Deck 12: Business Valuation

Question 1

How is book value calculated?

A) by deducting the accumulated depreciation from the original cost of the asset
B) by adding the original cost of the asset to the annual depreciation
C) by deducting the original cost of the asset from the depreciation
D) by adding the accumulated depreciation to the original cost of the asset

Answer 1

by deducting the accumulated depreciation from the original cost of the asset

Question 2

What is market value?

A) the total assets shown on the financial statements
B) the book value of the asset shown in an annual report
C) the price of the asset shown on the statement of financial position
D) the price at which a business or asset can be sold

Answer 2

the price at which a business or asset can be sold

Question 3

What does price-level accounting restate assets on financial statements in terms of?

A) the price at which identical assets are sold on the market
B) the price buyers are willing to pay
C) the price a seller can obtain from a buyer
D) the assets' current purchasing power

Answer 3

the assets' current purchasing power

Question 4

What does current-value accounting restate assets on financial statements in terms of?

A) their depreciated value
B) their worth if they were purchased today
C) their current purchasing power
D) their market value

Question 5

Which of the following is a classic example of market value?

A) the supermarket
B) the stock market
C) the common market
D) the oligopoly market

Question 6

When does the liquidation value approach show the worth of specific assets?

A) when assets are sold under strict contractual agreements
B) when assets are sold under duress
C) when assets are sold under free market conditions
D) when assets are sold above the market value

Question 7

Which collateral value approach is used for evaluating a business in an assessment by a lender regarding the value of a particular asset as collateral?

A) at face value
B) as a guarantee for tax purposes
C) as proof of purchase
D) as a guarantee for credit

Question 8

What is the economic-value model based on when evaluating a business?

A) the growth potential of an asset
B) the ability of a business to generate a gross profit
C) a business as an ongoing entity
D) the capacity of an asset to generate profit before taxes

Question 9

Which of the following methods is NOT a valuation model?

A) the market value method
B) the replacement or reproduction value method
C) the liquidation value method
D) the management-based value method

Question 10

Who uses the assessed value approach?

A) creditors, to determine the level of guarantees
B) provincial governments, to determine the level of provincial taxes
C) shareholders, to determine the potential of a business
D) municipal governments, to determine the level of property taxes

Question 11

Which of the following is most likely to be affected if a business operates in an extremely volatile and competitive environment?

A) its viability and profitability
B) its planning assumptions
C) its internal rate of return and NPV
D) its strategic and operational objectives

Question 12

What do planning assumptions help to formulate?

A) valuation models
B) the book value of a business
C) better pricing strategies
D) projected financial statements

Question 13

Which of the following is a qualitative planning assumption?

A) GNP
B) market demand
C) supply capability
D) consumer preferences

Question 14

Which of the following is a quantitative planning assumption?

A) the unemployment rate
B) technological conditions
C) an ethical environment
D) government regulations

Question 15

What does a company's overall performance measure?

A) the consumer price index
B) union acceptability
C) employee satisfaction
D) resource utilization

Question 16

A buyer is interested in price-tagging a business. Which statement of financial position account will this buyer NOT take into consideration?

A) goodwill
B) trade receivables
C) non-current assets
D) depreciation

Question 17

What key documents do investors examine when buying a business?

A) the general and industry environments
B) the market indices
C) the company's financial statements
D) Dun & Bradstreet reports

Question 18

What is the focus when restating the statement of financial position?

A) prepaid expenses
B) accumulated depreciation
C) non-current assets
D) retained earnings

Question 19

What key elements in the statement of income will investors examine before buying a business?

A) the cost of sales
B) shareholders' equity
C) cash flows
D) non-current assets

Question 20

Which relationship is highlighted when calculating a company's break-even points?

A) the relationship between revenue and costs
B) the relationship between operating profit and costs
C) the relationship between fixed costs and period costs
D) the relationship between cost of sales and revenue

Question 21

What does vertical analysis help investors to determine on a company's statement of income?

A) the company's operating effectiveness
B) the company's operating efficiencies
C) the company's operating economy
D) the company's operating economies of scale

Question 22

What does vertical analysis help investors to determine on a company's statement of financial position?

A) the company's capital structure
B) the company's operating performance
C) the company's competitive position
D) the company's market performance

Question 23

Which of the following assets will an investor want to evaluate before buying a business?

A) trade and other payables
B) intangible assets
C) current liabilities
D) prepaid expenses

Question 24

Which of the following assets are taken into consideration before buying a business?

A) trade and other receivables
B) trade and other payables
C) non-current assets
D) goodwill

Question 25

When does goodwill appear on a statement of financial position?

A) when a business increases its retained earnings
B) when a business generates profit for the year
C) when a business produces excellent earnings
D) when a business is purchased for more than the fair value of its net assets

Question 26

What methodology is used to restate the numbers appearing on financial statements?

A) planning assumptions
B) asset valuation
C) current value accounting
D) business evaluation

Question 27

What are trade and other payables deducted from to calculate net working capital within the framework of business evaluation?

A) non-current assets
B) intangible assets
C) trade receivables and inventories
D) cash and trade receivables

Question 28

What is the net present value method based on?

A) asset valuation methods
B) planning assumption methodologies
C) the time-value-of-money concept
D) accounting principles

Question 29

Which of the following must occur for the buyer of a business to achieve its hurdle rate?

A) The profitability index must be less than 1.0.
B) The NPV must equal at least zero.
C) The NPV must be negative.
D) The payback period must be positive.

Question 30

What standards are used to determine the value or worth of a business?

