ACC 570 - Chapter 17
In litigating bankruptcies, the court may direct the valuation expert to ignore the company's heavy debt load and direct the valuation expert to proceed as if the company had a normal debt load. True/False
True
In trying to determine how many years of data are necessary to perform a business valuation, five years is a commonly used starting point. True/False
True
Like external auditors, business valuation professionals must be independent. True/False
True
Preparing common-sized financial statements and performing ratio analysis of financial statements are examples of "spreading" financial statements. True/False
True
Some valuation methods weight recent period income or cash flows more heavily than older income or cash flows. True/False
True
The "cost approach" to business valuation involves adjusting a company's assets and liabilities up or down to reflect their "fair value". True/False
True
The "investment value" of a business is the value of the business to a specific buyer. True/False
True
The IRS defines "fair market value" as the amount at which property would change hands between a willing seller and a willing buyer then neither is acting under compulsion and when both have knowledge of the relevant facts. True/False
True
The conclusions presented in FASB No. 157 support the FASB's Conceptual Framework No. 2, No. 6, and No. 7. True/False
True
When preforming business valuations, it is essential that the analyst become very familiar with the company and the industry within which it operates. True/False
True
A "minority interest" in a business refers to a business in which the minority stockholder owns just slightly less than 50% of the business. True/False
False
A 100% controlling interest in a business has no impact on the business valuation. True/False
False
Although engagement letters are important for independent auditors they are really not necessary for valuation engagements. True/False
False
Business valuation reports typically identify some period of time over which the report is valid. True/False
False
Business valuations are performed on closely held companies for a variety of reasons, but they are never necessary with publicly traded companies. True/False
False
Dissenting minority stockholders may have to take their dispute to the court. If so, such cases are decided by a special ruling board of the New York Stock Exchange. True/False
False
Employee Stock Ownership Plans (ESOPs) effectively eliminate the need for valuation experts when such plans are in place. True/False
False
IRS Rev. Rul. 59-60 deals with estate tax planning for people who are 59-60 years old. True/False
False
In a typical business valuation report, one exhibit that is seldom used is ratio analysis of the company. True/False
False
In the AICPA's publication, Valuation of Closely Held Businesses, it suggest that balance sheet methods of valuations are preferred over income statement valuation methods. True/False
False
It is common for professional appraisers to work on a "contingent fee" basis True/False
False
Preparing common-sized financial statements and performing ratio analysis of financial statements are examples of customizing financial statements. True/False
False
For estate and gift tax valuation purposes, IRS ruling 59-60 is the primary standard for such purpose. True/False
True
Generally speaking, book value is not considered a business valuation method. True/False
True
Generally, it is conflicts that give rise to the need for valuations. True/False
True
IRS Rev. Rul. 59-60 provides guidelines for valuing closely held businesses. True/False
True
Probably the most comprehensive source of information on financial statements and credit analysis by industry is the Association of Certified Fraud Examiners. True/False
False
The "past transaction method" is one of the cost approach methods of business valuation. True/False
False
The AICPA defines "fair market value" as the amount at which property would change hands between a willing seller and a willing buyer when neither is acting under compulsion and when both have knowledge of the relevant facts. True/False
False
The Statement of Financial Accounting Standards No. 157 deals primarily with addressing unexplained differences in using various valuation methods. True/False
False
The book value method is one of the more commonly used business valuation methods. True/False
False
The main sections of a business valuation report usually include five sections. True/False
False
The most commonly accepted method of valuing businesses is the cost approach. True/False
False
There are three basic business valuation methods. They are the income approach, the market approach, and the book value approach. True/False
False
When making business valuations, one must be careful to ignore the percentage of ownership enjoyed by each owner in the company. True/False
False
When the IRS defines value as "The amount at which property would change hands between a willing seller and a willing buyer when neither is acting under compulsion and when both have knowledge of the relevant facts" it is referring to the concept of "intrinsic value". True/False
False
When using an income method of valuation, it is logical to weigh the older income streams more heavily because the represent more reliable historical data. True/False
False
A certified business appraiser (CBA) and a certified valuation analyst (CVA) are two common certifications that professional valuation analysts hold. True/False
True
The conclusions presented in FASB No. 157 support which FASB Conceptual Framework? a. FASB Conceptual Framework No. 2. b. FASB Conceptual Framework No. 6. c. FASB Conceptual Framework No. 7. d. All of the above. e. None of the above.
