A comparison between a firm’s going-concern valuation and its liquidation value will show that the going-concern value will always be:
A) equal to the present value of the expected continued operation of the firm.
B) greater than the liquidation value.
C) less than the liquidation value.
Your answer: B was incorrect. The correct answer was A) equal to the present value of the expected continued operation of the firm.
It is not possible to state the relationship between the going-concern value and the liquidation value without examining the prospects for the firm and the current value of the assets. The going-concern value is equal to the present value of the expected dividends arising from continued operation.
———————————
I know option A is correct, but isn’t option B also correct?
I though CFAI text says a firm’s going-concern valuation and its liquidation value will show that the going-concern value will always be greater than the liquidation value. I’m going to check it out again and paste it on here if I can find it.作者: dontknow1987 时间: 2013-4-12 21:51
i could potentially see a case where the CGV = LV, hence it might not ALWAYS be greater. it is taking into account continued operations, I don’t know what happens with the accounting when a firm enters bankruptcy and knows it will NOT emerge, is everything discontinued ops? There is such a thing of fresh start accounting for bankrupt companies (as the “CFAI says beyond the scope of this reading”)作者: NakedPuts00 时间: 2013-4-12 21:51
well B is not always true: sometimes going on concern is worth less that liquidation value. It can happen when sum of parts are less than the whole 2 + 2 = 3 i.e. reverse synergy effect.
In other words, assets are worth more when you sell them than to use them in some highly unproductive, or very risky activities, so that disc. CFs are very low.
Do you understand now?作者: Iginla2011 时间: 2013-4-12 21:51
Just think of the corporate raiders in the 80’s/90’s. They would buy entire firms and sell off the pieces at a profit.作者: giorgio10 时间: 2013-4-12 21:51
Just repeating what SFR said.
If returns generated by the firm in a going concern assumption are continuously less than their WACC, then the firm is actually depleting investors’ wealth.
If this is the case, then going concern value MAY be less than its liquidation value. Since, in the question, it is saying ALWAYS greater than the liquidation value, it becomes a weak choice as an answer.
Generally, whenever we see words like ‘ALWAYS’, ‘ONLY’ etc in the question or in choices, we should become more cautious in going for the generally known answer.
