Question

1.Which of the following is a commonly used cost approach in business valuation?

Multiples analysis approach

Capital cost approach

Transaction cost analysis approach

2.

The two market approaches commonly used in the business valuation are multiple analysis and:

project analysis.

transactions analysis.

market analysis.

NPV analysis.

3.

The transaction approach is difficult to use because:

transactions data are typically as reliable as the data available for multiples analysis, especially when they are associated with a private firm.

transactions involving the purchase or sale of an entire business in an industry tend to occur frequently and hence the amount of data is immense.

the terms of the transactions can be easy to assess.

the terms of the transactions can be difficult to assess.

4.

Which of the following statements about the free cash flow from the firm (FCFF) approach is true?

The total value of the firm, VF, is computed as the present value of the FCFF, discounted by the firm's weighted average cost of capital, WACC.

The costs associated with noninterest-bearing current liabilities, which are included in the firm's cost of sales and other operating expenses, are added in the calculation of FCFF.

We include the cash necessary to pay short-term liabilities that do not have interest charges associated with them, such as accounts payable and accrued expenses.

The present value of these cash flows exceeds the total value of the firm, or its enterprise value.

5.

In the free cash flow from the firm (FCFF) approach, the total value of the firm, VF, is computed as the present value of the FCFF using which of the following as a discount rate:

the firm's cost of equity.

the firm's cost of debt.

the inflation rate prevailing in the economy.

the firm's WACC.

6.

The free cash flow to equity (FCFE) approach uses only the portion of the cash flows that are available:

for distribution to bondholders and stockholders.

for distribution to board of directors.

for distribution to bondholders.

for distribution to stockholders.

7.

In contrast to the FCFE approach, the dividend discount model (DDM) approach uses:

the stream of cash flows that stockholders expect to receive through dividend payments.

the stream of cash flows that stockholders expect to receive through stock repurchase.

the stream of cash flows that stockholders expect to receive through bonus issue.

cash flows that are available for distribution to stockholders.

8.

The less marketable a security:

the lower the price owners are willing to pay.

the more the price owners are willing to pay.

the more the price investors are willing to pay.

the lower the price investors are willing to pay.

9.

_____ is an adjustment to a business value estimate that is made to reflect the potential loss of value associated with the unexpected departure of a key person.

Control adjustment premium

Key person premium

Key person discount

Control adjustment discount

Replacement cost approach

Answer 1

Answer 1 a. Multiple ANalysis approach

Out of various approaches for valuation, the most commonly used approach by investors is multiple analysis approach

Answer 2 Transaction analysis

The multiple analysis and Transaction analysis are the two most commonly used market approaches in the business valuation.

Answer 3 d the terms of the transactions can be difficult to assess.

The transaction approach is difficult to use because Transaction data is not reliable and instances of acquisition of similar firms in the industry are generally rare. Also the terms of the transactions can be difficult to assess.

Answer 4 a. The total value of the firm, VF, is computed as the present value of the FCFF, discounted by the firm's weighted average cost of capital, WACC.

For calculation of Value of Firm under the Free cash flow approach, all the FCFF which are expected to occur in future are discounted at required rate of return or Weighted Average Cost of Capital (WACC)