Question 1

Which of the following are examples of intangible assets that may have value to the acquiring company?
A) Patents
B) Trade names
C) Customer lists and relationships
D) Covenants not to compete
E) All of the above

Accepted Answer

CASE STUDY SHORT-ESSAY EXAMINATION QUESTIONS GOOGLE BUYS YOUTUBE: VALUING A FIRM WITHOUT CASH FLOWS YOUTUBE RANKS AS ONE OF THE MOST HEAVILY UTILIZED SITES ON THE INTERNET,WITH ONE BILLION VIEWS PER DAY,20 HOURS OF NEW VIDEO UPLOADED EVERY MINUTE,AND 300 MILLION USERS WORLDWIDE.DESPITE THE EXPLOSION IN USAGE,GOOGLE CONTINUES TO STRUGGLE TO "MONETIZE" THE TRAFFIC ON THE SITE FIVE YEARS AFTER HAVING ACQUIRED THE VIDEO SHARING BUSINESS.2010 MARKED THE FIRST TIME THE BUSINESS TURNED MARGINALLY PROFITABLE.WHETHER THE TRANSACTION IS VIEWED AS SUCCESSFUL DEPENDS ON WHETHER IT IS EVALUATED ON A STAND-ALONE BASIS OR AS PART OF A LARGER STRATEGY DESIGNED TO STEER ADDITIONAL TRAFFIC TO GOOGLE SITES AND PROMOTE THE BRAND.THIS CASE STUDY ILLUSTRATES HOW A VALUE DRIVER APPROACH TO VALUATION COULD HAVE BEEN USED BY GOOGLE TO ESTIMATE THE POTENTIAL VALUE OF YOUTUBE BY COLLECTING PUBLICLY AVAILABLE DATA FOR A COMPARABLE BUSINESS.NOTE THE IMPORTANCE OF CLEARLY IDENTIFYING KEY ASSUMPTIONS UNDERLYING THE VALUATION.THE CREDIBILITY OF THE VALUATION ULTIMATELY DEPENDS ON THE CREDIBILITY OF THE ASSUMPTIONS.GOOGLE ACQUIRED YOUTUBE IN LATE 2006 FOR $1.65 BILLION IN STOCK.AT THAT TIME,THE BUSINESS HAD BEEN IN EXISTENCE ONLY FOR 14 MONTHS,CONSISTED OF 65 EMPLOYEES,AND HAD NO SIGNIFICANT REVENUES.HOWEVER,WHAT IT LACKED IN SIZE IT MADE UP IN GLOBAL RECOGNITION AND A RAPIDLY ESCALATING NUMBER OF SITE VISITORS.UNDER PRESSURE TO CONTINUE TO FUEL ITS OWN METEORIC 77 PERCENT ANNUAL REVENUE GROWTH RATE,GOOGLE MOVED AGGRESSIVELY TO ACQUIRE YOUTUBE IN AN ATTEMPT TO ASSUME CENTER STAGE IN THE RAPIDLY GROWING ONLINE VIDEO MARKET.WITH NO DEBT,$9 BILLION IN CASH,AND A NET PROFIT MARGIN OF ABOUT 25 PERCENT,GOOGLE WAS IN REMARKABLE FINANCIAL HEALTH FOR A FIRM GROWING SO RAPIDLY.THE ACQUISITION WAS BY FAR THE MOST EXPENSIVE ACQUISITION BY GOOGLE IN ITS RELATIVELY SHORT EIGHT-YEAR HISTORY.IN 2005,GOOGLE SPENT $130.5 MILLION IN ACQUIRING 15 SMALL FIRMS.GOOGLE SEEMED TO BE PLACING A BIG BET THAT YOUTUBE WOULD BECOME A HUGE MARKETING HUB AS ITS