NACVA FINAL Questions and Answer

NACVA FINAL Questions and Answer A The market approach is frequently referred to by what other professional discipline's approach? a. Sales comparison approach used by realtors b. Automotive dealer "best deal" approach c. Broker's Commodity pricing model d. Black Scholes valuation methodology D In order to convert a Market Value of Invested Capital to an Equity Value, the valuation professional must do which of the following? a. Add the value of working capital b. Add the value of working capital and subtract all debt c. Add the value of working capital excluding inventory and subtract all debt d. None of the above C Which of the following statements about the Harmonic Mean is correct? a. Calculated by taking the average of the median and the mean b. Calculated by taking the average of the median, mean and mode c. A measure of central tendency that emphasizes an equal weighting of each observation d. A measure of central tendency that emphasizes an equal weighting of the mean, median, and mode D Which of the following statements regarding standard deviation (σ) is correct? a. Standard deviation is the most frequently occurring observation in a dataset b. It increases as the number of observations increase c. It decreases as the disparity between observations is increased d. It is a measure of mathematical expression about the dispersion of a population to its mean C All else equal, the valuation professional should select the multiple with a Coefficient of Variation: a. Equal to the subject's Beta b. Closest to the subject's beta c. Closest to zero d. Closest to the mean B The completed transaction method emphasizes the principle of which of the following? a. Multicollinearity b. Substitution c. Multiplication d. Multiplication and substitution D Common market value of invested capital (MVIC) multiples include: a. MVIC/Sales b. MVIC/EBITDA c. MVIC/Gross Profit d. Both A and B B In order to maintain consistency across methodologies, a valuation professional should a. Always use the same multiple regardless of the database selected using the market Approach b. Consistently apply the same period interval (e.g. not applying a forward P/E to a three-year average of EBITDA) from the income approach to the market approach c. Always use the same database for all of his/her valuation projects d. Never average the results from the revenue multiple and the EBITDA multiple B Without regard to issues of liquidity, the indicated value, before adjustments, derived from multiples using BIZCOMPS data is generally considered to be which of the following: a. Control, marketable value b. Control, non-marketable value c. Minority, marketable value d. Minority, non-marketable value D The transaction prices in IBA/ADAM include the value of which of the following? a. Only fixtures and equipment b. Only business-related goodwill c. Debt d. A and B only D Pratt's Stats consists of primarily which type of transaction? a. Contingent sales b. Liquidation sales c. Equity sales d. Asset sales C The majority of the observations in Done Deals are what type of transaction? a. Contingent sales b. Liquidation sales c. Equity sales d. Asset sales B BIZCOMPS transactions primarily consist of sales of a. Large publically traded entities b. Main street businesses such as restaurants, small retailers and other hard-to-find business c. Advertising agencies d. Insurance agencies e. All of the above f. C and D only F The unadjusted transaction prices in BIZCOMPS includes the value of which of the following: a. Fixtures and equipment only b. Inventory only c. Business-related goodwill only d. Debt e. All of the above f. A and C only B The indicated value before adjustments derived from multiples using IBA/ADAM data is generally considered to be a a. Control, marketable value b. Control, non-marketable value c. Minority, marketable value d. Minority, non-marketable value A The majority of the observations in S&P Capital IQ are what type of transaction? a. Equity sales b. Contingent sales c. Liquidation sales d. Asset sales A Which contains public company equity transaction information? a. Yahoo! Finance b. BIZCOMPS c. Pratt's Stats d. All of the above D One of the advantages of the Guideline Public Company Method is that a. The values derived are inclusive of market and economic factors as of the valuation date based on independent arms-length activity b. The degree of adjustment when valuing similar minority interests in large privately-held entities can often times be reduced to considerations for lack of marketability c. The underlying data is considered to be fairly reliable given the degree of scrutiny publicly traded companies must undergo d. All of the above All of the above Implicit in the calculation derived under the Guideline Public Company Method is the balance sheet, therefore: iii. No adjustment is required for the subject's routine balance sheet items. iv. Extraordinary and non-operating balance sheet items of the subject company need to be taken into consideration. D The single most