Valuation Concepts and Methods (Prelims) Questions and Answers

Valuation Concepts and Methods (Prelims) Questions and Answers False ToF: Firm value is determined under the going concern assumption. The going concern assumption believes that the entity will not continue to do its business activities into the unforeseeable future False - Liquidation Value ToF: 2. Present Value is the net amount that would be realized if the business is terminated and the assets are sold piecemeal False - Fair Market Value ToF: Book Value is the price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm's length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts False - Intrinsic value ToF: Fundamental analysts are persons who are interested in understanding and measuring the book value of a firm False - financial strength ToF: Fundamentals refer to the characteristics of an entity related to its physical strength, solvency or risk tendencies False - Activist ToF: Activities investors usually do "takeovers" - they use their equity holdings to push old management out of the company and change the way the company is being run. True ToF: Chartists relies on the concept that stock prices are significantly influenced by how investors think and act. Chartists rely on available trading KPIs such as price movements, trading volume, short sales - when making their investment decisions. False - Information traders ToF: Investment Traders are Traders that react based on new information about firms that are revealed to the stock market. The underlying belief is that investment traders are more adept in guessing or getting new information about firms and they can make predict how the market will react based on this False - fair value ToF: An acquisition usually has two parties: the buying firm and the selling firm. The buying firm needs to determine the book value of the target company prior to offering a bid price True ToF: Merger is the general term which describes the transaction two companies have their assets combined to form a wholly new entity. False - sale ToF: Divestiture is the acquisition of a major component or segment of a business (e.g. brand or product line) to another company True ToF: Spin-off is separating a segment or component business and transforming this into a separate legal entity. False - acquisition ToF: Leveraged buyout is the sale of another business by using significant debt which uses the acquired business as a collateral True ToF: Synergy can be attributable to more efficient operations, cost reductions, increased revenues, combined products/markets or cross-disciplinary talents of the combined organization. False - maximize ToF: Corporate finance mainly involves managing the firm's capital structure, including funding sources and strategies that the business should pursue to minimize firm value True ToF: Valuation is also important to businesses because of legal and tax purposes. False ToF: Top-down forecasting approach - Forecast starts from local to regional macroeconomic projections with utmost consideration to industry specific forecasts False ToF: Bottom-up forecasting approach - Forecast starts from the upper levels of the firm and builds the forecast as it captures what will happen to the company True ToF: Sensitivity analysis is the common methodology in valuation exercises wherein multiple other analyses are done to understand how changes in an input or variable will affect the outcome (i.e. firm value). T False - cost of capital ToF: Uncertainty is captured in valuation models through cost of expenditure or discount rate True ToF: Valuation on variables is the perceived estimation to be related to future investment returns, on comparisons with similar assets, or, when relevant, on estimates of immediate liquidation proceeds. False - intrinsic value, going concern value, liquidation value and fair market value ToF: Definition of value may vary depending on the context. Different definitions of value include book value, appraised value, present value and fair market True ToF: According to the CFA Institute, valuation is the estimation of an asset's value based on variables perceived to be related to future investment returns, on comparisons with similar assets, or, when relevant, on estimates of immediate liquidation proceeds. True ToF: Valuation includes the use of forecasts to come up with reasonable estimate of value of an entity's assets or its equity. True ToF: Valuation techniques may differ across different assets, but all follows similar fundamental principles that drives the core of these approaches. D. All of the above Note: Answer should be "None of the Above" Generally, the valuation process considers these steps, except A. Understanding the Business B. Forecasting Financial Performance C. Preparing Valuation model based on forecasts D. All of the above A. The value of a business is defined only at a specific point in time Which key principles in valuation refers to Business value tend to change every day as transaction happens? A. The value of a business is defined only at a specific point in time B. Value varies based on the ability of business to generate future cash flows C. Firm value can be impacted by underlying net