INCREASING NUMBER OF VIEWERS ATTRACTS ADVERTISERS INTERESTED IN MOVING FROM TELEVISION TO THE INTERNET.STARTED IN FEBRUARY 2005 IN THE GARAGE OF ONE OF THE FOUNDERS,YOUTUBE DISPLAYED IN 2006 MORE THAN 100 MILLION VIDEOS DAILY AND HAD AN ESTIMATED 72 MILLION VISITORS FROM AROUND THE WORLD EACH MONTH,OF WHICH 34 MILLION WERE UNIQUE.AS PART OF GOOGLE,YOUTUBE RETAINED ITS NAME AND CURRENT HEADQUARTERS IN SAN BRUNO,CALIFORNIA.IN ADDITION TO RECEIVING FUNDING FROM GOOGLE,YOUTUBE WAS ABLE TO TAP INTO GOOGLE'S SUBSTANTIAL TECHNOLOGICAL AND ADVERTISING EXPERTISE.^{UNIQUE VISITORS ARE THOSE WHOSE IP ADDRESSES ARE COUNT}^{ED ONLY ONCE NO MATTER HOW MANY}^{TIMES THEY VISIT A WEBSITE DURING A GIVEN PERIOD.} TO DETERMINE IF GOOGLE WOULD BE LIKELY TO EARN ITS COST OF EQUITY ON ITS INVESTMENT IN YOUTUBE,WE HAVE TO ESTABLISH A BASE-YEAR FREE CASH-FLOW ESTIMATE FOR YOUTUBE.THIS MAY BE DONE BY EXAMINING THE PERFORMANCE OF A SIMILAR BUT MORE MATURE WEBSITE,SUCH AS ABOUT.COM.ACQUIRED BY THE NEW YORK TIMES IN FEBRUARY 2005 FOR $410 MILLION,ABOUT.COM IS A WEBSITE OFFERING CONSUMER INFORMATION AND ADVICE AND IS BELIEVED TO BE ONE OF THE BIGGEST AND MOST PROFITABLE WEBSITES ON THE INTERNET,WITH ESTIMATED 2006 REVENUES OF ALMOST $100 MILLION.WITH A MONTHLY AVERAGE NUMBER OF UNIQUE VISITORS WORLDWIDE OF 42.6 MILLION,ABOUT.COM'S REVENUE PER UNIQUE VISITOR WAS ESTIMATED TO BE ABOUT $0.15,BASED ON MONTHLY REVENUES OF $6.4 MILLION.^{ABOUTMEDIAKIT,SEPTEMBER 17,2006,HTTP://BEANADVERTISER.ABOUT.COM/ARCHIVE/NEWS091606.HTML}. BY ASSUMING THESE NUMBERS COULD BE DUPLICATED BY YOUTUBE WITHIN THE FIRST FULL YEAR OF OWNERSHIP BY GOOGLE,YOUTUBE COULD POTENTIALLY ACHIEVE MONTHLY REVENUE OF $5.1 MILLION .ASSUMING OPTIMISTICALLY THAT CAPITAL SPENDING AND DEPRECIATION GROW AT THE SAME RATE AND THAT THE ANNUAL CHANGE IN WORKING CAPITAL IS MINIMAL,YOUTUBE'S FREE CASH FLOW WOULD EQUAL AFTER-TAX PROFITS.RECALL THAT A FIRM EARNS ITS COST OF EQUITY ON AN INVESTMENT WHENEVER THE NET PRESENT VALUE OF THE INVESTMENT IS ZERO.ASSUMING A RISK-FREE RATE OF RETURN OF 5.5 PERCENT,A BETA OF 0.82 (PER YAHOO! FINANCE),AND AN EQUITY PREMIUM OF 5.5 PERCENT,GOOGLE'S COST OF EQUITY WOULD BE 10 PERCENT.FOR GOOGLE TO EARN ITS COST OF EQUITY ON ITS INVESTMENT IN YOUTUBE,YOUTUBE WOULD HAVE TO GENERATE FUTURE