Chapters 8, 10, 11, 12, 13 – BV 201 Review
Chapter 2, Appendix A
1.
Evaluate the Validity of Each Statement relative to the Market Approach
to Valuation
A.
Multiples derived from the transaction prices of similar companies
can be used to calculate an indication for the value of the subject
company’s stock.
B.
Merger and acquisition transactions provide a more accurate
indication of a business value than other valuation methods.
C.
Multiples derived from the stock prices of publicly traded
companies are always more reliable than multiples from mergers
and acquisitions.
D.
Interpreting market transactions requires less judgment on the part
of the valuation analyst than the income approach.
Chapter 15-1
2.
What is the fundamental economic principle underlying the market
approach known as?
Chapter 8-2.
3.
Price/earnings multiples: - how do they work (tear apart formula)
I.
Are the inverse of earnings discount rates
II.
Are the inverse of earnings capitalization rates
III.
Reflect expected earnings growth rates
IV. Assume no growth in earnings
Chapter 11-7
4.
What is a primary advantage of the guideline public company method?
Chapter 8-3
5.
What is a main disadvantage of the guideline public company method?
Chapter 11-8
6.
Which of the following may an appraiser adjust the historical earnings of
both the subject and guideline companies? Why?
A.
B.
C.
D.
Discontinued operations
Nonrecurring events
Different inventory accounting methods
Ongoing officers’ compensation
Chapter 10-1
7.
Assume that inventory is reported on an LIFO basis and you want to
adjust it to more closely represent current values. Given the following
facts, calculate the net effect on retained earnings of this adjustment.
Assume the adjustment is tax-affected.
Tax rate 30%
LIFO reserve $800
Ending FIFO inventory $2,400
A.
B.
C.
D.
E.
($560)
$240
$560
$720
$1,680
Chapter 10-2
8.
Relative to the guideline companies, the subject company’s:
• Net profit margin is higher than the median,
• Total asset turnover is higher than the median, and
• Return on equity is lower than the median.
What does fact pattern indicates regarding the subject company’s relative
position (compared to the median firm)?
Chapters 7 and 10 Analysis
9.
Using the guideline public company method, you are valuing a control
position in a privately held company. Which of the following are possible
adjustments to the subject company (and why might this happen)?
A.
B.
C.
D.
Adjust owner compensation.
Remove excess assets from the operating balance sheet for
separate consideration.
Eliminate nonrecurring income and expense.
Adjust from straight-line depreciation to accelerated depreciation.
Chapter 7-11
10.
Valuation multiples should correctly match a market value indication in
the numerator with an income statement indication in the denominator.
Evaluate which of the following multiples represent valid matching of
the numerator and denominator? Why do you conclude this?
A.
B.
C.
D.
Stock price/EBIT
MVIC/Net income
MVIC/Sales
Stock price/Sales
Chapter 11-2
11.
Which of the following are valid multiples (and why)?
A.
B.
C.
D.
MVIC/Earnings before interest and taxes
MVIC/Net operating profit after tax
MVIC/Pre-tax income
MVIC/Invested capital net cash flow
Chapter 11-2
12.
Explain which market multiple will be useful if the guideline companies’
depreciation and effective tax rates are similar? (why) Which are limited?
A.
B.
C.
D.
Price/Net income
Price/Sales
Price/Book value
Price/Gross profit