Financing - Valuation - Asset Based Approach

Question 1

What are the two types of asset-based approaches for liquidation

Answer 1

1. Orderly (voluntary) liquidation - Not forced in court, voluntary act of the members or directors
2. Forced liquidation - Forced on an entity in court. Assets are sold to the highest bidder, usually a relatively short period of market exposure

Question 2

What are the four steps of performing liquidation approach

Answer 2

1. Balance sheet values for assets are adjusted to reflect the NRV of the individual assets at the valuation date
2. Amounts required to settle the liabilities are deducted from the NRV of the asset
3. Corporate income taxes are calculated based on tax consequences of the sale of the assets.
4. Personal income taxes are calculated on proceeds available for distribution to determine the liquidation value to the shareholder of the company

Question 3

What are the steps for performing adjusted net asset valuation

Answer 3

1. Balance sheet values for each asset and liabilities are adjusted to reflect the FMV of the individual asset and liabilities as the valuation date
2. Forgone tax shield - (NPV of the additional tax deduction on future capital CCA not available to the purchaser of a share
3. Latent taxes and selling costs associated with sales of assets are deducted. Latent taxes are those that would arise from selling the asset

Question 4

How is adjusting asset value determined

Answer 4

• Adjusting the balance sheet to FMV for intangible assets requires professional judgment
  Condition
  1. It is separable - It can be separated or divided from the entity other asset sold, transferred, licensed to another entity
  2. Arises from contractual or other legal right

Rudunant asset - included in the adjusted net asset approach
Rundunant liabilities - deducted under adjusted net asset approach

Question 5

What is the formula to use for the forgone tax shield and latent tax

Answer 5

(FMV* CCA rate * tax rate) / (Disocunt rate + CCA rate )
* (1+(discount rate *1.5))/ (1+ Discount rate)
-
(UCC * CCA rate * tax rate) / (Discount rate + CCA)

Latent tax
Capital gain = net proceeds on disposition - adjusted cost-based
Taxable capital gain = 50% * capital gain
Latent tax liability = income tax rate * taxable capital gain