BV203 Exam

Question 1

How to get to FMV of Equity

Answer 1

FMV Assets less FMV of Liabilities

Question 2

Reproduction Cost New

Answer 2

the expense to reproduce an EXACT DUPLICATE

Question 3

Replacement Cost New

Answer 3

cost of replacing an existing property with one of equal utility

Question 4

Depreciated Replacement Cost New

Answer 4

Replacement Cost New less ALL depreciation

Question 5

Three Types of Depreciation

Answer 5

1) physical depreciation
2) functional obsolescence
3) economic obsolescence

Question 6

Physical depreciation

Answer 6

loss of value caused by deterioration from age, wear and tear from use, fatigue and stress, exposure to the elements, and lack of maintenance

Question 7

Functional Obsolescence

Answer 7

loss in value caused by lack of utility, excess capacity, changes in design/technology, and efficiency

Question 8

Economic Obsolescence

Answer 8

loss in value caused by external factors

Question 9

FMV in Continued Use

Answer 9

Usually depreciated replacement cost new plus delivery, installation and other make-ready costs (e.g. training costs)

Question 10

Net Asset Value Method is better for companies that hold significant tangible assets? or intangibles assets?

Answer 10

better for companies with significant tangible assets

Question 11

Net Asset Value Method is better for companies that hold no significant tangible assets? or no significant intangibles assets?

Answer 11

better for companies that hold no significant intangibles assets

Question 12

Three types of liquidations

Answer 12

1) orderly liquidations
2) Forced liquidations
3) Liquidation value in Place

Question 13

orderly liquidations

Answer 13

gross amount, expressed in terms of money that typically could be realized from a liquidation sales, given reasonable period of time to find a purchaser(s), with the seller being compelled to sell on an as-is, where-is basis, as of a specific date

Question 14

Forced liquidations

Answer 14

gross amount, expressed in terms of money that typically could be realized from a properly advertised and conducted public auction with the seller being compelled to sell with a sense of immediacy on an as-is, where-is basis, as of a specific date

Question 15

Liquidation value in Place

Answer 15

gross amount, expressed in terms of money that typically could be realized from a properly advertised transaction, with the seller being compelled to sell, as of a specific date, for a failed, non-operating facility, assuming that the entire facility is sold intact

Question 16

WARA / WACC / Value Creation

Answer 16

if the WARA exceeds the WACC, value is created

Question 17

WARA / WACC / Value-maximizing Mgmt.

Answer 17

A value-maximizing owner/mgmt. team will obtain and deploy capital in such a way that the WARA equals or exceeds the WACC

Question 18

Asset Approach: control or minority value?

Answer 18

The asset approach will always result in a control value, unless adjustments are made to reflect a lack of control in the interest in the net asset

Question 19

Built-in Capital Gains: Stock vs Asset deals

Answer 19

Buyers often pay less for stock in corporations than assets because of the trapped in capital gain and not being able to get a stepped up basis

Question 20

Davis v Commissioner of the IRS (1998)

Answer 20

The Court concluded that the discount attributable to the built-in capital gains tax liability should be less than a dollar-for-dollar discount and, specifically, that 15% should be added to the DLOM to reflect the discount for built-in capital gains tax liability

Question 21

Eisenberg vs Commissioner of IRS (1998)

Answer 21

Court was convinced that even though no liquidation of the corporation or sale of its assets was planned or contemplated on the val. date, a hypothetical willing seller and a hypothetical willing buyer would not have agreed on that date on a price for each of the blocks of stock in question that took no account of the corporation’s built-in capital gains

Question 22

Jones vs Commissioner of IRS (2001)

Answer 22

The Court ruled than an additional DLOM due to built-in capital gains was not justified because there was a readily available means by which the tax on built-in gains could be avoid, a Section 754 election

Question 23

Dunn vs Commissioner of IRS (2002)

Answer 23

The rationale is that under the asset approach, the subject assets are assumed to be sold. The Court concluded that the likelihood of liquidation is not a factor affecting built-in tax liability

Question 24

Jelke vs Commissioner of IRS (2007)

Answer 24

The Court sided with a dollar-for-dollar discount to the net assets because such an approach forwent the need for prophesying and conjecture related to the sale of the underlying assets or liquidation of the corporation.

Question 25

Jensen vs Commissioner of IRS (2010)

Answer 25

The Court compounded the value of the land and related improvements into the future to reflect the remaining useful life of the real estate, calculated the then capital gains tax, and discounted it back to present and sided with the petitioner because of the proximity to the petitioner’s amount for the built-in capital gains tax.

Question 26

Syngeristic Value (aka Investment Value)

Answer 26

value to a particular investor

Question 27

Where is the difference in value between voting and non-voting stock the greatest? controlling interests? or non-controlling interests?

Answer 27

Controlling interest

Question 28

difference in value between voting and non-voting stock: substantial number of voting and nonvoting stock

Answer 28

the difference in value is very small

Question 29

Blockage discount

Answer 29

applies only to publicly traded companies when the daily market trades demonstrate an inability to effectively absorb the block

Question 30

M&A Comp Transactions and Asset Approach yield: control or minority-interest values?

