LOS r: Explain the private equity valuation principles, including the hierarchy of fair valuation methodologies for private equity investments.

Q1. For private equity, valuations must be prepared:

A)   annually only, and the lack of liquidity of private equity prohibits quarterly valuations.

B)   at least annually, but quarterly valuations are recommended.

C)   at least quarterly, but monthly valuations are recommended.

Q2. For private equity investments, GIPS sets forth a hierarchy or order of three fair value methodologies. Which of the following is the correct order from the best method to the least preferred method?

A)   Market transaction, present value of cash flows, market multiples.

B)   Market transaction, market multiples, present value of cash flows.

C)   Present value of cash flows, market transaction, market multiples.

Q3. Bill Penn, CFA, and Jenny Scott, CFA, are working at making their company’s private equity valuations GIPS compliant. They recognize that the valuations must be prepared with integrity and professionalism. Penn says that they must be prepared under the direction of senior management. Scott says that the valuations must be prepared by individuals with appropriate experience and ability. With respect to these statements:

A)   both Scott and Penn are correct.

B)   Penn is correct and Scott is incorrect.

C)   Scott is incorrect and Penn is correct.

[此贴子已经被作者于2009-4-10 16:22:09编辑过]

LOS r: Explain the private equity valuation principles, including the hierarchy of fair valuation methodologies for private equity investments. fficeffice" />

Q1. For private equity, valuations must be prepared:

A)   annually only, and the lack of liquidity of private equity prohibits quarterly valuations.

B)   at least annually, but quarterly valuations are recommended.

C)   at least quarterly, but monthly valuations are recommended.

Correct answer is B)

Provision II.7.B.1: Valuations must be prepared at least annually, but quarterly valuations are recommended.

Q2. For private equity investments, GIPS sets forth a hierarchy or order of three fair value methodologies. Which of the following is the correct order from the best method to the least preferred method?

A)   Market transaction, present value of cash flows, market multiples.

B)   Market transaction, market multiples, present value of cash flows.

C)   Present value of cash flows, market transaction, market multiples.

Correct answer is B)

This is the hierarchy set forth by GIPS. The first bases the value on market transactions. The second bases it on market multiples like the price-to-earnings ratio. The third, or least preferred method, calculates the present value of risk-adjusted expected cash flows discounted at the risk-free rate.

Q3. Bill Penn, CFA, and Jenny Scott, CFA, are working at making their company’s private equity valuations GIPS compliant. They recognize that the valuations must be prepared with integrity and professionalism. Penn says that they must be prepared under the direction of senior management. Scott says that the valuations must be prepared by individuals with appropriate experience and ability. With respect to these statements:

A)   both Scott and Penn are correct.

B)   Penn is correct and Scott is incorrect.

C)   Scott is incorrect and Penn is correct.

Correct answer is A)

The valuations must be prepared with integrity and professionalism by individuals with appropriate experience and ability and under the direction of senior management.

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