Business Valuation
Textbook Exam Questions
Course Introduction
Business Valuation is an essential course that explores the principles and methodologies used to determine the economic value of a business or company. Students will learn about various valuation approaches, including income-based, market-based, and asset-based methods, and how to apply these techniques in a real-world context. The course covers financial statement analysis, forecasting future cash flows, assessing risk and the cost of capital, and understanding the impact of industry and market conditions. By the end of the course, participants will be equipped with the skills to perform comprehensive business valuations for purposes such as mergers and acquisitions, investment analysis, and financial reporting.
Recommended Textbook
Financial Reporting Financial Statement Analysis and Valuation 6th Edition by Clyde P. Stickney
Available Study Resources on Quizplus
14 Chapters
732 Verified Questions
732 Flashcards
Source URL: https://quizplus.com/study-set/3961 Page 2
Chapter 1: Overview of Financial Reporting, Financial
Statement Analysis, and Valuation
Available Study Resources on Quizplus for this Chatper
67 Verified Questions
67 Flashcards
Source URL: https://quizplus.com/quiz/79407
Sample Questions
Q1) The tools of effective financial statement analysis are also useful for assessing whether to extend ____________________ to a firm, either for a short-term or for a long-term.
Answer: credit
Q2) The residual interest in a company is referred to as ______________________________.
Answer: shareholders' equity
Q3) Most financial statement analysis aims to assess a firm's ____________________ and ____________________.
Answer: profitability, risk
Q4) ______________________________ relates to the relative number of buyers and sellers in a particular industry.
Answer: Buyer power
Q5) Which of the following is not an expense of a business?
A) Depreciation
B) Dividends
C) Salaries
D) Advertising Answer: B
To view all questions and flashcards with answers, click on the resource link above. Page 3
Chapter 2: Asset and Liability Valuation and Income Measurement
Available Study Resources on Quizplus for this Chatper
49 Verified Questions
49 Flashcards
Source URL: https://quizplus.com/quiz/79401
Sample Questions
Q1) The net amount a firm would receive if it sold an asset or the net amount it would pay to settle a liability is referred to as
A) current replacement cost
B) net realizable value
C) current cost
D) acquisition cost
Answer: B
Q2) The amount initially paid to acquire an asset is called ______________________________.
Answer: acquisition cost
Q3) Shareholders' equity consists of what three components:
A) Assets, liabilities, and contributed capital.
B) Contributed capital, accumulated other comprehensive income, and retained earnings.
C) Liabilities, contributed capital, and retained earnings.
D) Liabilities, contributed capital, and accumulated other comprehensive income. Answer: B
Q4) Net income equals revenues plus ____________________ minus expenses and ____________________.
Answer: gains, losses
To view all questions and flashcards with answers, click on the resource link above. Page 4
Chapter 3: Income Flows Versus Cash Flows: Key
Relationships in the Dynamics of a Business
Available Study Resources on Quizplus for this Chatper
55 Verified Questions
55 Flashcards
Source URL: https://quizplus.com/quiz/79400
Sample Questions
Q1) EBITDA not only ignores four expenses but also ignores changes in __________________________________________________ accounts.
Answer: operating working capital
Q2) ____________________ activities relate to the acquisition and sale of noncurrent assets, particularly property, plant and equipment.
Answer: Investing
Q3) Which of the following is not an expense excluded when calculating EBITDA?
A) depreciation expense
B) administrative expense
C) interest expense
D) tax expense
Answer: B
Q4) The expense incurred by issuing stock options should be
A) classified as a financing activity.
B) added back to net income in the operating activities section.
C) subtracted from net income in the operating activities section.
D) does not appear in the statement of cash flows.
Answer: B
To view all questions and flashcards with answers, click on the resource link above. Page 5
Chapter 4: Profitability Analysis
Available Study Resources on Quizplus for this Chatper
69 Verified Questions
69 Flashcards
Source URL: https://quizplus.com/quiz/79399
Sample Questions
Q1) The numerator of the return on assets ratio is net income from operations excluding the effects of any ______________________________.
