Valuation Midterm Exam Questions and Answers

Valuation Midterm Exam Questions and Answers Why are businesses valued? Mergers, acquisitions, reorganizations, spin-offs, liquidations, financing, IPO's Who values business? Business valuation analysts, CPA, business brokers, professors, commercial real estate appraisers, investment bankers, internet Engagement Letter should include? Scope of the assignment, detailed description of the valuation subject, standard of value, effective dates, type of report that will be used to communicate the value estimated Three main valuation principles 1)Principles of Alternatives 2)Principles of Substitution 3) Principle of Future Benefits What are the standards of value? 1) FMV 2) FV 3)Investment value 4)Intrinsic value Three key points of FMV 1) cash or cash equivalent 2) Exposure for sale on an open market 3) Neither party under the compulsion to act Subsequent events Should not effect the valuation unless it existed during the date of issuance. Known or knowable Revenue Ruling 59-60 NEBEDISM Present Value of $1 FV x (1+r)n Normalization Adjustments Economic basis Financial Forecast Is based on the responsible party's assumptions reflecting the conditions it expects to exist and the course of action it expects to take Financial Projection Financial statements the reflect a given hypothetical assumption Invested Capital Financing of the nonworking capital assets of the company Equity Capital Stockholder's equity Factors to consider 1) Company specific factors 2) Economic conditions 3) Industry trends Professional Organizations 1) AICPA 2) American Society of Appraisers 3) NACVA 4) CFA Institute 5) Appraisal Foundation Porter's Five Forces 1. The threat of new entrants 2. The bargaining power of buyers 3. The bargaining power of suppliers 4. The threat of substitute products and services Control Adjustments Adjust private company earnings (1) for the economies and efficiencies of the typical financial buyer and (2) for synergies or strategies of particular buyers