Certified Valuation Analyst Market Approach and Comparable Analysis 2 — Questions and Answers
Question 1: Under the Guideline Public Company Method, what is the primary reason a control premium is NOT typically added when valuing a minority interest?
- Public company multiples already reflect minority, freely traded prices (Correct answer)
- Control premiums are illegal under USPAP
- Minority interests always trade above control value
- Public companies have no minority shareholders
Correct answer: Public company multiples already reflect minority, freely traded prices
Guideline public company prices reflect minority, marketable trades, so a minority interest derived from them needs no control premium.
Question 2: When selecting guideline companies, which factor is generally the MOST important for comparability?
- Identical CEO compensation
- Similar industry, products, and economic characteristics (Correct answer)
- Matching fiscal year-end month
- Same state of incorporation
Correct answer: Similar industry, products, and economic characteristics
Comparability rests on similar industry, products, markets, and economic and operational characteristics.
Question 3: A valuation analyst uses an MVIC/EBITDA multiple. What does MVIC represent?
- Market value of equity only
- Market value of invested capital (debt plus equity) (Correct answer)
- Minimum value of invested capital
- Market value of inventory and current assets
Correct answer: Market value of invested capital (debt plus equity)
MVIC is the market value of invested capital, combining interest-bearing debt and equity.
Question 4: Why is an equity multiple like Price/Earnings paired with a net (after-interest) earnings figure rather than EBITDA?
- EBITDA is always negative
- Equity value reflects returns after debt service, so denominators must too (Correct answer)
- P/E ratios cannot use any cash flow metric
- Net earnings exclude taxes
Correct answer: Equity value reflects returns after debt service, so denominators must too
Equity (price) multiples must use earnings after interest because equity holders are paid after debt is serviced.
Question 5: In the Guideline Transaction (Merger & Acquisition) Method, the multiples derived generally indicate what level of value?
- Minority, non-marketable
- Controlling interest value (Correct answer)
- Liquidation value only
- Book value
Correct answer: Controlling interest value
Completed M&A transactions involve sales of whole companies, so derived multiples reflect controlling interest value.
Question 6: Which adjustment to a target company's reported earnings is a 'normalization' adjustment in the market approach?
- Removing above-market owner compensation (Correct answer)
- Adding a hypothetical control premium
- Increasing revenue to industry average
- Applying a discount for lack of marketability
Correct answer: Removing above-market owner compensation
Normalizing removes non-operating or excess items such as above-market owner compensation to reflect economic earnings.
Question 7: When fewer than ideal guideline companies exist, the analyst should:
- Abandon the market approach automatically
- Apply broader screens and disclose comparability limitations (Correct answer)
- Use a single company without comment
- Use companies from any unrelated industry
Correct answer: Apply broader screens and disclose comparability limitations
The analyst can widen selection criteria but must disclose and weigh the reduced comparability in conclusions.
Certified Valuation Analyst Market Approach and Comparable Analysis 2
Under the Guideline Public Company Method, what is the primary reason a control premium is NOT typically added when valuing a minority interest?