Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › June 2015 Question 3c
- This topic has 5 replies, 2 voices, and was last updated 7 years ago by John Moffat.
- AuthorPosts
- June 7, 2016 at 4:01 am #320128AnonymousInactive
- Topics: 43
- Replies: 65
- ☆☆
Hi John,
just quick question for the net asset valuation why don’t we consider the 30 and 20 million non-current liabilities? the dividend valuation method considers the interest payments for this loan so why not include it when calculating the Net asset valuation?
Also is the Book value model the same as the net asset valuation this might be the reason for the difference?
Thank you
June 7, 2016 at 9:27 am #320228For the value of the business as a whole, the net assets represent the non-current assets plus the net current assets.
June 7, 2016 at 12:57 pm #320283AnonymousInactive- Topics: 43
- Replies: 65
- ☆☆
Ok
1) so if we removed the non-current liabilities that will only be the value of equity?
2) Also the Dividend Valuation model used in this question answer isn’t that just the value of equity? it also uses the cost of equity to discount(its seems similar to the FCFE method). Unless the dividend valuation model is the value of the whole company?
June 7, 2016 at 3:10 pm #320357The examiners wording in his answer could be a bit better (I appreciate it confuses a bit), but we are trying decide whether or not it is worth paying the 60M asked for the company.
In order to finance the 60M it is effectively the management who are borrowing a large part of it, and therefore the management (as the shareholders) need to be convinced they will end up being worth more than 60M as a result.
Based on market values, they would be paying 60M for assets worth 57.44M, which (ignoring any other considerations) would not be worthwhile.
Based on dividend valuation model, they will end up with shares worth 58.416M which is better, but (again ignoring other considerations) will still not be worthwhile.
June 7, 2016 at 3:19 pm #320370AnonymousInactive- Topics: 43
- Replies: 65
- ☆☆
Thanks a lot John much clearer.
But specifically am I correct in saying if we removed the Non-current liabilities of 30 and 20 from the 57.44 we will be left with the value of equity?
And for the 58.416 this is the value of equity alone?
Thanks
June 7, 2016 at 3:43 pm #320396Specifically, yes 🙂
- AuthorPosts
- You must be logged in to reply to this topic.