CIRA CIRA Valuation Methods & Asset Assessment 1 — Questions and Answers
Question 1: Which valuation approach estimates a company's value based on the present value of its projected future cash flows?
- Discounted Cash Flow (DCF) (Correct answer)
- Liquidation Value
- Book Value
- Comparable Company Analysis
Correct answer: Discounted Cash Flow (DCF)
The DCF approach values a business by discounting its expected future free cash flows back to the present using an appropriate discount rate.
Question 2: In a distressed valuation context, the 'orderly liquidation value' (OLV) typically differs from 'forced liquidation value' (FLV) because:
- OLV allows adequate time to market and sell assets, yielding higher proceeds (Correct answer)
- OLV assumes assets are sold immediately under duress
- FLV is always higher than OLV
- OLV excludes intangible assets from the analysis
Correct answer: OLV allows adequate time to market and sell assets, yielding higher proceeds
OLV assumes a reasonable marketing period, allowing sellers to find willing buyers and thus recover more value than a forced, time-constrained sale.
Question 3: When applying the market approach to valuing a distressed company, a CIRA professional would most likely use:
- Comparable company multiples adjusted for distress discount (Correct answer)
- The company's historical cost basis
- Only publicly traded stock prices
- Net asset value from the balance sheet
Correct answer: Comparable company multiples adjusted for distress discount
Comparable company multiples are typically adjusted downward to reflect the higher risk and uncertainty associated with distressed situations.
Question 4: Which of the following best describes 'enterprise value' (EV) in a restructuring analysis?
- Total value of the business to all capital providers, including debt and equity (Correct answer)
- The market capitalization of common equity only
- The book value of total assets minus current liabilities
- The liquidation value of tangible assets
Correct answer: Total value of the business to all capital providers, including debt and equity
Enterprise value represents the total value of the firm to all stakeholders—debt holders, preferred equity, and common equity—and is independent of capital structure.
Question 5: A CIRA is assessing a distressed manufacturer. Which factor would most significantly reduce the going-concern value relative to liquidation value?
- Severe and sustained operating losses with no viable turnaround plan (Correct answer)
- Temporary supply chain disruptions
- A single large customer representing 30% of revenue
- Pending minor litigation below $500,000
Correct answer: Severe and sustained operating losses with no viable turnaround plan
Severe, sustained losses without a credible turnaround plan undermine the premise that the business can generate future cash flows exceeding liquidation proceeds.
Question 6: Under the 'absolute priority rule,' which claim is paid first in a Chapter 7 liquidation?
- Secured creditors to the extent of their collateral value (Correct answer)
- Unsecured creditors
- Equity holders
- Junior subordinated debt
Correct answer: Secured creditors to the extent of their collateral value
Secured creditors have a lien on specific collateral and are paid from the proceeds of that collateral before any unsecured claimants receive distributions.
CIRA CIRA Valuation Methods & Asset Assessment 1
Which valuation approach estimates a company's value based on the present value of its projected future cash flows?