ASA BV Challenge Exam flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Fair Market Value

The price a hypothetical willing buyer would pay a willing seller, both informed and acting without compulsion, in an arm's-length transaction.

Investment Value

The value of a business to a specific buyer, reflecting that buyer's synergies, risk profile, and strategic objectives rather than a hypothetical market participant.

Premise of Value

The assumed condition of the business at valuation, such as going concern, orderly liquidation, or forced liquidation, which must align with the standard of value.

Highest and Best Use

The use that is legally permissible, physically possible, financially feasible, and maximally productive, yielding the highest value for the asset.

Valuation Date

The specific date as of which value is concluded; only information known or knowable by that date is used in the analysis.

Engagement Letter

A written agreement defining the purpose, standard and premise of value, valuation date, scope of work, assumptions, and fee basis for the engagement.

Intended Use

The purpose for which the valuation is prepared, such as litigation, tax, or transaction support, which determines the required scope and reporting.

Scope of Work

The extent of research, analysis, and data gathering sufficient for credible results given the intended use and intended users of the valuation.

Financial Statement Reliability

The level of assurance from audited, reviewed, compiled, or internal statements, which affects how much the appraiser can rely on them.

Common-Size Analysis

Expressing income statement lines as a percentage of revenue or balance sheet lines as a percentage of total assets to compare across periods and peers.

Normalization Adjustments

Adjustments removing nonrecurring, nonoperating, and discretionary items from reported earnings to derive sustainable economic earnings for valuation.

Excess Owner Compensation

The difference between actual owner compensation and the market-rate replacement compensation, added back or deducted to reflect economic earnings.

Nonoperating Assets

Assets such as excess cash, marketable securities, or real estate not needed in operations; removed from operating value and added separately at fair value.

Working Capital Normalization

Adjusting working capital to a typical operating level; surplus or deficit relative to the norm adjusts the concluded value of the business.

Porter's Five Forces

A framework analyzing rivalry, new entrants, substitutes, supplier power, and buyer power to assess industry profitability and competitive intensity.

Industry Life Cycle

The stage of an industry (start-up, growth, maturity, decline) that informs growth assumptions, risk premiums, and margin expectations.

Customer Concentration

Reliance on a small number of customers, which increases business risk and may warrant a higher discount rate or lower multiple.

Barriers to Entry

Factors such as capital, regulation, or brand that deter new competitors, supporting pricing power, margins, and lower business risk.

Capitalization of Earnings

A single-period income method where value equals normalized earnings divided by a capitalization rate equal to discount rate minus growth.

Gordon Growth Model

A perpetuity formula valuing cash flows as CF1 divided by the discount rate minus sustainable growth, often used for terminal value.

CAPM

A model where cost of equity equals the risk-free rate plus beta times the equity risk premium, sometimes with size and company-specific premiums.

WACC

The weighted average cost of capital blending after-tax cost of debt and cost of equity by their proportions in the capital structure.

Build-Up Method

A discount rate method adding risk-free rate, equity risk premium, size premium, industry premium, and company-specific risk premium.

Mid-Year Convention

A convention treating cash flows as received midway through each period, which raises present value relative to end-of-year discounting.

Guideline Public Company Method

A market approach applying valuation multiples of comparable publicly traded firms to the subject company's financial metric.

Guideline Transactions Method

A market approach using prices paid in merger and acquisition transactions, which reflect control and possibly buyer synergies.

Enterprise Value Multiple

A multiple such as EV/EBITDA applied to pre-interest metrics, matching enterprise value to the whole capital structure.

Adjusted Book Value

An asset-based method restating assets and liabilities to fair market value, typically used for asset-intensive or holding companies.

Orderly Liquidation Value

The value from selling assets over a reasonable marketing period, net of liquidation costs, as opposed to a forced sale.

Discount for Lack of Control

An adjustment reducing value for a minority interest's inability to influence distributions, strategy, or management decisions.

Discount for Lack of Marketability

An adjustment reflecting the time and cost to convert an ownership interest to cash, supported by restricted stock and pre-IPO studies.

Reconciliation of Approaches

The process of weighting income, market, and asset approaches by relevance and data quality to reach a concluded value.