CASH FLOWS WHOSE PRESENT VALUE WOULD BE AT LEAST $1.65 BILLION (I.E.,EQUAL TO ITS PURCHASE PRICE).TO ACHIEVE THIS RESULT,YOUTUBE'S FREE CASH FLOW TO EQUITY WOULD HAVE TO GROW AT A COMPOUND ANNUAL AVERAGE GROWTH RATE OF 225 PERCENT FOR THE NEXT 15 YEARS,AND THEN 5 PERCENT PER YEAR THEREAFTER.NOTE THAT THE PRESENT VALUE OF THE CASH FLOWS DURING THE INITIAL 15-YEAR PERIOD WOULD BE $605 MILLION AND THE PRESENT VALUE OF THE TERMINAL PERIOD CASH FLOWS WOULD BE $1,005 MILLION.USING A HIGHER REVENUE PER UNIQUE VISITOR ASSUMPTION WOULD RESULT IN A SLOWER REQUIRED ANNUAL GROWTH RATE IN CASH FLOWS TO EARN THE 10 PERCENT COST OF EQUITY.HOWEVER,A HIGHER DISCOUNT RATE MIGHT BE APPROPRIATE TO REFLECT YOUTUBE'S HIGHER INVESTMENT RISK.USING A HIGHER DISCOUNT RATE WOULD REQUIRE REVENUE GROWTH TO BE EVEN FASTER TO ACHIEVE AN NPV EQUAL TO ZERO.GOOGLE COULD EASILY HAVE PAID CASH,ASSUMING THAT THE YOUTUBE OWNERS WOULD PREFER CASH TO GOOGLE STOCK.PERHAPS GOOGLE SAW ITS STOCK AS OVERVALUED AND DECIDED TO USE IT NOW TO MINIMIZE THE NUMBER OF NEW SHARES THAT IT WOULD HAVE HAD TO ISSUE TO ACQUIRE YOUTUBE,OR PERHAPS YOUTUBE SHAREHOLDERS SIMPLY VIEWED GOOGLE STOCK AS MORE ATTRACTIVE THAN CASH.WITH YOUTUBE HAVING ACHIEVED MARGINAL PROFITABILITY IN 2010,IT WOULD APPEAR THAT THE VALUATION ASSUMPTIONS IMPLICIT IN GOOGLE'S INITIAL VALUATION OF YOUTUBE MAY,INDEED,HAVE BEEN HIGHLY OPTIMISTIC.WHILE YOUTUBE CONTINUES TO BE WILDLY SUCCESSFUL IN TERMS OF THE NUMBER OF SITE VISITS,WITH UNIQUE MONTHLY VISITS HAVING INCREASED ALMOST SIX FOLD FROM THEIR 2006 LEVEL,IT APPEARS TO BE DISAPPOINTING AT THIS JUNCTURE IN TERMS OF PROFITABILITY AND CASH FLOW.THE TRAFFIC CONTINUES TO GROW AS A RESULT OF INTEGRATION WITH SOCIAL NETWORKS SUCH AS FACEBOOK AND INITIATIVES SUCH AS THE ABILITY TO SEND CLIPS TO FRIENDS AS WELL AS TO RATE AND COMMENT ON VIDEOS.MOREOVER,YOUTUBE IS SHOWING SOME PROGRESS IN IMPROVING PROFITABILITY BY CONTINUING TO EXPAND ITS INDEX OF PROFESSIONALLY PRODUCED PREMIUM CONTENT.NEVERTHELESS,ON A STAND-ALONE BASIS,IT IS PROBLEMATIC THAT YOUTUBE WILL EARN GOOGLE'S COST OF EQUITY.HOWEVER,AS PART OF A BROADER GOOGLE STRATEGY INVOLVING MULTIPLE ACQUISITIONS TO ATTRACT ADDITIONAL TRAFFIC TO GOOGLE AND TO PROMOTE THE BRAND,THE PURCHASE MAY INDEED MAKE SENSE..DISCUSSION QUESTIONS:

Question 2

All of the following are true for market based valuation methods except for which of the following?
A) Assumes that markets are efficient such that current values reflect all the information currently known about the business
B) Current values represent what a willing buyer and seller are willing to pay for a business in the absence of full information
C) Market based methods are always superior to discounted cash flow techniques
D) Include comparable company and recent transactions methods
E) Include the tangible book value approach

Accepted Answer

Market based methods are not always superior to discounted cash flow techniques. The choice between market based methods and discounted cash flow techniques depends on the circumstances of the valuation, the quality of information available, and the reliability of the inputs.

Question 3

The purchase price paid for YouTube represented more than one percent of Google's then market value.If you were a Google
shareholder,how might you have evaluated the wisdom of the acquisition?

Accepted Answer

The answer of The purchase price paid for YouTube represented...

Question 4

What is the appropriate cost of equity for discounting future cash flows? Should it be Google's or YouTube's? Explain your
answer.

Accepted Answer

The answer of What is the appropriate cost of equity...

Question 5

Which of the following represent limitations of real options?
A) Key assumptions often are very difficult to quantify, especially volatility
B) Project delays may incur significant opportunity costs
C) Options often are not independent; therefore, selecting one option may foreclose other options
D) Often requires complex modeling
E) All of the above

Accepted Answer

All of the options listed represent limitations of real options. Key assumptions like volatility can be difficult to quantify, delays in a project can incur opportunity costs, options are often not independent which means selecting one may lead to the foreclosing of other options, and real options often require complex modeling.

Question 6

Which of the following is not generally considered a valuation method?
A) Discounted cash flow method
B) Comparable companies' method
C) Share exchange ratio method
D) Liquidation value method
E) Comparable transaction's method

Accepted Answer

Share exchange ratio method is not generally considered a valuation method. It is a method used in mergers and acquisitions to determine the ratio at which the shares of the two companies will be exchanged. The other options listed are all commonly used valuation methods.

Question 7

Which of the following represent advantages of the comparable companies' valuation method?
A) Uses the most accurate market-based valuation at a point in time
B) Valuations need to be adjusted to reflect control premiums
C) Adjusts for risk of future cash flows
D) Adjusts for the timing of future cash flows
E) A & B only

Accepted Answer

The comparable companies' valuation method uses the most accurate market-based valuation at a point in time, which is an advantage. The other options listed are not advantages of the comparable companies' valuation method.

Question 8

Case Study Short Essay Examination Questions
A Real Options' Perspective on Microsoft's Dealings with Yahoo
In a bold move to transform two relatively weak online search businesses into a competitor capable of challenging market leader Google, Microsoft proposed to buy Yahoo for $44.6 billion on February 2, 2008. At $31 per share in cash and stock, the offer represented a 62 percent premium over Yahoo's prior day closing price. Despite boosting its bid to $33 per share to offset a decline in the value of Microsoft's share price following the initial offer, Microsoft was rebuffed by Yahoo's board and management. In early May, Microsoft withdrew its bid to buy the entire firm and substituted an offer to acquire the search business only. Incensed at Yahoo's refusal to accept the Microsoft bid, activist shareholder Carl Icahn initiated an unsuccessful proxy fight to replace the Yahoo board. Throughout this entire melodrama, critics continued to ask how Microsoft could justify an offer valued at $44.6 billion when the market prior to the announcement had valued Yahoo at only $27.5 billion.
Microsoft could have continued to slug it out with Yahoo and Google, as it has been for the last five years, but this would have given Google more time to consolidate its leadership position. Despite having spent billions of dollars on Microsoft's online service (Microsoft Network or MSN) in recent years, the business remains a money loser (with losses exceeding one half billion dollars in 2007). Furthermore, MSN accounted for only 5 percent of the firm's total revenue at that time.
Microsoft argued that its share of the online Internet search (i.e., ads appearing with search results) and display (i.e., website banner ads) advertising markets would be dramatically increased by combining Yahoo with MSN. Yahoo also is the leading consumer email service. Anticipated cost savings from combining the two businesses were expected to reach $1 billion annually. Longer term, Microsoft expected to bundle search and advertising capabilities into the Windows operating system to increase the usage of the combined firms' online services by offering compatible new products and enhanced search capabilities.
The two firms have very different cultures. The iconic Silicon Valley-based Yahoo often is characterized as a company with a free-wheeling, fun-loving culture, potentially incompatible with Microsoft's more structured and disciplined environment. Melding or eliminating overlapping businesses represents a potentially mind-numbing effort given the diversity and complexity of the numerous sites available. To achieve the projected cost savings, Microsoft would have to choose which of the businesses and technologies would survive. Moreover, the software driving all of these sites and services is largely incompatible.
As an independent or stand-alone business, the market valued Yahoo at approximately $17 billion less than Microsoft's valuation. Microsoft was valuing Yahoo based on its intrinsic stand-alone value plus perceived synergy resulting from combining Yahoo and MSN. Standard discounted cash flow analysis assumes implicitly that, once Microsoft makes an investment decision, it cannot change its mind. In reality, once an investment decision is made, management often has a number of opportunities to make future decisions based on the outcome of things that are currently uncertain. These opportunities, or real options, include the decision to expand (i.e., accelerate investment at a later date), delay the initial investment, or abandon an investment. With respect to Microsoft's effort to acquire Yahoo, the major uncertainties dealt with the actual timing of an acquisition and whether the two businesses could be integrated successfully. For Microsoft's attempted takeover of Yahoo, such options included the following:
Base case. Buy 100 percent of Yahoo immediately.
Option to expand. If Yahoo were to accept the bid, accelerate investment in new products and services contingent on the successful integration of Yahoo and MSN.
Option to delay. (1) Temporarily walk away keeping open the possibility of returning for 100 percent of Yahoo if circumstances change, (2) offer to buy only the search business with the intent of purchasing the remainder of Yahoo at a later date, or (3) enter into a search partnership, with an option to buy at a later date.
Option to abandon. If Yahoo were to accept the bid, spin off or divest combined Yahoo/MSN if integration is unsuccessful.
The decision tree in the following exhibit illustrates the range of real options (albeit an incomplete list) available to the Microsoft board at that time. Each branch of the tree represents a specific option. The decision-tree framework is helpful in depicting the significant flexibility senior management often has in changing an existing investment decision at some point in the future.
With neither party making headway against Google, Microsoft again approached Yahoo in mid-2009, which resulted in an announcement in early 2010 of an internet search agreement between the two firms. Yahoo transferred control of its internet search technology to Microsoft in an attempt to boost its sagging profits. Microsoft is relying on a 10-year arrangement with Yahoo to help counter the dominance of Google in the internet search market. Both firms hope to be able to attract more advertising dollars paid by firms willing to pay for links on the firms' sites.  Case Study Short Essay Examination Questions
Merrill Lynch and BlackRock Agree to Swap Assets
During the 1990s, many financial services companies began offering mutual funds to their current customers who were pouring money into the then booming stock market. Hoping to become financial supermarkets offering an array of financial services to their customers, these firms offered mutual funds under their own brand name. The proliferation of mutual funds made it more difficult to be noticed by potential customers and required the firms to boost substantially advertising expenditures at a time when increased competition was reducing mutual fund management fees. In addition, potential customers were concerned that brokers would promote their own firm's mutual funds to boost profits.
This trend reversed in recent years, as banks, brokerage houses, and insurance companies are exiting the mutual fund management business. Merrill Lynch agreed on February 15, 2006, to swap its mutual funds business for an approximate 49 percent stake in money-manager BlackRock Inc. The mutual fund or retail accounts represented a new customer group for BlackRock, founded in 1987, which had previously managed primarily institutional accounts.
At $453 billion in 2005, BlackRock's assets under management had grown four times faster than Merrill's $544 billion mutual fund assets. During 2005, BlackRock's net income increased to $270 million, or 63 percent over the prior year, as compared to Merrill's 27 percent growth in net income in its mutual fund business to $397 million. BlackRock and Merrill stock traded at 30 and 19 times estimated 2006 earnings, respectively.
Merrill assets and net income represented 55 percent and 60 percent of the combined BlackRock and Merrill assets and net income, respectively. Under the terms of the transaction, BlackRock would issue 65 million new common shares to Merrill. Based on BlackRock's February 14, 2005, closing price, the deal is valued at $9.8 billion. The common stock gave Merrill 49 percent of the outstanding BlackRock voting stock. PNC Financial and employees and public shareholders owned 34 percent and 17 percent, respectively. Merrill's ability to influence board decisions is limited, since it has only 2 of 17 seats on the BlackRock board of directors. Certain "significant matters" require a 70 percent vote of all board members and 100 percent of the nine independent members, which include the two Merrill representatives. Merrill (along with PNC) must also vote its shares as recommended by the BlackRock board.
-Merrill owns less than half of the combined firms,although it contributed more than one- half of the combined firms' assets and net income.Discuss how you might use DCF and relative valuation methods to determine Merrill's proportionate ownership in the combined firms.

