LIQUIDATION

BASED
VALUATION
Module 7
 OBJECTIVES
01 Explain Meaning of Liquidation Value

Describe Situations to Consider Liquidation Value

03 Discuss When to use Liquidation Value

Explain How to calculate Liquidation Value

Liquidation value
For example, for the case of hotel closes
Liquidation value
Situations to Consider Liquidation Value
Business failures happen when there is:
Situations to Consider Liquidation Value
Situations to Consider Liquidation Value
Situations to Consider Liquidation Value
When to use Liquidation Valuation
Types of Liquidation
Types of Liquidation
Calculating Liquidation Value
Illustrative Example #1

Golda Company, which is a company specifically created for a

joint venture agreement to extract gold, will end its corporate life
in 3 years.
• Net Cash Flow expected during the years it still operate is at
Php3,000,000 per year.
• At the end of its life, Golda estimates to incur Php10,000,000 for
closure and rehabilitation costs for its mining site and other costs
related to the liquidation process. Cost of capital is set at 10%.
• Remaining assets by end of the corporate life will be bought by
another company for Php 30,000,000 and remaining debt of Php
4,000,000 will be fully paid off by then.
• If the valuation happens now, compute for the value of Golda
Company.
Calculating Present Value
Calculating Liquidation Value
Illustrative Example #2

Droid Company's balance sheet revealed

ü total assets of Php3 million,
ü total liabilities of Php 1 million, and
ü 100,000 shares of outstanding ordinary shares.
Upon checking with potential buyers, the assets of Droid can be
sold for Php1.8 million if sold today. Additional Php300,000 will also
be incurred to cover liquidation expenses. How much is the
liquidation value of Droid Company per share?
To compute for the liquidation value in this example, we need to
consider how much the company will receive from the assets if it
will sell today. This money will also be used to pay for the remaining
liabilities and liquidation expenses.
Calculating Liquidation Value
 Calculating Liquidation Value

Liquidation Value per Share = Liquidation Value / Number of Outstanding

Ordinary Shares
 SUMMARY
ü Liquidation value refers to the value of a company if it were
dissolved and its assets sold individually.
ü Liquidation value represents the net amount that can be
gathered if the business is shut down and its assets are sold
piecemeal,
ü Liquidation value is considered as the minimum or floor value for
any firm valuation exercise.
ü 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.
ü Liquidation value is appropriate in the cases of business failures,
end of life of the business or project and depletion of scarce
resources.
 SUMMARY
Liquidation value should be used:
· When liquidation value is greater than going concern
value
· When business has finite life
· To value non-operating assets
· If business continuity is dependent on current
management who will not stay
Thank you for
listening