Deck 11: Fundamentals of Business Valuation

Question 1

Which of the following is true of capitalization?

A) It is the same as discounting.
B) It is more commonly used with prospective data.
C) It is applied to a single benefit stream.
D) It converts present values to future benefits.

Answer 1

C

Question 2

A calculation engagement is limited in scope to specific approaches and methods determined by agreement with the client.

Answer 2

True

Question 3

The AICPA has more active credential holders (Certified Valuation Analysts)than all other valuation credentials combined.

Answer 3

False

Question 4

Which of the following is situation commonly drives a business valuation engagement?

A) hypothecation of assets
B) shareholder dispute
C) hedging a company's derivatives
D) determination of dividend payout

Question 5

In practice,absent valid market comps,forensic accountants most commonly use the dividend payout method.

Question 6

The discount and capitalization rates are equal when the growth rate is positive.

Question 7

The book value of a business may or may not represent its fair market value.

Question 8

Lilac,Inc.uses a discount rate of 17.5% its expected long-term sustainable growth rate is 1.5%.The net cash flows from operations of the company for the previous years are provided below. $$\begin{array} { | l | r | } \hline \text { Year } & \text { Net Cash Flow } \\\hline 2009 & \$ 190,835 \\\hline 2010 & 215,648 \\\hline 2011 & 185,96 \\\hline 2012 & 248,752 \\\hline 2013 & 221,960 \\\hline\end{array}$$ Calculate the value of business of Lilac,Inc.

A) $1,063,160
B) $1,215,040
C) $1,328,950
D) $1,090,420

Question 9

Egan,a forensic accountant,was appointed for a business valuation engagement by the management of Dreamsong,Inc.He qualified the purpose of the valuation,type of engagement,and the ownership interest to be considered.What should be Egan's next step?

A) Issue the valuation report.
B) Estimate the value of the business.
C) Gather the necessary information.
D) Analyze the information gathered.

Question 10

Which of the following gives the calculation of the capitalization rate?

A) the equity risk premium plus the specific company risk premium
B) the required rate of return minus the risk free rate
C) the dividend payout rate plus the long-term sustainable growth rate
D) the discount rate minus the expected long-term sustainable growth rate

Question 11

Prospective data are more commonly used to value closely held companies.

Question 12

Which of the following is a primary issue of the business valuation theory?

A) determining current benefits from the business
B) estimating expected future benefits
C) calculating historical benefits received
D) calculating financial ratios

Question 13

Fair market value proposes an actual sale price for cash.

Question 14

Which of the following is included in the first step of the valuation process?

A) issuing the valuation report
B) analyzing the company's financial statements
C) selecting and applying a valuation approach
D) qualifying the ownership interest to be considered

Question 15

Which of the following premiums is generally calculated as the excess of stock market returns over government bond returns?

A) equity risk premium
B) specific company risk premium
C) industry risk premium
D) firm size premium

Question 16

A valuation performed in litigation must conform to the reporting provisions of professional standards.

Question 17

Which of the following is a difference between a forecast and a projection?

A) A forecast reflects conditions that may occur, whereas a projection reflects expected conditions based on current knowledge of trends in relevant factors.
B) A forecast is typically for a short period, whereas projections can be made several years into the future projection.
C) A forecast is based on hypothetical assumptions, whereas a projection is based on current knowledge of trends.
D) A forecast invites rebuttal arguments of speculation and bias, whereas a projection is deemed to be the most appropriate indicator of expected future benefits.

Question 18

The NAV method determines a company's value as the difference between the book value of its assets and the fair market value of its liabilities.

Question 19

A detailed report is a structured and comprehensive submission designed to provide the reader with a sufficient understanding of the data,reasoning,and analysis underlying the conclusion of value.

Question 20

The management of Quills and Ink want to calculate the required rate of return (ROR)of the company.The following information is available: $$\begin{array} { l l } \text { Risk free rate } & 5.30 \% \\\text { Equity risk premium } & 4.24 \% \\\text { Firm size premium } & 2.16 \% \\\text { Industry risk premium } & 6.50 \% \\\text { Specific company risk premium } & 3.00 \%\end{array}$$ Calculate the ROR of Quills and Ink.

A) 16.96%
B) 21.20%
C) 18.20%
D) 19.40%

Question 21

Which of the following engagements allows the forensic accountants to apply any approaches and methods deemed appropriate?

A) valuation engagement
B) calculation engagement
C) consultation engagement
D) standardization engagement

Question 22

Which of the following is a premise of value that is applied to business valuations?

A) going concern
B) materiality
C) substance over form
D) neutrality

Question 23

Which of the following standards of value is often used in dissenting minority interest in litigation?

A) fair value
B) fair market value
C) book value
D) investment value

Question 24

Which of the following is a reason why purpose of business valuation is important?

A) It helps develop a suitable capitalization rate.
B) It can assist in representing the expected future benefits.
C) It determines the premise of value.
D) It identifies assumptions and limiting conditions.

Question 25

Which of the following situations will result in the investment value of a business approximating to the fair market value of the business?

