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CBV MQE practice questions

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Question 1Business Valuation (content domains not enumerated in source)

Under the income approach, which capitalization method converts a single representative benefit stream into an indication of value?

  1. Guideline transaction method using pricing multiples from acquisitions
  2. Direct capitalization using a capitalization rate derived from the discount rate less expected growth Correct answer.
  3. Adjusted book value method applied to the subject's net assets
  4. Yield capitalization discounting each projected year's cash flow separately

Explanation

Direct capitalization divides one normalized benefit stream by a capitalization rate, and in a growing-perpetuity framework that rate equals the discount rate minus long-term growth. The method is appropriate when the benefit stream is expected to grow at a stable rate in perpetuity.

Question 2Business Valuation (content domains not enumerated in source)

A valuation analyst selects guideline public companies that are significantly larger and more diversified than the subject. Which adjustment most directly addresses the resulting pricing distortion?

  1. Adding a blockage discount to the equity value
  2. Normalizing the subject's working capital to the peer median
  3. Selecting a control premium from acquisition data
  4. Applying a size premium to the discount rate Correct answer.

Explanation

Pricing multiples drawn from larger, more diversified peers typically embed lower risk, so a size premium (or a downward multiple adjustment) is used to reflect the subject's greater relative risk. Size premia are commonly supported by empirical studies of returns by market capitalization.

Question 3Business Valuation (content domains not enumerated in source)

Which statement best describes the treatment of nonoperating assets in an enterprise-value-based valuation?

  1. They are deducted from invested capital as a form of debt-like item
  2. They are included in the projected operating cash flows used to derive enterprise value
  3. They are excluded entirely because they generate no operating income
  4. They are added to the indicated operating enterprise value to reach total invested capital value Correct answer.

Explanation

Enterprise value captures only operating assets, so excess cash, marketable securities, and other nonoperating assets are added back after the operating value is determined. Their associated income is likewise excluded from the operating benefit stream to avoid double counting.

Question 4Business Valuation (content domains not enumerated in source)

In the excess earnings method, the analyst first deducts returns on which components before attributing residual earnings to goodwill?

  1. Working capital and fixed assets at required rates of return Correct answer.
  2. Deferred revenue and accrued liabilities at zero return
  3. Only intangible assets already identified at their book values
  4. Only long-term debt at its coupon rate

Explanation

The excess earnings method allocates a required return to net tangible assets, typically working capital and fixed assets, and treats the remainder as attributable to intangible value. That residual is then capitalized to indicate the intangible or goodwill value.

Question 5Business Valuation (content domains not enumerated in source)

Which factor most strongly supports applying a discount for lack of marketability to a minority interest in a closely held company?

  1. Absence of a ready public market and restrictions on transfer Correct answer.
  2. The company pays regular dividends to shareholders
  3. The interest is freely tradable on an exchange
  4. The subject interest carries voting control

Explanation

Lack of marketability discounts reflect the difficulty and cost of converting an ownership interest to cash, which is greatest where no public market exists and transfer is restricted. Control, dividend policy, and public tradability all reduce rather than support such a discount.

Question 6Business Valuation (content domains not enumerated in source)

A subject company reports normalized EBITDA of $5.0 million. Selected guideline companies trade at a median EV/EBITDA multiple of 7.0x. After applying the multiple, the analyst must still add which item to reach equity value?

  1. The full amount of accounts payable
  2. The company's annual capital expenditures
  3. Deferred tax assets arising from net operating losses
  4. Excess cash and nonoperating assets, net of interest-bearing debt Correct answer.

Explanation

An EBITDA multiple produces an enterprise value, so equity value requires adding nonoperating assets such as excess cash and subtracting interest-bearing debt. Ordinary working capital items are already captured within enterprise value.

Question 7Business Valuation (content domains not enumerated in source)

Which discount rate concept assumes a constant debt-to-total-capital ratio over the projection period?

  1. Cost of debt applied to interest-bearing obligations
  2. Weighted average cost of capital applied to free cash flow to the firm Correct answer.
  3. Cost of equity applied to free cash flow to equity
  4. Unlevered cost of equity applied without any debt tax shield

Explanation

WACC weights debt and equity at target market-value proportions and assumes that mix is maintained, so the interest tax shield is captured in the rate rather than in the cash flows. Free cash flow to the firm is then discounted at WACC.

