Case Chapter Four 2015v1 Review Questions
BV: Income and Asset Approaches
FUTURE BENEFIT STREAM
BUSINESS VALUATIONS: APPLICATIONS AND CALCULATIONS USING THE INCOME AND ASSET APPROACHES CHAPTER 4 REVIEW QUESTIONS
© 1995–2015 by National Association of Certified Valuators and Analysts (NACVA). All rights reserved. Used by Institute of Business Appraisers with permission of NACVA for limited purpose of collaborative training.
Chapter Four – 15 2015.v1
FUTURE BENEFIT STREAM
BV: Income and Asset Approaches
BV: APPLICATIONS AND CALCULATIONS USING THE INCOME AND ASSET APPROACHES CHAPTER REVIEW QUESTIONS Chapter 4: Estimating the Future Benefit Stream 1.
Which statement is correct when earnings are selected as the benefits type used to measure economic income? a. b.
c. d. 2.
Which one of following criteria is the estimated future benefit stream not based on? a. b. c. d.
3.
Unweighted Average Weighted Average Net Cash Flows to Equity Net Cash Flows to Invested Capital
Which method of estimating expected future earnings is calculated by taking the sum of a set of values, and dividing the sum by the number of values used in deriving the sum? (Sum of Variables / Number of Variables) a. b. c. d.
5.
The type of benefits used as a measurement of economic income. The use of historical or projected economic income to estimate future benefits. The method used to calculate the estimated future benefits. The years projected prior to calculating a terminal value.
What is the most appropriate method to use for calculating future earnings where there appears to be a historical pattern or trend that is expected to continue into the future? a. b. c. d.
4.
If pre-tax earnings are used, the discount/cap rate must be on an after-tax basis. When using earnings as the benefit stream, the analyst must have determined and documented that the future earnings and net cash flow are approximately the same and the discount/cap rate has been converted by the cash to earnings factor. The method of averaging historical economic income to determine the estimated future benefit stream is the specific methodology to use. Historical earnings demonstrate a trend that is expected to continue.
Net Cash Flows to Equity Net Cash Flows to Invested Capital Weighted Average Unweighted Average
What earnings type does the following formula represent? (After-tax net income + Non-cash charges – Capital expenditures – Additions (Deletions) to net working capital + After-tax interest expense) a. b. c. d.
Net Cash Flows to Equity Net Cash Flow to Invested Capital Total Cash Flow to Marketability B and C above
16 – Chapter Four 2015.v1
© 1995–2015 by National Association of Certified Valuators and Analysts (NACVA). All rights reserved. Used by Institute of Business Appraisers with permission of NACVA for limited purpose of collaborative training.
BV: Income and Asset Approaches
6.
Which of the following is the most preferred measure of economic income to use with a cost of capital analysis? a. b. c. d.
7.
The analyst uses the unweighted average instead of the weighted average historical cash flows. The analyst uses pre-tax earnings with an after-tax discount rate. The analyst does not consider the effects of annual economic growth. The analyst bases the components of cash flows on historical data and does not adjust for capital expenditures and working capital requirements to support the projected operations.
When valuing an equity interest, what type of benefit stream will the analyst normally use as a measurement of economic income? a. b. c. d.
9.
Net Income Pre-tax Income Net Cash Flow Gross Cash Flow
What are the most common mistakes analysts make when determining future cash flows? a. b. c. d.
8.
FUTURE BENEFIT STREAM
Net Cash Flows to Invested Capital Net Cash Flows to Equity After-tax Earnings Income from Operations
When are earnings used as the type of benefits to measure economic income? a. b. c. d.
When there is an expectation of heavy borrowing for capital expenditures When using the Ibbotson Build-up Method to derive a capitalization rate When calculating a terminal value for the business When the valuator expects the future earnings will approximate the future net cash flows
10. Most of the cost of capital derived from the capital markets and other empirical data that are used to derive the discount rate represents what earnings type to measure economic income? a. b. c. d.
Pre-tax earnings After-tax cash flows EBITDA After-tax earnings
11. Net cash flow to equity will result in what type of value? a. b. c. d.
Invested capital Equity Controlling interest Minority interest
© 1995–2015 by National Association of Certified Valuators and Analysts (NACVA). All rights reserved. Used by Institute of Business Appraisers with permission of NACVA for limited purpose of collaborative training.
Chapter Four – 17 2015.v1
FUTURE BENEFIT STREAM
BV: Income and Asset Approaches
12. When discounting cash flow to invested capital the appropriate discount rate is: a. b. c. d.
Cost of Equity Weighted Average Cost of Capital Capital Asset Pricing Model Ibbotson Buildup Method
13. Generally, estimated future benefits are based on historical economic income when: a. b. c. d.
There is a lack of historical information Start up or development stage companies Future benefits stream is non linear Future benefits are linear
14. A linear benefit stream is a stream of future benefits that is expected to grow or decline at a variable rate. a. b.
True False
15. Two most commonly used methods to estimate future benefits based a linear benefit stream are: a. b. c. d.
Weighted Average Method and Unweighted Average Method Weighted Average Method and Projected Cash Flow Method Unweighted Average Method and Projected Cash Flow Method Projected Cash Flow Method and Projected Earnings Method
16. Using a weighted average method to determine future benefits a valuator assigns more weight to the most recent years. This indicates: a. b. c. d.
The valuator determined the most recent year is the most indicative of future years. All of the past earnings are representative of the expected future benefits. No existing pattern or trend would suggest that any one year or years is more indicative than the rest of the historical data. There is no apparent trend in the historical earnings.
18 – Chapter Four 2015.v1
© 1995–2015 by National Association of Certified Valuators and Analysts (NACVA). All rights reserved. Used by Institute of Business Appraisers with permission of NACVA for limited purpose of collaborative training.
