Question No 208 BPP (Business Valuation on the basis of net assets)

Ffurqan.909y ago

The following is a summary of Monkton Co's statement of financial position: $m Non-current assets 5 Net current assets 3 8 Financed by: $1 Ordinary shares 1 Reserves 5 Loan notes 2 8 Non-current assets include machinery which cost $10 million when purchased 7 years ago and has a useful life of 10 years. Monkton Co uses straight-line depreciation. These assets were recently professionally valued at $1 million. Answer Statement of financial position value of equity = ordinary shares + reserves = (1 + 5=) $6 million. Net book value of revalued assets = $10m × 3/10 = $3m. Professional valuation of revalued assets = $1m; (3 – 1 =) $2m lower than net book value. Number of shares = $1m / $1 per share = 1 million shares. Realisable value per share = ($6m – $2m) / 1 million shares = $4 per share Hi John, Could you kindly help me out with this, I have no idea what is happening here :P Is the 2 million being deducted is the Loan notes value (as realisable value should be assets - liabilites) or the impairment of 2 million. Regards, Furqan

John MoffatTutor9y ago#1

On the statement of financial position, then net assets of the company are: assets 8M - liabilities 2M = 6M (which is the same as the equity: share capital plus reserves). However, this is only the book value, and the non-current assets are actually worth less than the figure on the SOFP. On the SOFP non-current assets include some that have a book value of 3M which are actually only worth 1M. So the assets are worth 2M less (3M - 1M) than the value shown on the SOFP and therefore the business is worth 2M less than the figure in my first sentence of 6M (The 2M has nothing to do with the loan notes - they are simply a liability).

Ffurqan.909y ago#2

Thanks John its clear now!

John MoffatTutor9y ago#3

You are welcome :-)

Ssunny208y ago#4

Hi John, I had looked above your answer, may I ask if 3M is depreciation value?

John MoffatTutor8y ago#5

No - it as both I wrote and as was written in the original post!!! It is the net book value of the assets (that are only actually worth $1M). The original cost less 7 years depreciation.