Question 8Business Valuation (content domains not enumerated in source)

Which of the following is the most appropriate basis for the market value of a minority, nonmarketable interest in a holding company whose only asset is a diversified securities portfolio?

  1. Capitalized normalized operating cash flow of the holding company
  2. Net asset value of the portfolio, adjusted for marketability and any tax effects Correct answer.
  3. Guideline public company EV/EBITDA multiple applied to portfolio income
  4. Replacement cost of the holding company's administrative overhead

Explanation

Where a company's value derives almost entirely from marketable securities, net asset value is the most direct and reliable indicator. Adjustments for marketability and embedded gains taxes may then be applied to reach the subject interest value.

Question 9Business Valuation (content domains not enumerated in source)

When using the guideline public company method, how is a control premium typically applied?

  1. It is applied in place of a marketability discount
  2. It is deducted from enterprise value to reach equity value
  3. It is added to every minority interest indication by default
  4. It is added only when the subject interest being valued is a controlling interest Correct answer.

Explanation

Public comparables trade as minority interests, so a control premium is added only when the subject is a controlling interest. For a minority subject, no control premium is applied, and a marketability discount may instead be considered.

Question 10Business Valuation (content domains not enumerated in source)

Which item is generally treated as a debt-like adjustment when bridging from enterprise value to equity value?

  1. Inventory valued at the lower of cost or market
  2. Prepaid insurance premiums
  3. An underfunded pension obligation Correct answer.
  4. A customer list intangible

Explanation

An unfunded pension liability is a financing-type obligation that reduces equity value in the EV-to-equity bridge. Operating working capital items and identified intangibles are already captured within enterprise value.

Question 11Business Valuation (content domains not enumerated in source)

A valuation of a 30% noncontrolling interest in a company with no shareholder agreement restrictions is performed. Which adjustment sequence is most defensible?

  1. Apply a marketability discount only, without a minority discount or control premium Correct answer.
  2. Apply neither a marketability discount nor any other adjustment
  3. Apply both a minority discount and a control premium
  4. Apply a control premium followed by a marketability discount

Explanation

Because the interest is already noncontrolling, no minority discount or control premium is needed; the interest's level of control is inherent in the subject. A marketability discount may still apply if the interest is not freely tradable.

Question 12Business Valuation (content domains not enumerated in source)

Which method estimates the value of a subject by reference to the prices paid for entire companies in the same industry?

  1. Guideline transaction method Correct answer.
  2. Relief-from-royalty method
  3. Dividend capitalization method
  4. Guideline public company method

Explanation

The guideline transaction method, also called the merger and acquisition method, draws multiples from completed transactions in whole companies. Those multiples typically reflect control and may require adjustment for differences in timing and terms.

Question 13Business Valuation (content domains not enumerated in source)

In a discounted cash flow model, which change would most likely increase the indicated enterprise value, all else equal?

  1. Shortening the projection period and omitting a terminal value
  2. Raising the assumed long-term growth rate above the discount rate
  3. Lowering the assumed weighted average cost of capital Correct answer.
  4. Increasing projected capital expenditures without any revenue benefit

Explanation

A lower discount rate increases the present value of every projected cash flow and the terminal value. Growth assumptions must remain below the discount rate for a perpetuity to be economically meaningful.

Question 14Business Valuation (content domains not enumerated in source)

Which of the following best characterizes the relief-from-royalty method?

  1. It measures the cost to recreate the intangible asset
  2. It allocates total enterprise value among contributory assets
  3. It capitalizes the royalty the owner avoids paying by owning the intangible Correct answer.
  4. It compares the subject intangible to recent sales of similar intangibles

Explanation

Relief-from-royalty estimates the hypothetical royalty payments avoided through ownership and discounts those after-tax savings to present value. It is an income approach technique commonly applied to trademarks and technology.

Question 15Business Valuation (content domains not enumerated in source)

A company's normalized earnings include a one-time gain from the sale of a building. How should the analyst treat this item?

  1. Remove it from normalized earnings and treat the building as a nonoperating asset if retained Correct answer.
  2. Include it in earnings and also add the building value separately
  3. Retain it because it is a genuine cash inflow to the company
  4. Annualize it over the projection period as recurring income

Explanation

Nonrecurring gains must be stripped from normalized earnings so the benefit stream reflects sustainable operations. If the related asset remains, it is captured separately as a nonoperating asset to avoid double counting.

