Certified Valuation Analyst CVA Valuation Approaches and Methodologies 2

Question 1

Under the income approach, the capitalization of earnings method is most appropriate when a company's future earnings are expected to:

Accepted Answer

Grow at a stable, constant rate

Answer

Fluctuate widely year to year

Answer

Decline to zero within five years

Answer

Be entirely reinvested with no distributions

Question 2

The capitalization rate used in the income approach is best described as:

Accepted Answer

The discount rate minus the long-term growth rate

Answer

The discount rate plus the growth rate

Answer

The risk-free rate alone

Answer

The company's tax rate

Question 3

In the discounted cash flow method, the terminal value typically represents:

Accepted Answer

The bulk of total enterprise value for a going concern

Answer

Only the final year's cash flow

Answer

The liquidation proceeds of fixed assets

Answer

The historical book value of equity

Question 4

Which adjustment is commonly made to normalize earnings before applying an income approach?

Accepted Answer

Removing above-market owner compensation

Answer

Adding back all depreciation permanently

Answer

Eliminating all interest expense regardless of debt

Answer

Ignoring non-recurring lawsuit settlements

Question 5

The Gordon Growth Model is used in the income approach primarily to:

Accepted Answer

Calculate the terminal value of perpetual cash flows

Answer

Determine the company's beta

Answer

Estimate working capital needs

Answer

Allocate purchase price among assets

Question 6

When projecting cash flows, an analyst should ensure the growth rate used in perpetuity does not exceed:

Accepted Answer

The long-term growth rate of the overall economy

Answer

The company's most recent single-year growth

Answer

The discount rate plus inflation

Answer

The industry's gross margin

Question 7

A key limitation of the income approach is that it:

Accepted Answer

Relies heavily on the reliability of future projections

Answer

Cannot be used for profitable companies

Answer

Ignores the time value of money

Answer

Requires identical guideline public companies