Certified Valuation Analyst CVA NACVA Questions + Answers
Posted: Thu Mar 03, 2022 8:39 am
QUESTION 1
One of the most important tools for conducting a business valuation thoroughly and on a timely basis is a proper schedule. Most first-time, or in frequent, business valuation clients (and their attorneys) tend to underestimate the amount of lead time necessary for the appraiser to prepare a through and professional opinion. Scheduling problems often arise because:
A. The client delays in committing to the project hoping that the valuation problem will go away. B. A major change in some aspect of assignment midway through the project
C. The client is not having awareness regarding valuation standards and selection criteria
D. Of some external pressures on the client
Correct Answer: AB Section: (none) Explanation
Explanation/Reference: QUESTION 2
____________ is perhaps the most difficult task for the business appraiser.
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A. Getting two or more parties with different economic and business expectations to agree on projected future benefits and the risks associated with achieving those projections.
B. Identification of partial interest.
C. Selection of enterprise value premise.
D. Estimation of invested capital
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
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QUESTION 3
When preparing a business valuation for reorganization proceedings under bankruptcy statues, the parties will frequently rely on___________.
A. Reengineering of valuation procedures B. Capitalization of anticipated cash flow C. Ownership of assets
D. Enterprise value
Correct Answer: B Section: (none) Explanation
Explanation/Reference: QUESTION 4
Which of the following are categories in which projections are usually necessary?
A. Antitrust, lost business opportunity, breach of contract B. Infringement of patents, copyrights or trademarks
C. Goodwill
D. Diversified businesses
Correct Answer: AB Section: (none) Explanation
Explanation/Reference:
QUESTION 5
“When earnings have once been “realized”, so that they can be expressed with some approach to accuracy in the company’s accounts, they are already water under the mill and have no direct bearing on what the property in question is now worth. Value, under any plausible theory of capitalized earning power is necessarily forward looking. It is an expression of the advantage that an owner of the property may expect to secure from the ownership in the future. The past earnings are therefore beside the point, save as a possible index of future earnings”. This statement correctly expresses:
A. Realized earnings B. Enterprise value
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C. Realized earning verses prospective earnings D. Prophesied gross and net earnings
Correct Answer: C Section: (none) Explanation
Explanation/Reference: QUESTION 6
One way or the other, the financial benefits of ownership of an interest in a business enterprise must come from the following sources EXCEPT:
A. Dividends, distributions, or other type of cash flow a) From operations, or
b) From investments (e.g. interest)
B. Liquidation or hypothecation of assets
C. Loan/Debt
D. Sale of interest
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
QUESTION 7
In many instances, value considerations are tempered by internal variables, often variables relative to specific shareholding as opposed to the company as a whole. Which of the following is NOT out of such variables?
A. Size of the subject interest (reflecting not only magnitude but control issues) B. The right to vote and to impact the direction of the business
C. Restrictive provisions affecting ownership rights
D. Legal proceedings related to ownership or management prerequisites.
Correct Answer: D Section: (none) Explanation
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Explanation/Reference:
QUESTION 8
1. Dividends or partnership withdrawals (i.e. current economic income). 2. Proceeds from the ultimate sale of the ownership interest or liquidation of the subject business (i.e., including any long-term appreciation in the value of the security interest itself). These two are the categories of:
A. The economic benefits that the non-controlling ownership interest holder may realize. B. The financial benefits that the non-controlling ownership interest holder may realize. C. The economic benefits that the controlling ownership interest holder may realize.
D. The financial benefits that the controlling stakeholder may realize.
Correct Answer: A Section: (none) Explanation
Explanation/Reference: QUESTION 9
Accepted business valuation approaches and methods are all of the following EXCEPT:
A. Income approach
B. Asset-based approach
C. Guideline acquisition company approach D. Market-based approach
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
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QUESTION 10
There’s a tendency for the market for the businesses to change more rapidly than the market for real estate. After all, a business can be thought of as a collection of _____________ each with its own price volatility and risks of ownership.
A. Realized and unrealized earnings
B. Short and long-term liabilities
C. Tangible and intangible assets
D. Unearned Revenues and fixed assets
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
QUESTION 11
The use of asset-based approach should not be confused with the selection of the appropriate premise of value for the subject business valuation. Some analysts mistakenly confuse the use of asset-based approach with a liquidation premise of value (or with a liquidation valuation). Rather, the asset-based approach can be used with all premises of value including:
A. Value in use as a going-concern
B. Value as orderly disposition
C. Value as in exchange as part of a forced orderly liquidation D. A, B and C
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
QUESTION 12
The capital stock of a corporation, its net assets and its share of stock are entirely different things... the value of one bears no fixed or necessary relation to the value of the other; because:
A. A share of common stock does not represent a share in the ownership of the assets of a business. B. Shareholders are only concerned with dividends
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C. Only the corporation itself holds to all its assets and liabilities ... A thirsty shareholder of brewery cannot walk into “his” company and demand that a case of beer be charged to his equity account
D. Putting capital in stocks is somewhat a risky investment
Correct Answer: AC Section: (none) Explanation
Explanation/Reference: QUESTION 13
When is the guideline merged and acquired company method most useful?
A. The initial value derived from the guideline merged and acquired company method, before adjustment for factors such as size of subject block and degree of marketability, is an indication of transaction prices of major ownership interest, usually controlling ownership interests.
B. When same acquisition target has different buyers both due to perception and reality
C. At the time of achieving synergies
D. In estimation of enterprise value
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
QUESTION 14
Control transaction valuation multiples (often called deal multiples or acquisition multiples or acquisition multiples) often use the following measures of returns in the denominator EXCEPT:
A. Revenues
B. Operating income available to invested capital [earnings before interest and taxes (EBIT)] C. Intangible book value
D. Discretionary earnings
Correct Answer: C Section: (none) Explanation
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Explanation/Reference: QUESTION 15
In merger market valuation models:
A. We compare prices among similar companies, much like comparison shopping for a consumer item among similar retail stores B. Corporations are not yellow pencils, quickly stacked and easily matched
C. Every M&A sale cannot be considered special or extraordinary
D. M & A market mostly evinces aberrations
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
QUESTION 16
As with any secondary sources, errors and inconsistencies occur, so the original source documents are the only guarantees of absolute accuracy as a source of merger and acquisition data. Which one of the following is NOT out of those original source documents?
A. Mergerstat Review
B. The merger yearbook
C. Buyouts, published every other week by securities data publishing D. Financial reports
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
QUESTION 17
1. Pratt’s stats
2. Done deal
3. Bizcomps
4. IBA market database
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These are the four databases devoted to:
A. Middle-market
B. Small company controlling ownership
C. Middle market and small company controlling ownership interest transactions D. Shareholders’ equity
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
QUESTION 18
Documentable, arm’s-length, bona fide offers to buy or sell may also be useful evidence of value. Funded bona fide offers (i.e. offers for which the financing for the offer is already in place) should be gives more weight and more consideration than:
A. Past subject company changes
B. Merger and acquisition offers
C. Unfunded bone fide offers
D. Past acquisition documents by the subject company
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
QUESTION 19
The same general processes and decision criteria apply to both (1) deciding on whether or not to rely on any particular valuation multiple at all and (2) deciding on the relative weight to be accorded each valuation multiple ultimately used in reaching the opinion of value. A study of the transactional data may lead to greater of lesser reliance on certain valuation multiples than one might have expected prior to compiling the data a. All of the following are considered in impact of guideline
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transactional data evaluation EXCEPT:
A. Number of data points available
B. Comparability of data measurement C. Comparability of data patterns
D. Apparent business reliance
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
QUESTION 20
Control shares are normally more valuable than minority shares because they contain a bundle of rights that minority shares do not enjoy. Below is a list of some of the rights. Which of the following is NOT out of such rights?
A. Appoint or change operational management
B. Determine management compensation and prerequisites
C. Set operational and strategic policy and change the course of business D. Negotiate and consummate goodwill
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
QUESTION 21
Below is a partial listing of possible scenarios in_________________.
-100 % control
-More than a majority or supermajority, but less than 100%
-More than 50% but less than a supermajority, where state statutes or articles of incorporation require a supermajority -50 %
-Less than 50 % but “effective control” -Minority shares that control by voting block
A. Control spectrum
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B. Control or lack of control spectrum
C. Discount for lack of control or minority discounts D. B & C both are the same
Correct Answer: D Section: (none) Explanation
Explanation/Reference: QUESTION 22
Which of the following best suits in replacement to question marks from left to right respectively?
A. Control value, strategic control value B. Enterprise value, control value
C. Strategic value, Enterprise value
D. Tangible value, Intangible value
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Correct Answer: A Section: (none) Explanation
Explanation/Reference: QUESTION 23
_________ is the value to some particular owner or potential owner, is found often in the context of mergers and acquisitions and in family law disputes.
A. Marketable value
B. Control Value
C. Investment value
D. Strategic Control value
Correct Answer: C Section: (none) Explanation
Explanation/Reference: QUESTION 24
A unique feature of Merger stat/Shannon Pratt’s control premium study is a transaction code by type of transaction. i.e.:
A. F- Financial H-Horizontal integration V-Vertical integration C-Conglomerate
B. F- Financial H-Hedged Value
V- Vertical integration C- Corporations
C. F- Funds
H- Horizontal value V- Vertical value C- Control value
D. C- Control and control risk H- Hedging
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F- Financial V-Vulnerability
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
QUESTION 25
“A takeover model became a significant explanatory variable for firms that had no coattail. A voting power model was a significant explanatory variable for firms that had coattail provision.” This is the conclusion of:
A. Robinson, Rumsey and white study
B. Robinson, Richard and Black study
C. Mergers stat/Shannon Pratt’s control premium study D. Jeff, James and Chris study
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
QUESTION 26
About half the state and many individual companies have statutes or articles that require a super majority to effect certain corporate actions. If the minority block is of sufficient size to block such actions, there may be cause to reduce the discount for lack of control. In most cases, this would not be grounds for a slight reduction in the discount. Which of the following term is related to this scenario?
A. Swing vote
B. Takeover
C. Blocking power
D. “Coattail” protection
Correct Answer: C Section: (none) Explanation
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Explanation/Reference: QUESTION 27
Supermajority vote requirements and state dissolution statues are the factors that influence:
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A. Swing vote
B. Blocking power
C. Lack of control discount
D. Ultimate rate of return produced by the interest.
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
QUESTION 28
Stockholders’ privilege to subscribe to new issues of voting stock, usually the common stock or securities convertible into voting stock, usually the common stock or securities convertible into voting stock, before such offerings are made to nonstockholders. This is called:
A. A privileged subscription right B. A preemptive right
C. Non-disclosure status
D. Pre-offering status
Correct Answer: AB Section: (none) Explanation
Explanation/Reference:
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QUESTION 29
If there are five directors to be elected, and 500 shares are outstanding and voting for the election of directors, the minimum number of shares necessary to elect one director would be 84 shares. Proof: 84 shares time five directors to be elected equals 420 votes, all cast for one director. Assuming the rest of the stock (416 shares) votes in bloc as the majority, such total of 2,080 votes distributed among five directors would be 416 votes each. Therefore, an individual representing the minority and receiving its 420votes is sure to get one of the places on the board, the majority getting the other four places. The minority in this example must be sure to vote all of its 420 votes for one director; if it distributed the 420 votes among two, it obviously would not win any places on the board. Cumulative voting, move over, requires a majority of the stock to be able to elect a majority of the board. In the above example, five directors, ______________ shares are necessary, or a majority of the _____________
shares total.
A. 200, 400 B. 150, 300 C. 251, 500 D. 249, 500
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
QUESTION 30
If the language of the relevant agreements indicates that minority block of stock will be valued on a controlling ownership interest level of value, a full lack of control discount will not apply to the transactions to which the provision is applicable. For example:
A. The agreement may say that the subject shares will be valued “on an enterprise basis” or as “a per share portion of the overall company value.” B. A lack of control discount must be applicable to overall business value
C. Lack of control discount may not be inflated due to influences of ownership control
D. Some of the benefits of ownership control are lost due to public disclosure
Correct Answer: D Section: (none) Explanation
Explanation/Reference: QUESTION 31
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1
1- _____________ 1+ premium
This is a formula for:
A. Converting a control premium
B. Identifying a total of shareholders
C. Converting a control premium to a market based premium D. Converting a control premium to an implied minority discount
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
QUESTION 32
_____________ proclaims that if valuing a company by the asset approach, the analyst should check to see whether capital gains taxes would be incurred on the liquidation of the assets. If so, it is possible that a discount should be taken for the capital gains tax liability.
A. Fiduciary duties
B. Contractual restrictions C. Built-in gains discount D. Potential dilution
Correct Answer: C Section: (none) Explanation
Explanation/Reference: QUESTION 33
Basic ways of approaching the valuation of non-controlling ownership interests are the following EXCEPT:
A. The discount approach
B. The direct comparison approach C. The market-based approach
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D. The bottom-up-approach (income approach)
Correct Answer: C Section: (none) Explanation
Explanation/Reference: QUESTION 34
The most frequently encountered reasons for needing to value debt securities are the following EXCEPT:
A. Purchase or sale for cash
B. Exchange of equity for debt, or vice versa
C. Allocating total enterprise value among classes of securities in a leverages buyout, recapitalization (including) D. Adjusting an equity statement owned or owed
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
QUESTION 35
Most typically, a company, or some or all of its stock, is to be sold and a debt security received as all or part of the consideration. The seller needs to know the cash- equivalent value of the consideration being received in return for the company or stock being given up. It is uncommon for notes or other debt securities issued in connection with the acquisition of a company to have a cash equivalent value of ___________________ the securities value.
A. 20 percent of
B. 20 percent more or below C. 20 more than
D. 20 percent below
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
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QUESTION 36
Recapitalizations involving debt securities may be undertaken for a variety of reasons. One common reason is:
A. A leveraged Buyout
B. A leveraged recapitalization C. Bankruptcy recapitalization D. Resource reallocation
Correct Answer: B Section: (none) Explanation
Explanation/Reference: QUESTION 37
Which of the following is NOT the advantage of leasing to the lessee?
A. The financing terms of the lease usually take into considerations the lessor’s ability to more efficiently use the tax advantages of asset ownership
B. Most leases are short-term operating leases, and that reduces the transaction costs (i.e. identifying qualified buyers and complications associated with equipment obsolescence) at the end of anticipated period of use
C. Installment sales agreements
D. There is less of a capital commitment so that equity and borrowing power are freed for the other financing
Correct Answer: C Section: (none) Explanation
Explanation/Reference: QUESTION 38
The rate of interest that, when applied to the expected future payments equal to the debt security’s observed market price is called the:
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A. Yield to maturity
B. Return on investment C. Market interest
D. Interest earning
Correct Answer: A Section: (none) Explanation
Explanation/Reference: QUESTION 39
____________________ are defined as the sum of the market value of total liabilities divide by the aggregate liquidation value of the preferred stock.
A. Liquidation Coverage ratio B. Pretax return on total capital C. Capitalization ratio
D. Fixed charge coverage
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
QUESTION 40
Qualitative factors might also cause the required yield to be higher or lower than that based solely on the quantitative ratio analysis. Whish of the following is NOT out of such quantitative factors?
A. The competitive environment in the industry B. Depth and competence of management
C. Trends in diversification of revenue sources D. Trends in diversification of strategies
Correct Answer: D
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Section: (none) Explanation
Explanation/Reference: QUESTION 41
Factors affecting the value of preferred stock are all of the following EXCEPT:
A. Stated dividend rate and the risk associated with payment of it B. Cumulative versus noncumulative dividends
C. Lack of marketability discount
D. Redemption privilege
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
QUESTION 42
If a $1000 per share value of convertible bond is issued for $1000, and is convertible into 20 shares of issuer’s common stock that pays no dividend, there will be no economic benefit in converting the debt to stock as long as the common stock is selling for:
A. Less than $50 per share B. $50 per share
C. $more than $50 per share D. Less than $25 per share
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
QUESTION 43
An interesting form of debt security, known as _________________, allows the issuer to avoid paying cash to the debt holder for interest prior to the debt’s maturity. The only cash payment from the debt issuer comes at maturity, when the debt’s face value is repaid to security holder.
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A. Callable bonds
B. Zero coupon debt C. Convertible debt
D. Collateral provisions
Correct Answer: B Section: (none) Explanation
Explanation/Reference: QUESTION 44
The special characteristics of the preferred stock that we typically encounter include all of the following EXCEPT:
A. Dividend rate
B. Liquidation preference
C. Cumulative versus noncumulative dividends
D. Convertible versus nonconvertible rights into preferred equity
Correct Answer: D Section: (none) Explanation
Explanation/Reference: QUESTION 45
Market evidence indicated that adjustable-rate preferred stocks generally required yields in the range of ______________ basic points.
A. 42 to 445 B. 48-498 C. 32-500 D. 50-500
Correct Answer: A Section: (none) Explanation
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Explanation/Reference:
QUESTION 46
If a $1000 per share value of convertible bond is issued for $1000, and is convertible into 20 shares of issuer’s common stock that pays no dividend, there will be no economic benefit in converting the debt to stock as long as the common stock is selling for less than $50 per share. If the bond value is indeed in the equity- equivalent region, as the value of a single share of common stock increases $1, the bond value will increase:
A. $25 B. $50 C. $20 D. $10
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
QUESTION 47
The most common forms of redemption provisions found in privately held companies are as follows. Which of the following is NOT out of the common forms of redemption provisions?
A. The entire issue is redeemable at the option of the issuing corporation at a specified price over a designated time period. These types of issue are commonly referred to as callable.
B. The entire issue is redeemable at the option of the issuing corporations at a changing price contingent upon a certain event.
C. Future redemption by the issuing company is mandatory and based on a specific redemption schedule.
D. Future issues have sinking funds provisions similar to vehicle by which bonds are retired at intervals up to their maturity dates and are referred to as sinking fund preferred.
Correct Answer: B Section: (none) Explanation
Explanation/Reference: QUESTION 48
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Which of the following factor/s is/are most important for the redemption provisions that affect their value?
A. Call price
B. Whether or not a sinking fund or some other means of financing the redemption is established
C. Issuing company’s financial ability to cash out the preferred shares without some sort of redemption fund. D. Redemption methods
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
QUESTION 49
The primary impact on the value of a sinking fund preferred stock results from the fact that redemption creates a finite stream of income to the investor plus________________.
A. A terminal value versus a theoretically infinite stream of income available to the nonsinking fund preferred stockholder. B. A negative value versus a theoretically infinite stream of income available to the nonsinking fund preferred stockholder. C. A terminal value versus a theoretically finite stream of income available to the nonsinking fund preferred stockholder. D. A positive value versus a theoretically finite earning available to the non-sinking fund preferred stockholder.
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
QUESTION 50
The most prevalent measure for assessing the likelihood of receiving future preferred dividends is the company’s_________________, commonly defined as the sum of pretax income plus interest expense divided by the sum of interest expense plus preferred dividends adjusted for tax.
A. Variable-charge coverage ratio B. Fixed-charge coverage ratio C. fixed-charge leverage ratio
D. fixed-charge liquidity ratio
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Correct Answer: B Section: (none) Explanation
Explanation/Reference:
QUESTION 51
1. Dissenting stockholder actions. 2. Minority oppression actions. Either may be accompanied by claims of breach of fiduciary duty. These are the actions brought by:
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A. Minority shareholder B. Majority shareholders C. OTC Trading
D. Short Selling
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
QUESTION 52
There are many subtitles to the application of fair value for cooperate law purposes. For example, some states consider concepts of “entire fairness.” There are following aspects of entire fairness EXCEPT:
A. Absolute fairness
B. Relative fairness
C. Competence and thoroughness D. Reorganization
Correct Answer: D
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Section: (none) Explanation
Explanation/Reference:
QUESTION 53
__________________ in context of Delware block method means value based on expected earnings and/or dividends. It is akin to value based on the income approach in the three basic approaches to value. It may be arrived at by discounted cash flow (DCF), capitalization of earnings, or capitalization of dividends.
A. Market value
B. Investment Value
C. Interest on invested capital D. Ownership interest
Correct Answer: B Section: (none) Explanation
Explanation/Reference: QUESTION 54
An item that frequently causes controversy in a business valuation is the value of a:
A. Net operating loss carryforward B. Accounting of leases
C. Installment sales
D. Contract work
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
QUESTION 55
Since the use of the extraordinary designation is so restrictive, obviously many items do not meet the strict definition for accounting purposes but nevertheless should be regarded as nonrecurring for analytical purposes. Some examples of such items would be all of the following EXCEPT:
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A. Gains or losses on the sale of assets
B. Gains or losses on disposition of a segment of the business C. Write-offs and other expenses related to an acquisition
D. Effects of normal price fluctuations
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
QUESTION 56
Let’s say that a company had 100,000 shares outstanding at the beginning of the year and issued 30,000 more shares on May 1. The 100,000 shares would be outstanding for four months and the 130,000 shares for eight months, or two-thirds of the year. The weighted average number of shares outstanding for the year would be:
A. 100, 000 B. 120,000 C. 140,000 D. 180,000
Correct Answer: B Section: (none) Explanation
Explanation/Reference: QUESTION 57
Continuing the above example, if earnings were $30,000, earning per share would be:
A. $2.50 B. $3.00 C. $4.00 D. $2.25
Correct Answer: A
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Section: (none) Explanation
Explanation/Reference:
QUESTION 58
Book value per share is based on the number of shares outstanding at the end of accounting period rather than the weighted average used in computing earnings per share. Also, book value normally is computed without considering:
A. Treasury stock
B. Possible dilutive effects of conversions C. Maximum potential dilution
D. Anti-dilutives and their effects
Correct Answer: B Section: (none) Explanation
Explanation/Reference: QUESTION 59
Situations commonly requiring the valuation of option are all of the following EXCEPT:
A. When the option is designed, granted exchanged, or terminated
B. When financial statement disclosure requires that the option value is recognized
C. When the option value is at issue in a damage suit, such as a breach of contract suit between an existing or former executive and the issuing company D. When the option is a repurchased option by the OTC market
Correct Answer: D Section: (none) Explanation
Explanation/Reference: QUESTION 60
____________________ is common stock received when the option is exercised.
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A. Underlying stock B. American option C. European option D. Strike
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
QUESTION 61
Imagine that an investor in the common stock of a company has two choices, either to (1) but 100 shares of a company’s common stock at $10 per share or (2) to purchase a call for $125 to purchase
100 shares at the same $10 price at the end of nine months. If the investor chooses to buy the stock, the investor must pay $1,000 immediately and is at risk for the entire $1,000 investment. If the investor chooses to purchase the call option, the investor will pay only $125 immediately and can wait until the option’s expiration date to decide whether or not to buy the stock for an additional $1,000. The investor’s risk is limited to $125. If the option is ____________________, the option will be exercised. If it is ____________________, the option will simply lapse.
A. In-the-money, Out-of-the-money B. At-the-money, Out-of-the-money C. At-the-money, In-of-the-money D. At-the-money, At-of-the-money
Correct Answer: A Section: (none) Explanation
Explanation/Reference: QUESTION 62
Which of the following is NOT out of the call option’s value?
A. The price of underlying stock
B. The risk bearing interest rate
C. The dividends expected during the life of the option D. The volatility of the price of the underlying stock
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Correct Answer: B Section: (none) Explanation
Explanation/Reference:
QUESTION 63
Options can be very complicated. For example, some options have strike pries that vary over time or under different market conditions. Other options have lives that vary depending on stock prices and market conditions. There are even _________________, which are options on option, and ______________, which set price boundaries.
A. Strike, barrier option
B. Risk free options, barrier options C. Compound options, barrier options D. Compound options, volatile options
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
QUESTION 64
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The Black-Scholes model assumes near perfect markets for both the options and the underlying stock. Among other conditions, the model assumes the following EXCEPT :
A. There are no commissions or other transaction costs in buying or selling the stock or the option B. The short-term risk-free rate is known and is constant through time
C. Trading never stops. It is continuous through time following a geometric Brownian motion
D. The stock price does not follow a random walk with a long normal distribution
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Correct Answer: D Section: (none) Explanation
Explanation/Reference:
QUESTION 65
A seller who does not own a security (a short seller) will simply accept price of the security
from the buyer and agree to settle with the buyer on some future date by paying him an amount equal to the price of the security on that date. While this short sale is outstanding, the short seller will have the use, of, or interest on, the proceeds of the sale. This is the assumption of:
A. An option market
B. Market of underlying stock in an option trading C. Near-perfect market
D. Volatile market
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
QUESTION 66
Calculating the volatility of the underlying stock is more complicated. Volatility is the standard deviation is the price of underlying stock. The volatility used in the Black Scholes model is the total volatility of the underlying stock’s price. It is not its bets, which measures
A. The relative movement of the stock’s price to the market B. That the stock’s price changes are relatively constant
C. Implied volatility
D. The number of outstanding shares of the issuer
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
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QUESTION 67
_________________ is computed by reverse re-engineering the price of a publicly traded option on the same underlying stock. This is the one when used in the Black-Scholes model along with the other four known variables results in a calculated value that matches the market price of the publicly traded options.
A. Implied price volatility
B. Volatility of closely held companies C. Historical price volatility
D. Both A & C
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
QUESTION 68
Fisher Black developed a technique to value American stock options using the Black- Scholes model called the pseudo-American call option model. The steps in the method are as follows EXCEPT:
A. Compute the adjusted market price of the stock by deducting the present value, using the risk-free rate, of the future dividends payable during the remaining life of the option
B. For each pseudo-option assumed to expire on a dividend date, deduct from the exercise price of the option the dividend payable on the date and the present value, using the risk-free rate, of all the remaining dividends to be paid after the dividend date during the term of the option
C. Select the European option with the highest value as the value of the American option
D. Using the Black-Scholes model, compute the value of each of the pseudo-options using unadjusted underlying stock price.
Correct Answer: D Section: (none) Explanation
Explanation/Reference: QUESTION 69
The advantages of the binomial model over the Black-Scholes model and its variations include:
A. The binomial model’s ability to incorporate a variety of conditions which can increase accuracy, including variations in expected volatility, dividends rates and risk- free discount rates as well as transaction costs.
B. The binomial model can be quite useful for valuing employee stock options as it is possible to include potential dilution, blackout periods, delayed vesting h
provisions, early exercise patterns and employee turnover in the model by increasing the number of periods and adjusting the option values at each node. C. Binomial model does not require more computations
D. Binomial Model does not have any liquidity problem
Correct Answer: AB Section: (none) Explanation
Explanation/Reference:
QUESTION 70
In creating employee stock options, the issuing company usually endeavors to set the option’s strike price at the fair market value of the underlying shares. When the strike price is set at the fair market value, the intrinsic value is ________, and the only value of the option is its __________.
A. One Value, market value
B. Zero value, time value
C. Current market value, zero value D. Par value, zero value
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
QUESTION 71
Income that is eventually derived from the qualified stock option (QSO) is determined to be ordinary income if the receipt exercises the option to buy the underlying securities and subsequently sells the securities within 12 months. To get a tax break:
A. The owner must hold the shares for at least one year
B. The reader should consult a tax advisor regarding any possible tax consequences C. Business valuation professional is to estimate the fair market value
D. The ISO must have been granted at least two years before the stock is sold
Correct Answer: AD Section: (none) Explanation
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Explanation/Reference: QUESTION 72
Under the asset approach, the value of the corporation’s investment in common stock is the common stock’s fair market value on the valuation date:
A. Less the potential income taxes payable on the sale of this stock B. Less the potential income taxes payable to hedge the stock
C. Plus the potential income taxes payable on the sale of this stock D. Less the potential income taxes payable on short selling
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
QUESTION 73
_____________________ applies option pricing methods to value economic projects, companies, and financial securities. Just as option pricing models incorporate the flexibility of option holders’ decision as to whether and when to exercise an option by paying the exercise price.
