This outcome asks you to value a company's equity from its assets less its liabilities, using book, break-up or replacement values. The examiner likes it because the arithmetic is simple but the adjustments (goodwill, preference shares, liquidation costs) are easy to miss.
The rule
Asset-based value = assets (on the chosen basis) less all liabilities and prior-charge capital, divided by the number of ordinary shares. Net book value (NBV) uses statement of financial position figures, with goodwill removed if told to. Net realisable value (NRV) uses expected sale proceeds and deducts liquidation costs and any redemption premium, so it is a break-up floor. Net replacement cost uses the cost to replace the assets and is usually the highest basis. None of them captures goodwill or earning power.
Worked example
Tile Co has 2m ordinary shares. Book values ($m): non-current assets 8.0 (including goodwill 1.0), current assets 3.0, current liabilities 2.0, 5% loan notes 2.5, preference shares 1.0.
NBV excluding goodwill:
Non-current assets 8.0 - 1.0 = 7.0
Add current assets: 7.0 + 3.0 = 10.0
Less current liabilities: 10.0 - 2.0 = 8.0
Less loan notes: 8.0 - 2.5 = 5.5
Less preference shares: 5.5 - 1.0 = 4.5
Value per share = 4.5 / 2.0 = $2.25
For NRV, you would replace each asset with its expected sale proceeds, then deduct all liabilities, the preference shares at their redemption amount and the liquidation costs, before dividing by 2m shares.
Remember: deduct everything that ranks ahead of the ordinary shareholders (liabilities, preference shares at redemption value, and liquidation costs under NRV) before dividing by the number of shares.
Where candidates lose marks
Forgetting to deduct preference shares, which rank ahead of ordinary shareholders, so the value per share is overstated.
Leaving goodwill in the assets when the question says to exclude it.
Ignoring the redemption premium or the liquidation costs in an NRV (break-up) valuation.
Setting a bid at NRV, when the market price is well above asset values because of goodwill and earning power.
Try it: 4 questions
Spoke Co, a bicycle maker, is to be wound up. Its book values and expected realisations are:
- Property: book value $5.0m, sale value $6.5m - Plant: book value $3.0m, sale value $1.2m - Inventory: book value $1.5m, 60% recoverable - Receivables: book value $2.0m, 90% collectable - Cash: $0.3m
Liabilities total $4.0m. In addition, $1.0m of redeemable preference shares must be redeemed at a 10% premium, and liquidation costs are expected to be $0.4m. There are 1.5m ordinary shares in issue.
What is the net realisable value per ordinary share, to the nearest cent?
Answer: C. Rule: NRV is the break-up value. Assets are taken at expected realisable amounts, then all liabilities, the preference shares at their redemption amount and the liquidation costs are deducted.
Working ($m): Property 6.5 + plant 1.2 + inventory (1.5 x 60%) 0.9 + receivables (2.0 x 90%) 1.8 + cash 0.3 = 10.7 Less liabilities 4.0 Less preference shares at redemption value (1.0 x 1.10) 1.1 Less liquidation costs 0.4 Net = 10.7 - 5.5 = 5.2 Per share: 5.2 / 1.5 = $3.47
Why the others are wrong: - $3.80 ignores both the redemption premium and the liquidation costs: (10.7 - 4.0 - 1.0) / 1.5. - $3.73 omits the liquidation costs: (10.7 - 5.1) / 1.5. - $3.53 omits the 10% redemption premium: (10.7 - 5.4) / 1.5.
Choc Delight Co extracts the following from its statement of financial position at 31 December 20X5:
- Non-current assets: $9.0m. This includes $1.2m of capitalised development costs and $0.8m of goodwill. - Current assets: $4.0m - Current liabilities: $2.5m - 6% loan notes: $3.0m - 5% irredeemable preference shares: $1.0m, stated at book value
The company has 2.0m ordinary shares in issue. Goodwill is excluded from the valuation, but the capitalised development costs are treated as stated.
What is the net book value (net asset) value per ordinary share?
Answer: B. Rule: the NBV basis values the equity as total assets less all liabilities and prior-charge capital, with goodwill removed as instructed. Dividing by the number of ordinary shares gives the value per share.
Working ($m): Non-current assets excluding goodwill: 9.0 - 0.8 = 8.2 Add current assets: 8.2 + 4.0 = 12.2 Less current liabilities: 12.2 - 2.5 = 9.7 Less 6% loan notes: 9.7 - 3.0 = 6.7 Less preference shares: 6.7 - 1.0 = 5.7 Value per share: 5.7 / 2.0 = $2.85
Why the others are wrong: - $3.25 leaves goodwill in the assets: 6.5 / 2.0. - $3.35 forgets to deduct the preference shares, which rank ahead of ordinary shareholders: 6.7 / 2.0. - $2.25 also strips out the development costs, which the question says to treat as stated: 4.5 / 2.0.
Press Co is a printing firm with 1 million ordinary shares in issue and a market capitalisation of $9.0m. Its asset-based valuations are: net book value (NBV) $4.0m, net realisable value (NRV) $2.8m and net replacement cost $5.5m.
Which of the following correctly ranks the asset bases from highest to lowest and interprets the pattern for a bid range and goodwill?
Answer: A. Per share (1m shares): net replacement cost $5.50, NBV $4.00, NRV $2.80, market value $9.00. The ranking is net replacement cost > NBV > NRV. NRV is lowest because it is a forced-sale, break-up value. The market value exceeds even the highest asset value by $9.0m - $5.5m = $3.5m. This gap suggests the market is valuing Press Co's earning power, goodwill and intangibles, which asset bases ignore. NRV acts as a floor, and shareholders are unlikely to accept less than something close to the market price, so a realistic bid is well above the asset values. B is wrong because it puts NRV highest; NRV is the lowest here because it reflects disposal values less selling costs. C is wrong because it concludes the shares are overpriced, when the gap simply reflects earning power that asset bases ignore. D is wrong because it treats replacement cost as a ceiling, ignoring that goodwill and earnings are valued by the market above $5.5m.
Kiln Co, a cement plant operator, has received a bid of $2.10 per share. The following information is available per share:
- Net realisable value: $2.60 - Net book value: $2.40 - Market price before the bid: $1.90
An asset-stripper is a possible rival bidder for Kiln Co.
Which of the following is the best advice to Kiln Co's shareholders?
Answer: B. Rule: where a break-up buyer such as an asset-stripper is a credible bidder, NRV sets the floor on the price shareholders should accept, because they could obtain at least that value from a rival.
Working: NRV $2.60 - offer $2.10 = $0.50 per share below the floor, which is about 19% under break-up value. The premium over the market price is only (2.10 - 1.90) / 1.90 = 10.5%. The market price is below even NRV, which suggests the shares are undervalued. The offer should be rejected.
Why the others are wrong: - Accepting because the offer is above the market price ignores the fact that the market price itself is below break-up value. - Saying NRV only matters in a winding-up ignores that an asset-stripper makes break-up value a realistic alternative. - Treating NBV as the floor reaches the right decision (reject) for the wrong reason. NBV is historic and is not what the assets would fetch, so the floor is the higher NRV figure.
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What is the difference between net book value and net realisable value in share valuation?
NBV uses the accounting values in the statement of financial position, while NRV uses what the assets would fetch if sold, less liquidation costs. NRV is a break-up value and is often lower than NBV.
How do you calculate net asset value per share?
Take total assets (excluding goodwill if told) and deduct all liabilities and preference shares. Divide the result by the number of ordinary shares in issue.
Why is market value usually higher than asset-based value?
Asset bases ignore goodwill, brand and future earning power, which the market prices in. A large gap suggests substantial intangible value, so a bidder would need to offer well above the asset values.