ASA BV Challenge Exam cheat sheet

Fair market value: hypothetical willing buyer and seller, both informed and acting without compulsion, price in cash or equivalent.

Investment value reflects a specific buyer's synergies; fair value is a statutory/legal standard whose meaning varies by jurisdiction.

Going-concern value assumes the business continues operating; liquidation value assumes orderly or forced disposition of assets.

Premise of value (going concern, orderly liquidation, forced liquidation) must match the standard of value and purpose.

Highest and best use is the use that is legally permissible, physically possible, financially feasible, and maximally productive.

ASA, USPAP, and AICPA SSVS govern valuation practice; USPAP requires an objective, supportable, and disclosed scope of work.

Valuation date fixes the information cutoff; subsequent events are considered only if known or knowable as of that date.

Levels of value: Level 1 observable quoted prices, Level 2 observable inputs, Level 3 unobservable inputs.

Appraiser independence: contingent fees based on the concluded value are prohibited under professional standards.

Engagement letter should state purpose, standard and premise of value, valuation date, scope, assumptions, and fee basis.

Scope of work must be sufficient for intended use and users; restricted-use reports require identified intended users.

Data requests typically include financial statements (3-5 years), tax returns, budgets, customer and supplier data, and owner compensation detail.

Management interviews and site visits corroborate data and reveal off-balance-sheet items and related-party transactions.

Confirm whether financial statements are audited, reviewed, compiled, or internal; reliability affects reliance and adjustments.

Independence and conflict checks should be completed before acceptance; prior relationships with the subject or parties are disclosed.

Engagement risk rises with litigation use, tight deadlines, incomplete records, and reliance on management projections.

Document the data relied upon and any limitations; unsupported assumptions must be disclosed and may require a scope limitation.

Common-size analysis expresses each line as a percentage of revenue (income statement) or total assets (balance sheet).

Ratio categories: liquidity (current, quick), leverage (debt/equity, interest coverage), activity (inventory and receivable turnover), profitability (gross, operating, net margin).

Normalization removes nonrecurring, nonoperating, and discretionary items to derive sustainable economic earnings.

Excess owner compensation is the difference between actual compensation and market-rate replacement compensation; it is added back or deducted.

Related-party rent above or below market is adjusted to a market rent to reflect economic reality.

Nonoperating assets (excess cash, marketable securities, real estate) are removed from operating value and added separately at fair value.

Discretionary personal expenses run through the business (autos, travel, club dues) are added back; personal expenses paid outside are deducted.

Working capital is normalized to a typical level; surplus or deficit relative to the operating norm adjusts value.

Adjusted earnings should be tested for reasonableness against industry benchmarks and multi-year trends.

Macro factors: GDP growth, interest rates, inflation, unemployment, and credit conditions affect discount rates and growth.

Porter's Five Forces: rivalry, new entrants, substitutes, supplier power, buyer power determine industry profitability.

Industry life cycle stages (start-up, growth, maturity, decline) inform growth assumptions and risk premiums.

Concentration (customer, supplier, geographic) increases business risk and may warrant a higher discount rate.

Barriers to entry and pricing power support higher margins and lower risk.

Regulatory, technological, and cyclical exposure are assessed for sustainability of projected cash flows.

Comparable industry data (RMA, IBISWorld, Damodaran) benchmark margins, growth, and capital structure.

SWOT and PEST analyses organize qualitative evidence; they support but do not replace quantitative forecasting.

Capitalization of earnings: Value = normalized earnings / capitalization rate; cap rate = discount rate minus long-term growth.

Gordon growth: Value = CF1 / (r - g), where CF1 is next-period cash flow, r is discount rate, g is sustainable growth.

Discount rate under CAPM: r = risk-free rate + beta x equity risk premium (+ size and company-specific premiums).

WACC = (E/V) x Re + (D/V) x Rd x (1 - tax rate); use when valuing the enterprise with debt in the capital structure.

Build-up method: risk-free rate + equity risk premium + size premium + industry premium + company-specific risk premium.

Mid-year convention discounts cash flows as if received mid-period, raising value versus end-of-year discounting.