A. Corporation based valuation B. Valuing the built-in gains
C. Return option valuation
D. Real option valuation
Correct Answer: D Section: (none) Explanation
Explanation/Reference: QUESTION 74
One of the most controversial and unsettled issues in business valuation today is, the valuation of:
A. Corporations B. C corporations
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C. S corporations D. MNCs
Correct Answer: C Section: (none) Explanation
Explanation/Reference: QUESTION 75
The purpose of Erickson and Wang study was to empirically quantify the increase in selling price realized by sellers of entire companies in cases where:
A. The buyer realizes a step-up in tax basis of the underlying assets when acquiring a “seasoned” S corporation
B. Most acquirers do not want to purchase stock of another corporation because of the potential for liability assumptions C. The step-up in tax basis of the assets result in an increase in proceeds
D. The entire analysis should be based on entire data
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
QUESTION 76
There is a general consensus among appraisers that there is little or no difference in controlling interest market values between S corporations and C corporations under most circumstances, and that any difference depends on:
A. Finding a seller that there may be differences in value at the shareholder level for noncontrolling interests. B. Finding a buyer that there may be differences in value at the shareholder level for noncontrolling interests. C. Finding a dealer that there may be differences in value at the shareholder level for non- controlling interests. D. Finding a broker that there may be differences in value at the shareholder level for non- controlling interests.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
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QUESTION 77
Fair market value is defined as the price at which the property would change hands between a willing buyer and a willing seller when:
A. Parallel regulation is there
B. Parties have sufficient knowledge base
C. Neither is under any compulsion to buy, or to sell, both parties having reasonable knowledge of the facts D. Courts have final jurisdiction over tax matters
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
QUESTION 78
It is advisable to emphasize that in the valuation of the stock of closely held corporations or the stock of corporations where market quotations are either lacking or too scarce to be recognized, all available financial data, as well as all relevant factors affecting the market value should be considered. The following factors, although not all—inclusive are fundamental and require careful analysis in each case
EXCEPT :
A. The nature of the business and the history of the enterprise from its inception
B. The economic outlook in general and the condition and outlook of the specific industry in particular C. The earning capacity of the company
D. The income-tax paying capacity of the company
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
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QUESTION 79
“In computing the book value per share of stock, assets of the investment type should be revalued on the basis of their market price and the book value adjusted accordingly.” This statement explains:
A. Weight to be accorded various factors B. Revenue ruling
C. Average factors
D. restrictive agreements
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
QUESTION 80
Which of the following is NOT out of the characteristics that must be present in a transaction while valuing recapitalizations and senior equity interests under Section 2701?
A. The retained security must be a class senior to the transferred junior security
B. The subject securities (both the retained senior preferred and transferred junior securities) must be non-publicly traded
C. The transaction must result in a transfer (directly or indirectly) between members of the family
D. The transfer is a proportionate transfer of all senior and junior equity interests and, as mentioned the transferor must retain a senior equity interest.
Correct Answer: D Section: (none) Explanation
Explanation/Reference: QUESTION 81
The practical effect/s of Special Valuation Rules is/ are:
A. Cumulative dividends or distribution rights B. Non-voters having voting rights
C. Flexible and optional redemption rights
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D. Non-lapsing conversion rights
Correct Answer: AD Section: (none) Explanation
Explanation/Reference:
QUESTION 82
There is an additional ____________ valuation rule, which requires that the appraiser determine whether any of the extraordinary payment rights, if exercised in conjunction with any qualified distribution rights, would lower the total value of the preferred security.
A. Lower of
B. Separate Command
C. Mandatory redemption rights D. Lower in
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
QUESTION 83
There are some factors that determine whether the buy-sell agreement is conclusively binding for estate tax purposes. Which of the following is/are out of those factors?
A. The agreement must restrict the transfer of the securities to the buy-sell price during the owner’s life as well as at death.
B. There must be a valid business purpose for establishing the agreement
C. The value may not reflect those typical of arm’s length transactions in the subject company’s industry
D. The value established in the agreement must have been an adequate and fair price at the time the agreement was executed
Correct Answer: ABD Section: (none) Explanation
Explanation/Reference:
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QUESTION 84
With respect to the contents, _____________ must include:
1. The date of the appraisal
2. The date of the transfer
3. The purpose of the appraisal
4. The description of the property
5. A description of the assumption utilized
6. A description of the appraisal process employed, including the valuation method utilized 7. A description of any hypothetical conditions considered etc.
A. Applicable valuation restrictions
B. Appraisal report
C. Three-year gift tax statute of limitations D. Lapse of certain rights
Correct Answer: B Section: (none) Explanation
Explanation/Reference: QUESTION 85
The remainder interest is valued:
A. By taking the security’s appraised fair market value and discounting it to a present value under the IRS actuarial tables based on seller’s projected remaining life. B. By self-canceling installment note
C. By taking the security’s appraised fair market value and discounting it to a present value under the IRS actuarial tables based on seller’s projected remaining life. D. By sale of a private annuity
Correct Answer: A Section: (none) Explanation
Explanation/Reference: QUESTION 86
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“Fair value” means the value of the corporation’s shares determined:
A. Immediately after the effectuation of the corporate actions to which the shareholder objects
B. Using customary and current valuation concepts and techniques generally employed for similar businesses in the context of the transaction requiring appraisal C. Without discounting for lack of marketability or minority status except, if appropriate, for amendments to the articles...
D. That the majority states use the pre-1999 definition
Correct Answer: BC Section: (none) Explanation
Explanation/Reference: QUESTION 87
A major issue in many fair value cases is:
A. Whether or not discounts and/or premiums are applicable
B. Lack of control
C. Lack of marketability
D. lack of ownership control premiums under certain specific circumstances.
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
QUESTION 88
The marital estate comes into being upon filing for divorce. It represents the assets that must be divided according to the property laws of the state. Currently, each state adheres to either (1) ________________ or (2) _____________________.
A. The community property standard, the investment value
B. The community property standard, the equitable distribution standard C. The family property standard, the equitable standard
D. The standard value, the equitable distribution standard
Correct Answer: B
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Section: (none) Explanation
Explanation/Reference:
QUESTION 89
Bishop and Schroeder make the point that lack of marketability discounts should be recognized, just as they are in Tax Court, because one spouse usually gets liquid assets while the other spouse lacks:
A. the mode of payment as it is the exchange of interests in the marital assets
B. Underlying principles that are much more consistent and broadly accepted
C. Such flexibility
D. The flexibility and safety of being able to “cash out” readily at the owner’s option
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
QUESTION 90
As with many matters related to marital dissolution valuations, the consideration of goodwill varies among states. In general, the various judicial precedents follow one of three positions regarding the consideration of goodwill. Which of the following is/are out of those options?
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A. Goodwill is never a distributable marital asset
B. Business or practice goodwill only is a distributable marital asset
C. All intangible value in the nature of goodwill (both personal and practice goodwill) related to the business or practice is distributable D. Intangible value of goodwill is attributable solely to the efforts of or reputation of an owner
Correct Answer: ABC Section: (none)
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Explanation Explanation/Reference:
QUESTION 91
Family law courts generally recognize three basic approaches to value. Which of the following is NOT out of those approaches?
A. Income approach (both direct capitalization and, increasingly, discounted cash flow) B. Market approach
C. Asset-based approach (including the capitalized excess earnings method)
D. Asset-based approach (excluding the capitalized excess earnings method)
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
QUESTION 92
A common first step in ratio analysis of financial statements is to prepare what are sometimes called ____________________. On these statements, each line item is expressed as a percentage of the total. For example, on the balance sheet, each line is shown as a percentage of total assets.
A. Pre-analysis statements B. Common-size statements C. Short-term analysis
D. Status diagnosis analysis
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
QUESTION 93
Which of the following ratios demonstrate the company’s ability to meet its current obligations? These can help resolve one of the common controversies in business valuation: whether the company has any assets in excess of those required for its operating needs or, conversely, whether its assets fall short of its needs.
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A. Liquidity ratios
B. Activity ratios
C. Leverage rations
D. Income statement coverage ratios
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
QUESTION 94
A single rule of thumb that, for example, a satisfactory ratio is 2.0:1 is not widely followed in determining the current ratio, because of vastly different conditions typical in various industries, such as accounts receivable and collection periods and inventory turnover periods. As with most ratios, the adequacy of the current ratios for the given company can be better gauged by:
A. Percentage of sales and total assets
B. Comparison with industry norms than by comparison with any absolute standard C. Comparison with a market leader than by comparison with any absolute standard D. Comparison with a market leader than by comparison with industry norms
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
QUESTION 95
______________ is defined as the sum of cash and cash equivalents plus receivables (usually all current assets listed above inventory) divided by current liabilities. For most companies, the only other significant current asset is inventory usually the slowest of the current assets is to be converted to cash.
A. Current ratio
B. Inventory turnover ratio
C. Quick (Acid-Test) ratio
D. Sales to Net Working Capital
Correct Answer: C
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Section: (none) Explanation
Explanation/Reference:
QUESTION 96
The purpose of risk analysis is to ascertain the uncertainty of the income flows to the company’s various suppliers. Generally, there are two classes of the capital suppliers those that provide equity capital and receive a fixed return and those:
A. That provides equity capital and receive a variable return but can participate in the company’s growth through increased future returns B. That used to examine the uncertainty of income to the various suppliers
C. That provides equity capital and receive a variable return but can participate in the preparation of financial statements
D. That provides long-term debt and receive a variable return but can participate in the preparation of financial statements
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
QUESTION 97
It is possible to examine the uncertainty of income to the various suppliers of capital by investigating the uncertainty of income to the company. The greater the uncertainty of income to the company:
A. The greater the uncertainty of the income to the investor in the company B. The lesser the uncertainty of the equity to the investor in the company C. The greater the uncertainty of the equity to the investor in the company D. The lesser the uncertainty of the income to the investor in the company
Correct Answer: A Section: (none) Explanation
Explanation/Reference: QUESTION 98
In measuring the business risk, for many companies, sales volatility is the most important determinant of the fluctuation of net income measured by the standard h
deviation. Although companies may have some control over annual sales volume, sales volatility is, to a considerable extent, a function of the:
A. Economy’s overall health
B. Operating leverage
C. Consumers’ willingness to spend their disposable income D. GDP
Correct Answer: AC Section: (none) Explanation
Explanation/Reference:
QUESTION 99
Some judicial circuits use a multifactor test to determine whether compensation is reasonable or excessive. For example, the Ninth Circuit has used a five-factor test. Which of the following is out of those factors?
