LOS a: Define valuation and discuss the uses of valuation models.

Q1. A wise analyst will examine a valuation to determine:

A)   ways to enhance a client's valuation.

B)   how well it will be received by the firm's management.

C)   its sensitivity to changes in expectations.

Q2. The goal of asset valuation, based on the expected future cash flows of an asset, is to establish an asset’s:

A)   relative value.

B)   intrinsic value.

C)   market value.

Q3. Which of the following is NOT a use of asset valuation?

A)   Projecting the value of corporate actions.

B)   Issuing fairness opinions.

C)   Estimating inflation rates.

Q4. Valuation models for equities contain estimates of required returns and:

A)   an assumed continuation of past cash flows.

B)   known future cash flows.

C)   expected future cash flows.

Q5. 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.

Q6. How can we account for different valuations for the same firm from several analysts even if they use the same required returns?

A)   The analysts may be biased with personal opinions about management.

B)   Valuations are based on the analyst's expectations.

C)   Valuation models contain random errors.

LOS a: Define valuation and discuss the uses of valuation models. fficeffice" />

Q1. A wise analyst will examine a valuation to determine:

A)   ways to enhance a client's valuation.

B)   how well it will be received by the firm's management.

C)   its sensitivity to changes in expectations.

Correct answer is C)

The results of valuation models can be very sensitive to changes in the expectations incorporated in the model. Analysis of a valuation’s sensitivity to the expectations and a review of the confidence the analyst has in the expectations may lead to the use of a valuation range rather than a pin-point value.

Q2. The goal of asset valuation, based on the expected future cash flows of an asset, is to establish an asset’s:

A)   relative value.

B)   intrinsic value.

C)   market value.

Correct answer is B)

Asset valuation based on the expected future cash flows is utilized to estimate an asset’s intrinsic value, or the value derived from the asset's investment characteristics.

Q3. Which of the following is NOT a use of asset valuation?

A)   Projecting the value of corporate actions.

B)   Issuing fairness opinions.

C)   Estimating inflation rates.

Correct answer is C)

Asset valuation has many uses including stock selection, reading the market, projecting the value of corporate actions, issuing fairness opinions, and valuing private businesses. Asset valuation is not used to project inflation rates.

Q4. Valuation models for equities contain estimates of required returns and:

A)   an assumed continuation of past cash flows.

B)   known future cash flows.

C)   expected future cash flows.

Correct answer is C)

Valuation models used for equities require the analyst to estimate the required return applicable to the investment and to develop an expectation of future cash flows. While cash flows for fixed-income investments are stated, no such definition is available for equities.

Q5. 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.

Correct answer is A)

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

Q6. How can we account for different valuations for the same firm from several analysts even if they use the same required returns?

A)   The analysts may be biased with personal opinions about management.

B)   Valuations are based on the analyst's expectations.

C)   Valuation models contain random errors.

Correct answer is B)

Valuation is based on expectations of future cash flows rather than known values. Each analyst will build expectations of cash flows from the fundamental data and from other factors, internal and external, that the analyst believes will affect the firm’s performance.

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