A comparison between a firm’s going-concern valuation and its liquidation value will show that the going-concern value will always be: A) greater than the liquidation value. B) equal to the present value of the expected continued operation of the firm. C) less than the liquidation value.
A) greater than the liquidation value
Answer is B! It is not possible to state the relationship between the going-concern value and the liquidation value without examining the prospects for the firm and the current value of the assets. The going-concern value is equal to the present value of the expected dividends arising from continued operation.
Liquidation value can sometimes be higher than the going-concern value…, which is why firms sell off a division to extract value rather than keep it and lose money over time.
Selling off a division is not tantamount to a fire-sale. In any case, the question specifically mentions “a firm’s going-concern valuation and its liquidation value” and not that of a division/asset.