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Business valuations and market efficiency

2.2 Problems with asset-based valuations

Asset based valuations do not value what is being purchased, i.e. the
right to future earnings/cash flows of the company.

Asset based valuations ignore intangible assets, such as goodwill
(particularly relevant for service companies which may have skilled
workers, strong management, or a strong customer base relative to its
competitors)

Question 1

Asset based valuation

The following are extracts from the statement of financial position of MNM Co,
an unquoted company, as at 31 December 20X6.

$
Non-current assets (written down value) 1,278,000
Net current assets 395,000
$0.50 ordinary shares 1,500,000
Reserves 687,000
8% loan notes 500,000
Further information is provided as follows:

A recent valuation of the non-current assets put them at 45% above their
current written down value.

The loan notes are redeemable at a 10% premium.

There is a long outstanding debt of $20,000 in receivables that is not expected
to be received.

Calculate the value of a share in MNM Co.

Total value of assets: $1,278,000 × 1.045 + $395,000 – $20,000 = $2,228,100

Less: redemption value of debt: $500,000 × 1.10 = $$550,000

Value of all shares = $1,678,100

Number of shares in issue: $1,500,000/$0.50 = 3,000,000

Value per share: $1,678,100/3,000,000 = $0.56 per share.

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