valuation quiz

What are the three types of standards of value

FMV, Fair Value & Strategic/Investment Value

What are the key financial variables

I measure drugs

What does the I stand for in I measure drugs

Indentification and definition of appropriate benefit stream

What are the two lowest areas of risk

U.S. treasury obligations & A to C rated corporate bonds

Capitalization (Cap) rate

a divisor (or multiplier) used to convert defined stream of income to an indicated value, (the expected yield rate on an investment)

How many periods is discounting applied to

a finite number

The amount that will compensate an owner involuntarily deprived of property, commonly there is

a willing buyer may be more knowledgeable than the seller

Typical Normalizing adjustment

add back to owner perks

Terminal value

applicable when the projection includes a time of change followed by a time of sustainable long term growth

Valuator must determine which to use in regards to historical vs. projected income

are future expectation consistent with history and the purpose of valuation

Specific adjustment for inventory valuation

are there obsolete goods in inventory/ pricing

Investment value principle (value)=

benefit stream/(required rate of return)

Alternatives Principle

both buyer and seller have alternatives

What is the valuation using discount process

calculate PV of future projections for all years projected then capitalize the benefit stream in the final year of the projection = terminal value then reduce to PV

Discounting

calculates the present value of a stream of future income

___________ is the required "yield" on the investment'

capitalization/ discount rate

Historical vs. projected income consideration

changes in regulations

Normalized Financial Statement are used for what three things

comparison with industry data, making projections, & indication of true level of benefits

What are the two types of income for owners of a small business

compensation to work performed (day to day management), & return on investment

Willing Buyer & Selleer have no

compulsion to buy or sell

Typical Normalizing adjustment

consider if adjustments need to flow back to prior period

What is meant by the nature of interest being valued

controlling or non-controlling

Principle of Substitution (value)=

cost of equally desirable substitute

What does the D stand for in I measure drugs

determination of an appropriate capitalization/ discount rate

Capitalization Rate=

discount rate - long-term sustainable growth rate

Application of accounting principles results in

distortions of the economic status of the company

Normalized financial statements adjust to ______ reality and FS uses as a _____for this purpose

economic & starting point

Is a valuation for an entire or partial interest in a closely held business

either or

Non-Linear

estimated future benefits are expected to grow or decline at a variable rate

Investment Risk consideration

exit strategy

Historical vs. projected income consideration

expected economic changes

There is a direct relationship between what someone would pay for an investment and the ______& the ______

expected return and anticipated risks

Many consider fair value to be

fair market value without discounts

What standard of value is the focus of this class

fair market value; (FMV)

Linear

future benefits expected to remain constant or grow/decline at a constant rate

What are NCF considerations

future working capital needs, capital asset additions, & changes in long term debt necessary to support projected sales

What are the 4 different premises of value

going concern value, book value, liquidation value and replacement value

For non-linear projection methods, future benefits are expected to _____ or______at a _____rate

grow, decline & non-linear

What are examples of intangible elements of Going Concern Value a resultant

having a trained work force, an operational plant, necessary licenses, systems and procedures in place

What are assets generally recorded at

historical cost, net of any accumulated depreciation and/ or value allowances, and liabilities are generally recorded at face value

What are the three types of GAAP distortions

historical cost, revenue recognition principle, and matchin principle

Historical vs. projected income consideration

history may be considered more accurate than projections

What is meant by the purpose of valuation

i.e. if the valuation is subject to contractually agreed valuation method

Historical vs. projected income consideration

is a change in operations anticipated

Historical vs. projected income consideration

is company new

According to the FASB, fair value

is the price that would be received for an asset or paid to transfer a liability in a transaction between marketplace participants at the measurement date

What is the first step in any valuation engagement

is to determine the purpose of the valuation

What is the capitalization rate with no growth

it is equal to the discount rate

Investment Risk consideration

knowledge of investment

Historical vs. projected income consideration

management expectations

What does the M stand for in I measure drugs

measurement of appropriate benefit stream

Typical Normalizing adjustment

method of accounting (LIFO, FIFO)

What are the two components to defining the benefit stream

nature of interest being valued & purpose of valuation

Is book value a proper basis for business valuation

no

Willing Buyer & Seller

no specific person or company is buyer

What are personal preference assets

office space, autos, etc.

