ASA BV 201 Test Questions and
Answers22
Principle of Substitution - ANSWERS-a prudent buyer will pay no more for a property than it
would cost to acquire a substitute property with the same utility
How is a Fairness Opinion different than a FMV? - ANSWERS-A Fairness Opinion goes further
than a FMV by assessing whether a transaction is fair between all ownership entities. It also
serves as an insurance policy for the transacting parties.
Which two valuation methods are based on the principle of substitution? - ANSWERS-Market
and Asset (Cost)
What is an "arm's-length" transaction? - ANSWERS-One in which both parties have the ability to
negotiate.
Why are "rules of thumb" used in valuation? - ANSWERS-When either (a) the rule is highly
common in the industry and the most likely buyer would use it, or (b) there is little or no data.
This method should only be used as a sanity test.
What are the strengths of the Market Approach? - ANSWERS-(a) It is a direct method of
valuation when using similar transactions, (b) the data is easily accessible and abundant, (c)
includes all assets, and (d) incorporate current market conditions - reflecting investor growth
and risk expectations
What are the weaknesses of the Market Approach? - ANSWERS-(a) no two companies or
transactions are identical, therefore it will always be somewhat inaccurate (think case-specific
synergistic premiums), (b) there could be a lack of activity, and (c) doesn't rely on forecasts
,What are the strengths of the Asset (Cost) Approach? - ANSWERS-(a) it is useful for the holding
company and (b) it is useful for liquidations
What are the weaknesses of the Asset (Cost) Approach? - ANSWERS-(a) it doesn't focus on the
income the assets produce as a whole, (b) it doesn't value intangible assets/value, and (c) it is
less applicable in minority interests valuations
What are the strengths of the Income Approach? - ANSWERS-It is the closest to pure value
theory.
What are the weaknesses of the Income Approach? - ANSWERS-(a) it is very difficult to
accurately forecast future cash flow and (b) the discount rate is difficult to accurately estimate
What is the ASA definition of a business? - ANSWERS-A commercial, industrial, service, or
investment entity pursuing an economic activity.
What is the dictionary definition of a business? - ANSWERS-(a) a commercial or industrial
enterprise and the people who constitute it, (b) an organization operated with the objective of
making a profit from the sale of goods or services, (c) an enterprise, commercial entity or firm,
in either the private or public sector, concerned with providing products or services to satisfy
customer requirements
What is the real world definition of a business? - ANSWERS-A group with a strategy of systems
and procedures to utilize assets to meet customer demand.
What are the four key components of a business? - ANSWERS-Strategy, Systems, People, Assets
What are the common differences between public and private companies? - ANSWERS-Size,
management depth, product line diversification, geographic diversification, market
position/share, supplier/customer dependence, access to capital, brand name
, What is included in Total Invested Capital? - ANSWERS-Interest-Bearing Debt and Stockholders'
Equity
Preferred stocks generally have precedence over common stock in what two areas? - ANSWERS-
Dividends and liquidation distributions.
What is the formula for Equity FCF? - ANSWERS-Net Income + D&A - Increase in WC - CapEx +
Increase in LT Debt
What is the formula for Invested Capital FCF? - ANSWERS-Net Income + Income Taxes + Interest
Expense - Taxes{Income Taxes/(Net Income + Income Taxes)} + D&A - Increase in WC - Capex
Calculate the Tax Rate - ANSWERS-Income Taxes/(Net Income + Income Taxes)
What is the formula for NOPAT? - ANSWERS-Net Income + Income Taxes + Interest Expense -
Taxes
A FMV is the value to whom? - ANSWERS-The most likely buyer
At what price do transactions usually take place? - ANSWERS-In between (perceived) investment
value and FMV
What is an Appraiser's job? - ANSWERS-to estimate economic value
What is the definition of FMV, according to Revenue Rule 59-60? - ANSWERS-The price at which
the property would change hands between a willing buyer and a willing seller, when the former
is not under any compulsion to buy and the latter is not under any compulsion to sell; both
parties having reasonable knowledge of relevant facts
Answers22
Principle of Substitution - ANSWERS-a prudent buyer will pay no more for a property than it
would cost to acquire a substitute property with the same utility
How is a Fairness Opinion different than a FMV? - ANSWERS-A Fairness Opinion goes further
than a FMV by assessing whether a transaction is fair between all ownership entities. It also
serves as an insurance policy for the transacting parties.
