Niña Kristel N.

Lagutao
BSA-3B

TOPIC 3
Assessment

True or False.
True 1. Liquidation value represents the net amount that can be gathered if the business is shut
down and its assets are sold in piecemeal.
True 2. A unique callout for liquidation value is if the firm is operating under a proprietorship
or partnership model.
True 3. Liquidation value is the base price or the floor price for any firm valuation exercise.
True 4. Bankruptcy is the most serious type of business failure as this happens when liabilities
become greater than asset balance.
True 5. Insolvency happens when a company cannot pay liabilities as they become due.
True 6. Business failure is the most common reason why businesses close or liquidate.
True 7. External factors such as severe economic down turn, occurrence of natural calamities or
pandemic and the likes may contribute to business failure.
True 8. For analysts, liquidation value method can also be used as benchmark in making
investment decisions.
True 9. Share price often reflects growth prospects of the company which is a consideration that
liquidation value does not have.
True 10. Book value should not be used as liquidation value.

Problem Solving.
1. A firm reported current assets of Php 1,000,000, which can be liquidated at 80 percent of book
value. Total liabilities, including preferred stock, equal Php270,000. The firm has 20,000 shares
of common stock outstanding. What is the liquidation value per share of common stock?

Asset adjusted value (1M x 80%) 800, 000

Less: Total liabilities to be settled (270, 000)
Liquidation value 530, 000
Divided by: No. of outstanding shares 20, 000
Liquidation value per share 26.50

2. Camel Homes is to be liquidated. All creditors, both secured and unsecured, are owed Php2
million. Administrative costs of liquidation and wages payments are expected to be Php 500,000.
A sale of assets is expected to bring Php3million after all costs and taxes. What is the liquidation
value of Camel Homes?

Sale of assets 3, 000, 000

Less: Total liabilities to be settled (2, 000, 000)
Administrative costs of liquidation
and wages payments 500, 000
Liquidation Value P 500, 000