Aicpa Abv Exam

Front 1

What are the two types of engagements used to estimate value as outlined in the AICPA's SSVS No. 1?

Back 1

A valuation engagement - an engagement to estimate value of a subject interest by performing appropriate valuation procedures and is free to apply the valuation approaches and methods he or she deems appropriate.

A calculation engagement - an engagement to estimate value wherein the valuation analyst and the client agree on the specific valuation approaches and valuation methods that will be used. A calculation engagement generally does not include all of the valuation procedures required for a valuation engagement.

Front 2

What is the AICPA Code of Professional Conduct - Rule 101

Back 2

Rule 101 deals with the responsibility of the professional to be independent in order to perform certain professional services such as audits and reviews of financial statements.

Front 3

What is the AICPA Code of Professional Conduct - Rule 102

Back 3

Rule 102 covers ethical considerations (integrity and objectivity). The analyst should maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgement to others. The analyst is an advocate for his or her professional opinion, not the client.

Front 4

What is AICPA Code of Professional Conduct - Rule 201

Back 4

A member shall comply with the following:

Professional Competence

Due Professional Care

Planning and Supervision

Sufficient Relevant Data

Front 5

What is Revenue Ruling 59-60?

Back 5

In valuing the stock of closely held corporations, or the stock of corporations where market quotations are not available, all other available financial data, as well as all relevant factors affecting the fair market value must be considered for estate tax and gift tax purposes. No general formula may be given that is applicable to the many different valuation situations arising in the valuation of such stock. However, the general approach, methods, and factors which must be considered in valuing such securities are outlined.

Front 6

What is Revenue Ruling 65-192?

Back 6

The general approach, methods and factors outlined in Revenue Ruling 59-60, C.B. 1959-1, 237, for use in valuing closely-held corporate stocks for estate and gift tax purposes are equally applicable to valuations thereof for income and other tax purposes and also in determinations of the fair market values of business interests of any type and of intangible assets for all tax purposes.

Front 7

What is Revenue Ruling 65-193?

Back 7

Revenue Ruling 59-60, C.B. 1959-1, 237, is hereby modified to delete the statements, contained therein at section4.02(f), that `In some instances it may not be possible to make a separate appraisal of the tangible and intangibleassets of the business. The enterprise has a value as an entity. Whatever intangible value there is, which issupportable by the facts, may be measured by the amount by which the appraised value of the tangible assetsexceeds the net book value of such assets.'The instances where it is not possible to make a separate appraisal of the tangible and intangible assets of a businessare rare and each case varies from the other. No rule can be devised which will be generally applicable to such cases.

Front 8

What is Revenue Procedure 66-49?

Back 8

The purpose of this procedure is to provide information and guidelines for taxpayers, individual appraisers, and valuation groups relative to appraisals of contributed property for Federal income tax purposes. The procedures outlined are applicable to all types of noncash property for which an appraisal is required such as real property, tangible or intangible personal property, and securities. These procedures are also appropriate for unique properties such as art objects, literary manuscripts, antiques, etc., with respect to which the determination of value often is more difficult.

Front 9

What are the valuation engagement steps?

Back 9

1. Define the engagement

2. Gather the information on the subject interest

3. Analyst the information

4. Determine an indication of value for the subject interest

5. Issue a report

Front 10

What are the types of reports?

Back 10

1. Valuation Detailed Report

2. Valuation Summary Report

3. Calculation Report

4. Oral Report

Front 11

What company specific factors does Revenue Ruling 59-60 identify as fundamental and requiring careful analysis?

Back 11

1. Nature of the business and the history of the enterprise from its inception

2. Economic outlook in general and the condition and outlook of the specific industry in particular

3. Book value of the stock and the financial condition of the business

4. Earning capacity of the company

5. Dividend-paying capacity

6. Whether or not the enterprise has goodwill or other intangible value

7. Transactions involving company's stock

8. Market price of stocks of companies engaged in the same or similar lines of business that are actively traded in a free and open market

Front 12

What information does SSVS No. 1 identify as necessary to perform a subject company analysis?