Which two valuation methods are based on the principle of substitution? - ANSWERS-Market
and Asset (Cost)
What is an "arm's-length" transaction? - ANSWERS-One in which both parties have the ability to
negotiate.
Why are "rules of thumb" used in valuation? - ANSWERS-When either (a) the rule is highly
common in the industry and the most likely buyer would use it, or (b) there is little or no data.
This method should only be used as a sanity test.
What are the strengths of the Market Approach? - ANSWERS-(a) It is a direct method of
valuation when using similar transactions, (b) the data is easily accessible and abundant, (c)
includes all assets, and (d) incorporate current market conditions - reflecting investor growth
and risk expectations
What are the weaknesses of the Market Approach? - ANSWERS-(a) no two companies or
transactions are identical, therefore it will always be somewhat inaccurate (think case-specific
synergistic premiums), (b) there could be a lack of activity, and (c) doesn't rely on forecasts
,What are the strengths of the Asset (Cost) Approach? - ANSWERS-(a) it is useful for the holding
company and (b) it is useful for liquidations
What are the weaknesses of the Asset (Cost) Approach? - ANSWERS-(a) it doesn't focus on the
income the assets produce as a whole, (b) it doesn't value intangible assets/value, and (c) it is
less applicable in minority interests valuations
What are the strengths of the Income Approach? - ANSWERS-It is the closest to pure value
theory.
What are the weaknesses of the Income Approach? - ANSWERS-(a) it is very difficult to
accurately forecast future cash flow and (b) the discount rate is difficult to accurately estimate
What is the ASA definition of a business? - ANSWERS-A commercial, industrial, service, or
investment entity pursuing an economic activity.
What is the dictionary definition of a business? - ANSWERS-(a) a commercial or industrial
enterprise and the people who constitute it, (b) an organization operated with the objective of
making a profit from the sale of goods or services, (c) an enterprise, commercial entity or firm,
in either the private or public sector, concerned with providing products or services to satisfy
customer requirements
What is the real world definition of a business? - ANSWERS-A group with a strategy of systems
and procedures to utilize assets to meet customer demand.
What are the four key components of a business? - ANSWERS-Strategy, Systems, People, Assets
What are the common differences between public and private companies? - ANSWERS-Size,
management depth, product line diversification, geographic diversification, market
position/share, supplier/customer dependence, access to capital, brand name
, What is included in Total Invested Capital? - ANSWERS-Interest-Bearing Debt and Stockholders'
Equity
Preferred stocks generally have precedence over common stock in what two areas? - ANSWERS-
Dividends and liquidation distributions.
What is the formula for Equity FCF? - ANSWERS-Net Income + D&A - Increase in WC - CapEx +
Increase in LT Debt
What is the formula for Invested Capital FCF? - ANSWERS-Net Income + Income Taxes + Interest
Expense - Taxes{Income Taxes/(Net Income + Income Taxes)} + D&A - Increase in WC - Capex
Calculate the Tax Rate - ANSWERS-Income Taxes/(Net Income + Income Taxes)
What is the formula for NOPAT? - ANSWERS-Net Income + Income Taxes + Interest Expense -
Taxes
A FMV is the value to whom? - ANSWERS-The most likely buyer
At what price do transactions usually take place? - ANSWERS-In between (perceived) investment
value and FMV
What is an Appraiser's job? - ANSWERS-to estimate economic value
What is the definition of FMV, according to Revenue Rule 59-60? - ANSWERS-The price at which
the property would change hands between a willing buyer and a willing seller, when the former
is not under any compulsion to buy and the latter is not under any compulsion to sell; both
parties having reasonable knowledge of relevant facts
