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Minority shareholders often do not have control of the price at which the firm will be sold or merged with another firm. In order to safeguard their interests, minority shareholders will often seek an analyst’s opinion of the value of the firm. This opinion is referred to as a:

A)
fairness opinion.
B)
second opinion.
C)
minority opinion.



Minority shareholders are often dependent upon an analyst's opinion about the fairness of a price to be received. Hence the term fairness opinion.


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Which of the following is least likely one of the primary steps of the top-down valuation process?

A)
Selecting a valuation model.
B)
Decision making.
C)
Assess corporate governance.



The valuation process consists of 5 steps:

  1. Understanding the business.
  2. Forecasting company performance.
  3. Selecting a valuation model.
  4. Complete a valuation.
  5. Decision making.

Corporate governance is important, but is not one of the primary steps.

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Financial Analyst Davey Jarvis, CFA, is evaluating Laura’s Chocolates, Inc., which processes nut-based toffee for world-wide distribution. Which of the following steps is Jarvis most likely to take as part of the top-down valuation process?

A)
Perform momentum-based technical analysis.
B)
Evaluate price performance on an ongoing basis.
C)
Learn / understand the business.



The valuation process consists of 5 steps:

  1. Understanding the business.
  2. Forecasting company performance.
  3. Selecting a valuation model.
  4. Complete the valuation.
  5. Decision making.

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When using a firm’s reported financial information as inputs into a security valuation model, it is important for the analyst to have confidence that the reported information accurately reflects the operations of the firm. This concern is referred to as:

A)
a confidence factor.
B)
the transparency of earnings.
C)
the quality of earnings.


The accuracy and level of detail disclosed in financial reports is referred to as the quality of earnings. Efforts of management to obscure the true operating performance of the firm can leave an analyst with little confidence in the security valuation.

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Overestimating the growth rate of a firm in using a valuation model would result in a value that is likely to be:

A)
can't tell from this information.
B)
too high.
C)
too low.



Using an estimate for a firm’s growth rate that is too high would overstate the amount of future returns, resulting in a present value that is too high.

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