All of the above
Preparing common-sized financial statements and performing ratio analyses of financial statements are examples of: a. "Customizing" financial statements. b. "Downsizing" financial statements. c. "Spreading" financial statements. d. "Simplifying" financial statements. e. None of the above.
"Spreading" financial statements
The Indy Company experiences the following annual incomes over the last five years: $60,000, $70,000, $110,000, $150,000, $160,000. A firm like Indy Company commands a 10% discount rate and a price earnings ratio of 10. Using a non-weighted earnings model, what is the value of the firm? a. $550,000. b. $770,000. c. $1,100,000. d. $1,600,000. e. None of the above is correct.
$1,100,000.
Using the facts in question 86, using the average earnings model and using the average price/earnings ratio for similar companies for the five year period, the value of the stock that the shareholder wants to sell to the company is: a. $1,253,333 b. $1,200,000 c. $6,266,667 d. $5,640,000 e. None of the above
$1,200,000
The Indy Company experiences the following annual incomes over the last five years: $60,000, $70,000, $110,000, $150,000, $160,000. A firm like Indy Company commands a 10% discount rate and a price earnings ratio of 10. Using a weighted earnings model that weights the more recent earnings more heavily, what is the value of the firm? a. $550,000. b. $770,000. c. $1,100,000. d. $1,286,667. e. None of the above is correct.
$1,286,667.
Using the facts in question 93, assume the investment group believes that the appropriate discount rate in valuing this investment opportunity should be 12 percent. The estimated value of this investment is: a. $96,980,550 b. $104,839,950 c. $90,003,800 d. $150,000,000 e. None of the above
$150,000,000
Using the facts in question 86, using the average earnings model and using the average price/earnings ratio for similar companies for the five year period, the value of Westwood Manufacturing at the end of year five is: a. $3,500,000 b. $5,013,333 c. $6,266,667 d. $5,640,000 e. None of the above
$5,640,000
Using the facts in question 86, using the average earnings model and using the price/earnings ratio for similar companies for the last two years, the value of Westwood Manufacturing at the end of year five is: a. $6,000,000 b. $5,013,333 c. $6,266,667 d. $5,640,000 e. None of the above
$6,000,000
Using the facts in question 86, giving more weight to the most recent year's earnings and using the average price/earnings ratio of similar companies for the five year period, the value of Westwood Manufacturing at the end of year five is: a. $3,500,000 b. $5,013,333 c. $6,266,667 d. $5,640,000 e. None of the above
$6,266,667
Westwood Manufacturing Company has experienced the following earnings record over the last five years. Year 1 Year 2 Year 3 Year 4 Year 5 Revenue $6,500,000 $6,800,000 $7,300,000 $ 7,500,000 $9,500,000 Cost of goods sold 3,700,000 3,900,000 4,300,000 4,400,000 6,000,000 Gross profit 2,800,000 2,900,000 3,000,000 3,100,000 3,500,000 Operating expenses 2,350,000 2,400,000 2,450,000 2,500,000 2,600,000 Net income $ 450,000 $ 500,000 $ 550,000 $ 600,000 $ 900,000 Westwood is a closely held company with five family members owning stock. The stock is not traded on any stock exchange and none of the shares have ever been sold after the initial sale of the stock from the company to the shareholders. One shareholder wants to sell her stock back to the company and cease any activities with the company. She owns 20 percent of the outstanding shares of the company stock. Similar companies' stock has traded with price/earnings (PE) ratios of 8, 9, 10, 11, and 9 over the past five years. The average earnings for the five year period are: a. $600,000 b. $550,000 c. $650,000 d. $500,000 e. None of the above
$600,000
Using the facts in question 86, using the weighted values to assign more weight to the more recent years would yield a value for the five year period of: a. $600,000 b. $900,000 c. $666,667 d. $533,333 e. None of the above
$666,667
An investment group is considering the acquisition of a well known and respected construction business. In evaluating the business, the investment group estimates annual free cash flows of $10,000,000 per year for the next 10 years. Free cash flows for years 11-30 are estimated to be $15,000,000 per year. Below are some selected values for the present value of an ordinary annuity: Period 9% 10% 11% 12% 1 .91743 .90909 .90009 .89286 2 1.75911 1.73554 1.71252 1.69005 3 2.53130 2.48685 2.44371 2.40183 4 3.23972 3.16986 3.10245 3.03735 5 3.88965 3.79079 3.69590 3.60478 10 6.41766 6.14457 5.88923 5.65022 15 8.06069 7.60608 7.19087 6.81086 20 9.12855 8.51356 7.96333 7.46944 Assume the investment group believes that the appropriate discount rate in valuing this investment opportunity should be based on an average price/earnings ratio that ranges between 9 and 11. The estimated value of this investment is: a. $96,980,550 b. $104,839,950 c. $90,003,800 d. $83,790,500 e. None of the above
$96,980,550
In trying to determine how many years of data are necessary to perform a business valuation, a commonly used starting point is: a. 20 years. b. 5 years. c. 10 years. d. 8 years. e. None of the above.
5 years
The main sections of a business valuation report usually number: a. 7. b. 4. c. 3. d. 8. e. 5.
7
IRS Rev. Rul. 59-60: a. Deals with the valuation of closely held businesses. b. Provides a list of eight factors that should be considered in valuing a closely held business. c. Is particularly useful for valuing closely held businesses in estate and gift tax situations. d. All of the above. e. None of the above.
All of the above
Common features of standards for valuation professionals includes all of the items listed below except: a. Independence. b. A disclosure of limiting conditions. c. A listing of professionals participating in the valuation. d. A statement that the fee may be contingent upon the results of the valuation.
A statement that the fee may be contingent upon the results of the valuation.
The "cost approach" to business valuation involves: a. Adjusting a company's assets and liabilities up or down to reflect their "fair value." b. Adjusting all accounts to their incurred "historical cost." c. Using only income statement accounts. d. A method that is no longer used in business valuations. e. None of the above.
Adjusting a company's assets and liabilities up or down to reflect their "fair value."
"Buy-sell agreements" relate to: a. Most divorce cases. b. All business valuation cases. c. Agreements made by owners of closely held businesses. d. Bankruptcy cases. e. None of the above.
Agreements made by owners of closely held businesses
A "minority interest" in a business: a. Technically is less than a 50-percent ownership in the business. b. Might be worth less than a pro-rata share of the business value. c. May have limited influence in the operations of the business. d. All of the above. e. None of the above.
All of the above
The major business valuation organization that has developed rigorous business valuation standards is: a. The National Association of Business Valuation Analysts (NACVA). b. The American Society of Appraisers (ASA). c. The Institute of Business Appraisers, Inc. (IBA). d. All of the above. e. None of the above.
All of the above
Common reasons for needing valuations of closely held businesses are: a. Estate or gift tax reporting. b. Divorce case distributions. c. The buyout of one or more shareholders. d. Death of a shareholder. e. All of the above are correct.
All of the above are correct
According to FASB No. 157, the changes made to the Statement will improve financial reporting by providing a single definition of fair value, together with a framework for measuring fair value. True/False
True
Business valuations are prepared primarily for closely held businesses. True/False
True
Dissenting minority stockholders may have to take their dispute to the court. If so, such cases are covered by: a. NY Stock Exchange rules and guidelines. b. Applicable state laws. c. Federal code. d. International rules of stock law. e. None of the above.
Applicable state laws
One type of agreement that can have a direct impact on the valuation of parts of a closely held business is a: a. Bankruptcy agreement. b. Medical malpractice agreement. c. Buy-sell agreement. d. Discounted cash flow agreement. e. None of the above is correct.
Buy-sell agreement.
A valuation professional who holds a CVA has the credentials of a: a. Continuous valuation analyst. b. Cost valuation of assets. c. Certified valuation analyst. d. None of the above is correct.
Certified valuation analyst.
Using the facts in question 93, if the price/earnings ratio used by the investment group to value the investment opportunity changed from a P/E ratio of 9 to a P/E ratio of 11, the estimated value of the investment would: a. Increase. b. Decrease. c. Could go up or down. d. Cannot be determined from the data given. e. None of the above.
Decrease.
If a shareholder in a closely held business sells his or her stock, the valuation professional typically would: a. Increase the value somewhat to get the minority owner out of the business. b. Do a standard professional valuation in which the minority interest issue is ignored. c. Discount the value somewhat to reflect the diminished value of being a minority interest holder. d. Always use a historical cost basis analysis to take conservatism into account. e. None of the above is correct.
Discount the value somewhat to reflect the diminished value of being a minority interest holder.