Answer:
Q2) Firms with high levels of operating leverage experience which of the following in comparison to firms with low levels of operating leverage
A) Higher levels of risk in operations.
B) Lower expected rates of return.
C) Lower variability in returns on assets.
D) Higher sales.
Q3) Firms with ____________________ levels of operating leverage experience greater variability in their return on assets.
Answer:
Q4) To reduce the risk inherent in ______________________________ a company should strive for a high proportion of variable costs in its cost structure.
Answer:
Q5) Operating income is negative in an amount equal to _________________________ when revenues are zero.
Answer:
To view all questions and flashcards with answers, click on the resource link above. Page 6
Chapter 5: Risk Analysis
Available Study Resources on Quizplus for this Chatper
63 Verified Questions
63 Flashcards
Source URL: https://quizplus.com/quiz/79398
Sample Questions
Q1) In general, the shorter the number of days of needed financing, the ____________________ is the cash flow from operations to average current liabilities.
Q2) Beta captures the _________________________ of the firm.
Q3) An analyst can view the revenues to cash ratio as a ________________________________________.
Q4) Refer to the financial statement data for Patriot Comp. for 2006 and 2005. Complete the table by computing the ratios.
Q5) Financially healthy firms frequently close any cash flow gap in their operating cycles with ________________________________________.
Q6) The source of risk related to technology, regulation and availability of raw materials is ____________________.
Q7) Large current ratios indicate the availability of cash and near cash assets to repay ____________________ coming due within the next year.
Q8) Discuss the differences between Chapter 7 and Chapter 11 bankruptcy filings?
Q9) The operating cycle must not only generate cash to supply ________________________________________ needs, it must generate sufficient cash to service debt.
Page 7
To view all questions and flashcards with answers, click on the resource link above.
Chapter 6: Quality of Accounting Information and Adjustments to Reported Financial Statement Data
Available Study Resources on Quizplus for this Chatper
52 Verified Questions
52 Flashcards
Source URL: https://quizplus.com/quiz/79397
Sample Questions
Q1) Gains and losses that appear in Other Comprehensive Income are the result of value changes
A) only in non-current assets and liabilities.
B) in stockholders' equity.
C) driven by difficult measurement issues.
D) that have not been realized in a market transaction.
Q2) Healy and Wahlen state that one type of earnings management occurs when managers use judgement in financial reporting to alter financial reports in order to mislead some stakeholder about the economic performance of the company. Earnings management is a consequence of a judgement by management which results in lower economic information content of the financial reports. Discuss four reasons that discourage managers from practicing earnings management.
Q3) Which of the following is not considered a motive to manage earnings?
A) To create optimal manager compensation payments.
B) To create optimal job security for senior management.
C) To create optimal measures of assets and liabilities for balance sheet purposes.
D) To manage reported earnings in order to reduce industry-specific actions.
To view all questions and flashcards with answers, click on the resource link above.
Page 8
Chapter 7: Revenue Recognition and Related Expenses
Available Study Resources on Quizplus for this Chatper
52 Verified Questions
52 Flashcards
Source URL: https://quizplus.com/quiz/79396
Sample Questions
Q1) Which of the following would not be suggestive of a company recognizing sales too early?
A) large and volatile amounts of uncollectible accounts receivable
B) excessive warranty expenditures
C) large growth in accounts receivable
D) unusually large amount of returned goods
Q2) Specifically identifiable intangible assets acquired from others may have either a ____________________ useful life or an ____________________ useful life.
Q3) ___________________________________ include trade and brand names, trademarks, patents, copyrights, franchise rights, customer lists and goodwill.
Q4) Finale Company's accounting manager decided to start capitalizing the company's routing repairs and maintenance expense, starting in 2006. What effect will this change have on the company's 2007 income and assets respectively?
