Certified Valuation Analyst CVA Discount Rates and Cost of Capital

Question 1

In the build-up method for estimating cost of equity, which component is added to the risk-free rate to account for the size of the subject company?

Accepted Answer

Small company risk premium

Answer

Equity risk premium

Answer

Industry risk premium

Answer

Company-specific risk premium

Question 2

The Weighted Average Cost of Capital (WACC) is used in business valuation primarily when:

Accepted Answer

Valuing invested capital using a debt-free net cash flow stream

Answer

Applying the direct capitalization of equity cash flows

Answer

Using the guideline public company method

Answer

Calculating the asset-based approach

Question 3

Which risk-free rate is most commonly used in U.S. business valuations as the base for the build-up method?

Accepted Answer

Yield on 20-year U.S. Treasury bonds

Answer

Federal funds rate

Answer

3-month U.S. Treasury bill yield

Answer

Prime lending rate

Question 4

Beta in the Capital Asset Pricing Model (CAPM) measures:

Accepted Answer

Systematic (market) risk of an investment relative to the overall market

Answer

Total risk including both systematic and unsystematic components

Answer

The company's financial leverage ratio

Answer

The volatility of a company's earnings over time

Question 5

When using Duff & Phelps size premium data, which decile has the highest size premium?

Accepted Answer

Decile 10 (smallest companies)

Answer

Decile 1 (largest companies)

Answer

Decile 5 (mid-market)

Answer

Decile 8 (small-cap)

Question 6

The company-specific risk premium (CSRP) in the build-up method is intended to capture:

Accepted Answer

Risks unique to the subject company not already reflected in other premium components

Answer

Macroeconomic risk affecting all businesses equally

Answer

The liquidity of the company's stock in public markets

Answer

Regulatory risk applicable to the entire industry