Accepted Answer

The answer of Case Study Short Essay Examination Questions
A Real...

Question 9

Limitations in applying the comparable companies' method of valuation include which of the following?

A) Finding truly comparable companies is difficult

B) The use of market-based methods can result in significant under- or overvaluation during periods of declining or rising stock markets
C) Market-based methods can be manipulated easily, because the methods do not require a clear statement of assumptions with respect to risk, growth, or the timing or magnitude of future earnings and cash flows.
D) A, B, & C
E) A & B only

Accepted Answer

All three options listed (A, B, and C) are limitations of applying the comparable companies' method of valuation. Finding truly comparable companies can be difficult due to differences in industry, size, and operations. Market-based methods, such as this one, can result in significant under- or overvaluation during periods of market volatility. Lastly, market-based methods can be manipulated easily because they do not require clear assumptions regarding risk, growth, or future earnings and cash flows.

Question 10

What are the key valuation assumptions implicit in the valuation method discussed in this case study?

Accepted Answer

The answer of What are the key valuation assumptions implicit...

Question 11

Intangible assets often constitute a substantial source of value to the acquiring firm.Which of the following are not generally considered intangible assets?
A) Patents and technical know-how
B) Warranty and contingent claims
C) Trademarks and customer lists
D) Covenants not to compete and franchises
E) Copyrights and software

Accepted Answer

Warranties and contingent claims are typically considered liabilities rather than assets, as they represent a potential future cost or obligation for the acquiring firm. The other options listed all represent types of intangible assets that could contribute to the value of a company being acquired.

Question 12

In determining the purchase price for an acquisition target,which one of the following valuation methods does not require the addition of a purchase price premium?
A) Discounted cash flow method
B) Comparable companies' method
C) Comparable industries' method
D) Recent transactions' method
E) A & B only

Accepted Answer

The answer of In determining the purchase price for an...

Question 13

The tangible book value or equity per share method is applicable primarily to the following industries:
A) Steel and financial services
B) Distribution and financial services
C) Electric and natural gas utilities
D) Coal and copper mining
E) Space and defense

Accepted Answer

The answer of The tangible book value or equity per...

Question 14

Which of the following is not true about the liquidation/break-up valuation methods?
A) Highly diversified companies are often valued in terms of the sum of the standalone values of their operating units
B) The calculation of such values is heavily dependent on the skill of appraisers who are intimately familiar with the operations to be liquidated.
C) Assets can sometimes be liquidated in an orderly fashion.
D) Legal, appraisal, and consulting fees may comprise a substantial share of the total proceeds of the sale of the assets
E) The liquidation value of most of the firm's assets is about the same.

Accepted Answer

The liquidation value of different assets will vary depending on their condition, usefulness, and market demand. Therefore, the liquidation value of most of the firm's assets will not be the same.

