Question

Daniels is a fund manager within Investio Inc, a global investment company. He has recently identified the following potential acquisition targets:

Company A: A is an unquoted, property development company with a portfolio of over two hundred houses at various stages of renovation. It has been loss making for the last two years dues to the economic downturn. Daniels believes that new government legislation will bring a welcome boost to the housing market.

Which of the following valuation methods is most suitable for valuing Company A?

Select one:

a. P/E ratio x earnings

b. Dividend valuation model (DVM)

c. Net realisable value of assets

d. Market capitalisation

Answer 1

Since the company is making loss for a couple of years, price to earning ratio cannot be used in association with this company and since the company is also not paying any kind of dividend, So,dividend valuation model is also not applicable in this company case and market capitalisation is not a method which can either be used in this case because the company is not highly capitalised.

So this company can only be valued through net realizable value of assets because after the change in the regulation of government policies the value of Assets of this housing company would go up significantly and it will help the valuer to value it into the right perspective.

Show the answer would be option (C)