Equity Valuation【Reading 43】Sample private, companies, 2012

invic

An analyst is examining three companies. Given the information below, which of them is most likely to be a private firm?

Firm	Number of Years in Operation	Market Capitalization	Required Return for Common Stock
A	12 years	$1,324.8 million	14.8%
B	4 years	$1,313.9 million	18.3%
C	19 years	$2,231.0 million	16.4%

A) Firm A.

B) Firm C.

C) Firm B.

---

The firm most likely to be a private firm is Firm B. Compared to public firms, private firms are less mature (4 years for Firm B), smaller (market cap of B is $1,313.9 million), and have higher required returns (required return for B is 18.3%).

invic

Which of the following statements most accurately describes the difference between private and public firm managers?

A) Because managers in a public firm are often paid with incentive compensation, public managers may take a longer term view than private managers.

B) Although managers in a public firm are often paid with incentive compensation, public managers may take a shorter term view than private managers because shareholders often focus on the short-term.

C) Because managers in a private firm are concerned with having the firm go public, private managers may take a shorter term view than public managers.

---

Although managers in a public firm are often paid with incentive compensation such as options, shareholders often focus on short-term measures such as quarterly earnings and the consistency of such. Management may therefore take a shorter term view than they otherwise would. Private firms should be able to take a longer term view.

invic

Which of the following is least likely an example of a litigation-related valuation for a private company?

A) Lost profits claims.

B) Bankruptcy proceeding.

C) Divorce settlements.

---

Litigation-related valuations may be required for shareholder suits, damage claims, lost profits claims, or divorce settlements. A bankruptcy proceeding is an example of a transaction-related valuation for a private company.

invic

Which of the following is least likely an example of a compliance-related valuation for a private company?

A) Bankruptcy proceeding.

B) Financial reporting.

C) Tax purposes.

---

A bankruptcy proceeding is an example of a transaction-related valuation for a private company.

invic

Which of the following is least likely an example of a transaction-related valuation for a private company?

A) Financial reporting.

B) Bankruptcy proceeding.

C) Performance-based managerial compensation.

---

Venture capital financing, initial public offering (IPO), bankruptcy proceeding, performance-based managerial compensation, and sale in an acquisition are all examples of transaction-related valuations for a private company.

invic

Which of the following is least likely an example of a transaction-related valuation for a private company?

A) Financial reporting.

B) Bankruptcy proceeding.

C) Performance-based managerial compensation.

---

Venture capital financing, initial public offering (IPO), bankruptcy proceeding, performance-based managerial compensation, and sale in an acquisition are all examples of transaction-related valuations for a private company.

invic

Assume that a property has an estimated net operating income (NOI) equal to $150,000. Further assume that comparable properties have a capitalization rate of 11%. The direct income capitalization approach provides a market value for this property that is closest to:

A) $13,636,363.

B) $1,500,000.

C) $1,363,636.

---

invic

Assume that a property that you are evaluating has a gross annual income equal to $230,000, and that comparable properties are selling for 10.5 times gross income. The gross income multiplier approach provides a market value for this property that is closest to:

A) $2,587,500.

B) $2,190,476.

C) $2,415,000.

---

Gross income multiplier technique: MV = gross income × income multiplier.
MV = $230,000 × 10.5 = $2,415,000

invic

A private business is being valued for the purpose of determining the appropriate level of performance-based managerial compensation. This private company valuation would be best described as a:

A) Compliance-related valuation

B) Litigation-related valuation

C) Transaction-related valuation

---

Transaction-related valuations may be performed for reasons related to venture capital financing, an IPO, a sale of the firm, bankruptcy, or performance-based managerial compensation. Compliance-related valuations are performed for financial reporting and tax purposes. Litigation-related valuations may be required for shareholder suits, damage claims, lost profits, or divorces. (Study Session 12, LOS 43.b)

invic

An appraiser must determine the value of an asset for tax purposes. Which of the following is the most likely standard of value the appraiser will use?

A) Market value.

B) Fair value for financial reporting.

C) Fair market value.

---

Fair market value is used for tax purposes in the U.S. and based on an arm’s length transaction. Though similar to fair market value, fair value for financial reporting is used for financial not tax reporting. Market value is used in real estate and other real asset appraisals.