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When valuing Bluebell Co using asset-based valuations, which of the following statements is correct?
A An asset-based valuation would be useful for an asset-stripping acquisition
B Bluebell Co’s workforce can be valued as an intangible asset
C Asset-based valuations consider the present value of Bluebell Co’s future income
D Replacement cost basis provides a deprival value for Bluebell CoWhat exactly does “deprival value” mean? Why is option D not the right answer?
Deprival value refers to the value that a company would lose if a particular asset were no longer available. So for option D it is not correct.
Why?
Because the valuation takes into account the cost of replacing the company’s assets at their current market prices. Considering potential loss or deprivation that would occur if the assets were no longer available.Thank you! Also regarding business valuations using replacement cost, at what value should we value the loan notes of a business? Nominal or the redemption price? And what value should we use if NRV is used to value a business?
When valuing loan notes in a business using replacement cost, the value to consider is the nominal value of the loan notes.
This is because the interest on the loan notes is calculated based on the nominal value. The redemption price of the loan notes is not relevant in this context.When valuing a business using net realisable value (NRV), the value to consider is the present value of the expected receipts discounted at the investor’s required rate of return.
The NRV approach focuses on the lowest value that sellers should accept, so it does not specifically consider the value of loan notes.
In a question regarding the valuation of a business using replacement cost, loan notes were taken at their redemption price which was at a 5% premium. The question was as follows:
Kewley Co has non-current assets on its books with a historic cost value of $5.500,000 but an independent valuation recently put their current replacement cost at 20% higher than cost. Kewley Co’s current assets of $1,200,000 include a long outstanding debt of $50,000 that is unlikely to be paid Kewley Co has loan notes with a nominal value of $1,350,000 in issue which are due to be redeemed at a 5% premium next year. The answer for the value of this business was $6,332,500 (5500000*1.20)+(1200000-50000)-(1350000*1.05). This question was from the Pre-December 2021 FM mock debrief.
I just want to clarify about which values for loan notes should I use (nominal, redemption or market) if the business is to be valued on:
1) Historic cost basis
2) Net realizable value
3) Replacement costIt’s important to note that the specific valuation basis should be specified in the question or context to determine which value to use for the loan notes. It must be clear to include and at what value. If it isn’t state down your reasoning for your choice in your answer.
When valuing a business on different bases, the values of the loan notes can vary depending on the basis used. Here’s how the loan notes should be considered for each basis:
Historic cost basis: On this basis, the loan notes should be valued at their nominal value. The nominal value represents the original value of the loan notes when they were issued.
Net realisable value: This basis considers the amount that the loan notes can be realized or sold for in the current market. In this case, the loan notes should be valued at their market value, which is the present value of the interest and redemption amounts, discounted at the appropriate rate.
Replacement cost: This basis looks at the cost of acquiring similar loan notes in the market. For this basis, the loan notes should be valued at their market value, which reflects the cost of buying similar loan notes in the market.
Look at at question – if you are unsure state down the reason for you choice
The valuation of the business using replacement cost takes into account the current replacement cost of non-current assets, the value of current assets, and the redemption value of loan notes.
In the given question, Kewley Co has non-current assets with a historic cost value of $5,500,000. The independent valuation recently put their current replacement cost at 20% higher than cost, which is calculated as $5,500,000 * 1.20 = $6,600,000.
The current assets of Kewley Co are valued at $1,200,000. However, there is a long outstanding debt of $50,000 that is unlikely to be paid. Therefore, the net value of current assets is $1,200,000 – $50,000 = $1,150,000.
Kewley Co has loan notes with a nominal value of $1,350,000 in issue, which are due to be redeemed at a 5% premium next year. The redemption value of the loan notes is calculated as $1,350,000 * 1.05 = $1,417,500.
To calculate the value of the business, we add the current replacement cost of non-current assets, subtract the outstanding debt from current assets, and subtract the redemption value of loan notes.
Therefore, the value of the business is ($6,600,000) + ($1,150,000) – ($1,417,500) = $6,332,500.
Thank you very much!
Just to clarify:
1) For historic cost use nominal values
For NRV use market values
For replacement cost use redemption value. Is this right?2) Also if market value is not given and we are asked to calculate on NRV basis, should we take the nominal value or redemption value (if its given)?
The problem is if it comes up for MCQS, I cannot state my reasoning for the answer that’s why I’m asking.
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