Business Valuation Final Questions and Answers

Business Valuation Final Questions and Answers The primary methods used to calculate the value of privately held business interests in the income approach are: a. Capitalization of Earnings/ Cash Flows Method and Excess Earnings/Treasury Method b. Excess Earnings/Treasury Method and Discounted Earnings/Cash Flows Method c. Capitalization of Earnings/Cash Flows Method and Discounted Earnings/Cash Flows Method d. Discounted Earnings/Cash Flows Method and Price/EBITDA Method C General expectations of the particular business being valued, the size of the business being valued, and the nature of the business being valued are examples of: a. External factors that may influence the capitalization or discount rate b. Internal factors that may influence the capitalization or discount rate c. Investment factors that may influence the capitalization or discount rate d. Marketability factors which affect the capitalization or discount rate B Using the Trend Line Projected Method, growth or data is: a. Increasing at a declining rate b. Increasing at an increasing rate c. Increasing at a constant rate Increasing at an increasingly declining rate A Three theoretical standards of value are: a. Investment value, going concern value, and fair market value b. Fair market value, investment value, and fair value c. Going concern value, asset value, and fair value d. Book value, fair market value, and liquidation value B When performing Other Services as defined by the Professional Standards, all of the Professional Standards shall apply EXCEPT for: a. General and Ethical Standards b. Development Standards c. Reporting Standards d. Both b and c D When valuing the stock of a real estate holding company, most likely the valuator will give the greatest weight to which method? a. Capitalization of earnings method b. Book value method c. Adjusted net assets method d. Rule of thumb C Which component of the Ibbotson Build-Up Method relates to the "unsystematic risk" associated with a particular business entity? a. Risk free rate b. Equity risk premium c. Beta d. Specific company risk premium D The valuation analyst needs historical performance data in order to: a. Decide whether or not the subject company is using the proper taxed based accounting b. Check and see whether or not the owner is taking too much in salary c. Find whether or not national economic reality may be properly reflected in the current year data. d. Analyze and compare various years in the company history to identify trends, strengths, weaknesses, and look for potential adjustments to normalize if adjustments are necessary and/or deemed appropriate D What are the three main reasons for tax related valuations? a. Estate tax, gift tax, and allocation of purchase price b. Estate tax, buy/sell agreements, and litigation c. ASC 805 (formerly FASB 141), ASC 350 (formerly FASB 142), and estate tax d. ASC 350 (formerly FASB 142), litigation, and gift tax A A member shall NOT express either a Conclusion of Value or a Calculated Value unless the member and the member's firm state whether or not the member or the member's firm has a financial interest in the subject of the engagement. a. True b. False A The adjusted net assets method generally sets a _________ for determining total entity value. a. floor value b. high value c. forced liquidation value d. investment value A WACC can add versatility to the valuation, in that a valuation analyst could change the capital structure of an entity when valuing a non-controlling (i.e., minority) interest. a. True b. False B When a valuation analyst is able to obtain audited GAAP compliance financial statements, most likely, normalized adjustments will not be necessary because of the high level of confidence placed on these issued financial statements. a. True b. False B IRC Section 401(a)(28)(C) requires the use of an "independent appraiser" for ESOP valuations to be independent the following conditions must be met: a. The valuator is qualified, performs appraisals on a regular basis, and is not a related party b. The valuator is qualified, may be a related party, and performs appraisals on a regular basis c. The valuator is qualified, does not perform appraisals on a regular basis, and is not a related party d. The valuator does not need to be qualified, but must perform appraisals regularly and is not a related party A The primary difference between a Valuation Engagement and a Calculation Engagement is that: a. A Calculation Engagement is a shorter form of a Valuation Engagement b. A Calculation Engagement can result in a range of values whereas a Valuation Engagement can only result in a single value c. The results of a Valuation Engagement can only be presented in a Detailed Report while the results of a Calculation Engagement can only be presented in a Summary Report d. A Valuation Engagement requires that a member applies valuation approaches and methods deemed in their professional judgment to be appropriate, whereas a Calculation Engagement occurs when the client and member agree to specific valuation approaches, methods, and the extent of selected procedures D Advantages of the market approach include: a. It uses actual data, it is relatively simple to apply, and it is inexpensive to determine. b. It uses actual data, it is inexpensive to determine, the data obtain via transaction databases are very reliable. c. It uses actual data, it is relatively simple to apply, and it does not rely on explicit forecasts. d. It is user friendly, relatively inexpensive to determine, and simple to apply. C The Duff & Phelps equity risk premium measurements are sorted into _________ measures of size. a. five b. eight c. ten d. twelve C Which of the following are considered "control" adjustments? a. Officers' compensation and depreciation adjustments b. Discretionary spending and depreciation adjustments c. Discretionary spending and officers' compensations d. Depreciation adjustments and bad debt adjustments C Which of the following factors should be considered when valuing a closely held business under Revenue Ruling 59-60? i. Nature and history of the business ii. Economic outlook and industry condition iii. Methods to calculate preferred stock iv. The earnings capacity of the company a. i, ii, and iv b. ii, iii, and iv c. i, ii, and iii d. All of the above A Select the reason(s) why a discount for lack of marketability (DLOM) for a controlling interest, even one that is 100%, may be applicable. a. Uncertain time horizon to complete the offering or sale b. Cost to prepare for and execute the offering or sale c. The eventual sale price is finalized d. Market conditions may require a quick sale D (A and B are also acceptable) Which method combines the income and asset based approaches to arrive at a value of a closely held business? a. Adjusted net assets value method b. Discounted cash flows method c. Guideline public companies method d. Excess earnings method D Bell Landscape Company has the following historical earnings: 1 - $75,400 2 - 65,200 3 - 87,600 4 - 90,500 5- 53,900 Which method of projecting earnings would appear most appropriate to estimate future benefits? a. Weighted average method b. Unweighted average method c. Trend Line—static method d. Gompertz curve method B Bell Landscape Company has the following historical earnings: 1 - $75,400 2 - 65,200 3 - 87,600 4 - 90,500 5- 53,900 for Bell Landscape, estimate the future benefits, using the method you have selected in question 27: a. $73,340 b. $75,700 c. $93,150 d. $74,520 D In 2006, a company purchased a new operating press costing $300,000. The company elected Section 179 depreciation for this piece of equipment. An appropriate normalization adjustment would be: a. Do nothing b. Adjust the income statement, only to add back Section 179 depreciation c. Adjust the income statement to add back the Section 179 depreciation and adjust the balance sheet to reflect the fair market value of the asset d. Adjust the balance sheet only to reflect the fair market value of the equipment C Value equals the benefit stream divided by a required rate of return is an example of what principle: a. Alternative principle b. Principle of substitution c. Investment value principal C The DLOM and DLOC show a relationship in valuations that: a. Indicate it is more difficult to sell a non-controlling (i.e., minority) interest in any privately-held business than to sell a controlling interest in that same business b. The greater the DLOC, the greater the DLOM c. A DLOM is only available for a non-controlling interest, which is also subject to a DLOC d. Indicate it is harder to sell a controlling interest in any business than to sell a non-controlling (i.e., minority) interest in that same business A The S election allows a shareholder to avoid which individual level tax? a. Capital gain tax b. Income tax c. Dividend tax d. Foreign tax C In a valuation in which the valuation analyst applies both a marketability discount and a discount for lack of control, the application of the discounts is additive not multiplicative. a. True b. False B What is a discount rate? a. The calculated external factor and internal factor multiplied by the investment factor b. Divisor or multiplier used to convert a defined benefit stream to present value c. The price/earnings ratio divided by the dividend paying capacity d. A rate of return used to convert a series of future income amounts to their present value D A linear benefit stream is a stream of future benefits that is expected to grow or decline at a variable rate. a. True b. False B The following are sources of empirical data on control/minority interests EXCEPT for: a. Mergerstat Review b. Morningstar Principia c. SEC Studies d. Emory Studies D Earnings for Jasper Company for the last five years are shown below. What are the weighted average historical earnings? Year -- Earnings -- Weight 1999 -- 1,230,000 -- 1 2000 -- 1,240,000 -- 2 2001 -- 1,245,000 -- 3 2002 -- 1,230,000 -- 4 2003 -- 1,230,000 -- 5 a 1,230,000 b. 1,234,333 c. 3,703,000 d. 7,714,581 B Ratio trend analysis will assist the valuation analyst in determining the following: a. The financial condition of the company b. Identifying all the strengths and weaknesses of the company c. The relative operating risks of the company d. Both a and c D What are the two primary cases listed in the Internal Revenue Service Valuation Training for Appeals Officers as the basis for discounts for lack of marketability? a. Simplot and Central Trust Co. b. Central Trust Co. and Estate of Andrews c. Estate of Andrews and Estate of Gross d. Estate of Gross and Estate of Adams B The price earnings ratios for five public companies are: 8.20, 4.60, 5.00, 4.86, and 2.10. The after- tax capitalization rate is: a. 16.00% b. 18.08% c. 20.19% d. 24.76% C If the capitalization of future earnings/cash flows method is used in a valuation engagement for U.S. Gift Tax purposes, the valuation analyst is required to include how many historical years in the estimate of the future earnings/cash flows? a. At least three years, based on Treasury Regulations b. As many years as the valuation analyst deems appropriate, based on his/her professional judgment c. Five years, based on requirements of the Internal Revenue Service d. Two to five years, based on Treasury Regulations B