A) Dun & Bradstreet market ratios
B) industry indices
C) industry multipliers
D) Standard & Poor's financial ratios

Question 31

What two items do analysts use to calculate the value of publicly traded companies?

A) the preferred shares issued and the share market price
B) the common shares issued and the share market price
C) the assets employed by a business and its liabilities
D) the bonds issued and their value

Question 32

How is the book value of a business determined?

A) by deducting long-term borrowings from total liabilities
B) by deducting non-current assets from total assets
C) by deducting assets from total owner's retained earnings
D) by deducting liabilities and equity from total assets

Question 33

What rate is used to determine the present value of a series of future receipts?

A) the NPV rate
B) the hurdle rate
C) the weighted average cost of capital rate
D) the capitalization rate

Question 34

What is one of the steps in calculating the market value of a business?

A) determining asset performance
B) determining the before-tax cash flow
C) determining the after-tax cash flow
D) determining market performance

Question 35

What is NOT considered when projecting a company's cash flow?

A) the opening cash balance
B) the future incremental working capital
C) the projected residual value
D) future capital investments

Question 36

Which of the following is NOT a business valuation method?

A) the replacement value method
B) the economic value method
C) the collateral value method
D) the statement of income value method

Question 37

Which of the following is NOT used to gauge the market value of a business?

A) NPV
B) IRR
C) industry multipliers
D) historical cost values

Question 38

The market value of a business is essentially the same as its book value.

Question 39

The "book value" of a business can be determined to some extent by its financial statements.

Question 40

The book value of an asset is its original cost less the depreciation for the year.

Question 41

Market value is the price that someone can get for an asset that can be sold.

Question 42

According to traditional accounting principles, financial statements present fairly the financial position of a company in a period of inflation.

Question 43

Price-level accounting is an accounting method used to restate assets on financial statements in terms of current purchasing power (inflation).

Question 44

Current-value accounting is an accounting method used to restate assets on financial statements in terms of what the assets are worth in the company's books, that is, the original cost less its accumulated depreciation.

Question 45

The stock market is a classic example that describes the value of assets in a company's books.

Question 46

The liquidation value of a company's assets is what they are worth if sold separately or under duress.

Question 47

The replacement value or reproduction value of an asset is the cost of replacing existing non-current assets with an identical asset.

Question 48

The collateral value of an asset is a system commonly used by shareholders to determine its real value.

Question 49

The assessed value approach is essentially the same as the economic value approach since both methods are used to determine the ability or capacity of an asset to generate cash.

Question 50

One critical step in the valuation process for someone wanting to buy a business is to examine the nature of the industry in which a business operates and the competition it faces.

Question 51

Scanning the environment in the valuation process is a financial method used during the planning process for the purpose of pinpointing how much potential investors are willing to pay for a business.

Question 52

Planning assumptions can help individuals prepare the projected financial statements.

Question 53

Both, overall performance and operating performance should be taken into consideration when going through the process of determining the value of a business.

Question 54

Market performance is a method used for gauging the efficiency and effectiveness of management within the industry in which it operates.

Question 55

Financial ratios are used to analyze a company's general and industry environments.

Question 56

The marketing plan usually includes the analysis of the consumer, the product description and pricing strategies.

Question 57

Cost of sales assumptions have to do with fixed and variable costs, raw materials and reliability, and production operations.

Question 58

Vertical analysis is an excellent financial tool to determine the growth rate of a business for different accounts shown on a company's statement of income.

Question 59

The projected bottom line (profit for the year) of a business can be used to determine the potential value of a business.

Question 60

Both, current assets and non-current assets should be reassessed in order to determine the market value of a business.

Question 61

The more important elements appearing on a statement of financial position that a potential buyer of a business should look for are prepaid expenses, investment securities, notes payable, and long-term debts.

Question 62

Goodwill is a special asset that appears on a statement of financial position only when a business is bought.

Question 63

The difference between total assets and total liabilities shown on a statement of financial position gives shareholders' equity.

Question 64

Asset valuation is a methodology used to restate the numbers appearing on a company's financial statements.

Question 65

The net present value method is a financial technique based on industry multipliers.

Question 66

To determine the purchase price of a business, you have to compound the future value of its cash inflows.

Question 67

The internal rate of return is a time value of money technique that can determine how much a buyer is willing to pay for a business.

Question 68

When using a hurdle rate, if the NPV of the cash outflows and cash inflows is negative, it suggests that the buyer should buy the business.

Question 69

The calculation of the purchase price of an on-going business should include its residual value.

Question 70

Industry multipliers can be used as standards to determine the value or worth of a business.

Question 71

Some people refrain from using industry multipliers because the approach focuses too much on gross sales, rather than profit for the year.

Question 72

A going-concern value of a business is a more relevant approach for determining a price tag for an ongoing business because it deals with the ability or capacity of a business to produce a stream of after-tax cash flows.

Question 73

Industry multipliers make use of the NPV method to determine the value on an on-going business.

Question 74

To calculate the value of publicly traded companies, analysts would have to use the number of common shares issued and the share market price.

Question 75

A risky business calls for investors to demand a higher return on their investment.

Question 76

A capitalization rate is a discount rate used to find the present value of a series of future receipts.

Question 77

The ___________________________ value of a business is presented on financial statements.

Question 78

The ___________________________ value of a business is the price at which an item, business, or assets can be sold.

Question 79

To determine the book value of a capital asset, you have to deduct the___________________________ depreciation from its original cost.

Question 80

The ___________________________ accounting method is used to restate assets on financial statements in terms of its current purchasing power (inflation).