Case Chapter Six 2015v1 Review Questions
BV: Income and Asset Approaches
VALUATION METHODS
BUSINESS VALUATIONS: APPLICATIONS AND CALCULATIONS USING THE INCOME AND ASSET APPROACHES CHAPTER 6 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 Six – 25 2015.v1
VALUATION METHODS
BV: Income and Asset Approaches
BV: APPLICATIONS AND CALCULATIONS USING THE INCOME AND ASSET APPROACHES CHAPTER REVIEW QUESTIONS Chapter 6: Valuation Methods 1.
When should you use the capitalization of earnings method? a. b. c. d.
2.
If using a discounted earnings method to determine value, how far in the future should earnings be projected? a. b. c. d.
3.
Capitalization of Earnings Market Approach—Dividend Paying Capacity Adjusted Net Assets Method Discounted Future Earnings Method
Which statement is true when using the Adjusted Net Assets Method of valuation? a. b. c. d.
5.
At least ten years Through the year after a stabilized level of operations is reached Until profit margins return to normal after a period of unusually high or low earnings B and C
Which method is most appropriate for estimating the value of a non-operating business or a business that continues to generate losses (or which is to be liquidated)? a. b. c. d.
4.
When expected growth rates are predictable When the company is a start-up company When expected growth rates are unpredictable None of the above
The FMV of the net assets are reduced by the FMV of any recorded and unrecorded liabilities This method also addresses the business’s operating earnings This method relies on comparable company data to adjust the value of the net assets to market value This method always underestimates the business’s value
Which valuation method has the negative aspect of not addressing the business’s operating earnings and would be inappropriate to use to value intangible assets such as patents or copyrights typically valued based on some type of operating earnings? a. b. c. d.
Retained Earnings Method Capitalization of Earnings Method Excess Earnings Reasonable Rate Method Adjusted Net Assets Method
26 – Chapter Six 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 method assumes all of the assets, tangible or intangible is indistinguishable parts of the business and does not attempt to separate the values of the two? a. b. c. d.
7.
Capitalization of Earnings Method Discounted Future Earnings Method Excess Earnings Treasury Method Excess Earnings Reasonable Rate Method
Which method is sometimes referred to as the Discounted Cash Flow Method? a. b. c. d.
9.
Capitalization of Earnings Method Discounted Future Earnings Method Excess Earnings Treasury Method Excess Earnings Reasonable Rate Method
Which method applies a reasonable rate of return to the latest year’s balance of adjusted net assets rather than to an unweighted or weighted average of net assets? a. b. c. d.
8.
VALUATION METHODS
Capitalization of Earnings Method Discounted Future Earnings Method Excess Earnings Treasury Method Excess Earnings Reasonable Rate Method
Which of the following statements is not applicable to the Price/Earnings Ratio Method a. b. c. d.
The Price/Earnings Ratio method is also an income-oriented approach. This method is mainly used when valuing closely held companies. The Price/Earnings ratios are typically obtained from comparable publicly traded companies. The earnings portion of the Price/Earnings ratio is represented by net after-tax income of comparable companies.
10. Which statement applies to the Dividend Paying Capacity Method? a. b. c. d.
To utilize this method, a company must have had a history of paying dividends. This method does not consider liquidity as a factor in the valuation. This method is highly regarded because it utilizes market comparisons. This method can only be used when valuing 100 percent of the company and not a portion of it.
11. When valuing the stock of a real estate holding company, most likely the valuator will give the greatest weight to which method? a. b. c. d.
Capitalization of Earnings Method Book Value Method Adjusted Book Value Method Rule of Thumb
© 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 Six – 27 2015.v1
VALUATION METHODS
BV: Income and Asset Approaches
12. Using the adjusted net asset method the valuator only values tangible assets. a. b.
True False
13. The adjusted net asset method generally sets a ___________ for determining total entity value. a. b. c. d.
Floor value High value Forced liquidation value Investment value
14. Which one of the following adjustments would be made on the balance sheet to reconcile the book value to adjusted fair market value? a. b. c. d.
Convert inventory from FIFO to LIFO Remove excess cash Adjust owner’s compensation A large account receivable write off due to a major customer filing for bankruptcy
15. A Company has a five year weighted average after tax cash flow of $125,000. It has been determined the discount rate is 19%, short term expected growth is 11% and long term sustainable growth is 3%. The valuator has also determined excess cash of 25,000. What is the value of the company based on the capitalization of after tax cash flows? a. b. c. d.
$625,000 $657,895 $829,400 $909,090
16. Which method is based on the theory that the total value of a business is the present value of its projected future earnings, plus the present value of the terminal value? a. b. c. d.
Capitalization of Earnings Method Discounted Cash Flows Method Excess Earnings Method Adjusted Book Value Method
28 – Chapter Six 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
VALUATION METHODS
17. ABC Company has projected the following cash flows: Year 1: 85,000 Year 2: 105,000 Year 3: 109,000 Year 4: 115,000 The valuator has determined an appropriate discount rate is 26% and the long term growth rate is 2%. Using the Gordon Growth Model, what is the terminal value? a. b. c. d.
175,596 193,936 187,096 202,687
18. The Mid period method of discounting should be used when the equity holder: a. b. c. d.
Has access to a dividend once a year Has access to a dividend throughout the year Has not received a dividend A&B
19. Which method combines the income and asset based approaches to arrive at a value of a closely held business? a. b. c. d.
Book Value Method Discounted Cash Flows Method Guideline Public Companies Method Excess Earnings Method
© 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 Six – 29 2015.v1
VALUATION METHODS
BV: Income and Asset Approaches
This page intentionally left blank.
