ASA Business Valuation Methods 1 — Questions and Answers
Question 1: Which standard of value is most commonly used in US federal tax matters such as estate and gift tax valuations?
- Fair market value (Correct answer)
- Investment value
- Fair value
- Intrinsic value
Correct answer: Fair market value
Fair market value — the price a willing buyer and willing seller would agree upon, both having reasonable knowledge — is the IRS-required standard for tax purposes.
Question 2: In business valuation, the capitalization of earnings method involves dividing a benefit stream by which rate?
- Capitalization rate (Correct answer)
- Discount rate
- Weighted average cost of capital only
- Price-earnings ratio
Correct answer: Capitalization rate
The capitalization rate equals the discount rate minus the expected long-term growth rate of the benefit stream.
Question 3: Which business valuation approach estimates value based on the present value of future economic benefits?
- Income approach (Correct answer)
- Asset approach
- Market approach
- Cost approach
Correct answer: Income approach
The income approach converts anticipated future economic benefits (earnings, cash flow, dividends) into present value using a discount or capitalization rate.
Question 4: EBITDA is commonly used in business valuation as a proxy for:
- Operating cash flow before capital structure and tax effects (Correct answer)
- Net income available to shareholders
- Total enterprise debt obligations
- Market capitalization of equity
Correct answer: Operating cash flow before capital structure and tax effects
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) approximates cash-generating ability independent of financing and accounting choices.
Question 5: A control premium in business valuation represents:
- Additional value paid to obtain a controlling interest (Correct answer)
- A discount for lack of marketability
- The premium a public company trades above book value
- An adjustment for above-market management compensation
Correct answer: Additional value paid to obtain a controlling interest
A control premium reflects the extra amount an acquirer pays to gain control and the ability to direct the enterprise.
Question 6: Which of the following is a form of the market approach in business valuation?
- Guideline public company method (Correct answer)
- Discounted cash flow method
- Adjusted net asset method
- Capitalization of dividends method
Correct answer: Guideline public company method
The guideline public company method uses pricing multiples from publicly traded comparable companies to value the subject business.
ASA Business Valuation Methods 1
Which standard of value is most commonly used in US federal tax matters such as estate and gift tax valuations?