ASA BV 201 Questions and
Answers 100% Solved
Principle of Substitution 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? 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? Market and
Asset (Cost)
What is an "arm's-length" transaction? One in which both parties have the ability to
negotiate.
Why are "rules of thumb" used in valuation? 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? (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? (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? (a) it is useful for the holding
company and (b) it is useful for liquidations
What are the weaknesses of the Asset (Cost) Approach? (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? It is the closest to pure value theory.
What are the weaknesses of the Income Approach? (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? A commercial, industrial, service, or investment
entity pursuing an economic activity.
What is the dictionary definition of a business? (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? 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? Strategy, Systems, People, Assets
What are the common differences between public and private companies? 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? Interest-Bearing Debt and Stockholders' Equity
Preferred stocks generally have precedence over common stock in what two areas?
Dividends and liquidation distributions.
What is the formula for Equity FCF? Net Income + D&A - Increase in WC - CapEx +
Increase in LT Debt
What is the formula for Invested Capital FCF? Net Income + Income Taxes + Interest
Expense - Taxes{Income Taxes/(Net Income + Income Taxes)} + D&A - Increase in WC - Capex
Answers 100% Solved
Principle of Substitution 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? 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? Market and
Asset (Cost)
What is an "arm's-length" transaction? One in which both parties have the ability to
negotiate.
Why are "rules of thumb" used in valuation? 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? (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? (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? (a) it is useful for the holding
company and (b) it is useful for liquidations
What are the weaknesses of the Asset (Cost) Approach? (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? It is the closest to pure value theory.
What are the weaknesses of the Income Approach? (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? A commercial, industrial, service, or investment
entity pursuing an economic activity.
What is the dictionary definition of a business? (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? 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? Strategy, Systems, People, Assets
What are the common differences between public and private companies? 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? Interest-Bearing Debt and Stockholders' Equity
Preferred stocks generally have precedence over common stock in what two areas?
Dividends and liquidation distributions.
What is the formula for Equity FCF? Net Income + D&A - Increase in WC - CapEx +
Increase in LT Debt
What is the formula for Invested Capital FCF? Net Income + Income Taxes + Interest
Expense - Taxes{Income Taxes/(Net Income + Income Taxes)} + D&A - Increase in WC - Capex
