FINANCIAL DECISION MAKING

Financial decision making

Financial decision making

Q. 1 (A)

A) An assets basis valuation

If we assume that a purchaser would accept the revaluation of assets by the independent valuation entity, an assets valuation of equity would be as follows: Fixed assets

Ignore patents. assumed to have no market value

RO

RO

Land and building s

1,075,000

Plant and equipment

480,000

Motor vehicles

45,000

1,600,000

Current assets including cash Cash(8)

383,000

1,983,000

Less : Current liabilities

230,000

Loan

400,000

630,000

Asset value of equity (300,000 shares )

1,353,000

Book Value per Share(asset value of equity/shares) = RO 4.51

Comments:

Book value

Asset basis valuation first starts with the book value of company's equity. Here in this case, it is given already which is RO 1060 (total assets-total liabilities). This means company still has the enough amounts even after paying all the liabilities.

Cash & Working Capital

This is a good measure if we want to buy a dollar value asset in one dollar. So first we will look at the cash, cash equivalents and short term assets then divide this amount by number of share outstanding (8/300), and this would generate RO of 0.02 per share. Here, company's cash are not sufficient even to pay the RO of one even, but yet it has the positive value which is the good sign.

Working capital is a good technique in the asset based valuation in order to know whether the asset bought is equal to the dollar of stock price. So, working capital figures of RO 153 already given. If we divide this amount by shares outstanding then RO of 0.51 will be per share.

Finally, the book value per share is calculated above, which is RO 4.51. This means that the safety associated with the shareholders is RO 4.51. Moreover, this measure illustrates whether the company's current shares are undervalued or overvalued. Overall, the company's financial position is sufficient, and shareholders can enjoy the handsome amount even after the company is liquidated. The amount the shareholders can get is around RO 5 (4.51) that is good signal for the investors, because it the straightforward sign for the investors whether to purchase it or not.

b) Earnings basis valuations

If the purchaser believes that earnings over the last five years are an appropriate measure for valuation, we could take average earning in these years, which were

Comments

The average earnings for the last five years showed that company has earned an average RO 93,000. This is good amount of earning for the private company working in a competitive business market. However, this value cannot be all alone analyzed without having the average industry earning in the respective business. But, yet is a good positive amount.

An appropriate P\E ratio for an earning basis Valuation might be the average of the three private limited companies for the recent year. (Attend towards an increase in the P\E ratio over three years is assumed and even though average earnings have been taken, the most recent years P\E ratio are considered to be the figures which are appropriate.

P\E

Bhawan llc

8.5

Hassar llc

9.0

Mufti llc

10.0

Average

9.167

Reduce by about 40% to allow for unquoted ...