CEPA Term Flashcards Session 2
Questions with All Correct
Answers
What are the three approaches to determining Business Value? - Answer-Income,
Market, Asset
What are the two methods to determining Business Value on an Income basis? -
Answer-1. Discounted Cash Flow (DCF) Method (good for growing or volatile earnings)
2. Capitalized Earnings Method (good for steady and predictable earnings)
What is the Discounted Cash Flow (DCF) method of determining Business Value on an
Income basis? - Answer-More complex to assemble.
Predicated on a specific future look at economic benefits (i.e., over a 3-5 year period.)
A financial projection is "Prospective financial statements that present, to the best of the
responsible party's knowledge and belief, given one or more hypothetical assumptions,
an entity's expected financial position, results of operations, and cash flows" using EBIT
or EBITDA.
The future stream of benefits is "discounted" by an appropriate rate of return specifically
developed for the particular assignment. There are many sources for determining the
rate of return, also referred to as the "cost of capital" or the "discount rate."
What are the 4 factors that play in to determining a discount rate? - Answer-1. Stage of
business (startup: high rate to mature: low rate)
2. Revenue and earning performance compared to peers
3. Revenue and earning performance compared to internal historical trends
4. The 4Cs of Intangible Assets
What is the Capitalization of Earnings Method of determining Business Value on an
Income basis? - Answer-This method is complementary to DCF, but there are some
significant differences. •Best used when future cash flows are expected to be consistent
and based on past performance.
What are the pros of using the Income approach to Business Valuation? - Answer-
Explicitly considers the future financial performance and outlook of the company.
, Based on projected income, a concern of most investors.
Provides flexibility in valuing companies with uneven or cyclical growth expectations.
What are the cons of using the Income approach to Business Valuation? - Answer-
Depends heavily on forecasted future financial performance, results are subject to who
prepares the forecast.
Hinges on the discount rate and the subjectivity of perceived risks.
More complex and time consuming.
What are 2 cons to the Public Company Guideline Method to Business Valuation? -
Answer-Suitability of Comparable Guideline Companies due to size, scope of
operations and stage of business.
Does not account for the future performance of the company.
What are 3 pros to the Public Company Guideline Method to Business Valuation? -
Answer-Sales of Stock in Public Markets - sufficient data points. Observable operating
metrics/performance. Transparency and financial integrity.
What are 3 pros to the Guideline Transaction Method to Business Valuation? - Answer-
Based on actual sales data.
Target companies are typically smaller and therefore more comparable (relative to the
publicly-traded comps).
Easy to understand.
What are 3 cons to the Guideline Transaction Method to Business Valuation? - Answer-
- Lack of transparency in regard to the Target company's financial performance.
- Lack of sufficient transactions and/or dated transactions.
- Lack of transparency in regard to deal structure.
- Often driven by synergistic benefits to the specific buyers.
What are two Pros to the Asset Approach to Valuation? - Answer-Can be appropriate
for asset-intensive businesses.
Conceptually easy to understand.
What are three Cons to the Asset Approach to Valuation? - Answer-- Is less useful for
service-oriented businesses.
- Can be expensive to apply if individual appraisals are needed to value real estate,
machinery and equipment.
Questions with All Correct
Answers
What are the three approaches to determining Business Value? - Answer-Income,
Market, Asset
What are the two methods to determining Business Value on an Income basis? -
Answer-1. Discounted Cash Flow (DCF) Method (good for growing or volatile earnings)
2. Capitalized Earnings Method (good for steady and predictable earnings)
What is the Discounted Cash Flow (DCF) method of determining Business Value on an
Income basis? - Answer-More complex to assemble.
Predicated on a specific future look at economic benefits (i.e., over a 3-5 year period.)
A financial projection is "Prospective financial statements that present, to the best of the
responsible party's knowledge and belief, given one or more hypothetical assumptions,
an entity's expected financial position, results of operations, and cash flows" using EBIT
or EBITDA.
The future stream of benefits is "discounted" by an appropriate rate of return specifically
developed for the particular assignment. There are many sources for determining the
rate of return, also referred to as the "cost of capital" or the "discount rate."
What are the 4 factors that play in to determining a discount rate? - Answer-1. Stage of
business (startup: high rate to mature: low rate)
2. Revenue and earning performance compared to peers
3. Revenue and earning performance compared to internal historical trends
4. The 4Cs of Intangible Assets
What is the Capitalization of Earnings Method of determining Business Value on an
Income basis? - Answer-This method is complementary to DCF, but there are some
significant differences. •Best used when future cash flows are expected to be consistent
and based on past performance.
What are the pros of using the Income approach to Business Valuation? - Answer-
Explicitly considers the future financial performance and outlook of the company.
, Based on projected income, a concern of most investors.
Provides flexibility in valuing companies with uneven or cyclical growth expectations.
What are the cons of using the Income approach to Business Valuation? - Answer-
Depends heavily on forecasted future financial performance, results are subject to who
prepares the forecast.
Hinges on the discount rate and the subjectivity of perceived risks.
More complex and time consuming.
What are 2 cons to the Public Company Guideline Method to Business Valuation? -
Answer-Suitability of Comparable Guideline Companies due to size, scope of
operations and stage of business.
Does not account for the future performance of the company.
What are 3 pros to the Public Company Guideline Method to Business Valuation? -
Answer-Sales of Stock in Public Markets - sufficient data points. Observable operating
metrics/performance. Transparency and financial integrity.
What are 3 pros to the Guideline Transaction Method to Business Valuation? - Answer-
Based on actual sales data.
Target companies are typically smaller and therefore more comparable (relative to the
publicly-traded comps).
Easy to understand.
What are 3 cons to the Guideline Transaction Method to Business Valuation? - Answer-
- Lack of transparency in regard to the Target company's financial performance.
- Lack of sufficient transactions and/or dated transactions.
- Lack of transparency in regard to deal structure.
- Often driven by synergistic benefits to the specific buyers.
What are two Pros to the Asset Approach to Valuation? - Answer-Can be appropriate
for asset-intensive businesses.
Conceptually easy to understand.
What are three Cons to the Asset Approach to Valuation? - Answer-- Is less useful for
service-oriented businesses.
- Can be expensive to apply if individual appraisals are needed to value real estate,
machinery and equipment.
