Scribd
Upload
226 views3 pages

Calculation For Liquidation Value at Closure Date Is Somewhat Like The Book Value Calculation

Calculation for liquidation value at closure date is somewhat like the book value calculation Calculation for liquidation value at closure date is somewhat like the book value calculation Calculation for liquidation value at closure date is somewhat like the book value calculation

Uploaded by

ALYZA ANGELA ORNEDO
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
226 views3 pages

Calculation For Liquidation Value at Closure Date Is Somewhat Like The Book Value Calculation

Calculation for liquidation value at closure date is somewhat like the book value calculation Calculation for liquidation value at closure date is somewhat like the book value calculation Calculation for liquidation value at closure date is somewhat like the book value calculation

Uploaded by

ALYZA ANGELA ORNEDO
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 3

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.

Kasi although similar sila ng approach, yung liquidation value provides an additional context sa valuation ng
business 

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.

Like for example siguro, yung business will end its corporate life in 3 years, For the three years prior to the closure,
yung business na yun will continue to generate positive free cash flow and this will form part of its value.

Liquidation value is far more realistic as compared to the book value method.

Even if these assets 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.

In practice, the liabilities of the business are deducted 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.

So may mga example po nito mamaya.

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. 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.

Special consideration should be emphasized for intangible assets like patents and internally developed software
programs which are often unsaleable.

When takeover occurs, it is usual that goodwill is recognized as part of the transaction. Monetary equivalent
specific for intangible assets cannot be reliably and separately measured. Instead, intangible assets are onset
against shareholder's equity to come up with a conservative liquidation value.
 
Estimation of liquidation values will be more complex if assets cannot be easily identified or separated; hence,
individual valuation may be impractical.
Golda Company, which is a company specifically created for a joint venture agreement to extract gold, will end
its corporate life in 3 years. Free cash flow expected during the years it still operates is at Php3,000,000 per year.
At the end of its life, Golda estimates to incur Php10,000,000 for closure and rehabilitation costs for its mining
site and other costs related to the liquidation process. Cost of capital is set at 1 0%. Remaining assets by end of
the corporate life will be bought by another company for P30,000,000 and remaining debt of P4,000,000 will be
fully paid off by then.
 
If the valuation happens now, compute for the value of Golda Company.
 
Since Golda Company will terminate its life after 3 years, it is more appropriate to use liquidation value as
terminal value input to the DCF model. For the three years prior to the closure, Golda Company will continue to
generate positive free cash flow and this will form part of its value.

Present Value (PV) of Cash Inflows during Years in Operation


PV of Annual Free Cash Flow: Free Cash Flow x PV Factor of 10%
 
PV of Free Cash Flow (Year 1) = Php3,000,000 x 0.9091 = Php2,727,273
PV of Free Cash Flow (Year 2) = Php3,000,000 x 0.8624 = Php2,479,339
PV of Free Cash Flow (Year 3) = Php3,000,000 x 0.7513 = Php2,253,944

Nakuha kopo yung present value na ganito sa calculator using 1.10, then click yung divide ng dalawang beses, so
depende kung pang ilang year yung kailangan mo kaya for this one sa 1 st year resulted sa 0.9091
 
PV of Cash Inflows during Years in Operation = PV of FCF (Year 1) + PV of FCF (Year. 2) + PV of FCF (Year 3)
PV of Cash Inflows during Years in Operation = Php2,727,273 + Php2,479,339 + Php2,253,944
PV of Cash arrows during Years in Operation = Php7,460,556

then para makuha natin yung PV of Cash arrows during Years in Operation, we sum up yung tatlong results ng
Present value of Free Cash Flow

Since corporate life ends by value will be based on the liquidation value by end of Year 3.

Liquidation Value = PV of Sale of Assets – PV of Closure Costs and Payment for Liabilities
Liquidation Value = (Php30,000,000 – 0.7513) – [(Php10,000,000 + Php4,000,000) x 0.7513]
Liquidation Value = Php22,539,444 – 10,518,407
Liquidation Value = Php12,021,037

so ditto po ginamit natin yung present value factor ng year 3 which is yung 0.7513

and to get the liquidation value, sinubtract natin yung 30 million, which is yung remaining assets na bibilhin na ng
ibang company, minus yung pv factr ng year 3, which resulted to 22,539,444 pesos, then etong
 22,539,444 pesos nato, isusubtract natin sa result ng 10 million which is yung estimate ni Golda company ma
maiincur nila plus yung 4 million na remaining debt, then imumultiply nmn yung sum nito sa pv factor ng year 3,
0.7513, equals 10, 518,407

So Php22,539,444 – 10,518,407 is equals to Php12,021,037 liquidation value


Cash flows during the remaining operating life and liquidation value by the end of Year 3 should be combined to
arrive at the value of Golda Company now.

Value of Golda Company = PV of Cash Inflows during the Years in Operation + Liquidation Value
Value of Golda Company = Php7,460,556 + Php12,021,037
Value of Golda Company = Php19,481,593

You might also like