A) when an investor's requirements and expectations are different than the fair value of the business
B) when an investor's requirements and expectations are representative of the book value of the business
C) when an investor's requirements and expectations are different than the market
D) when an investor's requirements and expectations are representative of the market

Question 26

Which of the following is true of the net asset method?

A) It requires the forensic accountant to adjust the company's balance sheet from book value to fair market value.
B) It determines a company's value as the difference between the book value of its assets and the fair market value of its liabilities.
C) It commonly requires the forensic accountant to use his or her judgment to arrive at the fair market value assessments.
D) It involves the development of a proxy benefit and the capitalization of this benefit to provide an indicated business value.

Question 27

Which of the following should be the first phase of analysis of information gathered for a business valuation engagement?

A) identifying significant relevant factors
B) reconciling information collected with the financial statement analysis
C) analysis of the company's financial statements
D) developing a discount rate

Question 28

As per the Rev.Rul.59-60 (Sec.4),which of the following factors should be considered in valuations?

A) the price earnings ratio of the company
B) the earning capacity of the company
C) the fair market value of the stock of the business
D) the book value of stocks of similar companies

Question 29

Which of the following is true of nonoperating assets of a business?

A) These are included in the valuation depending on the approach used.
B) These are required to produce the expected future benefit stream.
C) These should be excluded from the valuation.
D) These should always be included in the valuation.

Question 30

Which of the following is true of the standards of value used in business valuation?

A) The fair value proposes a hypothetical sale in an open and unrestricted market.
B) The investment value is often used in dissenting minority interest litigation.
C) The book value of a business rarely represents its fair market value.
D) The fair market value is usually greater than the investment value.

Question 31

Which of the following methods is a logical selection when engaged to value a nonoperating company or a company pending liquidation?

A) net asset value method
B) dividend payout method
C) capitalization of earnings method
D) guideline transaction method

Question 32

Which of the following statements is true of fair value as a standard of valuation?

A) It is the most widely recognized standard of value.
B) It does not propose a hypothetical sale in an open and unrestricted market.
C) It is mandated for all federal tax matters.
D) Its operational meaning does not vary from state to state because it is statutorily defined.

Question 33

Which of the following standards of value is mandated for all federal tax matters?

A) fair value
B) book value
C) fair market value
D) investment value

Question 34

Which of the following is true of a summary report?

A) It is a structured and comprehensive submission.
B) It includes certain minimum elements already included in the detailed report.
C) It identifies the procedures and scope of work performed.
D) It is a limited scope report and should be explicitly titled as a "summary report."

Question 35

Which of the following methods is commonly used to establish a floor value for the company?

A) dividend payout method
B) capitalization of earnings method
C) net asset value method
D) guideline transaction method

Question 36

________ proposes a "hypothetical" sale price for cash.This hypothetical sale takes place in an open and unrestricted marketplace.

A) Book value
B) Present value
C) Historical value
D) Fair market value

Question 37

Which of the following valuation approaches employs the time value of money?

A) asset approach
B) liabilities approach
C) market approach
D) income approach

Question 38

Which of the following standards of value is also known as strategic value?

A) investment value
B) book value
C) fair value
D) fair market value

Question 39

Why it is important to distinguish between enterprise goodwill and personal goodwill in divorce valuations?

A) In many states, enterprise goodwill is not considered a marital asset while personal goodwill is.
B) In many states, enterprise goodwill is considered a marital asset while personal goodwill is not.
C) Enterprise goodwill can be valued reasonably, while it is not possible to value personal goodwill.
D) Enterprise goodwill cannot be separately identified, while personal goodwill can be identified.

Question 40

Which of the following is true of investment value as a standard of valuation?

A) Investment value is usually lesser fair value.
B) Investment value is usually lesser than fair market value.
C) Investment value is usually greater than book value.
D) Investment value is usually greater than fair value.

Question 41

What is the significance of industry risk premium and specific company risk premium?

Question 42

Which of the following methods involves the development of a proxy benefit?

A) net asset value method
B) guideline transaction method
C) capitalization of earnings method
D) dividend payout method

Question 43

What is the purpose of the Statement on Standards for Valuation Services (SSVS)No.1 introduced by the AICPA?

Question 44

Which of the following methods is used in combination with net asset value method in the absence of valid market comps?

A) capitalization of earnings method
B) guideline transaction method
C) dividend payout method
D) earnings payout method

Question 45

Explain the two methods that are commonly considered under the market approach of valuation of the company.

Question 46

Which of the following methods is used under the income approach of business valuation?

A) net asset value method
B) capitalization of earnings method
C) dividend payout method
D) guideline transaction method

Question 47

Excluding valuation discounts allows for a more equitable determination of fair value.Substantiate.

Question 48

Why is identification of the ownership interest to be valued important?

Question 49

Which of the following is the foremost professional organization for the business valuation discipline?

A) the National Society of Business Appraisers
B) the American Association of Business Valuators and Appraisers
C) the American Society of Appraisers
D) the National Association of Certified Valuators and Analysts

Question 50

Which of the following business valuation organizations merged with the NACVA in 2012?

A) the American Society of Certified Analysts
B) the Institute of Business Appraisers
C) the American Society of Appraisers
D) the Institute of Valuation Analysts