following statements is/are true concerning the comparable (guideline) company
method?

a. It results in a marketable value. True

b. It results in a nonliquid value. False

c. The result is a value assuming the marketability of the guideline public companies’ stock. True

5.The application of the market approach includes intangible assets and goodwill to the extent they
exist.

a. True

b. False

6.Which of the following statements is/are true concerning the selection process for comparable
(guideline) companies?

a. Management of the subject company is often a good source for companies. True

b. Management often thinks the company is unique. True

c. If a small division of a diversified public company is the only part of that public company that is
similar to the subject company, it should be used as a guideline company. False

d. Industry publications and web sites can be good sources for potential guideline companies. True

e. After industry similarities, size is often the next most important selection criterion.
7.
You have been asked to value the issued shares in a company XYZ Co Ltd. It is currently struggling
to break even, and it does not expect to generate earnings commensurate with an appropriate rate of
return on its assets for a number of years. As a result, a valuation of the company based on either an
Market Approach (eg capitalisation of earnings) or Income Approach (eg discounted cash flows) is
not appropriate.
The company reported net assets of $50 million at the valuation date (being 31 December 2012),
is as follows:
Assets
Trade debtors 30
Inventories 25
Property, plant and equipment 60
Intangibles 10
Total assets 125
Liabilities
Bank overdraft (5)
Trade creditors and accruals (25)
Borrowings (35)
Provisions (10)
Total liabilities (75)
Net assets 50

In addition to the above, you have been provided with the following information.
• A freehold property is included in “property, plant and equipment” at a cost of $20 million,
but an independent valuation supports a market value of $30 million;
• “Intangibles” represents technology on acquisition of a business and is reflective of its
current state; and
• The corporate income tax rate is 30%.

The management is also considering a forced liquidation of the company and to realise its assets
under a fire sale scenario. In such event, the following will happen.
• A penalty of $3 million is payable if finance leases within “borrowings” are repaid before
the scheduled repayment date;

• Redundancy payments to employees of $4 million (not currently provided for) need to be

made if the company ceases to operate;
• The cost of the fire sale process would be $3 million, and would include the cost of debt
collection, inventory sale, property sale, plant and equipment sale, accounting advice and legal
advice; and
• The company would expect to incur an operating loss after tax of $2 million during the fire
sale period.

In addition,
• Only 80% of the carrying value of trade debtors is likely to be recoverable;
• A combination of selling some inventories at normal margins or cost is possible, but the
majority of inventories will be sold at a significant discount to cost (resulting in 50% of the carrying
value of inventories being recoverable);
• 60% of the carrying value of plant and equipment is recoverable; and
Intangibles will have no value by virtue of the fire sale process commissioned.

Determine the Equity Value of XYZ Co Ltd as at 31 December 2012 (i) on a going concern basis and
(ii) on forced liquidation basis.

(i) On a going concern basis: means company still going to operate, what’s the equity value in 2012

Equity Value: 60m (50+10) due to increase in property value.

(ii) On forced liquidation basis: need restate according to the events on forced liquidation

Assets

Trade Debtors: 24m (30 x 80%)

Inventories: 12.5m (25 x 50%)
Property, plant, and equipment: 54m [30m + (60% x 40m)] freehold property is 30m , remaining PPE
need take 60%
Intangibles: 0 (no value)
Total Assets: 90.5m

Liabilities

Bank Overdraft: (5) No changes as still need to pay whatever you owe
Trade Creditors and accruals: (25) No changes as still need to pay whatever you owe
Borrowings: 38m (35+3) Penalty
Provision: 14m (10+4) Redundancy payments to employees of $4 million
Operating Loss: 2m
Cost of Fire Sale Process: 3m
Total Liabilities: 82m

Equity Value: 90.5 – 85 = 3.5m