CBB Business Valuation & Financial Analysis 3 — Questions and Answers
Question 1: In the context of business valuation, 'working capital' is defined as:
- Total assets minus total liabilities
- Current assets minus current liabilities (Correct answer)
- Cash plus accounts receivable
- Revenue minus operating expenses
Correct answer: Current assets minus current liabilities
Working capital = current assets minus current liabilities, measuring short-term liquidity.
Question 2: Which valuation approach is most appropriate when a business generates no profit but holds significant real estate and equipment?
- Income approach
- Market approach
- Asset-based approach (Correct answer)
- Discounted cash flow approach
Correct answer: Asset-based approach
The asset-based approach values individual assets and liabilities, making it ideal when tangible assets dominate and income is minimal.
Question 3: A broker uses Guideline Public Company data and applies a Price/Earnings multiple of 8x to a private company earning $200,000. What adjustment is typically required?
- Add a control premium
- Apply a size and marketability discount (Correct answer)
- Increase earnings by the growth rate
- Subtract accumulated depreciation
Correct answer: Apply a size and marketability discount
Private companies receive discounts for lack of marketability and size compared to publicly traded guideline companies.
Question 4: An accounts receivable aging report is reviewed during due diligence. Receivables over 90 days past due are most likely treated as:
- Full value assets
- Collectible within 30 days
- Uncollectible and excluded from working capital value (Correct answer)
- A liability offsetting inventory
Correct answer: Uncollectible and excluded from working capital value
Aged receivables over 90 days are often considered uncollectible and must be excluded from the clean working capital calculation.
Question 5: A seller's tax return shows $180,000 net income, but the broker identifies $40,000 in non-recurring legal fees. What is the adjusted SDE before owner compensation add-back?
- $140,000
- $180,000
- $220,000 (Correct answer)
- $160,000
Correct answer: $220,000
$180,000 + $40,000 non-recurring expense add-back = $220,000 adjusted earnings before owner compensation.
Question 6: The 'build-up method' is used in business valuation to determine:
- The book value of assets
- An appropriate discount or capitalization rate (Correct answer)
- The revenue multiple for the industry
- The normalized owner's salary
Correct answer: An appropriate discount or capitalization rate
The build-up method sums a risk-free rate plus various risk premiums to construct an appropriate discount or cap rate.
Question 7: Which ratio best measures how efficiently a business converts sales into actual profit?
- Current ratio
- Debt-to-equity ratio
- Net profit margin (Correct answer)
- Asset turnover ratio
Correct answer: Net profit margin
Net profit margin (net income ÷ revenue) directly measures the percentage of each sales dollar retained as profit.
CBB Business Valuation & Financial Analysis 3
In the context of business valuation, 'working capital' is defined as: