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Firstly, Is it true that in order to determine the purchase price of a company the purchaser company needs to use valuation methods where different valuation methods can be used (where different valuation methods give different Market Value of a Company).
These different valuation methods are:
1) Net Assets Value
2) Market Capitalization
3) Dividend Valuation Method
4) PE ratio
5) Earning YieldSecondly, is that also correct that Net Assets Value method & Market Capitalization are the only Asset based Valuation methods in the paper F9 (in real life do we have any other method for Asset based Valuation?)
Thirdly, can u please explain how the Company’s Net Asset Value method is useful for Asset Stripping and Minimum Price AND what is Asset Stripping and Minimum Price?
Thanks in Advance:)
The purchaser can choose whichever valuation methods they want (and in the exam you use whichever methods are asked for). Generally the purchaser will look at several methods so as to get a range of values when deciding what to offer. There is no ‘correct’ value (either in real life or in the exam).
The only asset based method is the net assets value (although they might use book values or market values or a combination of the two). Market capitalisation is not an asset based method – it is simply the total market value of the shares.
Asset stripping is when a company is bought just in order to then sell off all the assets separately.
The minimum price is the lowest amount that the selling company is likely to be prepared to accept and which will be the net asset value.I explain all of this in my free lectures!
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