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  • Liquidation Based Valuation 03.06.2023

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    Ivan Jay E. Esmino
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    This document provides four liquidation-based valuation exercises. Exercise 1 calculates that ordinary shareholders of WW Inc. will receive $0 since proceeds of $2 million are insufficient to satisfy debt obligations of $2.8 million. Exercise 2 calculates the liquidation value per share of Lysle Company to be $0.08 if assets are sold for $40 million. Exercise 3 finds the liquidation value per common share is $0.50 if assets are sold at 80% of book value. Exercise 4 determines orderly liquidation value is $4 million and forced liquidation value is $2 million for Leth Company.

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    LIQUIDATION-BASED-VALUATION-03.06.2023 (1)

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    This document provides four liquidation-based valuation exercises. Exercise 1 calculates that ordinary shareholders of WW Inc. will receive $0 since proceeds of $2 million are insufficient to satisfy debt obligations of $2.8 million. Exercise 2 calculates the liquidation value per share of Lysle Company to be $0.08 if assets are sold for $40 million. Exercise 3 finds the liquidation value per common share is $0.50 if assets are sold at 80% of book value. Exercise 4 determines orderly liquidation value is $4 million and forced liquidation value is $2 million for Leth Company.

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    267 views6 pages

    Liquidation Based Valuation 03.06.2023

    Uploaded by

    Ivan Jay E. Esmino
    This document provides four liquidation-based valuation exercises. Exercise 1 calculates that ordinary shareholders of WW Inc. will receive $0 since proceeds of $2 million are insufficient to satisfy debt obligations of $2.8 million. Exercise 2 calculates the liquidation value per share of Lysle Company to be $0.08 if assets are sold for $40 million. Exercise 3 finds the liquidation value per common share is $0.50 if assets are sold at 80% of book value. Exercise 4 determines orderly liquidation value is $4 million and forced liquidation value is $2 million for Leth Company.

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    of 6

    LIQUIDATION BASED

    VALUATION
    EXERCISES 03.06.2023
    EXERCISE 1:
    • WW Inc. recently has had financial difficulty and is being liquidated.
    The firm has a liquidation value of Php 2,000,000 – Php 800,000 from
    the fixed assets that served as collateral for the mortgage bonds and
    Php 1,200,000 from all other assets (all prior claims have been
    satisfied). The firm’s current capital structure is as follows:
    • Unsecured Bonds – Php 1,000,000
    • Mortgage Bonds – Php 800,000
    • Preferred shares – Php 200,000
    • Ordinary shares – Php 500,000

    • How much will the ordinary shareholders get from this liquidation?
    EXERCISE 2:
    • At year end, Lysle Company balance sheet showed a total assets of
    Php 50 million, total liabilities of Php 30 million, and 500,000 shares
    of ordinary shares outstanding. If Lysle could sell its assets for Php 40
    million, Lysle liquidation value per share is?
    EXERCISE 3:
    • A firm reported current assets of Php 1,000,000 which can be
    liquidated at 80% of book value. Total liabilities, including preferred
    stock, equal Php 270,000. The firm has 20,000 shares of common
    stock outstanding. What is the liquidation value per share of common
    stock?
    EXERCISE 4:
    • Leth Company is currently undergoing liquidation proceedings and is
    consulting with potential buyers about the amount it can recover
    from the sale of its assets with book value of Php 7,000,000. Based on
    quotations, the assets can fetch a price of Php 6,000,000 if it will be
    sold within one year as negotiations and bidding will allow interested
    buyers to compete for the purchase. An interested buyer is willing to
    pay for Php 4M to purchase the assets now. Leth Company has
    liabilities to settle amounting to P2M.
    • How much is the orderly liquidation value of the company?
    • How much is the forced liquidation value of the company?
    Summary:
    • Liquidation value refers to the value of a company if it were to be dissolved and its
    assets sold individually.
    • Liquidation value is the most conservative valuation approach among all as it
    considers the realizable value of the asset if it is sold now based on current
    conditions.
    • Liquidation value is appropriate in the case of business failures, end of business
    life, and depletion of scarce resources.
    • The liquidation value considers the present value of the sums that can be obtained
    through the disposal (i.e. sale) of the assets of the firm in the most appropriate
    way, net of the sums set aside for the closure costs, repayment of the debts and
    settlement of all liabilities, and net of the tax charges related to the transaction
    and the costs of the liquidation process itself.

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