A) overstate, overstate
B) overstate, understate
C) understate, understate
D) understate, overstate
Q5) ___________________________________ is primarily a question of timing.
To view all questions and flashcards with answers, click on the resource link above.
Page 9
Chapter 8: Liability Recognition and Related Expenses
Available Study Resources on Quizplus for this Chatper
61 Verified Questions
61 Flashcards
Source URL: https://quizplus.com/quiz/79395
Sample Questions
Q1) Derivative instruments acquired to hedge exposure to variability in expected future cash are _________________________ hedges.
Q2) Which of the following best describes the accounting treatment for derivative instruments not held for purposes of hedging?
A) Record as an asset or liability and recognize changes in fair value in other comprehensive income.
B) Do not record as an asset or liability, record income from the transaction at maturity and recognize in earnings.
C) Record as an asset or liability, recognize changes in fair value currently in earnings.
D) Record as an asset or liability if off-balance sheet risk is material.
Q3) ____________________ differences arise from revenues and expenses that GAAP requires firms to include in income before taxes but that the income tax law excludes from taxable income.
Q4) Derivative instruments acquired to hedge exposure may be classified as either a fair value hedge or a cash flow hedge. Distinguish between the two types of hedges.
To view all questions and flashcards with answers, click on the resource link above.
Chapter 9: Intercorporate Entities
Available Study Resources on Quizplus for this Chatper
55 Verified Questions
55 Flashcards
Source URL: https://quizplus.com/quiz/79394
Sample Questions
Q1) Olivia Co. owns 4,000 of the 10,000 outstanding shares of Hobbitt Corp. common stock and exercises significant influence over the company. During 2006, Hobbitt earns $80,000 and pays cash dividends of $30,000. If the beginning balance in the investment account was $160,000, the balance at December 31, 2006 should b
A) $192,000
B) $172,000
C) $180,000
D) $160,000
Q2) When dividends from an investment are recognized as income, the investment must have been of which type?
A) Minority, Passive Investment
B) Majority, Passive Investment
C) Majority, Active Investment
D) Minority, Active Investment
Q3) The first date at which employees can exercise their stock options is termed the _________________________.
Q4) Ownership of 50% or more of the voting stock of another company implies an ability to ____________________.
To view all questions and flashcards with answers, click on the resource link above. Page 11
Chapter 10: Forecasting Financial Statements
Available Study Resources on Quizplus for this Chatper
41 Verified Questions
41 Flashcards
Source URL: https://quizplus.com/quiz/79406
Sample Questions
Q1) Projecting sales price changes depends on factors specific to the firm and its industry that might affect demand and price elasticity. Which of the following companies would most likely not be able to increase prices in the near future?
A) A firm in a capital intensive industry that is expected to operate near capacity for the near future.
B) A firm in a capital intensive industry in which excess capacity exists.
C) A firm operating in an industry that is expected to maintain its current production processes.
D) A firm operating in an industry that is transitioning from the introduction phase to the high growth phase of its life cycle.
Q2) An analyst using the inventory turnover ratio to calculate future levels of inventory may face the problem that
A) the method reduces the potential understatement inherent in average balances.
B) the method can introduce artificial volatility in ending balances.
C) the method results in understating inventory each year.
D) the method results in overstating inventory each year.
Q3) For some types of assets, such as accounts receivable asset growth typically ____________________ future sales growth.
To view all questions and flashcards with answers, click on the resource link above. Page 12
Chapter 11: Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach
Available Study Resources on Quizplus for this Chatper
30 Verified Questions
30 Flashcards
Source URL: https://quizplus.com/quiz/79405
Sample Questions
Q1) When deriving the equity value of a firm an analyst forecasts the real dividends expected to be paid in the future. In this case which discount rate should be used?
