11.2 Multiple-Choice Questions
1) Which of the following is situation commonly drives a business valuation engagement?
A) hypothecation of assets
B) shareholder dispute
C) hedging a company's derivatives
D) determination of dividend payout
2) Which of the following is a primary issue of the business valuation theory?
A) determining current benefits from the business
B) estimating expected future benefits
C) calculating historical benefits received
D) calculating financial ratios
3) Which of the following is a difference between a forecast and a projection?
A) A forecast reflects conditions that may occur, whereas a projection reflects expected conditions based on current knowledge of trends in relevant factors.
B) A forecast is typically for a short period, whereas projections can be made several years into the future projection.
C) A forecast is based on hypothetical assumptions, whereas a projection is based on current knowledge of trends.
D) A forecast invites rebuttal arguments of speculation and bias, whereas a projection is deemed to be the most appropriate indicator of expected future benefits.
4) The management of Quills and Ink want to calculate the required rate of return (ROR) of the company. The following information is available:
A) 16.96%
B) 21.20%
C) 18.20%
D) 19.40%
5) Which of the following premiums is generally calculated as the excess of stock market returns over government bond returns?
A) equity risk premium
B) specific company risk premium
C) industry risk premium
D) firm size premium
6) Which of the following gives the calculation of the capitalization rate?
A) the equity risk premium plus the specific company risk premium
B) the required rate of return minus the risk free rate
C) the dividend payout rate plus the long-term sustainable growth rate
D) the discount rate minus the expected long-term sustainable growth rate
7) Which of the following is true of capitalization?
A) It is the same as discounting.
B) It is more commonly used with prospective data.
C) It is applied to a single benefit stream.
D) It converts present values to future benefits.
8) Lilac, Inc. uses a discount rate of 17.5% its expected long-term sustainable growth rate is 1.5%. The net cash flows from operations of the company for the previous years are provided below.
|
Year |
Net Cash Flow |
|
2009 |
$190,835 |
|
2010 |
215,648 |
|
2011 |
185,965 |
|
2012 |
248,752 |
|
2013 |
221,960 |
Calculate the value of business of Lilac, Inc.
A) $1,063,160
B) $1,215,040
C) $1,328,950
D) $1,090,420
9) Egan, a forensic accountant, was appointed for a business valuation engagement by the management of Dreamsong, Inc. He qualified the purpose of the valuation, type of engagement, and the ownership interest to be considered. What should be Egan's next step?
A) Issue the valuation report.
B) Estimate the value of the business.
C) Gather the necessary information.
D) Analyze the information gathered.
1. Define the engagement.
2. Gather the necessary information.
3. Analyze the information gathered.
4. Estimate the value of the business.
5. Issue the valuation report.
10) Which of the following is included in the first step of the valuation process?
A) issuing the valuation report
B) analyzing the company's financial statements
C) selecting and applying a valuation approach
D) qualifying the ownership interest to be considered