Question 16Business Valuation (content domains not enumerated in source)

Which statement about the cost of equity in the capital asset pricing model is accurate?

  1. It equals the risk-free rate plus the equity risk premium without regard to beta
  2. It equals the risk-free rate plus beta times the equity risk premium Correct answer.
  3. It equals the weighted average cost of capital when debt is zero
  4. It equals the after-tax cost of debt plus a fixed spread

Explanation

CAPM expresses the cost of equity as the risk-free rate plus a systematic risk premium equal to beta times the market equity risk premium. A size premium or company-specific premium may be added when supported.

Question 17Business Valuation (content domains not enumerated in source)

An analyst uses the guideline public company method and applies a multiple derived from EBITDA that includes a deduction for depreciation. Which statement is correct?

  1. The multiple must be converted to an equity multiple before use
  2. The multiple should instead be applied to net income after interest
  3. The multiple is consistent with EBITDA because both measure pre-depreciation earnings Correct answer.
  4. The multiple requires a working capital adjustment before application

Explanation

A multiple's numerator and denominator must be consistently defined, so an EV/EBITDA multiple is applied to EBITDA. Mixing an enterprise-value multiple with an equity-level earnings measure would mismatch the capital structure captured.

Question 18Business Valuation (content domains not enumerated in source)

Which of the following is the primary purpose of a valuation report's statement of limiting conditions?

  1. To list the guideline companies selected for the market approach
  2. To summarize the company's historical financial statements
  3. To disclose assumptions, scope limitations, and reliance restrictions affecting the conclusion Correct answer.
  4. To present the analyst's professional qualifications and licensing

Explanation

Limiting conditions inform readers about the assumptions made, the information relied upon, and the restrictions on use of the report. They protect both the analyst and the reader by framing the conclusion's scope.

Question 19Business Valuation (content domains not enumerated in source)

In a with-and-without analysis of a noncompete agreement, the value is measured as which difference?

  1. Royalty rate avoided versus the market royalty rate
  2. Present value of cash flows with the agreement in place versus without it Correct answer.
  3. Book value of the protected assets versus their fair value
  4. Cost of the agreement's legal drafting versus its negotiated price

Explanation

The with-and-without method values an intangible by comparing the present value of expected cash flows with and without the asset in place. For a noncompete, the difference reflects protection from competitive harm during the agreement term.

Question 20Business Valuation (content domains not enumerated in source)

Which circumstance most likely warrants a company-specific risk premium in the discount rate?

  1. A target capital structure consistent with industry norms
  2. A strong, diversified customer base
  3. Heavy dependence on a single customer with no long-term contract Correct answer.
  4. A history of stable, growing operating margins

Explanation

A company-specific risk premium captures idiosyncratic risk not reflected in beta or size premia, such as concentrated customer dependence. Diversified customers and stable margins reduce rather than increase such risk.

Question 21Business Valuation (content domains not enumerated in source)

Which statement about the terminal value in a discounted cash flow model is most accurate?

  1. It is typically immaterial for going-concern companies
  2. It should be calculated using the book value of net assets at the horizon date
  3. It eliminates the need to normalize the final year's cash flow
  4. It often represents the majority of enterprise value and is highly sensitive to the growth and discount rate assumptions Correct answer.

Explanation

For a going concern, the terminal value usually dominates the total indication and is very sensitive to the perpetuity growth rate and discount rate. The final year's cash flow should still be normalized to a sustainable level before capitalization.

Question 22Business Valuation (content domains not enumerated in source)

Which of the following best describes a minority discount?

  1. A reduction for the inability to sell the interest in a public market
  2. An increase reflecting the benefits of controlling the entity
  3. A reduction reflecting the absence of control over the entity's decisions and cash flows Correct answer.
  4. A reduction for restrictions on transferring publicly traded shares

Explanation

A minority discount reflects the lack of control inherent in a noncontrolling interest, such as inability to direct dividends or operations. It is distinct from a marketability discount, which addresses liquidity.

Question 23Business Valuation (content domains not enumerated in source)

An analyst is valuing a controlling interest using guideline public company multiples that already reflect minority trading prices. Which adjustment is most consistent with the subject interest?

