Page 220 - Microsoft Word - 00 P1 IW Prelims.docx

Chapter 13

Asset based methods

4.1 Tangible net assets

The traditional asset based valuation method is to take as a starting point the value
of all the firm’s statement of financial position assets less any liabilities.

 Book value – the book value of assets can easily be found from
the financial statements. However, it is unlikely that book values
(which are based on historic cost accounting principles) will be a
reliable indicator of current market values.

 Replacement cost – the buyer of a business will be interested in
the replacement cost, since this represents the alternative cost of
setting up a similar business from scratch (organic growth versus
acquisition).

 Net realisable value – the seller of a business will usually see the
net realisable value of assets as the minimum acceptable price in
negotiations.

Illustrations and further practice

Now try TYU 6 and TYU 7 in Chapter 13

208