Deck 9: Business Valuation

Question 1

Which of the following factors are unique challenges of valuing privately held businesses?

A) Under-diversification
B) Illiquidity
C) Owner specific expenses
D) Unique assets
E) All of the above

Answer 1

E

Question 2

Which principle can be applied to determine what adjustments need to be made to income statement items during business valuation?

A) Incremental principle
B) Competitive principle
C) Efficiency principle
D) Optimization principle
E) Diversification principle

Answer 2

A

Question 3

The process of earnings normalization may involve

A) comparing common size statements with industry averages
B) identifying below market expenses due to family connections
C) focusing on operating income instead of net income
D) identifying over market expenses due to family connections
E) All of the above

Answer 3

E

Question 4

Enterprise valuation uses

A) free cash flows to the firm discounted by the cost of equity
B) free cash flows to the firm discounted by the weighted average cost of capital
C) free cash flows to equity holders discounted by the cost of equity
D) free cash flows to equity holders discounted by the weighted average cost of capital
E) free cash flows to equity holders discounted by the cost of debt

Question 5

Equity valuation uses

A) free cash flows to the firm discounted by the cost of equity
B) free cash flows to the firm discounted by the weighted average cost of capital
C) free cash flows to equity holders discounted by the cost of equity
D) free cash flows to equity holders discounted by the weighted average cost of capital
E) free cash flows to equity holders discounted by the cost of debt

Question 6

What are important characteristics to consider when choosing comparable firms for valuation using the multiples methods?

A) Industry and market segment
B) Ownership structure
C) Operating Characteristics
D) All of the above
E) None of the above

Question 7

Market value of invested capital include

A) market equity value only
B) market equity and debt values
C) market equity and debt values less cash
D) market equity value less cash
E) debt value less cash

Question 8

The challenges of using multiples valuation methods include

A) controlling for differences in financial leverage
B) discretionary expenses that are unique to the target firm or a comparable firm
C) finding appropriate comparable firms
D) All of the above
E) None of the above

Question 9

In addition to financial date, other factors that may affect the transaction price include

A) experience of the entrepreneur
B) special personal circumstances
C) unique local market conditions
D) All of the above
E) None of the above

Question 10

Valuation is important if

A) the owner(s) want to sell the entire business.
B) The owner(s) want to sell part of the business.
C) the owner(s) want to pass on the business to family members.
D) the business wants to obtain loans.
E) All of the above