Question 1

Of the following statements regarding valuation, which is NOT true?

Accepted Answer

A valuation is not always certain as it involves numerous assumptions and estimations.

Question 2

To be at arms' length means that __________.

Accepted Answer

To be at arms' length means that parties have no financial relationship, but it does not necessarily imply any specific familial or subsidiary relationship. Choice A is therefore incorrect, and choice B is not fully inclusive of the term's meaning.

Question 3

Of the following, which is not an adjustment made to determine the value of a specific ownership interest?

Accepted Answer

All of the options listed (Controlling interest, Marketability, Synergistic premium) are indeed adjustments made to determine the value of a specific ownership interest.

Question 4

Which of the following is an adjustment to the value of a share because it is not controlling?

Accepted Answer

A minority discount is an adjustment made to the value of a share because it does not give the holder control over the company. This is a common adjustment made when valuing minority shares in a private company or in the context of a merger or acquisition. Choices B and C are adjustments related to the ease of selling or trading a share, while choice D is a premium paid for the potential benefits of combining two companies.

Question 5

This valuation approach relies on prices that similar assets sell for in the marketplace.

Accepted Answer

The market approach relies on market prices of similar assets to determine the value of the subject asset. This approach is often used in real estate and business valuations.

Question 6

Using this valuation method, the cost to re-create the business or asset is calculated.

Accepted Answer

The cost approach is specifically designed to determine the cost to re-create the business or asset. This method takes into account the cost of acquiring the necessary land, materials, labor, and other expenses to build or replace the asset. Therefore, it is the most appropriate choice for this purpose.

Question 7

Income or cash flow serves as the basis for the value of the business or asset when this valuation approach is used.

Accepted Answer

The income approach values a business based on its ability to generate future cash flows. It considers the current income and growth potential of the business, which ultimately determines its value. The market approach looks at comparable transactions and the cost approach looks at the replacement or reproduction cost of the asset. The synergistic approach and Pratt's CPS approach are specialized methods of valuation.

Question 8

Of the following, which is a valuation method used in the market approach to measure the value of a business?

Accepted Answer

The answer of Of the following, which is a valuation...

Question 9

This approach to valuation is also referred to as a discounted cash flow analysis or discounted cash flow approach.

Accepted Answer

The discounted cash flow analysis is a key component of the Income approach to valuation, which is used to estimate the present value of future cash flows accruing to a business or asset. The Market approach involves finding comparable companies or assets and using their market values to estimate the value of the business or asset being valued. The Cost approach involves adding up the cost of all the inputs required to create a reproduction of the asset or business being valued. The Synergistic approach involves identifying the value of combining two or more companies or assets. The Pratt's CPS approach involves calculating the value of a business based on its expected future cash flows and the required rate of return.

Question 10

This valuation approach is appropriate for valuing assets for which substitutes could reasonable be brought or built.

Accepted Answer

The cost approach is appropriate for valuing assets that can be reproduced or replaced, as it involves estimating the cost of building or buying a substitute. For example, this approach might be used to value a piece of machinery or a building.

Question 11

To be at arm's length, the parties must not have a subsidiary of the other.

Accepted Answer

When parties are at arm's length, they are not related to each other by ownership, control or other means. This includes not having a subsidiary of the other party.

Question 12

A controlling interest allows the owner to control ticket prices, team colors, team name, and logos.

Accepted Answer

A controlling interest in a sports team gives the owner a significant level of control over important decisions, including branding and pricing.

Question 13

If the distribution of cash flows is based on ownership percentages, the valuation of control should be reduced.

Accepted Answer

If cash flows are distributed based on ownership percentages, then the value of control is reduced because the owner with larger ownership percentage already has control over the distribution of cash flows. This reduces the value of control for that owner.

Question 14

The minority discount is equal to the sum of 100 plus the controlling interest premium divided by the controlling interest premium.

Accepted Answer

The minority discount is equal to the difference between the pro rata value of a minority interest and the actual price paid for that interest. It is not equal to the sum of 100 plus the controlling interest premium divided by the controlling interest premium.

Question 15

The control premium is generally higher for sport teams than for many other industries because of ownership benefits such as shelters from federal income tax and league revenue sharing and future expansion fees.

Accepted Answer

Sport teams have unique ownership benefits that can increase the control premium, such as shelters from federal income tax and league revenue sharing and future expansion fees. These benefits are not commonly found in other industries, meaning that the control premium for sport teams is generally higher.

Question 16

Under the market multiples approach, the value of a company is determined in reference to the value of comparable firms that have been sold within a reasonably recent period of time, with appropriate adjustments for the time value of money.

Accepted Answer

The market multiples approach values a company based on multiples (like P/E, EV/EBITDA) of comparable publicly traded companies or recent acquisitions, without adjustments for the time value of money.

Question 17

The P/R ratio provides an estimate of how much money an investor will pay for each dollar of a company's earnings and allows for comparisons of the market values of companies of various sizes.

Accepted Answer

The P/E (Price-to-Earnings) ratio, not the P/R ratio, provides an estimate of how much money an investor will pay for each dollar of a company's earnings, allowing for comparisons of the market values of companies of various sizes.

Question 18

In a discounted cash flow analysis, cash flows are taken from the past and discounted a number of years into the future, using a suitable discount rate.

Accepted Answer

Cash flows in a discounted cash flow analysis are projected for future periods, not taken from the past.

Question 19

In forecasting revenue growth, considerations must be made for expectations for new product offerings.

Accepted Answer

New product offerings have the potential to significantly impact revenue growth, and as such, they should be factored into forecasting models.

Question 20

An accurate DCF analysis only requires information about all of the net cash flows accounted for on the team's financial statements.

Accepted Answer

An accurate DCF analysis requires information beyond just the net cash flows on the financial statements. It also requires information about capital expenditures, changes in working capital, and discount rates, among other factors.

Quiz 10: Valuation