important factor below that limits the applicability of the Guideline Public Company Method is a. The lack of information available about the comparable b. The substantial costs involved in the collection of info about the comparable c. The data is typically dated d. The relevant size of the subject company compared to its publicly traded peer group A The Guideline Public Company Method produces what kinds of multiples: a. Price Multiples b. Market value of indicated capital multiples c. Asset Multiples d. None of the above A Which of the following is one of the largest U.S. Stock Exchanges? a. NYSE b. LSE c. TMX d. CME C Which of the following is NOT one of the largest stock exchanges in the world? a. Deutsche Bourse b. LSE c. CST d. Japan D Which of the following statements regarding research on the effect of size on market multiples is NOT true: a. Empirical studies have more often focused on rates of return rather than multiples b. Pitchbook has recently conducted research on private equity and venture capital measures c. Findings on the effect of size on rates of return can be considered to shed light on the relationship between size and market multiples d. Research on the effect of size on market multiples indicates that multiples do not change across size categories D Which of the following should be done in the Guideline Public Companies Method? a. Compare the guideline companies' financial data to the subject company b. Make normalization adjustments to the subject company, where appropriate c. Make normalization adjustments to the guideline companies, where appropriate d. All of the above A Which of the following are equity multiples? a. Price to Earnings b. Book value to EBITDA c. Book value of Total Capital to Sales d. Interest Coverage Ratio e. Market value of invested capital to EBITDA D Which of the following is the most compelling reason to use the Guideline Public Company Method: a. It provides a verifiable and objective measure of value derived from actual transactions of similar interests b. Its use is required by revenue Ruling 59-60 c. It is the required method when valuing controlling interest d. It provides a verifiable and objective measure of value derived from publicly available information All of the above The valuation professional should consider which of the following when selecting guideline public companies? iv. Revenue v. Industry vi. Operating Segments B Which of the following are considered primary market methods? a. Rule of Thumb and Guideline Public Company Methods b. Guideline Public Company and Completed Transactions Methods c. Subscription Models and Guideline Public Company Methods d. Completed Transactions Methods and Subscription Models B What are the types of Valuation Services recognized by the Professional Standards? a. The Professional Standards recognize two types of services, Conclusion of Value and Calculated Value. b. The Professional Standards recognize two types of services, Valuation Engagements and Calculation Engagements c. The Professional Standards recognize three types of services, Conclusion of Value Services, Opinion of Value Services, and Estimate of Value Services d. The Professional Standards recognize two types of services, Conclusion of Value Services and Opinion of Value Services. D The Professional Standards are applicable when valuing the following: a. Real estate b. Intangible asset c. Business ownership interest d. B and C D The Professional Standards are: a. Rules-based b. Applicable to economic damages report c. Not applicable to valuations performed for transactions (M&A engagements) d. Principles-based C If I am also a member of ASA must I still also follow the Professional Standards in a Valuation Engagement? a. No. As a member, you may select which organization's standards are most appropriate to the valuation you are performing and write your report in the manner prescribed by that organization. b. No. This would confuse the requestor of the report. c. Yes. If you are a member of more than one certifying organization with standards, you must adhere to all of them as required by that organization. d. Yes. When the analyst is expressing a range of values, it is necessary to document the Professional Standards definition of a range of values. D Under the Professional Standards, when expressing a Conclusion of Value, the value amount may be communicated : a. As a range of values b. As a single member c. Orally d. All of the above F 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. Developmental Standards c. Reporting standards d. A and B e. None of the above, all standards apply f. B and C A A member may perform a Valuation Engagement for a contingent fee when expressing a Conclusion of Value. a. True b. False D According to the Development Standards, a member must identify all of the following except for: a. Subject to be valued b. Purpose and use of the valuation c. Premise of value d. Member's industry experience 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 Reporting Standards would NOT be exempt