Can We Spend Equity?
Your friend Andrew is looking at purchasing a small business and has come to you for help. Andrew thinks he's found a great
value in this business, but he wants you to look at the balance sheet and give your opinion.
The business is being sold for $4000.00.
Andrew is attracted to this business because the assets are worth more than the purchase price. In addition, Andrew believes that the
business is worth the owner's equity plus the assets.
Analyze the balance sheet presented below, and answer the questions that follow.
Balance Sheet
As at October 31, 2009
Cash $250.00 Bank Loan $2,500.00 Accounts Receivable 1,500.00 Accounts Payable 500.00 Equipment 2,500.00 _______ Furniture 750.00 Total Liabilities 3,000.00 Capital $2,000.00 _______ _______ Total Assets $5,000.00 Total L & O.E. $5,000.00 ======= =======
1. Comment on Andrew's method of valuation. Is his approach to evaluating
the worth of this business sound?
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