invic

An analyst is valuing a small private firm that is still developing and has yet to generate any earnings. Which of the following best describes the approach that should be used?

A) A market approach based on public comparables would be utilized.

B) Nonoperating assets are not crucial to the firm and should be excluded in any valuation.

C) An asset-based approach would be used.

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The valuation approach used will depend on the firm’s operations and its lifecycle stage. Early in its life, a firm’s future cash flows may be so uncertain that an asset-based approach would be selected. The price multiples from large public firms should not be used for a small private firm when using the market approach. Although a firm’s nonoperating assets are not crucial to the firm, they should be included in any valuation.

invic

An analyst is valuing a firm’s equity using the price-to-book-value ratio of similar firms. Which of the following is the most likely valuation approach the analyst will use?

A) The income approach.

B) The market approach.

C) The asset-based approach.

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The market approach values a firm using the price-multiples such as the price-to-book-value ratio and price-earnings ratio of comparable assets. The income approach values a firm as the present value of its future income. The asset-based approach values a firm as its assets minus liabilities

invic

Which of the following approaches to private company valuation uses discounted cash flow analysis?

A) The market approach.

B) The asset-based approach.

C) The income approach.

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The income approach values a firm as the present value of its future income. The asset-based approach values a firm as its assets minus liabilities. The market approach values a firm using the price-multiples from the sales of comparable assets.

invic

An analyst uses investment analysis in an attempt to determine the “true” value of a security, independent of any short-term mispricing. This estimate of asset value is best defined as:

A) Investment value

B) Intrinsic value

C) Fair market value

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Intrinsic value is the “true” value derived from investment analysis. Fair market value is used for tax purposes in the United States and based on an arm’s length transaction. Investment value, in contrast to the previous definitions that were market based, is the value to a particular buyer. (Study Session 12, LOS 43.c)

invic

Which of the following definitions of value is the value to a particular buyer?

A) Investment value.

B) Market value.

C) Fair market value.

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Investment value is the value to a particular buyer and may be different for each investor due to different estimates of future cash flows, perceived firm risk, discount rates, financing costs, and synergies with existing assets the buyer holds.

invic

Which of the following definitions of value refers to the value that should be the value in the market if the asset is correctly priced?

A) Intrinsic value.

B) Market value.

C) Investment value.

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Intrinsic value is derived from investment analysis and is the value that should be the market value once other investors arrive at this “true” value. Intrinsic value is independent of short-term mispricing that may occur. Market value is used in real estate and other real asset appraisals. Investment value is the value to a particular buyer.

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.

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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.

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

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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

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.

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

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.

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