CFA Level II ExamEquity InvestmentsEasy
A client is evaluating 'SwiftLogistics Inc.', a private transportation company, for a potential acquisition. The client's analyst is using the asset-based valuation method. SwiftLogistics has the following balance sheet items at fair market value: Cash and Equivalents = $5 million, Accounts Receivable = $10 million, Inventory = $8 million, Property, Plant, & Equipment (PP&E) = $30 million. On the liability side, Accounts Payable = $7 million, Short-term Debt = $3 million, Long-term Debt = $15 million. The analyst also identifies unrecorded intangible assets (e.g., brand value, customer relationships) with an estimated fair value of $12 million. What is the estimated equity value of SwiftLogistics Inc. using the adjusted net asset method?
- A$30 million
- B$25 million
- C$35 million
- D$40 million
Show answer & explanationAnswer & explanation
Correct answer: D. $40 million
The adjusted net asset method calculates equity value by summing the fair market value of all assets (including identified unrecorded intangible assets) and subtracting the fair market value of all liabilities.
Why the other options are wrong
- A. Incorrect. This value likely results from omitting the unrecorded intangible assets.
- B. Incorrect. This value likely results from omitting some assets or miscalculating liabilities.
- C. Incorrect. This value might result from an error in summing assets or liabilities.
Adjusted Net Asset Method
A private company valuation method that estimates equity value by adjusting the book values of assets and liabilities to their fair market values, including any unrecorded assets or liabilities.
- Often used for asset-heavy companies or those facing liquidation.
- Requires fair market valuation of all balance sheet items.
- Accounts for unrecorded intangible and contingent assets/liabilities.
Memory trick: Assets Minus Liabilities, Fair Value Is Key!