The most common measure of value is: a. Fair market value. b. Intrinsic value. c. Historical cost value. d. Majority stockholder value. e. None of the above is true.
Fair market value.
The Statement of Financial Accounting Standards No. 157 deals primarily with: a. Fair value measurements used in financial statement reporting. b. Using multiple concepts of the measurement of value. c. Addressing unexplained differences in using various valuation methods. d. Superseding all other authoritative pronouncements relating to valuations. e. None of the above.
Fair value measurements used in financial statement reporting. b. Using multiple concepts of the measurement of value
"Buy-sell Agreements" relate to divorce cases. True/False
False
"Equitable Distribution" in divorce cases is driven by the Uniform Commercial Code. True/False
False
"Intrinsic value" is not one of the six standards of value used in valuation situations. True/False
False
The first several sections in a valuation report usually contains: a. Exhibits, summary, and introduction. b. Company information, valuation methodology, and financial condition of the company. c. Front pages, introduction, and company information. d. Valuation methodology, valuation conclusions, and exhibits.
Front pages, introduction, and company information.
The creation of business valuation standards has led to: a. Fewer lawsuits than before. b. Greater professionalism within the valuation community. c. Higher fees for business valuation professionals. d. Greater understanding among the public of the results of business valuation reports. e. None of the above.
Greater professionalism within the valuation community
Definitions and valuation terms often are one of the exhibits in a typical valuation report. True/False
True
The most commonly accepted methods of business valuation use some form of: a. Balance sheet analysis. b. Historical cost basis. c. Book value method. d. Income statement approach.
Income statement approach
"Equitable distribution" in divorce cases is driven by: a. The Uniform Commercial Code nationally. b. Individual state laws. c. Supreme Court rulings. d. Professional standards. e. None of the above.
Individual state laws.
One/some of the most important IRS guidelines for gift and estate tax purposes: a. Are the regulations for research and experimentation tax credits. b. Is the 2006 Tax Simplification Act. c. Is the IRS publication on the Sale of Closely Held Businesses. d. Is IRS Rev. Rul. 59-60. e. None of the above.
Is IRS Rev. Rul. 59-60.
The "capitalization of excess earnings method" is: a. One of the market approach methods of business valuation. b. Requires additional investment by the seller. c. Is actually a hybrid of the cost and income approaches to business valuation. d. Is also called the discounted future cash flow method. e. None of the above.
Is actually a hybrid of the cost and income approaches to business valuation.
It is sometimes stated the use of book value in valuations: a. Is logical and appropriate because the values in the balance sheet are based on incurred historical costs. b. Is not really a valuation method. c. Always acceptable if the valuation expert uses adjusted book value. d. Always omits intangible assets.
Is not really a valuation method.
Using the facts in question 86, assume for this question that the computed value of the 20 percent share of the company is $1,400,000. Because the share being sold is 20 percent of a closely held company, the value of the stock: a. Might be higher than $1,400,000 because the shareholder is one of only a few shareholders in the company. b. Might be lower than $1,400,000 because the shareholder owns a minority share of stock in a closely held company without a regular market in which to make a sale. c. Might be subject to special SEC regulations before the stock can be valued and sold. d. Is completely unrelated to the fact that the stock is a minority interest in a closely held company.
Might be lower than $1,400,000 because the shareholder owns a minority share of stock in a closely held company without a regular market in which to make a sale
"Fair market value" is the amount at which property would change hands between a willing seller and a willing buyer when neither is acting under compulsion and when both have knowledge of the relevant facts. This is the definition provided by: a. The American Institute of Certified Public Accountants (AICPA). b. The Association of Certified Fraud Examiners (ACFE). c. The Institute of Management Accounting (IMA). d. The Risk Management Association (RMA). e. None of the above.
None of the above.
In a typical business valuation report, one exhibit that is seldom used is: a. Limiting conditions. b. Definitions of valuation terms. c. Ratio analysis of the company. d. Common size balance sheets of the company. e. None of the above.
None of the above.
Generally speaking "book value" is considered to be: a. Not really a valuation method. b. The best measure of value because it reflects actual accounting measurements. c. A good valuation method but it usually provides a conservative measure of value. d. The same thing as market value. e. None of the above.
Not really a valuation method. b. The best measure of value because it reflects actual accounting measurements
A 100-percent controlling interest in a business: a. Seldom happens. b. Often includes a valuation premium for control. c. May be investigated by the Securities and Exchange Commission (SEC). d. Has the same valuation impact as having a minority interest in the business. e. None of the above.
