Reading 33: Equity Valuation: Applications and Processes-LOS class, contrast, valuation, definition, 2010

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Session 10: Equity Valuation: Valuation Concepts
Reading 33: Equity Valuation: Applications and Processes

LOS b: Explain the going-concern assumption, contrast a going concern value to a liquidation value, and identify the definition of value most relevant to public company valuation.

 

 

 

The present value of expected future cash flows is the firm's:

A) terminal value.

B) liquidation value.

C) going-concern value.

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Going-concern value is the present worth of expected future cash flows generated by a business.

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Liquidation value is the:

A) cash generated by terminating a business and selling its assets.

B) market value of the total assets less the market value of the total liabilities.

C) present value of future cash flow less the possible liquidation cost.

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Liquidation value is the cash generated by terminating a business and selling all of its assets.

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A valuation of a firm based on the current market price of its assets is referred to as the firm’s:

A) going-concern value.

B) liquidation value.

C) operating value.

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The liquidation value is based on the assumption that the firm will cease to operate and all of its assets will be sold.

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A valuation of a firm based on the assumption that the firm will continue to operate is referred to as its:

A) operating value.

B) going-concern value.

C) status quo value.

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The going-concern value is based on the assumption that the firm will continue to operate and the firm’s value is the present value of its future dividends.

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A comparison between a firm’s going-concern valuation and its liquidation value will show that the going-concern value will always be:

A) greater than the liquidation value.

B) less than the liquidation value.

C) equal to the present value of the expected continued operation of the firm.

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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.