Certified Valuation Analyst Market Approach and Comparable Analysis 3 — Questions and Answers
Question 1: A guideline company's MVIC/Revenue multiple is 1.2x and the subject's revenue is $5,000,000. The indicated MVIC is:
- $4,166,667
- $6,000,000 (Correct answer)
- $5,000,000
- $1,200,000
Correct answer: $6,000,000
1.2 multiplied by $5,000,000 revenue equals $6,000,000 of invested capital.
Question 2: After deriving MVIC, how does the analyst arrive at equity value for the subject?
- Add interest-bearing debt to MVIC
- Subtract interest-bearing debt from MVIC (Correct answer)
- Multiply MVIC by the tax rate
- Divide MVIC by shares outstanding only
Correct answer: Subtract interest-bearing debt from MVIC
Equity value equals MVIC less the company's interest-bearing debt.
Question 3: Which statistic is often preferred over the simple mean when summarizing guideline multiples skewed by outliers?
- Median (Correct answer)
- Mode of revenues
- Sum
- Standard deviation
Correct answer: Median
The median reduces the distorting effect of outliers in a small set of multiples.
Question 4: Why might an analyst select a multiple at the lower end of the guideline range for a subject company?
- The subject has higher growth than guidelines
- The subject is smaller and riskier than the guidelines (Correct answer)
- The subject has stronger margins
- The subject pays higher dividends
Correct answer: The subject is smaller and riskier than the guidelines
Smaller, riskier subjects typically warrant multiples below the guideline median to reflect that added risk.
Question 5: Trailing twelve months (TTM) earnings are used in a multiple primarily to:
- Smooth seasonality and reflect the most recent full year (Correct answer)
- Forecast five years ahead
- Eliminate the need for normalization
- Match the company's incorporation date
Correct answer: Smooth seasonality and reflect the most recent full year
TTM captures the most recent full-year performance and smooths intra-year seasonality.
Question 6: An analyst weights an MVIC/EBITDA indication 60% and an MVIC/Revenue indication 40%. This weighting should be based on:
- Alphabetical order of multiples
- Relative reliability and relevance of each multiple to the subject (Correct answer)
- Always favoring revenue multiples
- The number of guideline companies' employees
Correct answer: Relative reliability and relevance of each multiple to the subject
Weights reflect each multiple's reliability and relevance given data quality and the subject's profitability.
Question 7: If a subject company is unprofitable, which multiple is often more meaningful than an earnings-based one?
- MVIC/Revenue (Correct answer)
- Price/Earnings
- MVIC/EBITDA
- Price/Net Income
Correct answer: MVIC/Revenue
A revenue multiple remains usable when earnings are negative and earnings multiples become meaningless.
Certified Valuation Analyst Market Approach and Comparable Analysis 3
A guideline company's MVIC/Revenue multiple is 1.2x and the subject's revenue is $5,000,000.
The indicated MVIC is: