Book value represents
the the net worth (or equity) of the business
-- assets minus liabilities -- as shown on the
company's balance sheet. It is relatively easy
to calculate, but provides a terribly deceptive
picture of value. .Financial statements are based
on historical cost and do not reflect how much
somebody would pay for the assets, much less the
ongoing business. Book value typically does not
reflect goodwill' or of the company's earnings
potential.
Liquidation value is the net amount
remaining after a business is brought to an end,
its assets are sold individually, and its creditors
are paid. This value may be difficult to calculate
if the business is large and has a sizable number
of assets. Assets also are often worth more when
valued based on their productive use in the context
of a going concern, rather than when they are
sold piecemeal.
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Example
Valuation by the book
Gustav Beerly owned 4% of the
stock in Mid-City National Bank of Chicago,
which was merged into a subsidiary of Mid-Citco,
a merger that enabled the bank to operate as
a bank holding company.
Beerly dissented from the merger
and presented an appraisal by a private valuator
of $743.77 per share. But the bank balked. After
he and the bank could not agree on a neutral
appraiser, Beerly requested the U.S. Treasury
Department's Comptroller of Currency to appraise
his shares pursuant to 12 U.S.C.S. § 215a(d).
Why does he get an appraisal - doesn't he still
hold 4% of the shares of the new holding company?
The Comptroller considered four
methods to value Beerly's stock: book value,
adjusted book value, market value, and investment
value. The Comptroller averaged the adjusted
book value and investment value, and fixed the
fair value of Beerly's shares at $282.39 per
share - which he considered too low.
What are each of these valuation
techniques? Why did the Comptroller not use
book value or market value?
Beerly sued in federal district
court, which found in favor of the government.
On appeal, the Seventh Circuit addressed a number
of points, including whether adjusted book value
could be a fair method of valution. (More>>)
Paskill Corp. v. Alcoma Corp (Del. 2000)
Both sides appealed the trial court's judgment
in appellant shareholder's appraisal proceeding.
The trial court erred as a matter of law in valuing
appellee corporation because it relied upon the
net asset value as the sole criterion for determining
the fair value of appellee's stock. The trial
court exacerbated that problem in calculating
appellee's net asset value by deducting speculative
future tax liabilities because that deduction
was inconsistent with the theoretical nature of
the liquidating value. The trial court correctly
excluded speculative expenses associated with
uncontemplated sales when it attempted to compute
appellee's net asset value. Since the trial court's
judgment was reversed, the issue relating to an
award of compound interest was moot. On remand,
the trial court was to ascertain the exact nature
of appellee as an enterprise and determine appellee's
fair value by an admissible valuation technique
based on record evidence. (More>>)
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3.4 Use of Financial Statements in Valuation