Business Valuation in Divorce Flashcards
7 cards from real CDA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Business Valuation in Divorce flashcards as text
A CDA is reviewing a business valuation report and notices the appraiser used a 'build-up method.' This method is used to determine:
Answer: The appropriate discount or capitalization rate
The build-up method constructs a discount rate by adding risk premiums (equity risk, size, industry, company-specific) to a risk-free rate.
Which of the following is a key difference between the capitalization method and the discounted cash flow (DCF) method?
Answer: The capitalization method assumes stable earnings; DCF accommodates variable growth projections
Capitalization applies a single rate to a normalized earnings figure assuming stable, steady-state growth, while DCF forecasts variable cash flows over a projection period.
When courts distinguish between marital and separate property components of a business, which portion is typically treated as marital property?
Answer: Appreciation in value occurring during the marriage
Most states treat the increase in business value during the marriage as marital property subject to division.
An appraiser uses EBITDA multiples from comparable public companies to value a private business. Which adjustment is typically required?
Answer: Apply a private company discount for size and marketability
Because private companies are less liquid and often smaller than public comparables, valuators typically apply size and marketability discounts to the resulting value.
A spouse claims the business valuation expert used 'investment value' rather than fair market value. How does investment value differ?
Answer: Investment value reflects the worth to a specific buyer given their synergies and expectations
Investment value is the value to a particular investor based on their unique circumstances, synergies, or financing, unlike fair market value's hypothetical arms-length standard.
Which of the following would typically INCREASE the capitalization rate applied to a small business in a divorce valuation?
Answer: Heavy reliance on the owner-spouse for all client relationships
Heavy owner dependency increases business risk, which raises the capitalization rate and correspondingly reduces the indicated value.
In a divorce case involving a franchise business, the franchise agreement is typically analyzed because:
Answer: Transfer restrictions in the agreement may affect the business's marketability and value
Many franchise agreements restrict ownership transfers and require franchisor approval, which can limit marketability and affect the business's fair market value.