Terminal value via Gordon growth or exit multiple; terminal value typically dominates total value and must be stress-tested.

Project cash flows: revenue growth, margins, capex, depreciation, working capital changes, and taxes, then discount to present value.

Excess earnings method: value = tangible asset value + capitalized excess earnings over a required return on tangible assets.

Guideline public company method uses market prices of comparable public firms with valuation multiples applied to the subject.

Guideline transactions (merger and acquisition) method uses prices paid in control transactions, implying control and possibly synergies.

Common multiples: EV/EBITDA, EV/EBIT, EV/revenue, P/E, price/book; match the multiple to the metric and capital structure.

Enterprise value multiples must be applied to pre-interest metrics; equity multiples apply to after-interest metrics.

Select comparables on size, growth, margins, leverage, and industry; adjust multiples for differences in risk and growth.

Control premiums observed in public deals typically range roughly 20-40 percent; synergies may inflate transaction multiples.

Multiples derived from transactions reflect the market at the transaction date; adjust for time and market conditions.

Weighting among methods and multiples should be explained and tied to data quality and relevance.

Private company transaction data (e.g., DealStats) supports small-business valuations but requires size and risk adjustments.

Adjusted book value restates assets and liabilities to fair market value; often used for asset-intensive or holding companies.

Asset-based value = FMV of assets minus FMV of liabilities; goodwill emerges only under the excess earnings method.

Intangible assets (customer lists, trademarks, workforce) are identified and valued separately when material.

Liquidation value assumes winding down; orderly liquidation allows reasonable marketing time, forced liquidation does not.

Liquidation costs include commissions, legal fees, severance, and time to dispose; these reduce net proceeds.

For going concerns, the asset-based method is typically a floor value and may be less relevant than income or market approaches.

Fixed assets are valued at depreciated replacement cost or market comparables, not historical book value.

Real estate and equipment appraisals may be required from credentialed specialists.

Discount for lack of control (DLOC) reflects reduced influence over distributions and strategy in a minority interest.

Discount for lack of marketability (DLOM) reflects time and cost to convert an interest to cash; restricted stock and pre-IPO studies support it.

Control premium and DLOC are related: DLOC = 1 - [1 / (1 + control premium)].

DLOM and DLOC compound multiplicatively, not additively: total adjustment = (1 - DLOM) x (1 - DLOC).

Minority interest value derives from either the discounted pro-rata share of control value or direct minority cash flow analysis.

Key person dependence, restrictive agreements, and transfer restrictions increase marketability discounts.

Swing-vote and blocking rights can reduce DLOC for otherwise minority interests.

Discounts must be supported by empirical evidence and tied to the specific subject interest's facts.

Reconcile approaches by weighting based on relevance, data quality, and purpose; explain why weights were chosen.

The concluded value should be presented as a point estimate or range consistent with the standard of value and valuation date.

A valuation report typically includes scope, sources, assumptions, analyses, and a statement of limiting conditions.

USPAP reporting options: Appraisal Report (fuller detail) or Restricted Appraisal Report (limited users and disclosure).

Noncontrolling and marketability adjustments are applied after selecting the enterprise or controlling value.

Sensitivity analysis on discount rate and growth shows how value responds to key assumptions.

Peer review and internal consistency checks (multiples implied by the DCF) validate the conclusion.

Subsequent events after the valuation date are disclosed but do not change the value unless they confirm conditions existing at that date.

Fair market value assumes a hypothetical willing buyer and seller, both informed, with no compulsion.

Investment value reflects a specific buyer's synergies; fair value depends on legal or statutory context.

Premise of value (going concern, orderly liquidation, forced liquidation) must align with the standard of value.

Highest and best use must be legally permissible, physically possible, financially feasible, and maximally productive.

USPAP requires an objective scope of work and disclosure of assumptions and limiting conditions.

The valuation date fixes the information cutoff; only known or knowable information is used.

Contingent fees tied to the concluded value violate independence under professional standards.

Engagement letters state purpose, standard and premise of value, valuation date, scope, assumptions, and fee basis.

Restricted-use reports require identified intended users; intended use drives scope of work.

Data requests include multi-year financial statements, tax returns, budgets, and owner compensation detail.