tangible assets D. Market dictates the appropriate rate of return for investors B. Uncertainty Refers to the possible range of values where the real firm value lies. A. risk of the unknown B. Uncertainty c. volatility d. None of the above D. Market dictates the appropriate rate of return for investors Which key principles in valuation refers to Market forces are constantly changing, and they normally provide guidance of what rate of return should investors expect from different investment vehicles in the market? A. The value of a business is defined only at a specific point in time B. Value varies based on the ability of business to generate future cash flows C. Firm value can be impacted by underlying net tangible assets D. Market dictates the appropriate rate of return for investors B. Value varies based on the ability of business to generate future cash flows The key principles in valuation refers to general concepts for most valuation techniques put emphasis on future cash flows except for some circumstances where value can be better derived from asset liquidation is a. The value of a business is defined only at a specific point in time b. Value varies based on the ability of business to generate future cash flows c. Firm value can be impacted by underlying net tangible assets d. Market dictates the appropriate rate of return for investors c. Future Prospects One major factor linked to the value of business that reflects what is the long-term and strategic decision of the company a. Current Operations b. Embedded Risks c. Future Prospects d. All of the above b. Embedded Risks One major factor linked to the value of business that shows what are the business risks involved in running the business a. Current Operations b. Embedded Risks c. Future Prospects d. All of the above B. Intrinsic Value Refers to the value of any asset based on the assumption assuming there is a hypothetically complete understanding of its investment characteristics A. Going concern value B. Intrinsic Value c. Liquidation Value d. Fair Market Value c. Liquidation Value Particularly relevant for companies who are experiencing severe financial distress. a. Going concern value b. Intrinsic Value c. Liquidation Value d. Fair Market Value a. Going concern value Value is determined under the going concern assumption. a. Going concern value B. Intrinsic Value c. Liquidation Value d. Fair Market Value B. Chartists They believe that these metrics imply investor psychology and will predict future movements in stock prices. A. Fundamental Analysts B. Chartists c. Activist Investors d. Information Traders. d. Information Traders The underlying belief is that information about firms and they can this. Hence, correlate value and how are more adept in guessing or getting new make predict how the market will react based on information will affect this value. A. Fundamental Analysts B. Chartists c. Activist Investors. d. Information Traders C. Both can be performed Under portfolio management, the following activities can be performed through the use of valuation techniques, except A. Stock Selection B. Deducing Market Expectation C. Both can be performed D. None of the above d. Spin-off Separating a segment or component business and transforming this into a separate legal entity whose ownership will be transferred to shareholders. A. Mergers B. Divestiture c. Acquisitions d. Spin-off B. Divestiture Sale of a major component or segment of a business (e.g. brand or product line) to another company A. Mergers B. Divestiture c. Acquisitions d. Spin-off A. Mergers General term which describes the transaction two companies combined to form a wholly new entity A. Mergers B. Divestiture c. Acquisitions d. Spin-off d. Acquisitions Usually has two parties: the buying firm and the selling firm. The buying firm needs to determine the fair value of the target company prior to offering a bid price. On the other hand, the selling firm (or sometimes, the target company) should have a sense of its firm value as well to gauge reasonableness of bid offers. a. Mergers b. Spin-off c. Divestiture d. Acquisitions D. Leveraged buy-out Acquisition of another business by using significant debt which uses the acquired business as a collateral. A Mergers B. Divestiture C. Acquisitions D. Leveraged buy-out a. Synergy Assumes that the combined value of two firms will be greater than the sum of separate be attributable to more efficient operations, cost reductions. increased revenues, combined products/markets or cross-disciplinary talents of the combined organization. a. Synergy b. Synergy and Control c. Control d. None of the above c. Corporate Finance Deals with prioritizing and distributing financial resources to activities that increases firm value. The ultimate goal is to maximize the firm value by appropriate planning and implementation of resources, while balancing profitability and risk appetite. a. Financial Management b. Risk Management c. Corporate Finance d. Portfolio Management d. Fair Market Value The price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm's length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts. A. Going concern value B. Intrinsic Value c. Liquidation Value d. Fair Market Value