  1. Deduct a minority discount from the minority-based indication
  2. Apply a blockage discount to the indication
  3. Make no adjustment because multiples already reflect control
  4. Add a control premium to the minority-based indication Correct answer.

Explanation

Public trading prices reflect minority interests, so a controlling subject requires a control premium to reflect the benefits of control. Deducting a minority discount would compound the mismatch in the wrong direction.

Question 24Business Valuation (content domains not enumerated in source)

Which of the following is an appropriate use of the asset-based approach?

  1. Valuing a going concern with substantial goodwill and recurring earnings
  2. Valuing a company whose value derives primarily from a patented technology
  3. Valuing a service business with minimal tangible assets and strong earnings
  4. Valuing an investment holding company whose value is driven by its portfolio of securities Correct answer.

Explanation

The asset-based approach is most reliable when a company's value is concentrated in identifiable assets, such as an investment holding company. For going concerns whose value derives from earnings or intangibles, income and market approaches are generally more relevant.

Question 25Business Valuation (content domains not enumerated in source)

Which statement about the discount for lack of control relative to the control premium is most accurate?

  1. The implied minority discount is always larger than the control premium
  2. The two concepts are unrelated and cannot be compared
  3. The implied minority discount is not simply the reciprocal of the control premium Correct answer.
  4. The implied minority discount always equals the control premium exactly

Explanation

Because the premium is applied to a minority base and the discount to a control base, the implied discount differs mathematically from the premium. Analysts should compute the implied discount from the premium rather than assume equality.

Question 26Business Valuation (content domains not enumerated in source)

Under the income approach, which valuation date convention requires the analyst to discount projected cash flows to the beginning of each period rather than the end?

  1. Average-date convention
  2. Beginning-of-period convention Correct answer.
  3. Mid-year convention
  4. End-of-period convention

Explanation

A beginning-of-period convention treats each period's cash flow as received at the start of the period, so a full period of discounting is applied before the flow is counted. The mid-year convention assumes flows arrive evenly through the period and discounts by half a period. Choosing the convention materially changes the indicated value, so it must be disclosed.

Question 27Business Valuation (content domains not enumerated in source)

A valuation analyst is told the subject company's goodwill has an indefinite useful life for accounting purposes. How should this affect the valuation of that intangible asset?

  1. The asset is amortized over a standard ten-year period for valuation purposes
  2. The asset is assigned a finite remaining life equal to the reporting unit's remaining depreciation period
  3. The asset still requires a finite remaining useful life assumption, because indefinite accounting life does not mean infinite economic life Correct answer.
  4. The asset is valued as a perpetual annuity with no growth

Explanation

Accounting treatment of goodwill as indefinite-lived does not establish an infinite economic life for valuation. The analyst must select a finite remaining useful life based on competitive, regulatory, and customer factors. That life drives the amortization tax benefit and the terminal assumptions in the income approach.

Question 28Business Valuation (content domains not enumerated in source)

Which valuation premise assumes that a market participant would pay for an asset based on the cash flows it generates in combination with other assets as part of a going concern?

  1. In-exchange premise
  2. Orderly liquidation premise
  3. In-use premise Correct answer.
  4. Replacement cost premise

Explanation

The in-use premise reflects value to a market participant using the asset together with complementary assets in a going concern. The in-exchange premise instead assumes the asset is sold on a standalone basis. The distinction matters most when valuing individual assets acquired in a business combination.

Question 29Business Valuation (content domains not enumerated in source)

A company's invested capital consists of $400 million of debt and $600 million of equity. Its after-tax cost of debt is 4% and its cost of equity is 12%. Using market value weights, what is the weighted average cost of capital?

  1. 7.2%
  2. 9.6%
  3. 6.4%
  4. 8.8% Correct answer.

Explanation

WACC weights each component by its share of total capital and applies the respective cost. Debt is 40% of the $1.0 billion total and equity is 60%. The computation is 0.40 times 4% plus 0.60 times 12%, which equals 1.6% plus 7.2%, or 8.8%.

Question 30Business Valuation (content domains not enumerated in source)

An analyst builds a capitalization of earnings model using a sustainable normalized earnings figure. Which input converts that single-period earnings stream into an indication of value?

  1. The projected growth rate in perpetuity
  2. The terminal year's depreciation expense
  3. The historical five-year average capital expenditure
  4. The capitalization rate, equal to the discount rate less long-term growth Correct answer.