Financial statement reliability (audited, reviewed, compiled, internal) affects reliance and adjustment depth.

Conflict and independence checks precede acceptance; prior relationships are disclosed.

Site visits and management interviews corroborate data and reveal off-balance-sheet and related-party items.

Scope limitations from missing data must be disclosed and may reduce the level of assurance.

Common-size statements express lines as percentages of revenue or total assets for comparability.

Normalization removes nonrecurring, nonoperating, and discretionary items to reach sustainable earnings.

Excess owner compensation equals actual compensation minus market-rate replacement compensation.

Related-party rent is adjusted to market rent to reflect economic reality.

Nonoperating assets (excess cash, real estate) are removed from operating value and added separately at fair value.

Discretionary personal expenses run through the business are added back; personal expenses paid outside are deducted.

Working capital is normalized to a typical operating level; surplus or deficit adjusts value.

Macro drivers include GDP growth, interest rates, inflation, and credit conditions, which affect discount rates and growth.

Porter's Five Forces determine industry profitability and competitive intensity.

Industry life cycle stage (growth, maturity, decline) informs growth assumptions and risk.

Customer, supplier, and geographic concentration raise business risk and may increase the discount rate.

Barriers to entry and pricing power support margins and lower risk.

Benchmark data (RMA, IBISWorld, Damodaran) calibrate margins, growth, and capital structure.

SWOT and PEST organize qualitative evidence supporting quantitative forecasts.

Capitalization: Value = normalized earnings / cap rate; cap rate = discount rate minus long-term growth.

Gordon growth: Value = CF1 / (r - g), with CF1 as next-period cash flow.

CAPM: r = risk-free rate + beta x equity risk premium (+ size and company-specific premiums).

WACC = (E/V) x Re + (D/V) x Rd x (1 - tax rate) for enterprise-level valuation.

Build-up method adds risk-free rate, equity risk premium, size premium, industry premium, and company-specific premium.

Mid-year convention raises value relative to end-of-year discounting.

Terminal value via Gordon growth or exit multiple typically dominates total value and requires stress testing.

Project cash flows from revenue, margins, capex, working capital, and taxes before discounting.

Guideline public company method applies public market multiples to the subject.

Guideline transactions method uses control transaction prices, implying control and possible synergies.

EV/EBITDA, EV/revenue, P/E, and price/book multiples must match the metric and capital structure.

Enterprise value multiples apply to pre-interest metrics; equity multiples apply to after-interest metrics.

Comparables are selected on size, growth, margins, leverage, and industry, then adjusted for differences.

Control premiums in public deals commonly range roughly 20-40 percent.

Transaction multiples reflect market conditions at the transaction date and require time adjustment.

Weighting among multiples is tied to data quality and relevance to the subject.

Adjusted book value restates assets and liabilities to fair market value.

Asset-based value = FMV of assets minus FMV of liabilities; goodwill arises only under the excess earnings method.

Intangible assets are identified and valued separately when material.

Orderly liquidation allows marketing time; forced liquidation does not.

Liquidation costs (commissions, legal fees, severance) reduce net proceeds.

For going concerns, asset-based value typically serves as a floor.

Fixed assets are valued at depreciated replacement cost or market comparables, not book value.

DLOC reflects reduced influence over distributions and strategy in a minority interest.

DLOM reflects time and cost to convert an interest to cash, supported by restricted stock and pre-IPO studies.

DLOC = 1 - [1 / (1 + control premium)].

DLOM and DLOC compound multiplicatively: (1 - DLOM) x (1 - DLOC).

Minority value derives from discounted pro-rata share of control value or direct minority cash flow analysis.

Key person dependence and transfer restrictions increase marketability discounts.

Swing-vote or blocking rights can reduce DLOC for minority interests.

Discounts require empirical support tied to the specific subject interest.

Reconcile approaches by weighting based on relevance, data quality, and purpose.

Present value as a point estimate or range consistent with the standard of value and valuation date.

Reports include scope, sources, assumptions, analyses, and limiting conditions.

USPAP offers Appraisal Report and Restricted Appraisal Report reporting options.

