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Sir in my exam kit there’s a line which reads: “asset based valuations are most useful when the company is being liquidated and assets disposed off”
However I do not seem to concur with the aforementioned statement, majorly cause, asset based valuations are generally on book value and not fair value, and it is the fair value which is most important when a company is liquidating it’s assets. So that means asset based valuation is not even useful when company is insolvent. Is my understanding correcting sir?
I would agree with you that asset based valuations based on book values are not of much use in any situation.
However, asset based valuations are not generally based on book values.
They can be based on replacement values and it is then useful in helping to form a decision on how much to offer in a takeover situation.
They can also be based on realisable values and it is then very useful when a company is being liquidated.
See Chapter 16 of our Paper FM lecture notes and Chapter 16 of our Paper AFM lecture notes (and the lectures that go with both chapters).
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