Question

Now assume that the apartment complex is dilapidated and cannot be operated after January 31, 2018. The owner of the property is willing to sell you the business (including the property) on February 1, 2018. The owner lists the following assets and liabilities of the business as of January 31, 2018:

	(in thousands of $)
Cash	$10
Rent Receivable	$200
(owed by tenants for January 2018)
Mortgage Payable	$535
(money owed to Bank)
Salary Payable	$5
(salary owed to employees for November)
Building
(Scrap (demolition) value)	$50
Land	$1,200

You are considering buying the business with the intent to liquidate (i.e., sell off assets and close the business). Assume that all values given above are what you can currently sell the asset for, or settle the liability at. Because of the risk involved with liquidation, you are looking for a 15% margin (profit) on the investment (pre-tax). How much are you willing to pay for the business? Show calculations.

Answer 1

In order to earn profit on the purchase of business it should be make sure that assets are always purchased at a value that is less then the value that the asset can realize if sold in open market.

Liabilities on the other hand cannot be settled for less as the creditor will make a claim for what was owned by the old firm so the liabilities are to be valued at as on date rate only.

Please see below the assets rate are adjusted accordingly to meet the requirement of 15% profit.