for a Valuation Engagement for what purpose? a. Gift tax b. Family law c. Shareholder oppression action d. Breach on contract litigation E A report expressing a Conclusion of Value may be presented in a: a. Summary Report b. Detailed report c. Restricted report d. Letter report e. A and B D 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 External Information includes all of the following except: a. General Economic Information b. General industry information c. Local and Regional Economic and Industry Information d. History, nature, and organization of the subject company C What is the main purpose of obtaining external information? a. To provide the analyst with the most recent 5 years of financial information b. To gain an understanding of the company's operations and its products or services c. To give the analyst knowledge of any outside factors that may directly or indirectly affect the future operations of the subject company d. To comply with the report writing standards as set forth by NACVA D The valuation engagement checklist for Adler-Cottino Wood Furniture, Inc. is found in Chapter 3. What Purpose, Standard and Premise of Value (in that order) were determined for this case? a. FMV, Controlling Interest and Arms-Length Transaction b. Related party, estate, and going concern c. Buy-sell, capitalization of earnings, net asset value d. Tax evaluation for 706 estate, fmv and going concern C What is the valuation analyst's main objective when gathering internal information? a. To examine historical and projected financial data including Financial Statements, Income Tax Returns and Budgets b. To keep abreast of changing general economics to ascertain how it may impact the assumptions that are made during the valuation process c. To gain an adequate understanding of the subject company's operational management and earnings ability d. To examine the current location(s) and physical condition of the subject company's facilities and operational assets B The Market Approach for valuing businesses utilizes information from Specific Comparable Companies. In order for a company to be truly comparable it must share all of the following characteristics with the subject company except: a. Companies must have similar capital structures b. Companies must have the same number of stockholders c. Companies must be of similar size, relative to sales volume and total assets d. Companies must have similar competitive positions within the industry B Independence of the valuator will be impaired if: a. The member who performs the appraisal or the member's firm prepares the tax return of the subject entity. b. The member or the member's firm performs an audit of the subject company's financial statement. c. Your neighbor's best friend owns 100% of the subject company d. The member or member's firm performs a compilation of the subject company's financial statement. C When defining the engagement the member should identify: a. Purpose, ownership interest, and profitability of the subject entity b. Purpose, valuation date, and valuation approach to be utilized c. Purpose, ownership interest, and valuation date d. Ownership interest, report date, and valuation approach B In a litigation engagement a valuator should be independent and objective; if an attorney wants you to give a specific and tailored answer, this will not impair your independence or objectivity a. True b. False D Of the following sources of information, which source provides data which can be specifically compared to the subject company? a. US Bureau of Census b. Federal Reserve banks c. Ibbotson Valuation Yearbook d. BIZCOMPS C After the historical financial statements have been adjusted for economic or normalizing items, the analyst should begin a thorough financial analysis of the adjusted financial statement data. Such analysis helps to identify all of the following trends except? a. Where has the company been? b. Where is the company today? c. What are the current and future management needs? d. Where might the company be in the future? C When adjustments have been made to increase the value of assets to their appraised or market value, a corresponding adjustment recognizing the amount of deferred income taxes should also be made. There have been conflicting arguments for doing so in valuation literature. What is the most often cited argument against recording deferred income taxes on the increased value of assets over book values? a. When selling the stock of an entity and not the asset itself, the assets do not have to be adjusted to fair market value, therefore, deferred taxes would not need to be adjusted. b. Deferred taxes are only booked for timing issues related to the recognition of income statement items. c. Deferred taxes should not be recorded unless the company has specific plans to liquidate within a reasonable period following the date of the valuation. d. The tax court has ruled in the Estate of Dunn, Estate of Davis, and the appeal of Dunn that no discount was given for taxes. D Which of the following are categorized