Ch. 17 - Valuations: Big Picture

Question 1

Different types of valuation approaches:

Answer 1

1. Asset based
2. Income based
3. Market based

Question 2

Different asset based approaches

Answer 2

1. Liquidation
2. Adjusted net asset
3. replacement

Question 3

Different income based approaches

Answer 3

1. capitalized cash flow
2. discounted cash flow
3. capitalized earnings
4. discounted earnings

Question 4

Different market based approaches

Answer 4

1. assets with an active market

2. comparable transactions

Question 5

Liquidation Approach

1. when to use
2. types

Answer 5

1. when the entity is not a going concern

2. orderly or forced liquidation

Question 6

Adjusted net asset approach

1. when to use

Answer 6

1. when the entity does not have active operations, but are a going concern; or for a floor value for active operations; or when an entity does not produce cash flows

Question 7

Adjusted net asset approach - how to calculate

Answer 7

1. all assets at FMV less disposition costs
2. less liabilities
3. less tax consequences from sale of assets

Question 8

Replacement cost approach - when to use

Answer 8

often used for insurance purposes (replacing items under insurance)

Question 9

Replacement cost approach - how to calculate

Answer 9

1. the cost to replace the asset
2. less liabilities
3. less tax consequences from sales

Question 10

Capitalized cash flow approach - when to use

Answer 10

when the entity has consistent excess earnings and active operations

Question 11

Capitalized cash flow approach - how to use

Answer 11

1. historical cash flows are capitalized at an appropriate rate

Question 12

Discounted Cash Flow approach - when to use

Answer 12

when an entity has had negative cash flows, or past cash flows do not represent future cash flows

Question 13

Discounted cash flow approach - how to use

Answer 13

take expected cash flows and discount them to present day dollars

Question 14

Capitalized earnings approach - when to use

Answer 14

when the entity has consistent excess earnings

Question 15

capitalized earnings approach - how to use

Answer 15

historical earnings are capitalized to current year dollars

Question 16

Discounted earnings approach - when to use

Answer 16

when historical earnings are not reflective of expectations

Question 17

Discounted earnings approach - how to use

Answer 17

estimated future earnings are discounted back to current year dollars

Question 18

Market-based approach - when to use

Answer 18

when the company is a going-concern, and information to determine the valuation multiple is publicly available

Question 19

Market-based approach - how to use

Answer 19

use a multiple for a company that is similar in size, location product mix, etc. and apply to earnings