Explanation

The capitalization rate divides a single normalized earnings figure into value and equals the discount rate minus expected long-term growth. Dividing normalized earnings by that rate produces the indicated value directly. Growth above the discount rate would produce a nonsensical negative rate.

Question 31Business Valuation (content domains not enumerated in source)

An analyst values a reporting unit and finds that its carrying amount exceeds its fair value. Under the applicable impairment guidance, which conclusion follows?

  1. Goodwill impairment is indicated but the loss cannot exceed the goodwill assigned to the reporting unit Correct answer.
  2. Impairment is measured as the difference between carrying amount and book value of net assets
  3. No further analysis is required because fair value is below carrying amount
  4. The entire carrying amount of the reporting unit must be written off

Explanation

When carrying amount exceeds fair value, goodwill impairment is indicated, but the loss is capped at the goodwill allocated to that reporting unit. The underlying net assets are not written down below fair value in the goodwill test. This cap prevents the impairment from exceeding the recorded goodwill balance.

Question 32Business Valuation (content domains not enumerated in source)

Which statement best describes the market approach's reliance on the efficient market hypothesis?

  1. It assumes that historical prices are irrelevant to current value
  2. It assumes that public companies are always more valuable than private companies
  3. It assumes that market prices reflect available information and can serve as evidence of value Correct answer.
  4. It assumes that observed transaction prices always equal intrinsic value

Explanation

The market approach relies on the premise that prices observed in active markets incorporate available information and therefore provide evidence of value. It does not assert that prices are always equal to intrinsic value. Adjustments are still needed for differences in size, growth, and risk.

Question 33Business Valuation (content domains not enumerated in source)

A subject company has a net operating loss carryforward. In a discounted cash flow model, how is the value of that carryforward typically captured?

  1. As an addition to the terminal value growth rate
  2. As a separate present value of the tax savings from future NOL utilization Correct answer.
  3. As a reduction to the discount rate applied to all projected cash flows
  4. As a direct addition to the equity value without discounting

Explanation

The NOL carryforward produces tax savings only when it shelters future taxable income, so its value is the present value of those expected tax savings. Timing and limitation rules affect when the shield can be used. Adding it undiscounted overstates value because utilization occurs in future periods.

Question 34Business Valuation (content domains not enumerated in source)

Which approach to valuing a minority interest is most consistent with the principle of proportionality when no control or marketability adjustments are warranted?

  1. Applying a control premium to the pro rata share of enterprise value
  2. Applying a discount for lack of control to the pro rata share
  3. Valuing the interest at the liquidation value of the underlying assets
  4. Valuing the interest as a pro rata share of the total equity value Correct answer.

Explanation

When no adjustment is warranted, a minority interest is valued at its proportionate share of total equity value. This reflects the ownership percentage applied to the whole. Control premiums and minority discounts are applied only when the facts justify them.

Question 35Business Valuation (content domains not enumerated in source)

An analyst selects guideline companies that are significantly larger than the subject and applies a size premium in the discount rate. What is the primary economic rationale for this adjustment?

  1. Larger companies are assumed to have higher growth rates
  2. Smaller companies are believed to carry greater unsystematic risk that investors require compensation for Correct answer.
  3. Smaller companies are exempt from market risk
  4. Larger companies always have lower debt levels

Explanation

The size premium reflects empirical evidence that smaller companies carry greater risk, including limited access to capital and customer concentration. Investors require additional return for bearing that risk. The premium is applied to the cost of equity, not used to assume growth differences.

Question 36Business Valuation (content domains not enumerated in source)

Which of the following is the most appropriate treatment of an operating lease obligation in an enterprise value to equity value bridge when the company reports under a framework that capitalizes leases?

  1. Add the lease liability to enterprise value as an equity item
  2. Treat the lease liability as a debt-like item and the corresponding right-of-use asset as part of invested capital Correct answer.
  3. Treat the lease liability as a reduction to normalized EBITDA
  4. Exclude the lease liability entirely from the bridge

Explanation

When leases are capitalized on the balance sheet, the lease liability functions like debt and the right-of-use asset is part of operating invested capital. Consistency requires that EBITDA exclude rent and that the liability be deducted in the bridge. Mixing treatments produces double counting or omission.

