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Lecture

ACCT 301 Lecture Notes - Standard Cost Accounting, Historical Cost, Share Capital


Department
Accounting
Course Code
ACCT 301
Professor
All

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Chapter 21
Breakup Valuation is based on the forced sale of individual assets in the second hand
market. Basically, the current values of all assets are added up together.
The Advantages
1. It represents the minimum value at which the company can be sold
2. If company ignores breakup value, an opportunity exists for asset-strippers
3. An indication of the min amount of capital that could be obtained for investment
elsewhere.
The Disadvantages
1. Ignores that the company is a going-concern
2. Values on assets are estimates
3. Sale value of fixed assets is hard to ascertain.
Book Value: Original Share Capital + Reserves
the Advantages
1. The figures are factual as they are based on historical cost
2. They are easily obtainable
3. The figures for debtors and non-equity liabilities are accurately reflected.
The Disadvantages
1. Inflation means that historical cost is not an accurate measure of current value
2. Historical costs aren't very accurate due to inaccurate measures of depreciation.
3. The book value of stock is unlikely to reflect its current value, because market values
often include an element of profit.
4. Ignores the existence of intangible assets such as goodwill.
Replacement Cost: Replacement Cost of Assets less: All Liabilities
The Advantages
Assets are valued at their replacement cost!
The Disadvantages
1. The cooperation of the company is needed to identify assets
2. Intangible assets such as goodwill aren't recognized
3. Replacement cost may overvalue the company.
Earnings Yield 100 = Annual Earnings Yield X 100 or 1 X 100
Required Earnings Yield P/E Ratio
The value of a company on the earnings-yield basis is the value of the stream of profit,
or earnings which the company is expected to generate.
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