Finc Mgmt D - Financial Valuations

Question 1

In a small town, the announcement of layoffs by the largest employer involves

Answer 1

higher risk of performance results not being met

Question 2

Two types of valuation engagements described by the Statement on Standards for Valuation Services (SSVS 1) ar

Answer 2

Valuation engagement and Calculation engagement

Question 3

In valuation engagements:

Answer 3

• analyst is free to employ the use of any valuation approach or method deemed professionally appropriate under the circumstances
• results are expressed in terms of a conclusion of value and can be a single number or range
• premise of value can either be going concern or liuidation

Question 4

In calculation engagements:

Answer 4

• analyst and client agree upon valuation method and approaches to use
• not free to use any approach or method
• results are expressed in terms of a calculated value and can be a single number or range
• premise of value can either be going concern or liquidation

Question 5

Per FASB ASC 820, the goal of disclosures presented in F/S related to FV measurements is to provide

Answer 5

enough info to users of F/S so that the inputs used in FV measurement can be assessed

Question 6

Using risk-free rate, beta coefficent, rate of return on the market portfolio, and required rate of return denotes that the _____ model is being used.

Answer 6

CAPM (capital aset pricing model)

Question 7

Three basic valuation approaches are:

Answer 7

• cost approach
• market approach
• income approach

Question 8

Market approach to determining FV uses

Answer 8

market comparisons of identical or comparable items; companies within the industry that have similar performance records and structure will have similar value

Question 9

Cost approach to determining FV is

Answer 9

an example of the economic substitution principle aka what would it cost to replace the item in question with an asset of like function and capacity

Question 10

Income approach to determining FV focuses on

Answer 10

the company’s ability to create earnings or some other benefit stream and the risk related to that investment

Question 11

When using the market approach on a subject, remember that potential guideline companies should:

Answer 11

• use similar GAAP choices
• have similar product diversification
• serve similar markets
• have similar geographic diversification
• be of similar size
• have similar financial and operating leverage
• have similar liquidity, solvency, growth, and profitability
• not be based on a single guideline
• not be identical

Question 12

Under FASB 820, when determining FV of property, the FV should be based

Answer 12

on the highest and best use as determined from the viewpoint of the purchaser

Question 13

When using the income approach, the higher the risk, the _____ the discount rate and the ________ the PV of the subject company

Answer 13

higher; lower

Question 14

Fair market value defines the seller as ______, whereas fair value assumes a ______ seller

Answer 14

hypothetical; specific

Question 15

Fair market value is

Answer 15

the price, expressed in terms of the cash equivalent, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts

Question 16

Fair value is

Answer 16

the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date

Question 17

Differences in fair market value and fair value:

Answer 17

• FMV implies a willing buyer/seller
• FV buyer/seller are not necessarily willing
• FMV has a hypothetical seller
• FV has a specific seller
• FMV takes advantage of an unrestricted market
• FV uses the principal or most advantageous market

Question 18

Four basic categories of normalization adjustments:

Answer 18

• nonoperating adjustments
• nonrecurring adjustments
• comparability adjustments
• discretionary adjustments

Question 19

Nonoperating adjustments are

Answer 19

the removal of nonoperating items included in the historical financial statements that are not part of normal operations

Question 20

Nonrecurring adjustments are

Answer 20

the removal of unusual, unexpected, or items not likely to occur again from the financial statements

Question 21

Comparability adjustments are

Answer 21

the adjustments of the historical financial statements to match GAAP choices of potential guideline companies

ex. LIFO to FIFO

Question 22

Discretionary adjustments are

Answer 22

the adjustments of the historical financial statement to include or to remove items not considered part of normal operations

ex. excessive wages paid to family members need to be adjusted to market rates

Question 23

The cost approach is appropriate when:

Answer 23

• the company is in liquidation
• the company is worth more in liquidation than as going concern
• the company’s value is basically related to assets held
• the company has had no income in recent years
• the future benefit streams cannot be adequately predicted

Question 24

Under FASB ASC 820, the principal market is considered to be the market where

Answer 24

the holder of the asset or liability could find the greatest volume of asset sales or liability transfers of items similar to the one being valued.

Question 25

Under FASB ASC 820, the most advantageous market is considered to be the market where

Answer 25

the holder of an asset could maximize the price received in an asset sale or minimize the transfer costs in the conveyance of a liability.

Question 26

Premise of value is

Answer 26

an assumption regarding the most likely set of transactional circumstances that may be applicable to the subject valuation

Question 27

Premise of value will be one of two situations:

Answer 27

• going concern

- liquidation

Question 28

Going concern is when

Answer 28

the company will be expected to continue operations into the future; they can falter, regroup, and continue

Question 29

Liquidation is when

Answer 29

the company has its assets sold or disposed of in some fashion and will ultimately discontinue ops completely

Question 30

IRS Revenue Ruling 68-608 provides guidance as to the form o the F/S when used in a valuation process and says that

Answer 30

the past earnings used in the valuation process should fairly reflect the probable future earnings.

Question 31

The three groups of inputs under FASB ASC 820

Answer 31

• Level 1
• Level 2
• Level 3

Question 32

Level 1 FV measurement is

Answer 32

directly observable inputs of identical items

Question 33

Level 2 FV measurement is

Answer 33

directly or indirectly observable inputs of similar items

Question 34

Level 3 FV measurement is

Answer 34

unobservable inputs

Question 35

If you have a quoted market price for a similar asset but there are some questions related to the condition being valued in comparison, then consider it a

Answer 35

Level 3

Question 36

If a company announces negative information that has a negative impact on the market price shortly after the close of the market, the fair value valuation should ______ and list the value of the subject asset at the ________. This would also _____ the input level to Level ____

Answer 36

employ the use of the new information; lower price; drop; Level 2

Question 37

Price is

Answer 37

the observed exchange price that occurs in the marketplace

Question 38

Worth is

Answer 38

the advantages of ownership based upon the perceived benefits at a particular point in time and for a particular use

Question 39

Value is

Answer 39

the determination of what would be received in an exchange between two willing parties in an arm’s-length transaction in the marketplace where both parties had acted with knowledge, with prudence, and without compulsion

Question 40

Cost is

Answer 40

what was paid for an asset in the marketplace

Question 41

The focus of a business valuation is

Answer 41

the value

[not the price, worth, or cost]

Question 42

Under FASB ASC 820, In-exchange premise assumes

Answer 42

that the max value of the subject item would come from the purchaser’s perspective when the item is used alone

Question 43

Under FASB ASC 820, In-use premise assumes

Answer 43

that the max value of the subject item would come from the purchaser’s perspective when the item is used in conjunction with other assets as a group

Question 44

To provide support for a valuation estimate arrived at using another method with similar results, a practitioner can use

Answer 44

rule of thumb; [reasonableness check]