A. The employee’s role in the company
B. Compensation paid to similarly situated employees in similar companies C. The character and condition of the company
D. All of these
Correct Answer: D Section: (none) Explanation
Explanation/Reference: QUESTION 100
Financial risk is measured in the following ways EXCEPT:
A. Through calculating the degree of financial leverage
B. Through calculating various leverage ratios
C. Standard deviation of net income
D. Calculating the level of company’s fixed operating income
Correct Answer: AB
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Section: (none) Explanation
Explanation/Reference:
One of the most important tools for conducting a business valuation thoroughly and on a timely basis is a proper schedule. Most first-time, or in frequent, business valuation clients (and their attorneys) tend to underestimate the amount of lead time necessary for the appraiser to prepare a through and professional opinion. Scheduling problems often arise because:
A. The client delays in committing to the project hoping that the valuation problem will go away. B. A major change in some aspect of assignment midway through the project
C. The client is not having awareness regarding valuation standards and selection criteria
D. Of some external pressures on the client
Correct Answer: AB Section: (none) Explanation
Explanation/Reference: QUESTION 2
____________ is perhaps the most difficult task for the business appraiser.
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A. Getting two or more parties with different economic and business expectations to agree on projected future benefits and the risks associated with achieving those projections.
B. Identification of partial interest.
C. Selection of enterprise value premise.
D. Estimation of invested capital
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
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QUESTION 3
When preparing a business valuation for reorganization proceedings under bankruptcy statues, the parties will frequently rely on___________.
A. Reengineering of valuation procedures B. Capitalization of anticipated cash flow C. Ownership of assets
D. Enterprise value
Correct Answer: B Section: (none) Explanation
Explanation/Reference: QUESTION 4
Which of the following are categories in which projections are usually necessary?
A. Antitrust, lost business opportunity, breach of contract B. Infringement of patents, copyrights or trademarks
C. Goodwill
D. Diversified businesses
Correct Answer: AB Section: (none) Explanation
Explanation/Reference:
QUESTION 5
“When earnings have once been “realized”, so that they can be expressed with some approach to accuracy in the company’s accounts, they are already water under the mill and have no direct bearing on what the property in question is now worth. Value, under any plausible theory of capitalized earning power is necessarily forward looking. It is an expression of the advantage that an owner of the property may expect to secure from the ownership in the future. The past earnings are therefore beside the point, save as a possible index of future earnings”. This statement correctly expresses:
A. Realized earnings B. Enterprise value
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C. Realized earning verses prospective earnings D. Prophesied gross and net earnings
Correct Answer: C Section: (none) Explanation
Explanation/Reference: QUESTION 6
One way or the other, the financial benefits of ownership of an interest in a business enterprise must come from the following sources EXCEPT:
A. Dividends, distributions, or other type of cash flow a) From operations, or
b) From investments (e.g. interest)
B. Liquidation or hypothecation of assets
C. Loan/Debt
D. Sale of interest
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
QUESTION 7
In many instances, value considerations are tempered by internal variables, often variables relative to specific shareholding as opposed to the company as a whole. Which of the following is NOT out of such variables?
A. Size of the subject interest (reflecting not only magnitude but control issues) B. The right to vote and to impact the direction of the business
C. Restrictive provisions affecting ownership rights
D. Legal proceedings related to ownership or management prerequisites.
Correct Answer: D Section: (none) Explanation
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Explanation/Reference:
QUESTION 8
1. Dividends or partnership withdrawals (i.e. current economic income). 2. Proceeds from the ultimate sale of the ownership interest or liquidation of the subject business (i.e., including any long-term appreciation in the value of the security interest itself). These two are the categories of:
A. The economic benefits that the non-controlling ownership interest holder may realize. B. The financial benefits that the non-controlling ownership interest holder may realize. C. The economic benefits that the controlling ownership interest holder may realize.
D. The financial benefits that the controlling stakeholder may realize.
Correct Answer: A Section: (none) Explanation
Explanation/Reference: QUESTION 9
Accepted business valuation approaches and methods are all of the following EXCEPT:
A. Income approach
B. Asset-based approach
C. Guideline acquisition company approach D. Market-based approach
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
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QUESTION 10
There’s a tendency for the market for the businesses to change more rapidly than the market for real estate. After all, a business can be thought of as a collection of _____________ each with its own price volatility and risks of ownership.
A. Realized and unrealized earnings
B. Short and long-term liabilities
C. Tangible and intangible assets
D. Unearned Revenues and fixed assets
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
QUESTION 11
The use of asset-based approach should not be confused with the selection of the appropriate premise of value for the subject business valuation. Some analysts mistakenly confuse the use of asset-based approach with a liquidation premise of value (or with a liquidation valuation). Rather, the asset-based approach can be used with all premises of value including:
A. Value in use as a going-concern
B. Value as orderly disposition
C. Value as in exchange as part of a forced orderly liquidation D. A, B and C
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
QUESTION 12
The capital stock of a corporation, its net assets and its share of stock are entirely different things... the value of one bears no fixed or necessary relation to the value of the other; because:
A. A share of common stock does not represent a share in the ownership of the assets of a business. B. Shareholders are only concerned with dividends
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C. Only the corporation itself holds to all its assets and liabilities ... A thirsty shareholder of brewery cannot walk into “his” company and demand that a case of beer be charged to his equity account
D. Putting capital in stocks is somewhat a risky investment
Correct Answer: AC Section: (none) Explanation
Explanation/Reference: QUESTION 13
When is the guideline merged and acquired company method most useful?
A. The initial value derived from the guideline merged and acquired company method, before adjustment for factors such as size of subject block and degree of marketability, is an indication of transaction prices of major ownership interest, usually controlling ownership interests.
B. When same acquisition target has different buyers both due to perception and reality
C. At the time of achieving synergies
D. In estimation of enterprise value
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
QUESTION 14
Control transaction valuation multiples (often called deal multiples or acquisition multiples or acquisition multiples) often use the following measures of returns in the denominator EXCEPT:
A. Revenues
B. Operating income available to invested capital [earnings before interest and taxes (EBIT)] C. Intangible book value
D. Discretionary earnings
Correct Answer: C Section: (none) Explanation
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Explanation/Reference: QUESTION 15
In merger market valuation models:
A. We compare prices among similar companies, much like comparison shopping for a consumer item among similar retail stores B. Corporations are not yellow pencils, quickly stacked and easily matched
C. Every M&A sale cannot be considered special or extraordinary
D. M & A market mostly evinces aberrations
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
QUESTION 16
As with any secondary sources, errors and inconsistencies occur, so the original source documents are the only guarantees of absolute accuracy as a source of merger and acquisition data. Which one of the following is NOT out of those original source documents?
A. Mergerstat Review
B. The merger yearbook
C. Buyouts, published every other week by securities data publishing D. Financial reports
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
QUESTION 17
1. Pratt’s stats
2. Done deal
3. Bizcomps
4. IBA market database
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These are the four databases devoted to:
A. Middle-market
B. Small company controlling ownership
C. Middle market and small company controlling ownership interest transactions D. Shareholders’ equity
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
QUESTION 18
Documentable, arm’s-length, bona fide offers to buy or sell may also be useful evidence of value. Funded bona fide offers (i.e. offers for which the financing for the offer is already in place) should be gives more weight and more consideration than:
A. Past subject company changes
B. Merger and acquisition offers
C. Unfunded bone fide offers
D. Past acquisition documents by the subject company
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
QUESTION 19
The same general processes and decision criteria apply to both (1) deciding on whether or not to rely on any particular valuation multiple at all and (2) deciding on the relative weight to be accorded each valuation multiple ultimately used in reaching the opinion of value. A study of the transactional data may lead to greater of lesser reliance on certain valuation multiples than one might have expected prior to compiling the data a. All of the following are considered in impact of guideline
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transactional data evaluation EXCEPT:
A. Number of data points available
B. Comparability of data measurement C. Comparability of data patterns
D. Apparent business reliance
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
QUESTION 20
Control shares are normally more valuable than minority shares because they contain a bundle of rights that minority shares do not enjoy. Below is a list of some of the rights. Which of the following is NOT out of such rights?
A. Appoint or change operational management
B. Determine management compensation and prerequisites
C. Set operational and strategic policy and change the course of business D. Negotiate and consummate goodwill
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
QUESTION 21
Below is a partial listing of possible scenarios in_________________.
-100 % control
-More than a majority or supermajority, but less than 100%
-More than 50% but less than a supermajority, where state statutes or articles of incorporation require a supermajority -50 %
-Less than 50 % but “effective control” -Minority shares that control by voting block
A. Control spectrum
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B. Control or lack of control spectrum
C. Discount for lack of control or minority discounts D. B & C both are the same
Correct Answer: D Section: (none) Explanation
Explanation/Reference: QUESTION 22
Which of the following best suits in replacement to question marks from left to right respectively?
A. Control value, strategic control value B. Enterprise value, control value
C. Strategic value, Enterprise value
D. Tangible value, Intangible value
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Correct Answer: A Section: (none) Explanation
Explanation/Reference: QUESTION 23
_________ is the value to some particular owner or potential owner, is found often in the context of mergers and acquisitions and in family law disputes.
A. Marketable value
B. Control Value
C. Investment value
D. Strategic Control value
Correct Answer: C Section: (none) Explanation
Explanation/Reference: QUESTION 24
A unique feature of Merger stat/Shannon Pratt’s control premium study is a transaction code by type of transaction. i.e.:
A. F- Financial H-Horizontal integration V-Vertical integration C-Conglomerate
B. F- Financial H-Hedged Value
V- Vertical integration C- Corporations
C. F- Funds
H- Horizontal value V- Vertical value C- Control value
D. C- Control and control risk H- Hedging
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F- Financial V-Vulnerability
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
QUESTION 25
“A takeover model became a significant explanatory variable for firms that had no coattail. A voting power model was a significant explanatory variable for firms that had coattail provision.” This is the conclusion of:
A. Robinson, Rumsey and white study
B. Robinson, Richard and Black study
C. Mergers stat/Shannon Pratt’s control premium study D. Jeff, James and Chris study
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
QUESTION 26
About half the state and many individual companies have statutes or articles that require a super majority to effect certain corporate actions. If the minority block is of sufficient size to block such actions, there may be cause to reduce the discount for lack of control. In most cases, this would not be grounds for a slight reduction in the discount. Which of the following term is related to this scenario?
