Question 1

The replacement cost approach to valuation of a target firm ignores value created by operating the assets in combination as a going concern.

Accepted Answer

The replacement cost approach only considers the cost of replacing the assets of the target firm, without taking into account the value generated by operating these assets as a part of a going concern. This approach does not factor in the synergies and efficiencies that a fully operational business can create, thereby disregarding the value created by combining the assets to create a profitable entity.

Question 2

If the market leader in an industry has a $300 million market value and a 30% market share,the market is valuing each percentage point of market share at $10 million.If a target company in the same industry has a 20% market share,the market value of the target company is $200 million.

Accepted Answer

If the market leader with a 30% market share is valued at $300 million, then each percentage point of market share is being valued at $10 million. Therefore, if the target company has a 20% market share, its market value would be $200 million, which is consistent with the given information.

Question 3

Liquidation value is the projected sale value of a firm's assets.

Accepted Answer

False

Question 4

Liquidation value provides an estimate of the minimum value of the target firm.

Accepted Answer

Liquidation value is the amount that would be left over for shareholders after all assets are sold and liabilities are paid off. This would be the minimum value of the firm.

Question 5

The capitalization rate is equivalent to the discount rate when the firm's revenues are not expected to grow.

Accepted Answer

The capitalization rate is the discount rate used to determine the present value of future cash flows when the revenues are expected to remain constant or not grow.

Question 6

Valuations of target firms based on the comparable companies and recent transactions methods must be adjusted to reflect control premiums.

Accepted Answer

The answer of Valuations of target firms based on the...

Question 7

The principal limitation to the comparable companies' valuation approach is the difficulty in finding companies that are truly comparable to the target firm.

Accepted Answer

The comparable companies valuation approach involves identifying companies that are similar in terms of size, industry, growth prospects, operations, and other factors to the target firm, and using their financial metrics to value the target company. However, finding truly comparable companies can be challenging, as there may be differences in products, markets, management, and other aspects that affect their financial performance and valuation multiples. As a result, the comparable companies' valuation approach should be used as one of several valuation methods and complemented with other approaches.

Question 8

If the P/E ratio for the comparable firm is equal to 10 and the after-tax earnings of the target firm are $2 million,the market value of the target firm would be $5 million.

Accepted Answer

The market value of the target firm would be calculated as the after-tax earnings multiplied by the P/E ratio, which in this case would be $2 million * 10 = $20 million.

Question 9

The comparable recent transactions method is usually considered less reliable than the comparable companies' valuation method.

Accepted Answer

The comparable recent transactions method involves analyzing the prices paid in recent mergers and acquisitions of similar companies, which can provide valuable insight into the current market conditions and the potential value of a target company. While it may have some disadvantages such as difficulty in finding truly comparable transactions, it is still considered a reliable valuation method. In comparison, the comparable companies' valuation method involves comparing a company's financial ratios and multiples to those of similar publicly traded companies, which may not always provide an accurate picture of a target company's unique characteristics and potential for growth.

Question 10

The weighted average valuation approach involves the use of a number of different valuation methods,weighted by the relative importance the appraiser attributes to each method.

Accepted Answer

The statement accurately describes the weighted average valuation approach.

Question 11

Break-up value assumes that individual businesses can be sold quickly without any material loss of value.

Accepted Answer

Break-up value is based on the assumption that the assets or individual businesses of a company can be sold separately and quickly without significant loss in their value, aiming to estimate the net value if the company were to be liquidated.

Question 12

Tangible book value is the value of shareholders' equity less net fixed assets.

Accepted Answer

Tangible book value is calculated as the total shareholders' equity minus intangible assets and goodwill, not net fixed assets.

Question 13

The use of market-based valuation methods usually reflect actual demand and supply considerations at a moment in time.

Accepted Answer

Market-based valuation methods, such as stock prices or real estate appraisals, reflect the current market demand and supply for the asset being valued. Therefore, they are a reflection of actual market conditions at a specific moment in time.

Question 14

Relative valuation methods are often described as market-based,as they reflect the amounts investors are willing to pay for each dollar of earnings,cash flow,sales,or book value at a moment in time.

Accepted Answer

Relative valuation methods are indeed market-based as they compare certain financial ratios, such as price-to-earnings or price-to-book, to similar ratios of other companies in the market to determine the relative value of a company. These methods reflect the prices that investors are willing to pay for certain financial measures at a particular moment in time.

Question 15

Asset oriented approaches to valuation involve the use of tangible book value,liquidation value,discounted cash flows,and break-up values.

Accepted Answer

Asset-oriented approaches to valuation primarily involve the use of tangible book value, liquidation value, and break-up values, but not discounted cash flows, which is a cash flow-oriented valuation method.

Question 16

If the tangible book value of a firm significantly exceeds its market value for an extended period of time,it can become an attractive takeover target.

Accepted Answer

When the tangible book value of a firm significantly exceeds its market value for an extended period of time, it means that the assets owned by the company are undervalued in the market. This undervaluation can attract potential buyers who see an opportunity to acquire the assets at a lower price than they are worth. Therefore, the firm becomes an attractive takeover target.

Question 17

Book values are maligned as measures of value,because they represent historical rather than current market values.

Accepted Answer

Book values are based on historical costs and do not take into account current market conditions, leading some to criticize their usefulness as a measure of actual value.

Question 18

Price-to-earnings ratios of comparable companies provide an excellent means of valuing the target firm at any point in the business cycle.

Accepted Answer

Price-to-earnings ratios can vary significantly across different stages of the business cycle, affecting their reliability for valuing a target firm consistently at any point. Factors such as economic conditions, industry performance, and company-specific events can lead to fluctuations in earnings, making P/E ratios less stable and potentially misleading for valuation purposes without considering the broader context.

Question 19

The comparable companies' valuation method uses the discounted value of a firm's free cash flow.

Accepted Answer

The comparable companies' valuation method involves comparing the valuation metrics of similar companies, such as price-to-earnings or EV/EBITDA ratios, rather than using discounted cash flows.

Question 20

Market-based valuation measures are meaningful only for firms with a stable earnings,cash flow,or sales history.

Accepted Answer

The answer of Market-based valuation measures are meaningful only for...

Quiz 8: Relative,asset-Oriented,and Real Option Valuation Basics