LOS b: Contrast quantitative and qualitative factors in valuation.

Q1. Which of the following would be a qualitative factor in asset valuation?

A)   The Food and Drug Administration has rejected the firm's new patent application.

B)   The new CEO has a reputation for financial gimmickry.

C)   Earnings are down 4% in a quiet market.

Q2. The fact that the CEO has hired his wife as CFO could be what type of factor in the asset valuation analysis?

A)   A qualitative factor.

B)   An internal factor.

C)   A quantitative factor.

Q3. Which of the following would be a quantitative factor in asset valuation?

A)   The CFO has been indicted for fraud.

B)   Required return on corporate bonds has increased.

C)   Top management has turned over often in the last two years.

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Q1. Which of the following would be a qualitative factor in asset valuation?

A)   The Food and Drug Administration has rejected the firm's new patent application.

B)   The new CEO has a reputation for financial gimmickry.

C)   Earnings are down 4% in a quiet market.

Correct answer is B)

Each of the other factors is quantitative in that the analyst can alter the expectations used in the valuation process. Lack of confidence in the inputs, evidenced by the CEO’s reputation, is a qualitative issue that can be expected to lessen the confidence that the analyst has in the valuation.

Q2. The fact that the CEO has hired his wife as CFO could be what type of factor in the asset valuation analysis?

A)   A qualitative factor.

B)   An internal factor.

C)   A quantitative factor.

Correct answer is A)

The close personal relationship between the CEO and CFO may be a qualitative factor affecting the analyst’s confidence in the valuation.

Q3. Which of the following would be a quantitative factor in asset valuation?

A)   The CFO has been indicted for fraud.

B)   Required return on corporate bonds has increased.

C)   Top management has turned over often in the last two years.

Correct answer is B)

The change in the required return on corporate bonds is a quantitative factor that the analyst can incorporate in the valuation model. Both of the remaining factors listed are qualitative factors which may undermine the analyst’s confidence in the valuation.

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