Certified Valuation Analyst Business Valuation Concepts 3 — Questions and Answers
Question 1: The three generally accepted approaches to business valuation are the income, market, and:
- Asset (cost) approach (Correct answer)
- Discount approach
- Comparable transactions approach
- Regression approach
Correct answer: Asset (cost) approach
The asset-based (cost) approach completes the trio of income, market, and asset approaches.
Question 2: Capitalization of earnings is most appropriate when a company's future benefit stream is expected to:
- Grow at a stable, constant rate (Correct answer)
- Be highly erratic year to year
- Decline to zero soon
- Vary with no discernible pattern
Correct answer: Grow at a stable, constant rate
A single-period capitalization assumes a stable, constant growth rate in the benefit stream.
Question 3: In the capitalization formula, the capitalization rate equals the discount rate minus the:
- Long-term growth rate (Correct answer)
- Tax rate
- Inflation premium
- Size premium
Correct answer: Long-term growth rate
Cap rate = discount rate − long-term sustainable growth rate.
Question 4: A discounted cash flow (DCF) model is preferred over single-period capitalization when:
- Cash flows are expected to vary over a projection period (Correct answer)
- Earnings are perfectly stable
- No projections are available
- The firm is in liquidation
Correct answer: Cash flows are expected to vary over a projection period
DCF (multi-period) handles uneven, changing cash flows before a terminal value is applied.
Question 5: In the guideline public company method, valuation multiples are derived from:
- Publicly traded comparable companies (Correct answer)
- The subject's own historical cost
- Liquidation auction prices
- IRS table rates
Correct answer: Publicly traded comparable companies
The guideline public company method draws pricing multiples from comparable publicly traded firms.
Question 6: The terminal (residual) value in a DCF typically represents the value of cash flows:
- Beyond the discrete projection period (Correct answer)
- During year one only
- Already realized historically
- Of liquidated fixed assets
Correct answer: Beyond the discrete projection period
Terminal value captures the present value of all cash flows after the explicit forecast horizon.
Question 7: The asset approach is generally MOST appropriate for valuing:
- A holding or asset-intensive company (Correct answer)
- A high-growth service firm
- A profitable brand-driven business
- A software startup with goodwill
Correct answer: A holding or asset-intensive company
Asset-holding or capital-intensive entities are best valued on net asset value.
Certified Valuation Analyst Business Valuation Concepts 3
The three generally accepted approaches to business valuation are the income, market, and: