LOS f: Contrast the going-concern and non-going concern assumptions in valuation.

Q1. The present value of expected future cash flows is the firm's:

A)   going-concern value.

B)   terminal value.

C)   liquidation value.

Q2. A valuation of a firm based on the assumption that the firm will continue to operate is referred to as its:

A)   going-concern value.

B)   operating value.

C)   status quo value.

Q3. A comparison between a firm’s going-concern valuation and its liquidation value will show that the going-concern value will always be:

A)   greater than the liquidation value.

B)   equal to the present value of the expected continued operation of the firm.

C)   less than the liquidation value.

Q4. Liquidation value is the:

A)   market value of the total assets less the market value of the total liabilities.

B)   present value of future cash flow less the possible liquidation cost.

C)   cash generated by terminating a business and selling its assets.

Q5. A valuation of a firm based on the current market price of its assets is referred to as the firm’s:

A)   liquidation value.

B)   going-concern value.

C)   operating value.

LOS f: Contrast the going-concern and non-going concern assumptions in valuation. fficeffice" />

Q1. The present value of expected future cash flows is the firm's:

A)   going-concern value.

B)   terminal value.

C)   liquidation value.

Correct answer is A)

Going-concern value is the present worth of expected future cash flows generated by a business.

Q2. A valuation of a firm based on the assumption that the firm will continue to operate is referred to as its:

A)   going-concern value.

B)   operating value.

C)   status quo value.

Correct answer is A)

The going-concern value is based on the assumption that the firm will continue to operate and the firm’s value is the present value of its future dividends.

Q3. A comparison between a firm’s going-concern valuation and its liquidation value will show that the going-concern value will always be:

A)   greater than the liquidation value.

B)   equal to the present value of the expected continued operation of the firm.

C)   less than the liquidation value.

Correct answer is B)

It is not possible to state the relationship between the going-concern value and the liquidation value without examining the prospects for the firm and the current value of the assets. The going-concern value is equal to the present value of the expected dividends arising from continued operation.

Q4. Liquidation value is the:

A)   market value of the total assets less the market value of the total liabilities.

B)   present value of future cash flow less the possible liquidation cost.

C)   cash generated by terminating a business and selling its assets.

Correct answer is C)

Liquidation value is the cash generated by terminating a business and selling all of its assets.

Q5. A valuation of a firm based on the current market price of its assets is referred to as the firm’s:

A)   liquidation value.

B)   going-concern value.

C)   operating value.

Correct answer is A)

The liquidation value is based on the assumption that the firm will cease to operate and all of its assets will be sold.