CBB Business Valuation & Financial Analysis 1 — Questions and Answers
Question 1: Which method is commonly used to determine a business’s fair market value?
- Rule of Thumb Method
- Asset Accumulation Approach
- Income Approach (Correct answer)
- Cost Segregation Analysis
Correct answer: Income Approach
The income approach estimates value based on the future income a business is expected to generate.
Question 2: What financial metric is most important for determining cash flow available to a buyer?
- Gross Revenue
- Net Profit
- Seller’s Discretionary Earnings (SDE) (Correct answer)
- Operating Income
Correct answer: Seller’s Discretionary Earnings (SDE)
Seller’s Discretionary Earnings (SDE) reflects true cash flow by adding back expenses not needed by a new owner.
Question 3: Which of the following is typically adjusted when calculating SDE?
- Cost of goods sold
- Depreciation
- Owner's compensation (Correct answer)
- Interest on loans
Correct answer: Owner's compensation
Owner’s compensation is often adjusted out of the income statement to reflect transferable earnings.
Question 4: What does a high inventory turnover ratio generally indicate?
- Excessive inventory buildup
- Strong product sales (Correct answer)
- Decreasing customer demand
- Poor supplier relations
Correct answer: Strong product sales
High turnover means products sell quickly, which may suggest strong sales performance and inventory management.
Question 5: When using a market-based valuation, what is typically compared?
- Product pricing models
- Similar business sales (Correct answer)
- Industry regulations
- Customer satisfaction surveys
Correct answer: Similar business sales
This approach values a business based on sales data from similar businesses recently sold in the market.
Question 6: Which document is most useful when analyzing a business’s financial history?
- Sales brochure
- Business license
- Tax returns (Correct answer)
- Bank deposit slips
Correct answer: Tax returns
Tax returns provide reliable, third-party verified information on a business's financial operations.
CBB Business Valuation & Financial Analysis 1
Which method is commonly used to determine a business’s fair market value?