Back 12

1. Nature of the subject interest

2. Scope of the valuation engagement

3. Intended use of the valuation

4. Applicable standard of value

5. Applicable premise of value

6. Assumptions and limiting conditions

7. Applicable governmental regulations or other professional standards

Front 13

What non-financial information should a valuation analyst consider under SSVS No. 1?

Back 13

1. nature, background and history

2. facilities

3. organizational structure

4. management team

5. classes of equity ownership and rights

6. products/services

7. economic environment

8. geographical markets

9. industry markets

10. key customers and suppliers

11. competition

12. business risks

13. strategy and future plans

14. governmental or regulatory environment

Front 14

What non-financial information should a valuation analyst consider under Revenue Ruling 59-60?

Back 14

1. operating and investment assets

2. capital structure

3. sales

4. non-recurring or non-operating items

Front 15

What is Revenue Ruling 59-60's guidance on restrictive agreements?

Back 15

If the issuing company reserves the right to repurchase ownership interests at a certain price, the price under certain circumstances may be reflective of fair market value for estate tax purposes, but not necessarily for gift tax purposes.

Front 16

Describe Port's Five Competitive Forces

Back 16

1. Bargaining Power of Suppliers

2. Bargaining Power of Customers

3. Threat of New Entrants

4. Threat of Substitute Products/Services

5. Competition Between Companies

Front 17

Under SSVS No. 1 what financial information should a valuation analyst obtain?

Back 17

1. Historical Financial Information

2. Prospective Financial Information

3. Comparative Summaries of Financial Statements

4. Comparative Common-Size Financial Statements

5. Comparative Common-Size Industry Financial Information

6. Income Tax Returns

7. Owner Compensation

8. Key Person/Officer Life Insurance

9. Management's Responses to Contracts, Off-Balance Sheet Items and Prior Sales of Company Stock

Front 18

Define the DuPont formula.

Back 18

The DuPont formula is also referred to as a return on equity ratio. It integrates profitability, asset turnover, and leverage into one financial measure.

Front 19

What are the four most common methods of applying the Market Approach?

Back 19

1. Prior Transactions of Company Stock

2. Guideline Public Company Method (Using Multiples)

3. Merger and Acquisition Method (Guideline Company Transaction Method or Direct Market Data Method)

4. Rules of Thumb (Industry Method)

Front 20

In what types of valuations does Revenue Ruling 59-60 and related tax regulations suggest consideration of the Market Approach?

Back 20

1. Estate and gift tax-related valuations

Front 21

What are the primary considerations when evaluating a subject company's prior transactions of stock?

Back 21

1. Were the transactions arms-length?

2. How many transactions have occured?

3. What are the dates of the transactions?

4. What were the types and size of the block of stock sold? (Voting vs. Non-Voting, Control vs. Minority)

Front 22

What are the steps of applying the Guideline Public Company Method?

Back 22

1. Obtain financial statements for the subject company

2. Analyze and adjust the financial statements of the subject company as needed

3. Adjust tax expense accordingly

4. Perform a search, and select, publicly traded guideline companies

5. Obtain appropriate financial information for a representative period of time for the selected guideline public companies

6. Consider adjusting or normalizing the guideline public company financial data

7. Analyze the differences between the subject company and the guideline public companies (operations, financial condition, business description)

8. Select appropriate valuation multiples for guideline public companies

9. Calculate valuation multiples for guideline public companies

10. Select and adjust multiples as appropriate for the subject company

11. Apply selected multiples to subject company

12. Determine if and when to add net non-operating assets of the subject company

Front 23

What are the commonly used valuation multiples in the Guideline Public Company Method?

Back 23

1. MVIC/EBIT

2. MVIC/EBITDA

3. MVIC/Revenues

4. Price/Earnings

5. Price/Book Value of Equity

Front 24

When calculating valuation multiples under the Guideline Public Company Method, what can be used as the numerator?

Back 24

1. Stock price at the valuation date

2. Market Value of Invested Capital

Front 25

What are the common multiples used in the Guideline Merger and Acquisition Method?

Back 25

MVIC to

1. Revenues

2. Net Income

3. EBIT

4. EBITDA

5. Book Value

Front 26

What are the common sources for smaller company and private transactions?

Back 26

1. Institute of Business Appraisers (IBA) Database

2. BIZCOMPS

3. Business Brokers

4. Pratt's Stats

5. Done Deals

Front 27

What are the common sources for publicly traded companies?

Back 27

1. Dialog

2. Mergerstat

3. Thomson Securities Data Company

4. Public Stats

Front 28

What information can be found in Pratt's Stats?

Back 28

Private company merger and acquisition transaction data. Pratt's Stats provides both stock and asset sales and many of the details are provided for each transaction. All multiples provided are based on the market value of invested capital, and the database provides the date of the financial information provided for the target company. An advantage of Pratt's Stats is that it contains more data points for each transaction.

Front 29

What information can be found in Done Deals?

Back 29

Done Deals provides both public and private merger and acquisition transaction data. This database provides both equity and invested capital multiples, as well as asset and stock sales. Done Deals annualizes the most recent interim financial period of 6 to 11 months.

Front 30

What information can be found in the Institute of Business Appraisers Database?

Back 30

Sales of mostly smaller, private, companies. Historically, IBA's position is that typically, asset sales include inventory, fixed assets (excluding real estate), and intangible assets (Book Value of the Business). IBA defines discretionary earnings as the annual earnings before owner's compensation, interest and taxes. Contains largest known source of transactions of small closely held businesses.

Front 31

What information can be found in BizComps?

Back 31

Sales of mostly smaller, private, companies. BizComps excludes inventory from the sales price of asset sales since it believes that the amount of inventory can vary greatly and can skew multiples. BizComps defines the seller's discretionary earnings as net profit before taxes, one owner's compensation, plus amortization, depreciation, interest, and other non-cash expenses, and non-business related expenses.

Front 32

Define "cost of capital"

Back 32

The cost of capital is defined as the expected rate of return that the market requires to attract funds to a particular investment. The cost of capital is also referred to as the discount rate. This rate is used under the income approach to determine an indication of value for a business based on its ability to generate net cash flow or income to the owners.

Front 33

What are the three types of economic risks inherent in the capital markets?

Back 33

1. Maturity risk (interest rate risk)

2. Market risk (systematic risk)

3. Specific Company risk (unsystematic risk)

Front 34

Define market risk.

Back 34

Market risk, also know as systematic risk, is the uncertainty of future returns due to factors that affect the stock market as a whole. It can not be eliminated by portfolio diversification.

Front 35

What are the assumptions of the capital asset pricing model?

Back 35

1. Investors are risk-adverse

2. Rational investors seek to hold efficient portfolios

3. All investors have identical time horizons

4. All investors have identical expectations around expected rates of return and how capitalization rates are generated

5. There are not investment-related taxes or transaction costs

6. Relative return volatility is a modifier of equity market risk and required return

7. The rate received from lending money is the same as the cost of borrowing money

8. The market has perfect divisibility and liquidity

Front 36

What is the risk-free rate of return?

Back 36

Based on yield to maturity of U.S. treasury stocks. Reflects the rental rate for lending the funds over the investment period, inflation (investment rate risk) over the term of the investment, and maturity risk (risk that the principle market value will rise or fall during the period until maturity) The 20-year U.S. Treasury bond yield is often used for the risk-free rate of return.

Front 37

What is the equity risk premium?

Back 37

Commonly used sources are calculations in Morningstar's Stocks, Bonds, Bill and Inflation Yearbook (SBBI). It is the premium investors require above the risk-free rate to compensation for the increased risk of an equity investment. Estimated equity risk premiums are often based on the historical average return on stocks minus the historical average risk-free rate

Front 38

What is beta?