FUTURE BENEFIT STREAM
BUSINESS VALUATIONS: APPLICATIONS AND CALCULATIONS USING THE INCOME AND ASSET APPROACHES CHAPTER 4 REVIEW QUESTIONS
© 1995–2015 by National Association of Certified Valuators and Analysts (NACVA). All rights reserved. Used by Institute of Business Appraisers with permission of NACVA for limited purpose of collaborative training.
Chapter Four – 15 2015.v1
FUTURE BENEFIT STREAM
BV: Income and Asset Approaches
BV: APPLICATIONS AND CALCULATIONS USING THE INCOME AND ASSET APPROACHES CHAPTER REVIEW QUESTIONS Chapter 4: Estimating the Future Benefit Stream 1.
Which statement is correct when earnings are selected as the benefits type used to measure economic income? a. b.
c. d. 2.
Which one of following criteria is the estimated future benefit stream not based on? a. b. c. d.
3.
Unweighted Average Weighted Average Net Cash Flows to Equity Net Cash Flows to Invested Capital
Which method of estimating expected future earnings is calculated by taking the sum of a set of values, and dividing the sum by the number of values used in deriving the sum? (Sum of Variables / Number of Variables) a. b. c. d.
5.
The type of benefits used as a measurement of economic income. The use of historical or projected economic income to estimate future benefits. The method used to calculate the estimated future benefits. The years projected prior to calculating a terminal value.
What is the most appropriate method to use for calculating future earnings where there appears to be a historical pattern or trend that is expected to continue into the future? a. b. c. d.
4.
If pre-tax earnings are used, the discount/cap rate must be on an after-tax basis. When using earnings as the benefit stream, the analyst must have determined and documented that the future earnings and net cash flow are approximately the same and the discount/cap rate has been converted by the cash to earnings factor. The method of averaging historical economic income to determine the estimated future benefit stream is the specific methodology to use. Historical earnings demonstrate a trend that is expected to continue.
Net Cash Flows to Equity Net Cash Flows to Invested Capital Weighted Average Unweighted Average
What earnings type does the following formula represent? (After-tax net income + Non-cash charges – Capital expenditures – Additions (Deletions) to net working capital + After-tax interest expense) a. b. c. d.
Net Cash Flows to Equity Net Cash Flow to Invested Capital Total Cash Flow to Marketability B and C above
16 – Chapter Four 2015.v1
© 1995–2015 by National Association of Certified Valuators and Analysts (NACVA). All rights reserved. Used by Institute of Business Appraisers with permission of NACVA for limited purpose of collaborative training.
BV: Income and Asset Approaches
6.
Which of the following is the most preferred measure of economic income to use with a cost of capital analysis? a. b. c. d.
7.
The analyst uses the unweighted average instead of the weighted average historical cash flows. The analyst uses pre-tax earnings with an after-tax discount rate. The analyst does not consider the effects of annual economic growth. The analyst bases the components of cash flows on historical data and does not adjust for capital expenditures and working capital requirements to support the projected operations.
When valuing an equity interest, what type of benefit stream will the analyst normally use as a measurement of economic income? a. b. c. d.
9.
Net Income Pre-tax Income Net Cash Flow Gross Cash Flow
What are the most common mistakes analysts make when determining future cash flows? a. b. c. d.
8.
FUTURE BENEFIT STREAM
Net Cash Flows to Invested Capital Net Cash Flows to Equity After-tax Earnings Income from Operations
When are earnings used as the type of benefits to measure economic income? a. b. c. d.
When there is an expectation of heavy borrowing for capital expenditures When using the Ibbotson Build-up Method to derive a capitalization rate When calculating a terminal value for the business When the valuator expects the future earnings will approximate the future net cash flows
10. Most of the cost of capital derived from the capital markets and other empirical data that are used to derive the discount rate represents what earnings type to measure economic income? a. b. c. d.
Pre-tax earnings After-tax cash flows EBITDA After-tax earnings
11. Net cash flow to equity will result in what type of value? a. b. c. d.
Invested capital Equity Controlling interest Minority interest
© 1995–2015 by National Association of Certified Valuators and Analysts (NACVA). All rights reserved. Used by Institute of Business Appraisers with permission of NACVA for limited purpose of collaborative training.
Chapter Four – 17 2015.v1
FUTURE BENEFIT STREAM
BV: Income and Asset Approaches
12. When discounting cash flow to invested capital the appropriate discount rate is: a. b. c. d.
Cost of Equity Weighted Average Cost of Capital Capital Asset Pricing Model Ibbotson Buildup Method
13. Generally, estimated future benefits are based on historical economic income when: a. b. c. d.
There is a lack of historical information Start up or development stage companies Future benefits stream is non linear Future benefits are linear
14. A linear benefit stream is a stream of future benefits that is expected to grow or decline at a variable rate. a. b.
True False
15. Two most commonly used methods to estimate future benefits based a linear benefit stream are: a. b. c. d.
Weighted Average Method and Unweighted Average Method Weighted Average Method and Projected Cash Flow Method Unweighted Average Method and Projected Cash Flow Method Projected Cash Flow Method and Projected Earnings Method
16. Using a weighted average method to determine future benefits a valuator assigns more weight to the most recent years. This indicates: a. b. c. d.
The valuator determined the most recent year is the most indicative of future years. All of the past earnings are representative of the expected future benefits. No existing pattern or trend would suggest that any one year or years is more indicative than the rest of the historical data. There is no apparent trend in the historical earnings.
18 – Chapter Four 2015.v1
© 1995–2015 by National Association of Certified Valuators and Analysts (NACVA). All rights reserved. Used by Institute of Business Appraisers with permission of NACVA for limited purpose of collaborative training.