Question 15

Which one of the following is not a commonly used method of valuing target firms?
A) Discounted cash flow
B) Comparable companies method
C) Recent transactions method
D) Asset oriented method
E) Share exchange ratio method

Accepted Answer

Share exchange ratio method is not a commonly used method of valuing target firms. This method is mainly used in the context of exchange offers, where the acquirer offers its own shares in exchange for the target company's shares. The other methods listed (discounted cash flow, comparable companies method, recent transactions method, and asset oriented method) are commonly used in traditional M&A valuation.

Question 16

What alternative valuation methods could Google have used to justify the purchase price it paid for YouTube? Discuss the
advantages and disadvantages of each.

Accepted Answer

The answer of What alternative valuation methods could Google have...

Question 17

To what extent might the use of stock by Google have influenced the amount they were willing to pay for YouTube? How might
the use of "overvalued" shares impact future appreciation of Google stock?

Accepted Answer

The answer of To what extent might the use of...

Question 18

Which of the following statements about the comparable companies' valuation method is not true?
A) Requires the use of firms that are "substantially" similar to the target firm
B) Uses market based rather than cash flow based valuations
C) Often used as the basis of investment banker fairness opinions
D) Generally provides the most accurate valuation method
E) Provides an estimate of the target firm at a moment in time.

Accepted Answer

The statement that the comparable companies' valuation method generally provides the most accurate valuation method is not true. While this method can offer a good estimate of a firm's value, it is just one of many valuation methods available and its accuracy will depend on the validity of the comparable companies chosen and the specific circumstances of the target firm being valued.

Question 19

Which of the following represent options available to managers in making investment decisions?
A) Delay initial investment
B) Accelerate cumulative investment
C) Abandon the investment at a later date
D) A & B only
E) A, B, & C

Accepted Answer

Managers have the option to delay initial investment, accelerate cumulative investment, or abandon an investment at a later date. All three options should be carefully considered based on factors such as expected returns, risk tolerance, and market conditions. Therefore, the best choice is to have all three options available for managers to choose from.

Question 20

Which of the following is not true about real options?
A) All investment decisions contain identifiable and measurable real options.
B) Under certain circumstances, management may be able to delay their initial investment in a project or M&A.
C) Real options may be valued as the expected value of various alternative cash flow projections.
D) Real options can be valued using the Black-Sholes method.
E) None of the above

Accepted Answer

Not all investment decisions necessarily contain identifiable and measurable real options. Real options only exist in certain circumstances, such as when there is uncertainty about the future cash flows or when management has flexibility in making decisions related to the investment.

Quiz 8: Relative,asset-Oriented,and Real Option Valuation Basics

Which of the following are examples of intangible assets that may have value to the acquiring company?

All of the following are true for market based valuation methods except for which of the following?

The purchase price paid for YouTube represented more than one percent of Google's then market value.If you were a Google shareholder,how might you have evaluated the wisdom of the acquisition?

What is the appropriate cost of equity for discounting future cash flows? Should it be Google's or YouTube's? Explain your answer.

Which of the following represent limitations of real options?

Which of the following is not generally considered a valuation method?

Which of the following represent advantages of the comparable companies' valuation method?

Limitations in applying the comparable companies' method of valuation include which of the following?

What are the key valuation assumptions implicit in the valuation method discussed in this case study?

Intangible assets often constitute a substantial source of value to the acquiring firm.Which of the following are not generally considered intangible assets?

In determining the purchase price for an acquisition target,which one of the following valuation methods does not require the addition of a purchase price premium?

The tangible book value or equity per share method is applicable primarily to the following industries:

Which of the following is not true about the liquidation/break-up valuation methods?

Which one of the following is not a commonly used method of valuing target firms?

What alternative valuation methods could Google have used to justify the purchase price it paid for YouTube? Discuss the advantages and disadvantages of each.

To what extent might the use of stock by Google have influenced the amount they were willing to pay for YouTube? How might the use of "overvalued" shares impact future appreciation of Google stock?

Which of the following statements about the comparable companies' valuation method is not true?

Which of the following represent options available to managers in making investment decisions?

Which of the following is not true about real options?