A. Swing vote
B. Takeover
C. Blocking power
D. “Coattail” protection
Correct Answer: C Section: (none) Explanation
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Explanation/Reference: QUESTION 27
Supermajority vote requirements and state dissolution statues are the factors that influence:
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A. Swing vote
B. Blocking power
C. Lack of control discount
D. Ultimate rate of return produced by the interest.
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
QUESTION 28
Stockholders’ privilege to subscribe to new issues of voting stock, usually the common stock or securities convertible into voting stock, usually the common stock or securities convertible into voting stock, before such offerings are made to nonstockholders. This is called:
A. A privileged subscription right B. A preemptive right
C. Non-disclosure status
D. Pre-offering status
Correct Answer: AB Section: (none) Explanation
Explanation/Reference:
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QUESTION 29
If there are five directors to be elected, and 500 shares are outstanding and voting for the election of directors, the minimum number of shares necessary to elect one director would be 84 shares. Proof: 84 shares time five directors to be elected equals 420 votes, all cast for one director. Assuming the rest of the stock (416 shares) votes in bloc as the majority, such total of 2,080 votes distributed among five directors would be 416 votes each. Therefore, an individual representing the minority and receiving its 420votes is sure to get one of the places on the board, the majority getting the other four places. The minority in this example must be sure to vote all of its 420 votes for one director; if it distributed the 420 votes among two, it obviously would not win any places on the board. Cumulative voting, move over, requires a majority of the stock to be able to elect a majority of the board. In the above example, five directors, ______________ shares are necessary, or a majority of the _____________
shares total.
A. 200, 400 B. 150, 300 C. 251, 500 D. 249, 500
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
QUESTION 30
If the language of the relevant agreements indicates that minority block of stock will be valued on a controlling ownership interest level of value, a full lack of control discount will not apply to the transactions to which the provision is applicable. For example:
A. The agreement may say that the subject shares will be valued “on an enterprise basis” or as “a per share portion of the overall company value.” B. A lack of control discount must be applicable to overall business value
C. Lack of control discount may not be inflated due to influences of ownership control
D. Some of the benefits of ownership control are lost due to public disclosure
Correct Answer: D Section: (none) Explanation
Explanation/Reference: QUESTION 31
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1
1- _____________ 1+ premium
This is a formula for:
A. Converting a control premium
B. Identifying a total of shareholders
C. Converting a control premium to a market based premium D. Converting a control premium to an implied minority discount
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
QUESTION 32
_____________ proclaims that if valuing a company by the asset approach, the analyst should check to see whether capital gains taxes would be incurred on the liquidation of the assets. If so, it is possible that a discount should be taken for the capital gains tax liability.
A. Fiduciary duties
B. Contractual restrictions C. Built-in gains discount D. Potential dilution
Correct Answer: C Section: (none) Explanation
Explanation/Reference: QUESTION 33
Basic ways of approaching the valuation of non-controlling ownership interests are the following EXCEPT:
A. The discount approach
B. The direct comparison approach C. The market-based approach
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D. The bottom-up-approach (income approach)
Correct Answer: C Section: (none) Explanation
Explanation/Reference: QUESTION 34
The most frequently encountered reasons for needing to value debt securities are the following EXCEPT:
A. Purchase or sale for cash
B. Exchange of equity for debt, or vice versa
C. Allocating total enterprise value among classes of securities in a leverages buyout, recapitalization (including) D. Adjusting an equity statement owned or owed
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
QUESTION 35
Most typically, a company, or some or all of its stock, is to be sold and a debt security received as all or part of the consideration. The seller needs to know the cash- equivalent value of the consideration being received in return for the company or stock being given up. It is uncommon for notes or other debt securities issued in connection with the acquisition of a company to have a cash equivalent value of ___________________ the securities value.
A. 20 percent of
B. 20 percent more or below C. 20 more than
D. 20 percent below
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
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QUESTION 36
Recapitalizations involving debt securities may be undertaken for a variety of reasons. One common reason is:
A. A leveraged Buyout
B. A leveraged recapitalization C. Bankruptcy recapitalization D. Resource reallocation
Correct Answer: B Section: (none) Explanation
Explanation/Reference: QUESTION 37
Which of the following is NOT the advantage of leasing to the lessee?
A. The financing terms of the lease usually take into considerations the lessor’s ability to more efficiently use the tax advantages of asset ownership
B. Most leases are short-term operating leases, and that reduces the transaction costs (i.e. identifying qualified buyers and complications associated with equipment obsolescence) at the end of anticipated period of use
C. Installment sales agreements
D. There is less of a capital commitment so that equity and borrowing power are freed for the other financing
Correct Answer: C Section: (none) Explanation
Explanation/Reference: QUESTION 38
The rate of interest that, when applied to the expected future payments equal to the debt security’s observed market price is called the:
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A. Yield to maturity
B. Return on investment C. Market interest
D. Interest earning
Correct Answer: A Section: (none) Explanation
Explanation/Reference: QUESTION 39
____________________ are defined as the sum of the market value of total liabilities divide by the aggregate liquidation value of the preferred stock.
A. Liquidation Coverage ratio B. Pretax return on total capital C. Capitalization ratio
D. Fixed charge coverage
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
QUESTION 40
Qualitative factors might also cause the required yield to be higher or lower than that based solely on the quantitative ratio analysis. Whish of the following is NOT out of such quantitative factors?
A. The competitive environment in the industry B. Depth and competence of management
C. Trends in diversification of revenue sources D. Trends in diversification of strategies
Correct Answer: D
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Section: (none) Explanation
Explanation/Reference: QUESTION 41
Factors affecting the value of preferred stock are all of the following EXCEPT:
A. Stated dividend rate and the risk associated with payment of it B. Cumulative versus noncumulative dividends
C. Lack of marketability discount
D. Redemption privilege
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
QUESTION 42
If a $1000 per share value of convertible bond is issued for $1000, and is convertible into 20 shares of issuer’s common stock that pays no dividend, there will be no economic benefit in converting the debt to stock as long as the common stock is selling for:
A. Less than $50 per share B. $50 per share
C. $more than $50 per share D. Less than $25 per share
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
QUESTION 43
An interesting form of debt security, known as _________________, allows the issuer to avoid paying cash to the debt holder for interest prior to the debt’s maturity. The only cash payment from the debt issuer comes at maturity, when the debt’s face value is repaid to security holder.
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A. Callable bonds
B. Zero coupon debt C. Convertible debt
D. Collateral provisions
Correct Answer: B Section: (none) Explanation
Explanation/Reference: QUESTION 44
The special characteristics of the preferred stock that we typically encounter include all of the following EXCEPT:
A. Dividend rate
B. Liquidation preference
C. Cumulative versus noncumulative dividends
D. Convertible versus nonconvertible rights into preferred equity
Correct Answer: D Section: (none) Explanation
Explanation/Reference: QUESTION 45
Market evidence indicated that adjustable-rate preferred stocks generally required yields in the range of ______________ basic points.
A. 42 to 445 B. 48-498 C. 32-500 D. 50-500
Correct Answer: A Section: (none) Explanation
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Explanation/Reference:
QUESTION 46
If a $1000 per share value of convertible bond is issued for $1000, and is convertible into 20 shares of issuer’s common stock that pays no dividend, there will be no economic benefit in converting the debt to stock as long as the common stock is selling for less than $50 per share. If the bond value is indeed in the equity- equivalent region, as the value of a single share of common stock increases $1, the bond value will increase:
A. $25 B. $50 C. $20 D. $10
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
QUESTION 47
The most common forms of redemption provisions found in privately held companies are as follows. Which of the following is NOT out of the common forms of redemption provisions?
A. The entire issue is redeemable at the option of the issuing corporation at a specified price over a designated time period. These types of issue are commonly referred to as callable.
B. The entire issue is redeemable at the option of the issuing corporations at a changing price contingent upon a certain event.
C. Future redemption by the issuing company is mandatory and based on a specific redemption schedule.
D. Future issues have sinking funds provisions similar to vehicle by which bonds are retired at intervals up to their maturity dates and are referred to as sinking fund preferred.
Correct Answer: B Section: (none) Explanation
Explanation/Reference: QUESTION 48
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Which of the following factor/s is/are most important for the redemption provisions that affect their value?
A. Call price
B. Whether or not a sinking fund or some other means of financing the redemption is established
C. Issuing company’s financial ability to cash out the preferred shares without some sort of redemption fund. D. Redemption methods
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
QUESTION 49
The primary impact on the value of a sinking fund preferred stock results from the fact that redemption creates a finite stream of income to the investor plus________________.
A. A terminal value versus a theoretically infinite stream of income available to the nonsinking fund preferred stockholder. B. A negative value versus a theoretically infinite stream of income available to the nonsinking fund preferred stockholder. C. A terminal value versus a theoretically finite stream of income available to the nonsinking fund preferred stockholder. D. A positive value versus a theoretically finite earning available to the non-sinking fund preferred stockholder.
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
QUESTION 50
The most prevalent measure for assessing the likelihood of receiving future preferred dividends is the company’s_________________, commonly defined as the sum of pretax income plus interest expense divided by the sum of interest expense plus preferred dividends adjusted for tax.