as "Risk" ratios of a company? a. Accounts Receivable Turnover Ratios and Current Liabilities as a percent of assets b. Total Debt as a percent of assets and long term debt as a percent of assets c. Operating Profit as a percent of sales and interest coverage ratio d. Current ratio and quick ratio E When comparing Adler-Cottino to the Industry in Exhibits 10-7 and 10-8, Chapter 10, which of the following statements is/are true: a. The Company's current, quick, and debt/equity ratios are all significantly favorable relative to the industry b. The Company has a different asset mix than the companies that make up the median of the RMA data c. The Company's long-term debt as a percentage of assets is lower than the industry median d. The Company's operating performance is much better than the industry on average and is superior to the industry relative to financial strength, leverage and liquidity e. All of the above B A Comparative Analysis utilizes information from two sources and can involve either a comparison of the subject company with specific comparable companies or with industry averages for a historical period of one or more years. Which two sources of the subject company are used to perform a Comparative Analysis? a. RMA and Integra b. Common Size Analysis and Ratio Analysis c. Historical and Normalized Financial Statements d. Forecasted and Budgeted Financial Statements A Normalized financial statements should allow the valuation analyst to: a. Present a financial picture which represents fair market values b. Present a financial picture to appease the client c. Present a financial picture to reflect a predetermined power d. To increase a valuation analysts fees C What is the best way to determine if a normalizing adjustment should be made to Accounts Receivable? a. Common size the balance sheet b. Use trend analysis c. Look at accounts receivable changing d. Discuss with management C In Exhibit 10-2, what would be a good reference source to use as a benchmark to determine excess cash? a. Ibbotson b. BizComps c. RMA d. An inquiry with management provides enough support A Ratio Analysis can be an effective tool to compare how well a company is performing to industry bench marks. a. True b. False B Which statement is correct when earnings are selected as the type of benefits used to measure economic income? a. If pre-tax earnings are used, then the discount/cap rate must be on an after-tax basis. b. 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. c. The method of averaging historical economic income to determine the estimated future benefit stream is a specific methodology to be used. d. Historical earnings demonstrate a trend that is expected to always continue in the future. D Which one of the following criteria is the estimated future benefits stream not base on: a. The type of benefits used as a measurement of economic income. b. The use of "historical" or "projected" economic income to estimate future benefits. c. The method used to calculate the estimated future benefits. d. The years projected prior to calculating a terminal value. B 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. Unweighted Average b. Weighted average c. Net Cash Flows to Equity d. Net Cash Flows to Invested Capital D 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. Net Cash Flows to Equity b. Net Cash Flows to Invested Capital c. Weighted Average d. Unweighted Average B What type of earnings 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. Net Cash Flows to Equity b. Net Cash Flow to Invested Capital c. Total Cash Flow to Marketability d. Both B and C C Which of the following is the most preferred measure of economic income to use with a cost of capital analysis? a. Net Income b. Pre-tax Income c. Net Cash Flow d. Gross Cash Flow D What are the most common mistakes analysts make when determining future cash flows? a. The analyst uses the unweighted average instead of the weighted average historical cash flows. b. The analyst uses pre-tax earnings with an after-tax discount rate. c. The analyst does not consider the effects of annual economic growth. d. 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 B When valuing an equity interest, what type of benefit stream will the analyst normally use as a measurement of economic income? a. Net Cash Flows to Invested Capital b. Net Cash Flows to Equity c. After-tax earnings d. Income from Operations D When are Earnings used as the type of benefits to measure economic income? a. When there is an expectation of heavy borrowing for capital expenditures. b. When using the Ibbotson build up method to derive a capitalization. c. When calculating a terminal value for the business. d. When the valuator expects that the future earnings will approximate the future net cash flows. B Most of the cost of capital derived from the capital markets and other empirical data that is used to derive the discount rate represents what type of earnings to measure economic income? a. Pre-tax earnings b. After-tax cash flows c. EBITDA d. After-tax earnings