The adjusted book value approach to corporate valuation involves estimation of the market value of the assets and liabilities of the firm as a going concern. It is a pointer to the liquidation value of the firm. It is, however, distinct from the conventional book value method. The conventional book value approach relies on the historical book value of the assets and liabilities. But in this method of adjusted book value approach, the valuation of the assets and liabilities are taken at their fair market value. Valuation of Tangible Assets The adjusted book value approach begins with valuation of all the assets of the firm. Fixed assets constitute substantial portion of the asset side of the balance sheet in capital intensive companies. Land is valued at its current market price. Buildings are normally valued at replacement cost. However appropriate allowances are to be made for depreciation and deterioration in its conditions. Similarly plant & machinery, capital equipments, furniture, fixtures, etc. are to be valued at fixed costs net of depreciation and allowances for deterioration in conditions. An alternative method of valuing plant & machinery involves estimation ...

Interest rates exert the following economic influences. Interest rates in a country influence the foreign exchange value of the country’s currency. Interest rates act as a guide to the return that a company’s shareholders might want, and changes in market interest rates will affect share prices. A positive real rate of interest enhances an investor’s real wealth to the income he earns from his investments. However, when interest rates go up or down, perhaps due to a rise or fall in the rate of inflation, there will also be a potential capital loss or gain for the investor. In other words, the market value of interest-bearing securities will alter. Market values will fall when interest rates go up and vice versa. Interest Rates are Important for Financial Decisions by Companies Interest rate is important for financial decisions by companies. The incidence of the interest rates can have the following effects. 1. When interest rates are low, it might be beneficial: To borrow more, preferably at a fixed rate of interest, and so increase the company’s gearing, To borrow for long periods rather than for short periods, To pay back loans which incur a high ...

Goal congruence is the term which describes the situation when the goals of different interest groups coincide. A way of helping to achieve goal congruence between shareholders and managers is by the introduction of carefully designed remuneration packages for managers which would motivate managers to take decisions which were consistent with the objectives of the shareholders. Agency theory sees employees of businesses, including managers, as individuals, each with his or her own objectives. Within a department of a business, there are departmental objectives. If achieving these various objectives also leads to the achievement of the objectives of the organization as a whole, there is said to be goal congruence. Achieving Goal Congruence Goal congruence can be achieved, and at the same time, the ‘agency problem’ can be dealt with, providing managers with incentives which are related to profits or share price, or other factors such as: Pay or bonuses related to the size of profits termed as profit-related pay. Rewarding managers with shares, e.g.: when a private company ‘goes public’ and managers are invited to subscribe for shares in the company at an attractive ...

Applying overhead costs to each product or service based on the extent to which that product or service causes overhead cost to be incurred is the primary objective of accounting for overhead costs. In many production processes, overhead is applied to products using a single predetermined overhead rate based on a single activity measure. With Activity-Based Costing (ABC), multiple activities are identified in the production process that are associated with costs. The events within these activities that cause work (costs) are called cost drivers. Examples of overhead cost drivers are machine set-ups, material-handling operations, and the number of steps in a manufacturing process. Examples of cost drivers in non-manufacturing organizations are hospital beds occupied, the number of take-offs and landing for an airline, and the number of rooms occupied in a hotel. The cost drivers are used to apply overhead to products and services when using Activity-Based Costing. The following five steps are used to apply costs to products under an Activity-Based Costing (ABC) system. Choose Appropriate Activities: The first step of ABC is to choose the activities that result in incurring ...

A firm is said to be bankrupt or in financial distress if it is unable to meet its current obligations to the creditors. Bankruptcy may occur because of a number of external and internal factors. The primary cause of a firm encountering financial distress starts when it finds it difficult to meet the scheduled payments or when the cash flow projections of the firm are indicative of the fact that it will soon be unable to do so. Some important business bankruptcy recovery strategies are: 1. Settlements without going through formal bankruptcy When a firm goes through the period of financial distress, it is very important for its management and creditors to decide whether the problem is a temporary one and it is possible for the firm to continue its operations or whether the problem is more serious and permanent in nature that has the possibility of endangering the life of the firm. So having done this, the parties involved in the process decides upon solving the problem either through the intervention of the bankruptcy court or through informal process. If the firm goes for filing a formal bankruptcy under chapter 11 of the Bankruptcy Act it involves certain costs. Coupled to ...

Agency theory is often described in terms of the relationships between the various interested parties in the firm. The agency theory examines the duties and conflicts that occur between parties who have an agency relationship. Agency relationships occur when one party, the principal, employs another party, called the agent, to perform a task on their behalf. Agency theory is helpful in explaining the actions of the various interest groups in the corporate governance debate. For example, managers can be seen as the agents of shareholders, employees as the agents of managers, managers and shareholders as the agents of long and short-term creditors, etc. In most of these principal-agent relationships conflicts of interest is seen to exist. It has been widely observed that the conflicts between shareholders and managers and in a similar way the objectives of employees and managers may be in conflict. Although the actions of all the parties are united by one mutual objective of wishing the firm to survive, the various principals involved might make various arrangements to ensure their agents work closer to their own interests. For example, shareholders might insist that part of ...