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Hi John,
When calculating the value of besserlot using asset based valuation, why is the inventory amount of 1020 taken (why 2380 not taken)?Also when calculating the value of besserlot using PV of expected future cash flows, why is the interest deducted? Can’t we ignore it?
First question:
The answer has not taken the inventory as 1,020 at all. It has taken the net assets (which include the inventory at full value) and then subtracted 30% of the inventory value as an adjustment.
Second question:
As is stated in the answer, they have discounted the free cash flows to equity at the cost of equity. Free cash flows to equity are always after deducting interest.
Thank you John. I got the second question. But I’m still confused about the first one. The question says that the existing inventory is expected to be 70 %of its book value which is 3400. So why do we take 1020, why not 2380? Don’t we add the realisable value?
But again, they do not take 1,020 at all!!!!
They take the whole of the book value (3,400) because it is included in the total net assets, and then they subtract 30% of the 3,400 so as to be left with 2,380.
I assume that you tried this question yourself before you looked at the answer, and so if you brought in the inventory at 70% in the first place you would have ended up with the same final answer.
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