A. Variable-charge coverage ratio B. Fixed-charge coverage ratio C. fixed-charge leverage ratio
D. fixed-charge liquidity ratio
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Correct Answer: B Section: (none) Explanation
Explanation/Reference:
QUESTION 51
1. Dissenting stockholder actions. 2. Minority oppression actions. Either may be accompanied by claims of breach of fiduciary duty. These are the actions brought by:
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A. Minority shareholder B. Majority shareholders C. OTC Trading
D. Short Selling
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
QUESTION 52
There are many subtitles to the application of fair value for cooperate law purposes. For example, some states consider concepts of “entire fairness.” There are following aspects of entire fairness EXCEPT:
A. Absolute fairness
B. Relative fairness
C. Competence and thoroughness D. Reorganization
Correct Answer: D
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Section: (none) Explanation
Explanation/Reference:
QUESTION 53
__________________ in context of Delware block method means value based on expected earnings and/or dividends. It is akin to value based on the income approach in the three basic approaches to value. It may be arrived at by discounted cash flow (DCF), capitalization of earnings, or capitalization of dividends.
A. Market value
B. Investment Value
C. Interest on invested capital D. Ownership interest
Correct Answer: B Section: (none) Explanation
Explanation/Reference: QUESTION 54
An item that frequently causes controversy in a business valuation is the value of a:
A. Net operating loss carryforward B. Accounting of leases
C. Installment sales
D. Contract work
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
QUESTION 55
Since the use of the extraordinary designation is so restrictive, obviously many items do not meet the strict definition for accounting purposes but nevertheless should be regarded as nonrecurring for analytical purposes. Some examples of such items would be all of the following EXCEPT:
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A. Gains or losses on the sale of assets
B. Gains or losses on disposition of a segment of the business C. Write-offs and other expenses related to an acquisition
D. Effects of normal price fluctuations
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
QUESTION 56
Let’s say that a company had 100,000 shares outstanding at the beginning of the year and issued 30,000 more shares on May 1. The 100,000 shares would be outstanding for four months and the 130,000 shares for eight months, or two-thirds of the year. The weighted average number of shares outstanding for the year would be:
A. 100, 000 B. 120,000 C. 140,000 D. 180,000
Correct Answer: B Section: (none) Explanation
Explanation/Reference: QUESTION 57
Continuing the above example, if earnings were $30,000, earning per share would be:
A. $2.50 B. $3.00 C. $4.00 D. $2.25
Correct Answer: A
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Section: (none) Explanation
Explanation/Reference:
QUESTION 58
Book value per share is based on the number of shares outstanding at the end of accounting period rather than the weighted average used in computing earnings per share. Also, book value normally is computed without considering:
A. Treasury stock
B. Possible dilutive effects of conversions C. Maximum potential dilution
D. Anti-dilutives and their effects
Correct Answer: B Section: (none) Explanation
Explanation/Reference: QUESTION 59
Situations commonly requiring the valuation of option are all of the following EXCEPT:
A. When the option is designed, granted exchanged, or terminated
B. When financial statement disclosure requires that the option value is recognized
C. When the option value is at issue in a damage suit, such as a breach of contract suit between an existing or former executive and the issuing company D. When the option is a repurchased option by the OTC market
Correct Answer: D Section: (none) Explanation
Explanation/Reference: QUESTION 60
____________________ is common stock received when the option is exercised.
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A. Underlying stock B. American option C. European option D. Strike
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
QUESTION 61
Imagine that an investor in the common stock of a company has two choices, either to (1) but 100 shares of a company’s common stock at $10 per share or (2) to purchase a call for $125 to purchase
100 shares at the same $10 price at the end of nine months. If the investor chooses to buy the stock, the investor must pay $1,000 immediately and is at risk for the entire $1,000 investment. If the investor chooses to purchase the call option, the investor will pay only $125 immediately and can wait until the option’s expiration date to decide whether or not to buy the stock for an additional $1,000. The investor’s risk is limited to $125. If the option is ____________________, the option will be exercised. If it is ____________________, the option will simply lapse.
A. In-the-money, Out-of-the-money B. At-the-money, Out-of-the-money C. At-the-money, In-of-the-money D. At-the-money, At-of-the-money
Correct Answer: A Section: (none) Explanation
Explanation/Reference: QUESTION 62
Which of the following is NOT out of the call option’s value?
A. The price of underlying stock
B. The risk bearing interest rate
C. The dividends expected during the life of the option D. The volatility of the price of the underlying stock
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Correct Answer: B Section: (none) Explanation
Explanation/Reference:
QUESTION 63
Options can be very complicated. For example, some options have strike pries that vary over time or under different market conditions. Other options have lives that vary depending on stock prices and market conditions. There are even _________________, which are options on option, and ______________, which set price boundaries.
A. Strike, barrier option
B. Risk free options, barrier options C. Compound options, barrier options D. Compound options, volatile options
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
QUESTION 64
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The Black-Scholes model assumes near perfect markets for both the options and the underlying stock. Among other conditions, the model assumes the following EXCEPT :
A. There are no commissions or other transaction costs in buying or selling the stock or the option B. The short-term risk-free rate is known and is constant through time
C. Trading never stops. It is continuous through time following a geometric Brownian motion
D. The stock price does not follow a random walk with a long normal distribution
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Correct Answer: D Section: (none) Explanation
Explanation/Reference:
QUESTION 65
A seller who does not own a security (a short seller) will simply accept price of the security
from the buyer and agree to settle with the buyer on some future date by paying him an amount equal to the price of the security on that date. While this short sale is outstanding, the short seller will have the use, of, or interest on, the proceeds of the sale. This is the assumption of:
A. An option market
B. Market of underlying stock in an option trading C. Near-perfect market
D. Volatile market
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
QUESTION 66
Calculating the volatility of the underlying stock is more complicated. Volatility is the standard deviation is the price of underlying stock. The volatility used in the Black Scholes model is the total volatility of the underlying stock’s price. It is not its bets, which measures
A. The relative movement of the stock’s price to the market B. That the stock’s price changes are relatively constant
C. Implied volatility
D. The number of outstanding shares of the issuer
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
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QUESTION 67
_________________ is computed by reverse re-engineering the price of a publicly traded option on the same underlying stock. This is the one when used in the Black-Scholes model along with the other four known variables results in a calculated value that matches the market price of the publicly traded options.
A. Implied price volatility
B. Volatility of closely held companies C. Historical price volatility
D. Both A & C
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
QUESTION 68
Fisher Black developed a technique to value American stock options using the Black- Scholes model called the pseudo-American call option model. The steps in the method are as follows EXCEPT:
A. Compute the adjusted market price of the stock by deducting the present value, using the risk-free rate, of the future dividends payable during the remaining life of the option
B. For each pseudo-option assumed to expire on a dividend date, deduct from the exercise price of the option the dividend payable on the date and the present value, using the risk-free rate, of all the remaining dividends to be paid after the dividend date during the term of the option
C. Select the European option with the highest value as the value of the American option
D. Using the Black-Scholes model, compute the value of each of the pseudo-options using unadjusted underlying stock price.
Correct Answer: D Section: (none) Explanation
Explanation/Reference: QUESTION 69
The advantages of the binomial model over the Black-Scholes model and its variations include:
A. The binomial model’s ability to incorporate a variety of conditions which can increase accuracy, including variations in expected volatility, dividends rates and risk- free discount rates as well as transaction costs.
B. The binomial model can be quite useful for valuing employee stock options as it is possible to include potential dilution, blackout periods, delayed vesting h
provisions, early exercise patterns and employee turnover in the model by increasing the number of periods and adjusting the option values at each node. C. Binomial model does not require more computations
D. Binomial Model does not have any liquidity problem
Correct Answer: AB Section: (none) Explanation
Explanation/Reference:
QUESTION 70
In creating employee stock options, the issuing company usually endeavors to set the option’s strike price at the fair market value of the underlying shares. When the strike price is set at the fair market value, the intrinsic value is ________, and the only value of the option is its __________.
A. One Value, market value
B. Zero value, time value
C. Current market value, zero value D. Par value, zero value
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
QUESTION 71
Income that is eventually derived from the qualified stock option (QSO) is determined to be ordinary income if the receipt exercises the option to buy the underlying securities and subsequently sells the securities within 12 months. To get a tax break:
A. The owner must hold the shares for at least one year
B. The reader should consult a tax advisor regarding any possible tax consequences C. Business valuation professional is to estimate the fair market value
D. The ISO must have been granted at least two years before the stock is sold
Correct Answer: AD Section: (none) Explanation
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Explanation/Reference: QUESTION 72
Under the asset approach, the value of the corporation’s investment in common stock is the common stock’s fair market value on the valuation date:
A. Less the potential income taxes payable on the sale of this stock B. Less the potential income taxes payable to hedge the stock
C. Plus the potential income taxes payable on the sale of this stock D. Less the potential income taxes payable on short selling
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
QUESTION 73
_____________________ applies option pricing methods to value economic projects, companies, and financial securities. Just as option pricing models incorporate the flexibility of option holders’ decision as to whether and when to exercise an option by paying the exercise price.