Often includes a valuation premium for control.
Dissenting minority stockholders may have to take their dispute to the court, which will be decided by governing state law. True/False
True
Using the facts in question 93, assume the investment group believes that the appropriate discount rate in valuing this investment opportunity should be 11 percent. Additionally, new estimated cash flows increase from $15,000,000 per year to $20,000,000 per year for years 11-20, and estimated cash flows for years 1-10 decrease to $8,000,000 per year. If the investment can be acquired for $95,000,000 the investment group should: a. Acquire the investment because the present value of the investment is $1,980,550 more than the cost of the investment. b. Cannot be determined from the information given. c. Pass on the investment because the present value of the investment is $6,404,160 less than the cost of the investment. d. Acquire the investment because the cost is $95,000,000 and the estimated total value of the cash inflows over the next 20 years is $280,000,000.
Pass on the investment because the present value of the investment is $6,404,160 less than the cost of the investment.
All of the items listed below are elements of business valuation standards except: a. Independence. b. Possession of a master's degree in business by the business valuation analyst. c. Fee not contingent on appraised value. d. List the information sources used. e. None of the above.
Possession of a master's degree in business by the business valuation analyst.
According to FASB No. 157, the changes made to the Statement will improve financial reporting by: a. Expanding the number of acceptable methods of valuation. b. Creating a single formula for performing any kind of valuation. c. Providing a single definition of fair value, together with a framework for measuring fair value. d. Eliminating any possibility for interpretations of value measurements. e. None of the above.
Providing a single definition of fair value, together with a framework for measuring fair value.
A major challenge in doing valuations in a divorce case is: a. Dealing with all of the strife and bickering that goes on in divorce cases. b. Dealing with the child custody issues. c. Figuring out what assets to sell and what assets to keep. d. Searching for hidden assets that a spouse may try to hide from the court. e. None of the above is correct.
Searching for hidden assets that a spouse may try to hide from the court
Probably the most comprehensive source of information on financial statements and credit analysis by industry is: a. The American Institute of Certified Public Accountants (AICPA). b. The Association of Certified Fraud Examiners (ACFE). c. The Institute of Management Accounting (IMA). d. The Risk Management Association (RMA). e. None of the above.
The Risk Management Association (RMA)
The three main valuation methods include all of the following except: a. The income approach. b. The cost approach. c. The market approach. d. The appraisal approach.
The appraisal approach.
In litigating bankruptcies: a. Business valuations make no sense. b. The court might direct the valuation expert to ignore the company's excessive debt and value the company as if it had a normal debt level. c. The court prohibits many types of business valuation methods. d. The valuation expert must be very conservative in his/her valuation amounts. e. None of the above.
The court might direct the valuation expert to ignore the company's excessive debt and value the company as if it had a normal debt level.
"Investment value" is: a. The general market value of a business. b. The market value of a listed company. c. The value of the business to the current owner. d. The value of the business to a specific buyer. e. None of the above.
The value of the business to a specific buyer.
A favorite method of business valuation is the use of free cash flows. With this approach, free cash flows are discounted to their present value. A major challenge with this method is: a. It is hard to determine the correct discount factor. b. There is not a consensus on the definition of free cash flows. c. Cash flows are not as good a predictor of value as reported net income. d. The Fed keeps changing the discount rate. e. None of the above is correct.
There is not a consensus on the definition of free cash flows
"Buy-sell Agreements" relate to agreements made by owners of closely held businesses. True/False
True
"Equitable Distribution" in divorce cases is driven by individual state laws. True/False
True
A "minority interest" in a business may have less value than its pro-rata share of the total business. True/False
True
When the IRS defines value as "The amount at which property would change hands between a willing seller and a willing buyer when neither is acting under compulsion and when both have knowledge of the relevant facts" it is referring to the concept of "fair market value". True/False
True
When valuing minority interests in a closely held business, one should assign less value to those shares than would appear appropriate given their amount of interest. True/False
True
IRS Rev. Rul. 59-60: a. Was promulgated in 1959. b. Deals with companies that are listed on major stock exchanges. c. Requires that all people over 59-60 must start drawing retirement funds. d. Seldom applies to business valuation issues. e. None of the above.
Was promulgated in 1959