Question 37Business Valuation (content domains not enumerated in source)

A valuation analyst is estimating the fair value of a customer relationship intangible. Which method directly discounts the expected profits attributable to those customers after returns on contributory assets?

  1. Guideline transaction method
  2. Multi-period excess earnings method Correct answer.
  3. Relief-from-royalty method
  4. Replacement cost method

Explanation

The multi-period excess earnings method discounts the cash flows attributable to the subject intangible after charging returns for contributory assets such as working capital and fixed assets. It is commonly applied to customer relationships because those cash flows are identifiable and finite. The residual cash flow after contributory charges is the intangible's contribution.

Question 38Business Valuation (content domains not enumerated in source)

In a guideline merged and acquired company method, an analyst observes transaction multiples that embed synergies available to strategic buyers. What adjustment is typically needed when valuing a non-synergistic standalone interest?

  1. Apply a marketability discount to the multiples themselves
  2. Apply a control premium to the observed multiples
  3. Increase the multiples to reflect the subject's growth prospects
  4. Reduce the observed multiples to remove the effect of buyer-specific synergies Correct answer.

Explanation

Transaction multiples often reflect synergies that a specific acquirer expected, which a standalone subject would not capture. The analyst reduces the observed multiples to isolate the standalone value. This avoids attributing acquirer-specific benefits to the subject interest.

Question 39Business Valuation (content domains not enumerated in source)

Which item is most appropriately classified as a non-operating asset when estimating enterprise value?

  1. Excess cash and marketable securities Correct answer.
  2. Prepaid operating expenses
  3. Accounts receivable
  4. Inventory

Explanation

Excess cash and marketable securities are not needed for operations and are added separately in the bridge to equity value. Working capital items such as receivables, inventory, and prepaid expenses support operations and are embedded in enterprise value. Misclassifying excess cash as operating distorts the enterprise value.

Question 40Business Valuation (content domains not enumerated in source)

An analyst values a controlling interest in a private company using guideline public company multiples that reflect minority trading prices. Which adjustment is most appropriate?

  1. Apply a minority discount to the indicated value
  2. Apply a control premium to the indicated minority value to reflect the controlling interest Correct answer.
  3. Apply a discount for lack of marketability to the multiples
  4. Make no adjustment because the subject interest is controlling

Explanation

Guideline public company multiples reflect minority trading prices, so a controlling interest requires a control premium to reflect the ability to direct the business. The premium is applied after the minority indication is derived. Omitting it understates the controlling interest's value.

Question 41Business Valuation (content domains not enumerated in source)

Which factor most directly supports the use of a discount for lack of marketability when valuing a closely held interest?

  1. The company has a long operating history
  2. The company pays regular dividends
  3. The interest cannot be readily converted to cash in a public market Correct answer.
  4. The interest carries voting control

Explanation

A discount for lack of marketability reflects the inability to quickly sell an interest in a public market. The discount compensates the holder for illiquidity and the associated costs and time to sell. Control, operating history, and dividend policy address different attributes.

Question 42Business Valuation (content domains not enumerated in source)

An analyst is reconciling indications of value from the income, market, and asset approaches. Which practice best supports the final selected value?

  1. Selecting the highest indication to avoid understating value
  2. Weighting the indications based on the relevance and reliability of the underlying data Correct answer.
  3. Discarding the income approach whenever the market approach is available
  4. Averaging the three indications equally regardless of data quality

Explanation

Reconciliation is a judgmental process that weights each indication by the quality, relevance, and reliability of its inputs. Equal weighting ignores differences in data quality. The selected value should be supported by reasoning, not by mechanical averaging or by choosing extremes.

Question 43Business Valuation (content domains not enumerated in source)

Which statement about the use of the asset-based approach for a going-concern operating company is most accurate?

  1. It generally ignores the value of assembled workforce and going-concern goodwill Correct answer.
  2. It values only intangible assets and excludes tangible assets
  3. It always produces a higher value than the income approach
  4. It is required for all private company valuations

Explanation

A pure asset-based approach sums the fair values of individual assets and liabilities and typically omits going-concern elements such as assembled workforce and internally generated goodwill. For profitable operating companies it often understates value. It is most useful for holding companies or asset-intensive entities.

Question 44Business Valuation (content domains not enumerated in source)

A company reports EBITDA of $12 million and annual capital expenditures of $5 million, with depreciation of $4 million. An analyst wants a multiple that better reflects cash available to capital providers. Which adjustment is most appropriate?