A) The nominal rate of return
B) The real rate of return
C) The risk free rate of return
D) The risk adjusted rate of return
Q2) In theory, the value of a share of common equity is the present value of ____________________________________________________________.
Q3) To determine the appropriate weights to use in the weighted average cost of capital, an analyst will need to determine the ______________________________ of the debt, preferred stock and common equity capital.
Q4) Suppose a firm has a market beta of 1.34 and the risk free interest rate is 5.3%. In addition, the excess return over the risk-free rate is 5.9%. Calculate the firm's cost of equity capital using the CAPM model.
Q5) A company with a market beta of 1 has systemic risk ____________________ to the average amount of systemic risk of all equity securities in the market.
Q6) Provide the rationale for using expected dividends in a valuation model.
Page 13
To view all questions and flashcards with answers, click on the resource link above.
Chapter 12: Valuation: Cash-Flow-Based Approaches
Available Study Resources on Quizplus for this Chatper
41 Verified Questions
41 Flashcards
Source URL: https://quizplus.com/quiz/79404
Sample Questions
Q1) Operating liabilities include all of the following except
A) accounts payable
B) pension obligations
C) accrued taxes
D) long-term debt
Q2) Operating assets include all of the following except A) accounts receivable
B) property, plant and equipment
C) intangible assets
D) Property held for sale
Q3) Discuss under which scenario it is appropriate to use free cash flows for all debt and equity capital stakeholders.
Q4) If a firm generates a rate of return on __________________________________________________ equal to the discount rate used by the investor then it does not matter if an analyst uses cash flows to the investor or cash flows to the firm.
Q5) For most firms, ______________________________ include cash and short-term investment securities, accounts receivable, inventory, property, plant and equipment, intangible assets and investments in affiliated companies.
To view all questions and flashcards with answers, click on the resource link above. Page 14
Chapter 13: Valuation: Earnings-Based Approaches
Available Study Resources on Quizplus for this Chatper
47 Verified Questions
47 Flashcards
Source URL: https://quizplus.com/quiz/79403
Sample Questions
Q1) At the beginning of 2007 investors had invested $25,000 of common equity in Giants Corp.and expect to earn a return of 11% per year. In addition, investors expect Giant Corp. to pay out 100% of income in dividends each year. Forecasts of Giant's net income are as follows: 2007 - $3,500
2008 - $3,200
2009 - $2,900
2010 and beyond - $2,750
Using this information what is Giant's residual income valuation at the beginning of 2007?
A) $25,000
B) $26,350
C) $26,151
D) $26041
Q2) Over sufficiently long periods, _________________________ equals free cash flows to common equity.
Q3) Clean surplus accounting means that ____________________ include all direct capital transactions between the firm and the common equity shareholders.
Q4) What is meant by the term clean surplus accounting?
Q5) What is the rationale for using expected earnings as a basis for valuations?
To view all questions and flashcards with answers, click on the resource link above. Page 15
Chapter 14: Valuation: Market-Based Approaches
Available Study Resources on Quizplus for this Chatper
50 Verified Questions
50 Flashcards
Source URL: https://quizplus.com/quiz/79402
Sample Questions
Q1) What is the value of reverse engineering stock prices? How does the process work?
Q2) Companies value-to-book and market-to-book ratios may differ due to accounting reasons. An example of an accounting reason that would create a difference is
A) accelerated methods of depreciation.
B) successful research and development programs.
C) using LIFO versus FIFO for inventory.
D) high operating leverage.
Q3) Discuss how risk and profitability factors cause differences in price-earnings ratios across firms.
Q4) Under the value-to-book model new projects will be abnormally profitable only when
A) ROCE equals ROA
B) ROCE equals R<sub>E</sub>
C) ROCE is greater than R<sub>E</sub>
D) ROCE is less than R<sub>E</sub>
Q5) What is a price differential and how is it computed? What information does a price differential provide to an analyst?
To view all questions and flashcards with answers, click on the resource link above.
Page 16