A. Corporation based valuation B. Valuing the built-in gains
C. Return option valuation
D. Real option valuation
Correct Answer: D Section: (none) Explanation
Explanation/Reference: QUESTION 74
One of the most controversial and unsettled issues in business valuation today is, the valuation of:
A. Corporations B. C corporations
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C. S corporations D. MNCs
Correct Answer: C Section: (none) Explanation
Explanation/Reference: QUESTION 75
The purpose of Erickson and Wang study was to empirically quantify the increase in selling price realized by sellers of entire companies in cases where:
A. The buyer realizes a step-up in tax basis of the underlying assets when acquiring a “seasoned” S corporation
B. Most acquirers do not want to purchase stock of another corporation because of the potential for liability assumptions C. The step-up in tax basis of the assets result in an increase in proceeds
D. The entire analysis should be based on entire data
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
QUESTION 76
There is a general consensus among appraisers that there is little or no difference in controlling interest market values between S corporations and C corporations under most circumstances, and that any difference depends on:
A. Finding a seller that there may be differences in value at the shareholder level for noncontrolling interests. B. Finding a buyer that there may be differences in value at the shareholder level for noncontrolling interests. C. Finding a dealer that there may be differences in value at the shareholder level for non- controlling interests. D. Finding a broker that there may be differences in value at the shareholder level for non- controlling interests.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
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QUESTION 77
Fair market value is defined as the price at which the property would change hands between a willing buyer and a willing seller when:
A. Parallel regulation is there
B. Parties have sufficient knowledge base
C. Neither is under any compulsion to buy, or to sell, both parties having reasonable knowledge of the facts D. Courts have final jurisdiction over tax matters
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
QUESTION 78
It is advisable to emphasize that in the valuation of the stock of closely held corporations or the stock of corporations where market quotations are either lacking or too scarce to be recognized, all available financial data, as well as all relevant factors affecting the market value should be considered. The following factors, although not all—inclusive are fundamental and require careful analysis in each case
EXCEPT :
A. The nature of the business and the history of the enterprise from its inception
B. The economic outlook in general and the condition and outlook of the specific industry in particular C. The earning capacity of the company
D. The income-tax paying capacity of the company
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
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QUESTION 79
“In computing the book value per share of stock, assets of the investment type should be revalued on the basis of their market price and the book value adjusted accordingly.” This statement explains:
A. Weight to be accorded various factors B. Revenue ruling
C. Average factors
D. restrictive agreements
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
QUESTION 80
Which of the following is NOT out of the characteristics that must be present in a transaction while valuing recapitalizations and senior equity interests under Section 2701?
A. The retained security must be a class senior to the transferred junior security
B. The subject securities (both the retained senior preferred and transferred junior securities) must be non-publicly traded
C. The transaction must result in a transfer (directly or indirectly) between members of the family
D. The transfer is a proportionate transfer of all senior and junior equity interests and, as mentioned the transferor must retain a senior equity interest.
Correct Answer: D Section: (none) Explanation
Explanation/Reference: QUESTION 81
The practical effect/s of Special Valuation Rules is/ are:
A. Cumulative dividends or distribution rights B. Non-voters having voting rights
C. Flexible and optional redemption rights
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D. Non-lapsing conversion rights
Correct Answer: AD Section: (none) Explanation
Explanation/Reference:
QUESTION 82
There is an additional ____________ valuation rule, which requires that the appraiser determine whether any of the extraordinary payment rights, if exercised in conjunction with any qualified distribution rights, would lower the total value of the preferred security.
A. Lower of
B. Separate Command
C. Mandatory redemption rights D. Lower in
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
QUESTION 83
There are some factors that determine whether the buy-sell agreement is conclusively binding for estate tax purposes. Which of the following is/are out of those factors?
A. The agreement must restrict the transfer of the securities to the buy-sell price during the owner’s life as well as at death.
B. There must be a valid business purpose for establishing the agreement
C. The value may not reflect those typical of arm’s length transactions in the subject company’s industry
D. The value established in the agreement must have been an adequate and fair price at the time the agreement was executed
Correct Answer: ABD Section: (none) Explanation
Explanation/Reference:
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QUESTION 84
With respect to the contents, _____________ must include:
1. The date of the appraisal
2. The date of the transfer
3. The purpose of the appraisal
4. The description of the property
5. A description of the assumption utilized
6. A description of the appraisal process employed, including the valuation method utilized 7. A description of any hypothetical conditions considered etc.
A. Applicable valuation restrictions
B. Appraisal report
C. Three-year gift tax statute of limitations D. Lapse of certain rights
Correct Answer: B Section: (none) Explanation
Explanation/Reference: QUESTION 85
The remainder interest is valued:
A. By taking the security’s appraised fair market value and discounting it to a present value under the IRS actuarial tables based on seller’s projected remaining life. B. By self-canceling installment note
C. By taking the security’s appraised fair market value and discounting it to a present value under the IRS actuarial tables based on seller’s projected remaining life. D. By sale of a private annuity
Correct Answer: A Section: (none) Explanation
Explanation/Reference: QUESTION 86
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“Fair value” means the value of the corporation’s shares determined:
A. Immediately after the effectuation of the corporate actions to which the shareholder objects
B. Using customary and current valuation concepts and techniques generally employed for similar businesses in the context of the transaction requiring appraisal C. Without discounting for lack of marketability or minority status except, if appropriate, for amendments to the articles...
D. That the majority states use the pre-1999 definition
Correct Answer: BC Section: (none) Explanation
Explanation/Reference: QUESTION 87
A major issue in many fair value cases is:
A. Whether or not discounts and/or premiums are applicable
B. Lack of control
C. Lack of marketability
D. lack of ownership control premiums under certain specific circumstances.
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
QUESTION 88
The marital estate comes into being upon filing for divorce. It represents the assets that must be divided according to the property laws of the state. Currently, each state adheres to either (1) ________________ or (2) _____________________.
A. The community property standard, the investment value
B. The community property standard, the equitable distribution standard C. The family property standard, the equitable standard
D. The standard value, the equitable distribution standard
Correct Answer: B
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Section: (none) Explanation
Explanation/Reference:
QUESTION 89
Bishop and Schroeder make the point that lack of marketability discounts should be recognized, just as they are in Tax Court, because one spouse usually gets liquid assets while the other spouse lacks:
A. the mode of payment as it is the exchange of interests in the marital assets
B. Underlying principles that are much more consistent and broadly accepted
C. Such flexibility
D. The flexibility and safety of being able to “cash out” readily at the owner’s option
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
QUESTION 90
As with many matters related to marital dissolution valuations, the consideration of goodwill varies among states. In general, the various judicial precedents follow one of three positions regarding the consideration of goodwill. Which of the following is/are out of those options?
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A. Goodwill is never a distributable marital asset
B. Business or practice goodwill only is a distributable marital asset
C. All intangible value in the nature of goodwill (both personal and practice goodwill) related to the business or practice is distributable D. Intangible value of goodwill is attributable solely to the efforts of or reputation of an owner
Correct Answer: ABC Section: (none)
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Explanation Explanation/Reference:
QUESTION 91
Family law courts generally recognize three basic approaches to value. Which of the following is NOT out of those approaches?
A. Income approach (both direct capitalization and, increasingly, discounted cash flow) B. Market approach
C. Asset-based approach (including the capitalized excess earnings method)
D. Asset-based approach (excluding the capitalized excess earnings method)
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
QUESTION 92
A common first step in ratio analysis of financial statements is to prepare what are sometimes called ____________________. On these statements, each line item is expressed as a percentage of the total. For example, on the balance sheet, each line is shown as a percentage of total assets.
A. Pre-analysis statements B. Common-size statements C. Short-term analysis
D. Status diagnosis analysis
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
QUESTION 93
Which of the following ratios demonstrate the company’s ability to meet its current obligations? These can help resolve one of the common controversies in business valuation: whether the company has any assets in excess of those required for its operating needs or, conversely, whether its assets fall short of its needs.
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A. Liquidity ratios
B. Activity ratios
C. Leverage rations
D. Income statement coverage ratios
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
QUESTION 94
A single rule of thumb that, for example, a satisfactory ratio is 2.0:1 is not widely followed in determining the current ratio, because of vastly different conditions typical in various industries, such as accounts receivable and collection periods and inventory turnover periods. As with most ratios, the adequacy of the current ratios for the given company can be better gauged by:
A. Percentage of sales and total assets
B. Comparison with industry norms than by comparison with any absolute standard C. Comparison with a market leader than by comparison with any absolute standard D. Comparison with a market leader than by comparison with industry norms
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
QUESTION 95
______________ is defined as the sum of cash and cash equivalents plus receivables (usually all current assets listed above inventory) divided by current liabilities. For most companies, the only other significant current asset is inventory usually the slowest of the current assets is to be converted to cash.
A. Current ratio
B. Inventory turnover ratio
C. Quick (Acid-Test) ratio
D. Sales to Net Working Capital
Correct Answer: C
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Section: (none) Explanation
Explanation/Reference:
QUESTION 96
The purpose of risk analysis is to ascertain the uncertainty of the income flows to the company’s various suppliers. Generally, there are two classes of the capital suppliers those that provide equity capital and receive a fixed return and those:
A. That provides equity capital and receive a variable return but can participate in the company’s growth through increased future returns B. That used to examine the uncertainty of income to the various suppliers
C. That provides equity capital and receive a variable return but can participate in the preparation of financial statements
D. That provides long-term debt and receive a variable return but can participate in the preparation of financial statements
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
QUESTION 97
It is possible to examine the uncertainty of income to the various suppliers of capital by investigating the uncertainty of income to the company. The greater the uncertainty of income to the company:
A. The greater the uncertainty of the income to the investor in the company B. The lesser the uncertainty of the equity to the investor in the company C. The greater the uncertainty of the equity to the investor in the company D. The lesser the uncertainty of the income to the investor in the company
Correct Answer: A Section: (none) Explanation
Explanation/Reference: QUESTION 98
In measuring the business risk, for many companies, sales volatility is the most important determinant of the fluctuation of net income measured by the standard h
deviation. Although companies may have some control over annual sales volume, sales volatility is, to a considerable extent, a function of the:
A. Economy’s overall health
B. Operating leverage
C. Consumers’ willingness to spend their disposable income D. GDP
Correct Answer: AC Section: (none) Explanation
Explanation/Reference:
QUESTION 99
Some judicial circuits use a multifactor test to determine whether compensation is reasonable or excessive. For example, the Ninth Circuit has used a five-factor test. Which of the following is out of those factors?
A. The employee’s role in the company
B. Compensation paid to similarly situated employees in similar companies C. The character and condition of the company
D. All of these
Correct Answer: D Section: (none) Explanation
Explanation/Reference: QUESTION 100
Financial risk is measured in the following ways EXCEPT:
A. Through calculating the degree of financial leverage
B. Through calculating various leverage ratios
C. Standard deviation of net income
D. Calculating the level of company’s fixed operating income
Correct Answer: AB
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Section: (none) Explanation
Explanation/Reference: