Certified Valuation Analyst CVA Valuation Approaches and Methodologies 3 — Questions and Answers
Question 1: The guideline public company method falls under which valuation approach?
- Market approach (Correct answer)
- Income approach
- Asset approach
- Cost approach
Correct answer: Market approach
The guideline public company method derives multiples from comparable publicly traded firms, a hallmark of the market approach.
Question 2: Which multiple is most commonly used in the guideline transaction method for closely held companies?
- MVIC/EBITDA (Correct answer)
- Price/Sales for retail only
- Book value per share
- Dividend yield
Correct answer: MVIC/EBITDA
MVIC/EBITDA (market value of invested capital to EBITDA) is a widely used multiple because it is capital-structure neutral.
Question 3: When selecting guideline companies, the analyst should prioritize firms that are:
- Similar in industry, size, and risk profile (Correct answer)
- Located in the same building
- Audited by the same accounting firm
- Founded in the same year
Correct answer: Similar in industry, size, and risk profile
Comparability hinges on similar industry, size, growth, and risk characteristics, not incidental factors.
Question 4: A control premium is typically applied when the valuation derived from public company multiples needs to reflect:
- A controlling ownership interest (Correct answer)
- A minority, non-marketable interest
- Liquidation value
- Tax basis only
Correct answer: A controlling ownership interest
Public minority-trading multiples produce a minority value, so a control premium is added to reach a controlling-interest value.
Question 5: In the market approach, why is EBITDA often preferred over net income for comparison?
- It removes effects of capital structure, taxes, and depreciation policy (Correct answer)
- It always produces a higher value
- It is required by GAAP for valuations
- It includes one-time gains
Correct answer: It removes effects of capital structure, taxes, and depreciation policy
EBITDA normalizes differences in financing, tax, and accounting policies, improving comparability across companies.
Question 6: A practical challenge of the guideline transaction (merged and acquired) method is that:
- Transaction details are often private and incomplete (Correct answer)
- Public data is always perfectly comparable
- It cannot use any multiples
- It ignores the subject company entirely
Correct answer: Transaction details are often private and incomplete
Private transaction terms are frequently undisclosed or incomplete, limiting the reliability of derived multiples.
Question 7: When applying a selected multiple to the subject company, the analyst should apply it to:
- A normalized, comparable financial metric of the subject (Correct answer)
- The subject's gross book value only
- The largest reported single-year figure
- The industry average regardless of the subject
Correct answer: A normalized, comparable financial metric of the subject
The multiple must be applied to a normalized subject metric defined consistently with how the multiple was calculated.
Certified Valuation Analyst CVA Valuation Approaches and Methodologies 3
The guideline public company method falls under which valuation approach?