Valuation Quiz Flashcards

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What are the two highest areas of risk?

Small business common stock (correct)

Small common stock mutual fund (correct)

Venture capital investments (correct)

U.S. treasury obligations

What are the two lowest areas of risk?

U.S. treasury obligations (correct)

Venture capital investments

A to C rated corporate bonds (correct)

Small common stock mutual fund

What is the value of an interest in a closely held business typically considered to be equal to?

the future benefits what will be received from the business discounted at present at the appropriate discount rate

What is a valuation?

a process to establish a value Signup and view all the answers

What is the first step in any valuation engagement?

to determine the purpose of the valuation Signup and view all the answers

Fair market value is the focus of this class.

True Signup and view all the answers

What are the three types of standards of value?

FMV, Fair Value & Strategic/Investment Value Signup and view all the answers

What is the IRS definition of FMV?

the price at which the property would change hands between a willing buyer and a willing seller, when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts. Signup and view all the answers

A valuation takes into account both _ and _ tangible business being valued.

quantitative and qualitative Signup and view all the answers

What are examples of intangible elements of Going Concern Value?

having a trained workforce, an operational plant, necessary licenses, systems and procedures in place Signup and view all the answers

What is the definition of Going concern value?

the value of a business enterprise that is expected to continue to operate into the indefinite future Signup and view all the answers

What is the replacement value?

refers to the current cost of a similar new property having the nearest equivalent utility to the property being valued Signup and view all the answers

What does the I stand for in 'I measure drugs'?

Identification and definition of appropriate benefit stream Signup and view all the answers

What is the discounted cash flows method projected for?

specific number of years Signup and view all the answers

Book value is a proper basis for business valuation.

False Signup and view all the answers

What is the Capitalization Rate?

discount rate - long-term sustainable growth rate Signup and view all the answers

What is discounting?

calculates the present value of a stream of future income Signup and view all the answers

Match the following valuation concepts with their definitions:

Discount rate = Rate of return to convert future income amounts to present value Capitalization (Cap) rate = Divisor used to convert defined stream of income to indicated value Terminal value = Value of the company at the end of the last year for which the benefit stream was projected Replacement value = Current cost of a similar new property having the nearest equivalent utility Signup and view all the answers

Study Notes

Valuation Concepts

Value of an interest in a closely held business equals future benefits discounted at the appropriate rate.
A valuation process establishes a value of an entire or partial interest in a business.
Valuations account for both quantitative and qualitative aspects of the business.

Standards of Value

Fair market value (FMV) is the key focus for valuations.
Three types of standards of value: FMV, Fair Value, and Strategic/Investment Value.
FMV defined by IRS as the price at which property changes hands between a willing buyer and seller without compulsion.

Valuation Processes

First step in a valuation engagement is determining the purpose of the valuation.
Selection of standard and premise of value is required in all valuations.
Four principal premises of value: going concern value, book value, liquidation value, and replacement value.

Distortions and Adjustments

Book value defined as total net assets minus total liabilities; not an appropriate basis for business valuation.
Distortions in financial statements arise from accounting principles leading to inaccurate economic status representation.
Normalizing financial statements adjusts for anomalies that may distort financial results.

Liquidation and Replacement Value

Liquidation value is the net amount realized if the business closes and assets are sold piecemeal, can be orderly or forced.
Replacement value is the current cost to acquire similar new property providing equivalent utility, commonly linked to property insurance.

Investment Valuation Principles

Direct relationship exists between investment price, expected return, and anticipated risks.
Investment valuation depends on benefit stream, risk of principal, and management expectations.
Two highest-risk areas include venture capital and small business stocks; lowest-risk areas are U.S. treasury obligations and corporate bonds.

Cash Flow Considerations

Net cash flows (NCF) are favored as they represent what investors seek in the valuation process.
Historical versus projected income analysis considers accuracy and relevance to the purpose of the valuation.
Projected cash flows are assessed using various methods, including discounting and capitalization techniques.

Terminal Value and Discounting

Terminal value represents the company's value at the end of the projection period, calculated as capitalized earnings reduced to present value.
Discounting determines present value of future income streams over a finite number of periods, critical for accurate valuation.

Capitalization Rate

Capitalization rate is derived from the discount rate minus long-term sustainable growth rate.
When there is no growth, the capitalization rate equals the discount rate.

Key Financial Variables for Valuation

The I in "I measure drugs" stands for the identification of an appropriate benefit stream.
Adjustments for owner compensation, warranty liabilities, and inventory valuation are crucial for accurate business assessment.
Special considerations are necessary when dealing with shareholder loans and allowances for doubtful accounts.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Description

Test your knowledge of business valuation concepts with these flashcards. Each card presents key terms and definitions related to the valuation of closely held businesses. Enhance your understanding of this critical financial process.