Answer 30

controlling-interest

Question 31

Controlling Interest

Answer 31

An interest that possesses “the power to direct the management and policies of a business enterprise” (ASA Business Valuation Standards, Glossary Definitions)

Question 32

Marketable, Minority Interest

Answer 32

A minority interest (or noncontrolling interest) is “an ownership interest less than 50% of the voting interest in a business enterprise (ASA Business Valuation Standards, Glossary Definitions). A marketable, minority interest (or as if freely-traded, minority interest) is a minority interest in an enterprise that does not suffer from illiquidity – usually relevant to per share interests in publicly-held equities that trade freely on an open market.

Question 33

The prerogatives of Control

Answer 33

The prerogatives of control refer to the rights possessed by the owner of a controlling interest in a business enterprise to direct the management and policies of a business enterprise

Question 34

Irrespective whether a guideline public company is used, if a control stream of benefits is used, the result is _________ and not __________.

Answer 34

Irrespective whether a guideline public company is used, if a control stream of benefits is used, the result is control and not minority.

Question 35

Economic Benefits of Control

Answer 35

1) Enhanced Cash Flows

2) Lower Cost of Capital

Question 36

A hypothetical buyer would be unwilling to pay more than the value of the economic benefits available to the ________________________________________.

Answer 36

The hypothetical buyer would be unwilling to pay more than the value of the economic benefits available to the next most advantageously positioned hypothetical buyer.

Question 37

Degree of Control is Determined by:

Answer 37

1) The relevant jurisdictional law
2) Corporate Agreements
3) Distribution of Shareholder Interests
4) Ability to exercise prerogatives of control
5) Ability to declare dividends

Question 38

Preemptive rights

Answer 38

Preemptive rights: Preemptive rights in the bylaws would allow all shareholders the opportunity to keep their pro-rata share of the ownership upon the issuance of additional stock in the company, as opposed to having their interest diluted by the controlling shareholder(s) who may issue additional shares to herself at a favorable price.

Question 39

Valuation Approaches for Partial Interests and Valuation of the Whole

Answer 39

If ownership of a partial interest does not provide the ability to liquidate an entity, cause its sale or gain access to any of the assets, valuation of the whole may not be relevant to the analysis

Question 40

Liquidity

Answer 40

Liquidity is the ability to quickly convert property to cash or pay a liability.

Said another way, liquidity is the relative ease with which the asset holder can convert the asset into cash without sacrificing any portion of the asset’s intrinsic value.

Question 41

Marketability

Answer 41

Marketability is the capability and ease of transfer or salability of an asset, business, business ownership interest or security. An asset that lacks marketability also lacks liquidity but the lack of liquidity is due to legal or contractual restrictions

Question 42

Is an illiquid asset always non-marketable?

Answer 42

Being illiquid does not necessarily mean non-marketable…it may still be sellable but not quickly or without loss of value.

Question 43

Is there direct empirical evidence to support a DLOM for controlling interests?

Answer 43

There is no direct empirical evidence to support a DLOM for controlling interests.

Question 44

Has the U.S. Tax Court has allowed DLOMs on controlling interests?

Answer 44

The U.S. Tax Court has allowed DLOMs on controlling interests in the range of 3% to 33% depending on the facts and circumstances.

Question 45

Qualitative factors that affect the size of the DLOM:

Answer 45

a. ) Existence of put rights
b. ) Terms included in the buy-sell, shareholder, or operating agreements
c. ) Existence and amount of past and future dividend payments
d. ) Size of the pool of available buyers
e. ) Accessibility and reliability of relevant information
f. ) Prospect for sale or public offering of the company
g. ) Condition of the equity markets
h. ) Concentration of ownership – the higher the concentration of ownership (for example, among founders or one or two investors), the higher the discount would tend to be.
i. ) Other factors should be considered if they were not already included as risk factors in the discount rate

Question 46

The factors that appear to be most significantly correlated with observed discounts in restricted stock transactions are __________, ____________, and _______________.

Answer 46

The factors that appear to be most significantly correlated with observed discounts in restricted stock transactions are the underlying volatility of the stock, the restriction period of the stock in the transactions, and the size of the block being sold as a percentage of the shares outstanding.

Question 47

DLOM Approaches – Derivatives-based Methods

Answer 47

a. ) Seaman - Long-Term Equity Anticipation Securities (LEAPS) Method
b. ) Chaffe Method – European Put Options
c. ) Longstaff Method – Look Back Put Options
d. ) Finnerty Method – Average Strike Price Put Options
e. ) Abbott Method - Long-term Volatility

Question 48

Impact on Put Option Value When Increasing the following Factors:
Term - 
Volatility - 
Dividends - 
Risk-free rate -

Answer 48

Increase in Factor:
Term - Increase
Volatility - Increase
Dividends - Increase
Risk-free rate - Decrease