Liquidation can be either "____" or "____"

orderly or forced

Investment Risk consideration

owner time commitment

What are the four closely held business distortions

perks, understatement/overstatement of salaries, family members on payroll, personal preference assets

What are the four issues related to the use of Net Cash Flows

preferred for our purposes, represents what investors are really looking for, data used for discounts is based on net cash flows & NCF considerations

What are the other methods of projecting cash flows

projected growth rate (increasing at steady rate & trend-line)

A valuation takes into account both____and____tangible business being valued

quantitative and qualitative

Discount rate

rate of return to convert series of future income amounts to present value

In a Willing Buyer & Seller situation both parties have what kind of knowledge

reasonable knowledge of relevant facts

Replacement value

refers to the current cost of a similar new property having the nearest equivalent utility to the property being valued

Normalizing financial statements

refers to the process of indentifying and adjusting for financial data which may distort the financial results of a company

Two valuations prepared by objective and qualified valuators should show

relatively close valuation amounts

What value is linked most typically to property insurance coverage

replacement value

Typical Normalizing adjustment

restatement of other expenses to market

Typical Normalizing adjustment

restatement of owner salaries to market

Investors expect _____ on their investment

return

Investment Risk consideration

risk of attaining anticipated income/cash flow return

Investment Risk consideration

risk to principle

Specific adjustments for warranty liabilities

small companies do not record

All valuations require selection of a _____ __&_______

standard of value & premise of value

Historical vs. projected income consideration

state or other legal requirements

What are the two valuation purposes

tax valuations & non-tax valuations

Specific adjustment for depreciation

tax vs. FS vs. useful life (objective is to adjust to realistic method)

Value of an interest in a closely held business typically considered to be equal to

the future benefits what will be received from the business discounted at present at the appropriate discount rate

What premise of value is the focus of class

the going concern value

Liquidation value

the net amount that would be realized if the business terminated and the assets are sold piecemeal

What is the IRS definition of FMV

the price at which the property would change hands between a willing buyer and a willing seller, when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.

Definition of Going concern value

the value of a business enterprise that is expected to continue to operate into the indefinite future

Strategic/Investment Value

the value to a particular investor based on individual investment requirement and expectations

Risk affect investment value

there is a direct relationship between what someone would pay for an investment and the expected return and the anticipated risks

A valuation is a process

to establish a value

Fair value is a legal term left

to judicial interpretation

Book value=

total net assets - total liabilities

Typical Normalizing adjustment

transactions not expected in future (ex: discontinued operations)

Unweighted average

used when past earnings represented and no pattern indicating any year more representative than another

Weighted average

used when there is a pattern which can be extrapolated into the future

The valuation purpose can affect the

value

Terminal value

value of the company at the end of the last year for which the benefit stream was projected, (= capitalized earnings in last year reduced to PV at the valuation date)

What are the two highest areas of risk

venture capital investments, small business common stock, & small common stock mutual fund

Specific adjustments for interest-free loans to shareholders

verify the status, is it really a loan and is it collectible?

Specific adjustments for compensation of owners

what if not taking salary or taking too much?

Specific adjustments for allowance for doubtful accounts

what is really collectible

What are the two questions asked in regards to discounting/ capitalizing earnings

where earning expected to increase at a steady rate consistent with inflation or expected to increase or decrease at a rate different from inflation

Projected cash flows (discounted cash flows method) are projected for specific number of _____ then determine _______

years, terminal value (how many years)

Are interest free loans from shareholders specific adjustments

yes