Would it be a sound rule to liquidate whenever the liquidation value is above the value of the corporation as a going concern? Discuss.

Explanation

A company's value as a going concern is calculated based on its outlook. This value can be improved by changing management or operations. This negative outlook might also be caused due to temporary financial distress. If the company's value as a going concern cannot be improved and the creditors face a high risk if the operations are continued, then the liquidation is necessary. The firm must pay its creditors by distributing its assets when the firm's liquidation value is more than the value as a going concern.

Verified Answer

Liquidation is not necessary if the firm's value of its assets is more than the value of the company as a going concern. A company's value as a going concern can be improved by changing the management or the operations. If this does not provide sufficient results, the company may decide to liquidate.