Quiz 3

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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 estimated market value of the target firm would be $5 million

Answer 4

False

Question 5

Disadvantages of the industry method of valuation include the presumption that industry multiples are actually comparable and that analysts’ earnings projections are unbiased

Answer 5

True

Question 6

The effectiveness of a comparable companies’ valuation method is not impacted by when it is calculated in the business cycle

Answer 6

False

Question 7

The Enterprise Value to EBITDA multiple is useful because more firms are likely to have have negative earnings than negative EBITDA

Answer 7

True

Question 8

The Enterprise Value to EBITDA method of valuation can be compared more readily among firms exhibiting different levels of leverage than for other measures of earnings, since the numerator represents the total value of the firm and the denominator measures earnings before interest

Answer 8

True

Question 9

The PEG ratio can be helpful in evaluating the potential aquisition targets of a number of firms in the same industry with widely varying expected earnings growth

Answer 9

True

Question 10

In the absence of earnings, other factors that drive the creation of value for a firm may be used for valuation purposes

Answer 10

True

Question 11

The output of M&A models is only as good as the accuracy and timeliness of the numbers that are used to create the model and the quality of the assumptions used in making the projections

Answer 11

True

Question 12

Pro-Forma is an accounting reflection of what a completed merger might look like using a set of assumptions

Answer 12

True

Question 13

EPS accretion / dilution analysis is accomplished by comparing pro-forma EPS with the of the target firm’s EPS pre-merger

Answer 13

False

Question 14

Many acquirer corporate boards will not move forward with a merger unless it can be shown to be immediately accretive to earnings-per-share given reasonable synergy assumptions

Answer 14

True

Question 15

As a mini merger model does not require many inputs, an analyst should place more focus on model building detail and complexity

Answer 15

False

Question 16

When calculating sources and uses of cash in a merger model, always determine the sources of cash first

Answer 16

False

Question 17

Sources and uses of cash must equal eachother when building a merger model

Answer 17

True

Question 18

For mergers between public firms, Interest Expense for the Target firm should not be included in the pro0forma income statement as the target debt is retired upon completion of the deal

Answer 18

False

Question 19

The “write up” of target assets above book value is of no consequence to building a pro forma merger income statement

Answer 19

False

Question 20

Which one of the following factors is not considered when calculating a firm’s PEG ratio?
a) Projected growth rate of the value indicator
b) Ratio of market price to value indicator
c) Expected stock price growth rate
d) none of the above

Answer 20

c) Expected stock price growth rate

Question 21

In determining the purchase price for an acquisition target, which one of the following valuation methods does not require the addition of a purchase price premium?
a) Discounted cash flow method
b) comparable companies’ method
c) industry method
d) precedent transactions’ method

Answer 21

d) precedent transactions’ method

Question 22

Limitations in applying the comparable companies’ method of valuation include which of the following?
a) finding truly comparable companies is difficult
b) the use of market based methods can result in significant under - or - over valuation during periods of declining or rising stock markets
c) Market based methods can be manipulated easily, because the methods do not require a clear statement of assumptions with respect to risk, growth, or the timing or magnitude of future earnings and cash flows
d) all of the above

Answer 22

d) all of the above

Question 23

Which one of the following is not as commonly used method of valuing target firms?
a) Discounted cash flow
b) Comparable companies method
c) Precedent transactions method
d) Share exchange ratio method

Answer 23

d) share exchange ratio method

Question 24

Which of the following statements about the comparable companies’ valuation method is not true?
a) Requires the use of firms that are “substantially” similar to the target firm
b) Uses market based rather than cash flow based valuations
c) Requires assumptions on future earnings
d) Provides an estimate of the target firm at a moment in time

Answer 24

D) Provides an estimate of the target firm at a moment in time

Question 25

Intangible assets often constitute a substantial source of value to the acquiring firm. Which of the following are not generally considered intangible assets?
a) Patents and technical know-how
b) Property, plant and equipment
c) Trademarks and customer lists
d) copyrights and software

Answer 25

B) property, plant, and equipment

Question 26

All of the statements are true for market-based valuation methods except for which of the following?
a) assumes that markets are efficient such that current values reflect all the information currently known about the business
b) current values represent what a willing buyer and seller are willing to pay for a business in the absence of full information
c) Market-based methods are generally superior to discounted cash flow techniques
d) Include comparable company and precedent transactions methods

Answer 26

c) Method-based methods are generally superior to discounted cash flow techniques

Question 27

Rationale for merger models include all of the following, except for:
a) How much should an acquirer pay
b) optimize a depreciation schedule
c) accretion/dilution analysis
d) how to finance the deal

Answer 27

optimize a depreciation schedule

Question 28

All of the statements regarding who uses merger models is true, except for:
a) buyers use models to evaluate the highest price they and competitors can afford to pay
b) models help sellers evaluate how much all potential buyers can afford to pau
c) models are used by companies to evaluate lawyers
d) bankers use models to advise both potential buyers and sellers

Answer 28

c) models are used by companies to evaluate lawyers

Question 29

A merger model should accomplish all of the following, except for:
a) determine a target firm’s intrinsic valuation
b) Quantify deal synergies
c) show pro-forma relative valuation metrics
d) Provide sensitivity analysis

Answer 29

a) determine a target firm’s intrinsic value