CBV MQE common mistakes
CBV MQE · Understand the traps and how to avoid them.
Treating the three approaches as competing answers and averaging them mechanically, instead of reconciling them and defending a single concluded value with a weighted rationale.
Candidates memorize 'income, market, asset' as a checklist and assume equal weighting is the neutral default, when exam items reward a reasoned selection of the approach most relevant to the subject company's facts.
What to do instead
Before computing, write one sentence on why each approach is or is not applicable (e.g., no reliable guideline transactions, asset-heavy holding company). Weight explicitly and state the qualitative reasons for the weight, not just the arithmetic.
Applying a control premium or a discount for lack of marketability without stating the base to which it applies and without checking for double counting.
Candidates chain adjustments reflexively (DLOM then DLOC, or vice versa) and lose track of whether the starting value is a controlling or minority, marketable or non-marketable interest.
What to do instead
Draw the level-of-value ladder first (control/marketable down to minority/non-marketable), place the starting value on it, and list each adjustment with its base. Test order sensitivity: a discount applied to a minority base is not the same dollar amount as applied to a control base.
Building a discounted cash flow model whose projected cash flows are inconsistent with the discount rate used, e.g., nominal cash flows discounted at a real rate, or pre-tax flows discounted at an after-tax WACC.
Candidates learn the WACC formula and the growth formula separately and never check that the numerator and denominator describe the same thing (currency, tax basis, inflation, and whether debt is in the cash flow).
What to do instead
State the consistency rules explicitly at the top of every model: nominal-to-nominal, after-tax-to-after-tax, and free cash flow to the firm matched to WACC while free cash flow to equity is matched to cost of equity. Reconcile the two paths to the same value as a self-check.
Estimating a terminal value with a perpetuity growth rate that exceeds the long-run growth of the economy, or with an exit multiple that contradicts the explicit-period assumptions.
The terminal value is often 60-80% of total value, and candidates pick a convenient round number or a peer multiple without testing whether implied growth or implied multiple is plausible.
What to do instead
Always back-solve the other direction: from the exit multiple, derive the implied perpetuity growth rate, and from the growth rate, derive the implied multiple. If implied growth exceeds nominal GDP growth, justify it or revise. Also confirm terminal-year capital expenditure and depreciation are in steady state.
Selecting guideline companies or transactions on size, industry label, or a database screen alone, without testing for functional and economic comparability.
Screen output looks authoritative, and candidates assume SIC code plus revenue band equals comparability, ignoring differences in margin structure, capital intensity, growth, and customer concentration.
What to do instead
For each candidate, tabulate the drivers that matter for the multiple being used (margin, growth, reinvestment, leverage, size). Exclude or adjust outliers and explain the exclusion. If no comparable set is defensible, say so and rely on another approach.
Normalizing earnings by accepting the most recent year as reported, or by adjusting only obvious one-offs, without a full normalization of owner compensation, related-party rents, non-recurring items, and accounting policy differences.
Candidates conflate 'normalized' with 'average of three years' and skip the substantive adjustments that exam items deliberately bury in the fact pattern.
What to do instead
Work a standard checklist: officer compensation to market, discretionary and personal expenses, related-party transactions at market terms, non-recurring gains and losses, inventory and revenue recognition policy, and a sustainable maintenance capital expenditure figure. Document each adjustment and its tax effect.
Confusing the valuation date, the report date, and the date of the information used, and then using post-valuation-date events to support the conclusion.
Fact patterns include later events (a sale, a lawsuit outcome) as distractors, and candidates treat hindsight as evidence rather than as information that was unavailable at the valuation date.
What to do instead
Anchor every input to the stated valuation date. Ask of each fact: was this known or knowable at that date? Exclude hindsight, and if a subsequent event is relevant, disclose it separately rather than folding it into the value.
Writing a report that presents a single point value with no scope, no standard of value, no premise of value, and no statement of limiting conditions, or conversely burying the conclusion under boilerplate.
Candidates treat reporting as an afterthought and copy generic template language, missing that exam items test whether the report is adequate for its intended use and audience.
What to do instead
Lead with a clearly identified conclusion, then include the standard and premise of value, the interest valued, the valuation date, the approaches used and rejected, key assumptions, and limiting conditions. Match the report's depth to its purpose (e.g., a summary for internal use versus a full report for litigation or a transaction).
Mishandling the cost of capital: using a published industry beta without unlevering and relevering, ignoring the size and country risk premia consistently, or using a WACC built on target weights while the cash flows assume current weights.
The mechanics are learned as a formula chain, and candidates do not check that the capital structure embedded in the discount rate matches the one embedded in the projections.
What to do instead
Show the build-up explicitly: risk-free rate matched to the cash flow horizon and currency, unlevered beta from comparables, relevering at the subject's target capital structure, and each premium with a source and rationale. Confirm the debt weight in WACC equals the debt assumed in the cash flows.
In an asset-based or intangible-asset valuation, double counting or omitting contributory assets, or applying the wrong premise (orderly liquidation versus going concern) to the subject assets.
Candidates add up asset appraisals and compare the total to an enterprise value without checking whether the assembled assets include working capital, assembled workforce, or synergies already captured elsewhere.
What to do instead
State the premise of value and the asset perimeter first. Use a contributory asset charge or a reconciliation to enterprise value to test for completeness and duplication, and confirm the sum of parts does not implicitly include goodwill that has no separate support.