Apply noncontrolling and marketability adjustments after selecting enterprise or controlling value.

Sensitivity analysis on discount rate and growth shows value responsiveness.

Cross-check the DCF-implied multiples against market data for consistency.

Post-valuation-date events are disclosed but do not change value unless they confirm prior conditions.

Fair market value is a hypothetical, informed, noncompulsory transaction price.

Investment value reflects a specific buyer's synergies; fair value is legally defined.

Premise of value must match the standard of value and engagement purpose.

Highest and best use is legally permissible, physically possible, financially feasible, and maximally productive.

USPAP requires objective scope and disclosure of assumptions.

Valuation date fixes the information cutoff for known or knowable facts.

Value-based contingent fees are prohibited for independence.

Engagement letters define purpose, standard and premise of value, date, scope, and fees.

Intended use and users determine scope and reporting type.

Data requests include financial statements, tax returns, budgets, and compensation detail.

Financial statement reliability affects reliance and adjustment depth.

Conflict checks precede acceptance and prior relationships are disclosed.

Site visits and interviews reveal off-balance-sheet and related-party items.

Scope limitations must be disclosed and may reduce assurance.

Common-size analysis supports comparability across periods and peers.

Normalization removes nonrecurring, nonoperating, and discretionary items.

Excess owner compensation = actual minus market-rate replacement compensation.

Related-party rent is adjusted to market rent.

Nonoperating assets are removed from operating value and added separately.

Personal expenses run through the business are added back; those paid outside are deducted.

Working capital is normalized to a typical level, adjusting value for surplus or deficit.

Interest rates and GDP growth affect discount rates and growth assumptions.

Porter's Five Forces frame competitive intensity and profitability.

Life cycle stage informs growth and risk.

Concentration in customers, suppliers, or geography raises risk.

Barriers to entry and pricing power support margins.

Industry benchmarks calibrate margins, growth, and leverage.

SWOT and PEST support quantitative forecasting.

Value = normalized earnings / cap rate; cap rate = discount rate minus growth.

Gordon growth: Value = CF1 / (r - g).

CAPM adds risk-free rate, beta times equity risk premium, and premiums.

WACC blends after-tax cost of debt and cost of equity by capital weights.

Build-up method adds risk-free rate, ERP, size, industry, and company-specific premiums.

Mid-year convention increases value versus year-end discounting.

Terminal value often dominates and must be stress-tested.

Project cash flows from revenue, margins, capex, working capital, and taxes.

Guideline public company method applies public multiples to the subject.

Guideline transactions method uses control prices, implying control and synergies.

Match multiples to metrics and capital structure (EV vs equity).

EV multiples use pre-interest metrics; equity multiples use after-interest metrics.

Comparables selected on size, growth, margins, leverage, and industry.

Control premiums commonly range roughly 20-40 percent.

Adjust transaction multiples for time and market conditions.

Weighting reflects data quality and relevance.

Adjusted book value restates assets and liabilities to fair market value.

Asset-based value = FMV assets minus FMV liabilities.

Intangibles are identified and valued separately when material.

Orderly liquidation allows marketing time; forced liquidation does not.

Liquidation costs reduce net proceeds.

Asset-based value typically serves as a floor for going concerns.

Fixed assets valued at depreciated replacement cost or market comparables.

DLOC reflects reduced influence in a minority interest.

DLOM reflects time and cost to convert to cash.

DLOC = 1 - [1 / (1 + control premium)].

DLOM and DLOC compound multiplicatively.

Minority value uses discounted pro-rata control value or direct cash flow.

Key person dependence and transfer restrictions raise DLOM.

Swing-vote or blocking rights can reduce DLOC.

Discounts require empirical support tied to the subject.

Weight approaches by relevance, data quality, and purpose.

Present value as a point estimate or range consistent with the standard of value.

Reports include scope, sources, assumptions, and limiting conditions.

USPAP offers Appraisal Report and Restricted Appraisal Report options.

Apply noncontrolling and marketability adjustments after selecting enterprise value.

Sensitivity analysis tests discount rate and growth assumptions.

Cross-check DCF-implied multiples against market data.

Post-date events are disclosed but do not change value unless confirming prior conditions.