B Net cash flow to equity will result in what type of value: a. Invested Capital b. Equity c. Controlling Interest d. Minority Interest B When discounting cash flow to invested capital the appropriate discount rate is: a. Cost of Equity b. Weighted Average Cost of Capital c. Capital Asset Pricing Model d. Ibbotson Buildup Method D Generally, estimated future benefits are based on historical economic income when: a. There is a lack of historical information b. Start up or developmental stage companies c. Future benefits stream is nonlinear d. Future benefits are linear B 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 A Two most commonly used methods to estimate future benefits based a linear benefit stream are: a. Weighted average method and unweighted average method b. Weighted average method and projected cash flow method c. Unweighted average method and projects cash flow method d. Projected cash flow method and projected earnings method A Using a weighted average method to determine future benefits an valuator assigns more weight to the most recent years. This indicates: a. The valuator determined the most recent year is the most indicative of future years b. All of the past earnings are representative of the expected future benefits c. No existing patter or trend would suggest that any one year or years is more indicative than the rest of the historical data d. There is no apparent trend in the historical earnings D When using the Ibbotson Build-Up Method, which of the following would be used as "Equity Risk Premium"? a. Short-term expected risk on large equity securities on the S&P 500 b. Expected mid-capitalization equity size premium c. Long-term U.S. Treasury Bond Yield d. Long-horizon expected equity risk premium: Large company stock returns minus long-term government bond income returns. C Regarding Ibbotson's general equity risk premium and size premiums which of the following statement(s) is correct? a. The specific company risk is also considered systematic risk b. The short-term arithmetic average equity risk premium is the best proxy for today's equity risk premium. c. The SBBI premiums are not industry specific. d. You do not have to calculate specific company risk when the company you value does not approach the size of a publicly traded company. A The specific company risk is also defined as the unsystematic risk? What does this risk measure? a. This risk measures the uncertainty of returns arising from other factors such as industry and individual company factors b. This risk measures the well-balanced rate of return that the investor wants. c. This risk measures the stability of long-term historical returns. d. This risk measures the size premium risk of mid-cap equities. A Which of the following would not be considered a Company Specific Factor when calculating specific company risk premium? a. The expected return on the security b. Abnormal present or pending competition c. Pending regulatory changes d. Concentration of customer base B By definition, the Ibbotson Build-Up Method calculates a rate to be applied to which of the following? a. After-Tax Net Income b. After-Tax Net Cash Flows c. Pre-tax Net Income d. EBITDA B What method for determining a capitalization or discount rate is based on the theory that investors in risky assets require a rate of return above and beyond a risk-free rate as compensation for bearing the risk associated with holding the investment? a. Ibbotson b. CAPM c. WACC d. RRCM C What is the primary problem with the equity formula when calculating the Weighted Average Cost of Capital (WACC)? a. You must have at least 100 shareholders in order to use WACC. b. You must have at least five million in equity in order to use WACC. c. You must know the stock price d. You must be valuing a publicly traded company D Which of the following is probably the most commonly used market method to describe the price of a share of stock? a. WACC b. Dividend/Price c. S&P 500 d. Price/Earnings Ratio A What is the primary argument against using the Price/Earnings Ratio method to value closely held companies? a. Large, diversified, publicly traded companies are not reasonably comparable for a smaller closely held business. b. P/E ratios are based on earnings after interest and taxes c. P/E ratios are the inverse of the capitalization rate d. P/E ratios are difficult to calculate for public companies B Which of the following statements are true for the RRCM (buildup summation capitalization method)? a. This build-up method uses the large-capitalization and small-capitalization premiums from Ibbotson. b. RRCM risk factors are Competition, Financial Strength, Management Ability and Depth, and Profitability and Stability of Earnings. c. The RRCM method is favored over Ibbotson or CAPM for valuing small businesses. d. No working paper documentation is required with the RRCM method. A The following is the primary formula for the Ibbotson buildup method: a. Rf + ERP + IRPi + SP + SCR b. Rf +B(ERm-Rf)+SP c. Rf +B(ERm-Rf)+SP+SCR d. (ke x We) + (Kd/(pt)(1-t)x Wd)