CBV MQE 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 at which property would change hands between a hypothetical willing buyer and seller, neither under compulsion, both reasonably informed about relevant facts. It assumes an open market and a reasonable exposure period.

Investment value

The value to a particular investor based on individual investment requirements and expectations, including synergies and tax position. It can exceed fair market value when a specific buyer gains unique benefits.

Going-concern premise

A valuation assumption that the business continues operating and realizes value through ongoing operations rather than asset disposal. It supports income and market approaches and typically produces higher value than liquidation.

Liquidation premise

A valuation assumption that the entity ceases operations and assets are sold individually. Orderly liquidation assumes reasonable marketing time; forced liquidation assumes immediate sale and yields the lowest value.

Income approach

A valuation approach that converts expected future economic benefits into present value using a discount rate reflecting risk and time value. Common forms are discounted cash flow and capitalization of earnings.

Market approach

A valuation approach that derives value from prices of comparable assets or businesses, using guideline public companies, merger and acquisition transactions, or prior transactions in the subject interest.

Asset-based approach

A valuation approach that sums the fair values of a company's assets less liabilities, producing adjusted net asset value. It suits holding companies, early-stage firms, and capital-intensive businesses with limited earnings.

Capitalization of earnings

A single-period income method dividing a normalized benefit stream by a capitalization rate. The cap rate equals the discount rate minus expected long-term growth, so it assumes stable perpetual growth.

Gordon growth model

A perpetuity formula valuing a growing stream as next-period cash flow divided by the difference between discount rate and growth rate. Growth must be below the discount rate or the result is meaningless.

Terminal value

The present value at the end of the explicit forecast of all cash flows beyond that horizon, usually computed with a perpetuity growth or exit multiple method. It often exceeds half of total enterprise value.

WACC

The weighted average cost of capital blending after-tax cost of debt and cost of equity by market-value weights. It discounts enterprise free cash flow and must use target, not current, capital structure weights.

CAPM cost of equity

Cost of equity equals the risk-free rate plus beta multiplied by the equity risk premium, often plus size and company-specific premiums. Beta measures sensitivity of the subject's returns to market returns.

Relevered beta

A beta adjusted from comparable companies' observed levered beta by removing their capital structure (unlevering) and then reapplying the subject company's target debt-to-equity ratio.

Equity risk premium

The excess return investors expect from the equity market over the risk-free rate. It is estimated from historical realized returns or forward-looking implied returns from current prices.

Free cash flow to firm

Cash available to all capital providers: EBIT times one minus tax rate, plus depreciation and amortization, minus capital expenditures, minus increases in net working capital. It is discounted at WACC.

Free cash flow to equity

Cash available to common shareholders after debt service and reinvestment: net income plus noncash charges, minus capital expenditures, minus working-capital increases, plus net borrowing. It is discounted at cost of equity.

Normalizing adjustments

Adjustments converting reported financials to an economic benefit stream: market-rate owner compensation, removal of nonrecurring items, related-party terms at arm's length, and discretionary personal expenses added back.

Non-operating assets

Assets not required for operations, such as excess cash, vacant land, or investment portfolios. Their fair value is added separately to the operating enterprise value rather than embedded in cash flow forecasts.

Control premium

The amount by which the pro rata value of a controlling interest exceeds a minority interest value, reflecting the ability to direct operations and cash flows. It is measured from observed acquisitions of control.

Discount for lack of marketability

A reduction in value reflecting the cost and time to convert an ownership interest to cash. It is supported by restricted stock studies and pre-IPO studies and is larger for minority interests in private firms.

Discount for lack of control

A reduction applied to a pro rata value when the interest cannot direct management, distributions, or sale. It is the inverse of a control premium and should not be applied twice.

Enterprise value

The value of the operating business attributable to all capital providers, equal to equity value plus debt, preferred stock, and noncontrolling interests, minus excess cash. It pairs with enterprise-level cash flows and multiples.

EV/EBITDA multiple

Enterprise value divided by earnings before interest, taxes, depreciation, and amortization. It is capital-structure and tax neutral, making it suitable for comparing companies with differing leverage and depreciation policies.

Guideline public company method

A market approach applying pricing multiples from publicly traded companies similar to the subject to the subject's operating metric, with adjustments for size, growth, and liquidity differences.

Guideline transaction method

A market approach using multiples paid in actual acquisitions of comparable companies. Transaction multiples typically embed control premiums and expected synergies and require adjustment for a minority subject interest.

Mid-year convention

A discounting convention assuming cash flows arrive evenly throughout each year, so the first period is discounted at 0.5 years rather than 1.0. It raises present value relative to end-of-year discounting.

Adjusted net asset value

Total fair value of assets minus liabilities, excluding internally generated goodwill. It represents the asset-based approach result and is a floor indication for a going concern with positive earnings.

Excess earnings method

A hybrid method capitalizing earnings above a fair return on net tangible assets as an intangible value, then adding adjusted net tangible asset value. It is common for small businesses and professional practices.

Minority interest valuation

Valuation of an ownership stake that cannot control the entity, typically starting from a controlling or enterprise value and applying lack-of-control and lack-of-marketability discounts supported by empirical studies.

Sensitivity analysis

Testing how value changes with key inputs such as growth rate, discount rate, and margins. It communicates valuation range and identifies which assumptions most influence the concluded value.

Valuation date

The specific point in time to which the value conclusion applies. Only information known or knowable as of that date may be used, and later events are excluded from the analysis.

Premise of value

The assumed circumstances of a sale, such as going concern, orderly liquidation, or forced liquidation. The premise determines which approaches apply and materially changes the concluded value.