  1. Use EBITDA without adjustment because it already reflects capital spending
  2. Deduct capital expenditures in excess of depreciation to derive an adjusted EBITDA Correct answer.
  3. Add back depreciation to EBITDA a second time
  4. Replace EBITDA with gross revenue

Explanation

EBITDA ignores the cash cost of replacing assets, so analysts often deduct capital expenditures in excess of depreciation to approximate cash flow available to capital providers. This adjusted measure improves comparability across companies with different capital intensity. Simply using EBITDA can overstate cash-generating ability.

Question 45Business Valuation (content domains not enumerated in source)

Which of the following best explains why a terminal value is often the largest component of a discounted cash flow valuation?

  1. Terminal value excludes the cost of capital
  2. Terminal value is discounted at a lower rate than the forecast period
  3. Terminal value captures all cash flows beyond the explicit forecast period, which is typically a small fraction of the company's life Correct answer.
  4. Terminal value is based on historical results rather than projections

Explanation

Because the explicit forecast period usually covers only a few years while the business is assumed to continue indefinitely, the terminal value captures most of the going-concern value. That is why terminal growth and discount rate assumptions are heavily scrutinized. Small changes in these inputs can move the indicated value substantially.

Question 46Business Valuation (content domains not enumerated in source)

An analyst is estimating the cost of equity for a private company using the build-up method. Which component is included in the build-up method but not in the standard capital asset pricing model?

  1. The market beta
  2. A company-specific risk premium Correct answer.
  3. The equity risk premium
  4. The risk-free rate

Explanation

The build-up method starts with the risk-free rate and adds an equity risk premium plus a size premium and a company-specific risk premium. It omits beta because the subject's returns are not observable in the market. The company-specific premium captures risks unique to the subject.

Question 47Business Valuation (content domains not enumerated in source)

A company has 1,000,000 shares outstanding and an indicated equity value of $15 million. It holds 100,000 treasury shares. Which share count should be used to derive value per share for a minority holder?

  1. 1,000,000 shares, because treasury shares are already issued
  2. 1,100,000 shares, including treasury shares
  3. 100,000 shares, representing only the treasury holdings
  4. 900,000 shares, excluding treasury shares Correct answer.

Explanation

Treasury shares are issued but no longer outstanding, so they do not participate in equity value. The value per share should be based on shares outstanding, which equals issued shares less treasury shares, or 900,000. Using issued shares would understate value per share.

Question 48Business Valuation (content domains not enumerated in source)

Which of the following best describes the role of a control premium in the context of the market approach?

  1. It adjusts for differences in accounting policies between companies
  2. It reflects the time value of money over the projection period
  3. It reflects the additional value a buyer will pay for the ability to direct the operations and cash flows of a business Correct answer.
  4. It compensates the buyer for illiquidity of the investment

Explanation

A control premium represents the incremental amount a buyer pays to obtain control, including the ability to direct operations and cash flows. It is distinct from marketability and time value concepts. Control premiums are derived from observed acquisition prices relative to pre-announcement trading prices.

Question 49Business Valuation (content domains not enumerated in source)

An analyst values a patent using the relief-from-royalty method. The royalty rate is 5% of projected revenue of $20 million, the tax rate is 25%, the remaining life is five years, and the discount rate is 12%. What is the first-year after-tax royalty savings before discounting?

  1. $500,000
  2. $1,250,000
  3. $750,000 Correct answer.
  4. $1,000,000

Explanation

The royalty savings before tax equal 5% of $20 million, or $1.0 million. Applying the 25% tax rate leaves $750,000 after tax. This figure is then discounted over the remaining life to arrive at the patent's indicated value.

Question 50Business Valuation (content domains not enumerated in source)

Which of the following best describes how the guideline public company method typically treats a subject company's superior growth prospects relative to its guideline companies?

  1. It replaces the multiple with a capitalization rate
  2. It ignores growth differences because multiples already capture them
  3. It applies a downward adjustment to the selected multiple
  4. It applies an upward adjustment to the selected multiple Correct answer.

Explanation

When the subject's growth prospects exceed those of the guideline companies, the selected multiple is adjusted upward to reflect that advantage. The adjustment is judgmental and supported by the comparability analysis. Ignoring the difference would misstate relative value.