Book Value of A Company is defined as the sum of all assets subtracted by the sum of all liabilities/obligations. In other words, this is what shareholders will get if the company is to cease operations immediately. The reality, however, is different from that. Book Value does not always reflect what shareholders will get in the event of liquidation. For example, inventory is stated at full cost (100% value). But, who would want to buy a bunch of Pentium IV chips if the company is not going to exist tomorrow?
Therefore, we cannot rely on book value to find the value of a company during liquidation. The rest of the article will help you conservatively predict the fair value of all the assets when the company stops its operations.
Cash & Cash Equivalents: This is the amount of money held in the company's checking and saving accounts. Cash is cash. The fair value of this is 100% of the stated balance sheet value.
Short Term Investments: Short term investments is the money invested by the company for a duration of less than one year. Examples include: stocks, bonds or certificate of deposit. Short Term investments can be sold at 100 % of the stated balance sheet value.
Net Receivables: Receivables is the money owed by the company's customers. Some of them may pay it back, some of them won't. Net Receivables normally can be sold at 50% of the stated balance sheet value.
Inventory: Inventory is the supply of goods that a company is going to sell to its customers. Depending on the industry, inventory normally can be sold at 50 % of the stated balance sheet value.
Long Term Investments: The definition for long term investment varies. But, it is commonly referred to as investments with long term of one year or more. This includes an 18 month certificate of deposit, investing in property and so forth. The liquidation value of long term investments is 100 % of the stated balance sheet value.
Property Plant And Equipment: This includes machinery, factory equipment, company vehicles and others. Basically, it is equipment that helps the company functions. In liquidation, property plant and equipment normally gets only around 25 % of the stated balance sheet value.
Goodwill: This is the value obtained when a company acquire other companies above the net asset value. Goodwill is abstract, meaning that it does not have a physical form. Goodwill has a 0 % value during liquidation.
Intangible Assets: This is an asset from patent protection, brand name or other copyrights. Intangible assets has no physical appearance and its value depends on the cash flow generated by those assets. During liquidation, however, intangible assets should be valued at 0 % balance sheet value.
Liabilities: All liabilities need to be paid in full. Therefore, liabilities need to be paid 100 % of the stated balance sheet value.
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