Question 18.A.1: Using the Adjusted Book Valuation Approach PROBLEM: You are ...
Using the Adjusted Book Valuation Approach
PROBLEM: You are considering purchasing a company that manufactures specialized components for recreational vehicles. These components are sold to the companies that manufacture the vehicles. As part of your analysis of this opportunity, you decide to estimate the liquidation value of the company. Management has provided you with the following information about its assets. All values are in thousands of dollars.
Management has also told you that you can reasonably expect to collect 93 percent of the receivables (accounting for collection expenses), that the inventory can be sold to realize 85 percent of its book value, and that sale of the property, plant, and equipment would yield $6,100. What is the liquidation value of this company?
APPROACH: Calculate the value that will be realized for each of the individual types assets and sum those values to obtain the liquidation value of the company.
The liquidation value is:
\begin{matrix} Cash &&& \$444 &\times& 100\%&=&\$444 \\ Accounts \ receivable &&& 739 &\times& 93\% &=&\$687 \\ Inventory &&& 1,436 &\times& 85\% &=& \$1,221 \\ Net \ PP\&E &&& \underline{8,463} &&&=& \underline{\$6,100} \\ Total \ assets &&& \$11,082 &&&& \$8,452\end{matrix}You can expect to realize $8,452 from the liquidation of this company if there are no liquidation expenses that are not accounted for in these numbers.