30 – Chapter Six 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.
VALUATION METHODS
BUSINESS VALUATIONS: APPLICATIONS AND CALCULATIONS USING THE INCOME AND ASSET APPROACHES CHAPTER 6 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 Six – 25 2015.v1
VALUATION METHODS
BV: Income and Asset Approaches
BV: APPLICATIONS AND CALCULATIONS USING THE INCOME AND ASSET APPROACHES CHAPTER REVIEW QUESTIONS Chapter 6: Valuation Methods 1.
When should you use the capitalization of earnings method? a. b. c. d.
2.
If using a discounted earnings method to determine value, how far in the future should earnings be projected? a. b. c. d.
3.
Capitalization of Earnings Market Approach—Dividend Paying Capacity Adjusted Net Assets Method Discounted Future Earnings Method
Which statement is true when using the Adjusted Net Assets Method of valuation? a. b. c. d.
5.
At least ten years Through the year after a stabilized level of operations is reached Until profit margins return to normal after a period of unusually high or low earnings B and C
Which method is most appropriate for estimating the value of a non-operating business or a business that continues to generate losses (or which is to be liquidated)? a. b. c. d.
4.
When expected growth rates are predictable When the company is a start-up company When expected growth rates are unpredictable None of the above
The FMV of the net assets are reduced by the FMV of any recorded and unrecorded liabilities This method also addresses the business’s operating earnings This method relies on comparable company data to adjust the value of the net assets to market value This method always underestimates the business’s value
Which valuation method has the negative aspect of not addressing the business’s operating earnings and would be inappropriate to use to value intangible assets such as patents or copyrights typically valued based on some type of operating earnings? a. b. c. d.
Retained Earnings Method Capitalization of Earnings Method Excess Earnings Reasonable Rate Method Adjusted Net Assets Method
26 – Chapter Six 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 method assumes all of the assets, tangible or intangible is indistinguishable parts of the business and does not attempt to separate the values of the two? a. b. c. d.
7.
Capitalization of Earnings Method Discounted Future Earnings Method Excess Earnings Treasury Method Excess Earnings Reasonable Rate Method
Which method is sometimes referred to as the Discounted Cash Flow Method? a. b. c. d.
9.
Capitalization of Earnings Method Discounted Future Earnings Method Excess Earnings Treasury Method Excess Earnings Reasonable Rate Method
Which method applies a reasonable rate of return to the latest year’s balance of adjusted net assets rather than to an unweighted or weighted average of net assets? a. b. c. d.
8.
VALUATION METHODS
Capitalization of Earnings Method Discounted Future Earnings Method Excess Earnings Treasury Method Excess Earnings Reasonable Rate Method
Which of the following statements is not applicable to the Price/Earnings Ratio Method a. b. c. d.
The Price/Earnings Ratio method is also an income-oriented approach. This method is mainly used when valuing closely held companies. The Price/Earnings ratios are typically obtained from comparable publicly traded companies. The earnings portion of the Price/Earnings ratio is represented by net after-tax income of comparable companies.
10. Which statement applies to the Dividend Paying Capacity Method? a. b. c. d.
To utilize this method, a company must have had a history of paying dividends. This method does not consider liquidity as a factor in the valuation. This method is highly regarded because it utilizes market comparisons. This method can only be used when valuing 100 percent of the company and not a portion of it.
11. When valuing the stock of a real estate holding company, most likely the valuator will give the greatest weight to which method? a. b. c. d.
Capitalization of Earnings Method Book Value Method Adjusted Book Value Method Rule of Thumb
© 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 Six – 27 2015.v1
VALUATION METHODS
BV: Income and Asset Approaches
12. Using the adjusted net asset method the valuator only values tangible assets. a. b.
True False
13. The adjusted net asset method generally sets a ___________ for determining total entity value. a. b. c. d.
Floor value High value Forced liquidation value Investment value
14. Which one of the following adjustments would be made on the balance sheet to reconcile the book value to adjusted fair market value? a. b. c. d.
Convert inventory from FIFO to LIFO Remove excess cash Adjust owner’s compensation A large account receivable write off due to a major customer filing for bankruptcy
15. A Company has a five year weighted average after tax cash flow of $125,000. It has been determined the discount rate is 19%, short term expected growth is 11% and long term sustainable growth is 3%. The valuator has also determined excess cash of 25,000. What is the value of the company based on the capitalization of after tax cash flows? a. b. c. d.
$625,000 $657,895 $829,400 $909,090
16. Which method is based on the theory that the total value of a business is the present value of its projected future earnings, plus the present value of the terminal value? a. b. c. d.
Capitalization of Earnings Method Discounted Cash Flows Method Excess Earnings Method Adjusted Book Value Method
28 – Chapter Six 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
VALUATION METHODS
17. ABC Company has projected the following cash flows: Year 1: 85,000 Year 2: 105,000 Year 3: 109,000 Year 4: 115,000 The valuator has determined an appropriate discount rate is 26% and the long term growth rate is 2%. Using the Gordon Growth Model, what is the terminal value? a. b. c. d.
175,596 193,936 187,096 202,687
18. The Mid period method of discounting should be used when the equity holder: a. b. c. d.
Has access to a dividend once a year Has access to a dividend throughout the year Has not received a dividend A&B
19. Which method combines the income and asset based approaches to arrive at a value of a closely held business? a. b. c. d.
Book Value Method Discounted Cash Flows Method Guideline Public Companies Method Excess Earnings Method
© 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 Six – 29 2015.v1
VALUATION METHODS
BV: Income and Asset Approaches
This page intentionally left blank.
30 – Chapter Six 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.
