Certified Valuation Analyst Asset-Based Approach and Specialized Topics 2 — Questions and Answers
Question 1: Under the adjusted net asset method, what is the first step in valuing a company?
- Restate all assets and liabilities to fair market value (Correct answer)
- Capitalize the company's normalized earnings
- Apply a discount for lack of marketability
- Forecast five years of free cash flow
Correct answer: Restate all assets and liabilities to fair market value
The adjusted net asset method begins by restating each asset and liability from book value to fair market value.
Question 2: The asset-based approach is generally MOST appropriate for which type of company?
- A holding company whose value derives from its underlying assets (Correct answer)
- A fast-growing software firm with few tangible assets
- A professional services firm reliant on key personnel
- A startup with negative earnings and high goodwill
Correct answer: A holding company whose value derives from its underlying assets
Holding and investment companies are well suited to the asset-based approach because their value rests in underlying assets.
Question 3: What does the term 'built-in gains tax' liability refer to in an asset-based valuation of a C corporation?
- The embedded tax on the appreciation of assets if they were sold (Correct answer)
- The penalty for late corporate tax filing
- A discount applied to controlling interests
- The capitalized cost of goodwill amortization
Correct answer: The embedded tax on the appreciation of assets if they were sold
Built-in gains tax reflects the embedded tax that would arise if appreciated assets were sold by the corporation.
Question 4: In the liquidation value method, an 'orderly liquidation' assumes what compared to a 'forced liquidation'?
- A reasonable period to sell assets at higher prices (Correct answer)
- Immediate sale at the lowest possible prices
- No selling costs are deducted
- Assets are sold only to insiders
Correct answer: A reasonable period to sell assets at higher prices
Orderly liquidation allows a reasonable marketing period, generally yielding higher proceeds than a forced sale.
Question 5: Which intangible asset is typically valued using the relief-from-royalty method?
- A trademark or brand name (Correct answer)
- Net working capital
- Marketable securities
- Accounts payable
Correct answer: A trademark or brand name
The relief-from-royalty method is commonly applied to trademarks, patents, and other licensable intangibles.
Question 6: When valuing real estate held by a company under the asset approach, the analyst should rely primarily on what?
- An independent real estate appraisal at fair market value (Correct answer)
- The depreciated book value on the balance sheet
- The original purchase price
- The insured replacement cost only
Correct answer: An independent real estate appraisal at fair market value
Real estate is best stated at fair market value, typically supported by an independent appraisal.
Question 7: A key limitation of the asset-based approach is that it often fails to capture what?
- Internally generated goodwill and going-concern value (Correct answer)
- The value of cash on hand
- The fair value of marketable securities
- The amount of outstanding debt
Correct answer: Internally generated goodwill and going-concern value
The approach may understate value because it often omits internally generated goodwill and going-concern intangibles.
Certified Valuation Analyst Asset-Based Approach and Specialized Topics 2
Under the adjusted net asset method, what is the first step in valuing a company?