Back 38

A measure of market risk volatility. The market has a beta of 1, a beta greater than 1 represents more volatility than the market, a beta less than 1 represents less volatility than the market. Sources for determining beta include Value Line Investment Source, S&P Compustat, NYSE, and Yahoo Finance.

Front 39

What is the size risk premium?

Back 39

Often estimated based on data provided from SBBI or the Duff and Phelps Risk Premium Report. Additional premium investors require over and above the equity risk premium to compensation for the increased risk of an investment in smaller companies for size characteristics only.

Front 40

What is the specific company risk premium?

Back 40

Addresses specific risks associated with the target company suck as thin management, smaller size relative to small cap stocks, financial performance, lack of diversification, geographic concentration, demographics, limited access to capital, litigation, environmental issues, concentration of customers, and limited supply sources

Front 41

What is the Butler-Pinkerton Calculator?

Back 41

A new tool available from Business Valuation Resources that provides a market-based calculation for estimating total returns, including specific company risk, for the guideline companies. It can be used as an additional methodology for supporting the cost of capital.

Front 42

What is the Morningstar SBBI?

Back 42

Study of the long-term returns by asset class including the equity risk premium and size risk premium.

Front 43

What is the Duff & Phelps Risk Premium Report?

Back 43

An alternative to the Morningstar SBBI, reports differences in stock returns as a function of firm size measured by the market value of equity. Reports size metrics. This report is used to estimate the size risk premium.

Front 44

What is the debt discount rate?

Back 44

Defined as the pretax borrowing rate of the subject company that is then adjusted by the tax benefits associated with the deductibility of interest expense.

Pretax borrowing rate * (1- tax rate)

Front 45

What is a capitalization rate?

Back 45

Discount rate minus long-term sustainable growth equals the cap rate. The long-term growth rate selected should reflect the present value of expected future growth in the benefit stream selected.

Front 46

What are the advantages of a income approach?

Back 46

The income approach produces a value based on the expected benefits. It values an enterprise based on its earnings or cash flow generating abilities. At times, it is the only approach that can be used to value intangible assets.

Front 47

What are the disadvantages of the income approach?

Back 47

It requires an estimated level of sustainable benefits that can be challenging to estimate for smaller companies. It can be hard to develop the appropriate capitalization and discount rate, and require the analyst to use subjective judgement.

Front 48

What is the discounted cash flow method?

Back 48

A multiple period valuation model that converts a future series of benefit streams into value by discounting them to present value at a rate of return that reflects the risk inherent in the benefit stream. It is discounted by the cost of equity capital when valuing equity, and the WACC when valuing invested capital.

Front 49

What is the capitalized cash flow method?

Back 49

A single period valuation model that converts a benefits stream into value by dividing the benefits stream by a rate of return that is adjusted for growth. The CCF method is an abridged version of the DCF method when the valuation analyst expects long-term, stable cash flows into perpetuity.

Front 50

What is the direct equity valuation model?

Back 50

The net cash flow would be the amount that is available to common stockholders of a company. Based on net cash flow to equity. It is the amount that is left over after the company reinvests in itself to continue its operations while providing for growth.

Front 51

What is the invested capital valuation model?

Back 51

Valuing the enterprise on a debt-free basis so that the cash flow is to both the equity and interest-bearing debt holders. This method adds back interest expenses, net of taxes, to the cash flow and does not consider changes in debt. Often used when the capital structure is expected to change.

Front 52

What is the direct equity formula for DCF?

Back 52

Present Value = Net Cash Flow to Equity/(1+discount rate of equity) for each period with the discount rate being adjusted appropriately (1+ Discount Rate) Squared, etc. for each future period.

Front 53

What is the invested capital formula for DCF?

Back 53

Present Value = Net Cash Flow to Invested Capital/(1+WACC) for each period with the WACC being adjusted appropriately (1+ WACC) Squared, etc. for each future period.

Front 54

What is the direct equity formula for CCF?

Back 54

PV = Net Cash Flow to equity for the next period / (Discount Rate for Equity - Long Term Expected Growth Rate)

Front 55

What is the invested capital formula for CCF?

Back 55

PV = Net cash flow to invested capital for the next period / (WACC - long-term expected growth rate)

Front 56

What is the calculation for cash flow to total equity?

Back 56

Normalized Net Income

Plus: Non-Cash Charges (D&A, Deferred Taxes)

Less: Incremental Working Capital

Less: Anticipated CAPEX

Plus: New Debt Principal (Borrowings)

Less: Debt Principal Out (Repayments)

Front 57

What is the calculation for net cash flow to invested capital?

Back 57

Normalized Net Income (After Tax)

Plus: Interest Expense (Tax Affected)

Plus: Non-Cash Charges (D&A, Deferred Taxes)

Less: Incremental Working Capital (No Int. Debt)

Less: Anticipated CAPEX

Front 58

What is the Gordon Growth Model formula?

Back 58

Direct Equity DCF Residual Value = NCFe(1+g)/(Discount-g)

IC Terminal Value = NCFic(1-g)/(WACC-g)

Front 59

How does revenue ruling 59-60 refer to the Asset Based Approach?

Back 59

Earnings may be the most important criteria of value in some cases, whereas asset value will receive primary consideration in others. Primary consideration is given to earnings when valuing stocks of companies which sell products or services to the public. Conversely, in an investment or holding type of company, the appraiser may give the greatest weight to the underlying assets.

Front 60

What is the theory behind the Asset Based Approach?

Back 60

Current value of all assets, tangible and intangible

minus

Current value of all liabilites

equals

The current value of equity of the subject company

Front 61

What is the economic principal of substitution?

Back 61

The principal of substitution states that a buyer would not pay more than the value of an equally desirable substitute.

Front 62

When should you use the Asset Based Approach?

Back 62

The Asset Based Approach yields the most appropriate estimate of value when the value of the cash flows generated by the current use of assets is less than the cash flows that can be generated by alternative uses, or the returns available by the shareholders are not a fair indication of the value of the underlying assets.

Front 63

The Assets Based Approach is more appropriate when valuing what types of companies?

Back 63

1. Real estate, investment, or asset intensive holding companies

2. Companies with a high percentage of nonoperating assets

3.Start up or troubled companies with limited earnings history

4. Natural resource companies

5. Utilities

6. Not-for-profit organizations

7. Manufacturing companies

8. Controlling interests that can liquidate assets

Front 64

What are the potential problem areas of the Asset-Based Approach?

Back 64

1. Cost and time constraints in extensive analyses of receivables and inventories, and obtaining tangible asset appraisals of fixed assets.

2. When material intangible assets exists, the asset-based approach can depend on the income element

3. Difficulty identifying and measuring all intangible asset drivers

4. Should be consistency for the premise/standard of value between the tangible asset appraisals and the business value

5. Mistaking book value for fair market value

Front 65

What is the assumption of going concern?

Back 65

Going concern assumes the company will continue to operate in a manner consistent with its intended business purpose into the future.

Front 66

What is the assumption for orderly liquidation?

Back 66

Orderly liquidation assumes the company will be liquidated. Assets will be sold piecemeal, and each will receive the benefit of being on the market for a reasonable period. Usually an orderly liquidation is executed under some form or plan of liquidation.

Front 67

What is the assumption for forced liquidation?

Back 67

Forced liquidation assumes the company will be liquidated. Assets will be sold piecemeal but without the benefit of being on the market for a reasonable period of time. A forced liquidation reflects the effect of third parties, such as creditors, impacting market forces, and normally does not involve any form or plan of liquidation.

Front 68

What is the assumption for assembled groups of assets?

Back 68

A mass assemblage of assets is one not currently used in the production of income and not part of a going concern business enterprise. This premise of value is unique to liquidations where a group of assets is not currently operating, but nevertheless capable of becoming part of an income-producing concern.

Front 69

What is the adjusted net asset value method?

Back 69

This method is based on the balance sheet of the subject company, and uses the theory of adjusting the company's balance sheet to the defined value. This method typically assumes the going concern premise of value as opposed to liquidation.

Front 70

What is the excess earnings method?

Back 70

The genesis for this approach is the Appeals and Review Memorandum 34 written in 1920 and updated in Revenue Ruling 68-609. The excess earnings method was intended to value only intangible assets. This method is only used when no better method exists regarding the valuation of intangible assets as outlined in Revenue Ruling 68-609. This approach is used to value a controlling interest, and is less applicable to a minority interest.

Front 71

What is the theory associated with the excess earnings method?

Back 71

Conceptually, this method states that earnings in excess of the require market rate of return on the value of the net tangible assets is associated with the intangible assets of the business. A capitalization of the excess earnings would results in the FMV of a company's intangible assets.

Front 72

What are the premises of value for tangible assets?

Back 72

1. Replacement Cost New

2. Reproduction Cost New

3. Fair Market Value

4. Fair Market Value in Continued Use

5. Orderly Liquidation Value

6. Forced Liquidation Value

Front 73

In regards to tangible assets, what is the difference between FMV and FMV in Continued Use?

Back 73

FMV is the price at which a willing buyer and seller would exchange a tangible asset. FMV in Continued Use also includes all normal direct and indirect costs to make the asset full operational. (Installation, etc.)

Front 74

What are the two types of depreciation under the Adjusted Net Assets approach?

Back 74

Method One - Fair market value is obtained through the used market, and the difference between the replacement cost and market value represents an indication of depreciation.

Method Two - And age/life analysis is used to determine depreciation.

Front 75

What types of discount and premium issues does Revenue Ruling 59-60 reference?

Back 75

1. Discount for Lack of Marketability

2. Discount for Blockage

3. Premium for Control

4. Discount for Lack of Control

5. Key Man or Key Person Discount

6. Consideration of Restrictive Agreements and Potential Impacts on Marketability

Front 76

What are the types of models for calculating adjustments for discounts and premiums?

Back 76

1. Theoretical Models - Top down and horizontal

2. Original Empirical Models - Similar Ownership rights

3. Inferential Models - Premiums paid for control

4. Precendential models - Court decisions

Front 77

What are the Market Approach methods and applicable control/minority and marketable/nonmarketable methods?

Back 77

Guideline Public Company Method - Control or Minority - Marketable

Acquisition Method (Public) - Control - Marketable

Acquisition Method (Private) - Control - NonMarketable

Front 78

What are the Asset-Based Approach methods and applicable control/minority and marketable/nonmarketable methods?

Back 78

Adjusted Book Value Method - Control - Marketable

Liquidation Method - Control - Marketable

Cost to Create Method - Control - Marketable

Front 79

What are the Income Approach methods and applicable control/minority and marketable/nonmarketable methods?

Back 79

Capitalization of Benefits Method - Control or Minority - Marketable or NonMarketable

Discounted Future Benefits Method - Control or Minority - Marketable or NonMarketable

Excess Earnings Method - Control - Marketable or NonMarketable

Front 80

What is Method 1 of valuing a minority interest?

Back 80

1. Estimate the value of the equity of the total enterprise on a controlling basis

2. Compute the minority owner's pro rata interest in the total

3. Estimate the amount of discount for lack of control, if any, applicable to the prop rata valuate of the total enterprise. Further discounts, such as lack of marketability, can be considered after

Front 81

What is Method 2 for valuing a minority interest?

Back 81

Value the minority interest directly by use of only those cash flows available to a minority owner

Front 82

What are the sources to quantify a discount for lack of control?

Back 82

1. Control Premium Study

2. Factset Mergerstat Review

3. Mergerstat/BVR Control Premium Study

4. Direct Investments Spectrum

5. Morningstar Principia Closed-End Funds

Front 83

What is the Control Premium Study?

Back 83

A quarterly publication compiled by FactSet Mergerstat, LLC and distributed by BVR. This reports on the difference between the per share price to obtain a controlling interest in a public company, and the per share price prior to the acquistion (supposedly on a minority basis). The Control Premium Study does not include negative premiums.

Front 84

What is the FactSet Mergerstat Review?

Back 84

It is an annual publication from FactSet Mergerstat, LLC, distributed by BVR. It reports overall M&A activity including privately-held, publicly traded, and cross-border transactions, including premiums offered.

Front 85

What is the Mergerstat/BVR Control Premium Study?

Back 85

Compiled by FactSet Mergerstat, LLC and distributed by BVR, this is a searchable database of transactions that can be used to quantify control premiums and minority discounts.

Front 86

What is the implied discount for lack of control ratio?

Back 86

1 - (1/(1+ Average Premium Paid))

Front 87

What is the Direct Investments Spectrum?

Back 87

A report published by Partnership Profiles, Inc. on a bi-monthly basis since 1990. It provides indications of price-to-value discounts applicable in the secondary partnership market. It does not break down DLOC and DLOM.

Front 88

What is the Morningstar Principia Closed-End Funds?

Back 88

Monthly CD-ROM that includes thousands of closed-end funds. The Price/NAV multiple can be used as a proxy for DLOC when valuing holding companies whose primary asset is marketable securities.

Front 89

What is Revenue Ruling 93-12?

Back 89

Relates to gift tax, and states that in the case of a corporation with a single class of stock, notwithstanding family relationships, the share of family members will not be aggregated with the transferred shares to determine if the transferred shares should be valued as part of a controlling interest.

Front 90

What is Source 1 for determining the discount for lack of marketability?

Back 90

Restricted Stock Studies which compare the prices of private placements of restricted securities with publicly traded securities of the same company. Most of these studies identify median or average discounts in the range of 25% to 35% for lack of marketability.

Front 91

What is Source 2 for determining the discount for lack of marketability?

Back 91

Pre-IPO Studies that compare stock sales of closely held companies with their prices at the IPO, representing a DLOM. Look at Emory Study, Willamette Management Associates Study, Valuation Advisors, LLC Study, and Hitchner Studies. These studies have controversy for having selection bias for only including successful IPOs.

Front 92

What are the methodologies for calculating a discount for lack of marketability?

Back 92

Databases - FMV Restricted Stock Study and Valuation Advisors' LOMD Study

Quantitative Marketability Discount Model

Options Pricing Model

Long-Term Equity Anticipation Securities

Front 93

What is the FMV Restricted Stock Study?

Back 93

Searchable database sold by BVR, contains over 700 restricted stock transactions. Used to find the DLOM.

Front 94

What is the Valuation Advisors' Lack of Marketability Discount Study?

Back 94

BVR database with 9,000+ pre-IPO transactions used to find the DLOM.

Front 95

What is the QMDM?

Back 95

Quantitative Marketability Discount Model - Developed by Mercer Capital in 1997, is a shareholder level DCF model that is used to calculate the DLOM.

Front 96

What is an Options Pricing Model?

Back 96

Option theory used as a proxy for DLOM under the premise that a put option is a cost to guarantee price. Various models are used such as Bolack Scholes.`

Front 97

What is LEAPS?

Back 97

Long-Term Equity Anticipation Securities - Long-term put option, data is used in a market approach type analysis to determine DLOM.

Front 98

What is the formula for combined (or effective) discounts?

Back 98

1- ((1-DLOC)*(1-DLOM))

Front 99

What are some examples of Restricted Stock Surveys?

Back 99

SEC Institutional Investor, Gelman Study, Trout Study, Moroney Study, Maher Study, Standard Research Consultant's Study, Willamette Management Associates, Silber Study, FMV Opinions Study, Management Planning Study, Johnson Study, Columbia Financial Advisors Study, and Trugman Valuation Associates, Inc.

Front 100

What are other discounts that may be applied?

Back 100

Key person or thin management, blockage, restrictive agreement, information access and reliability, non-homogeneous assets, lack of diversification, liquidation costs, trapped capital gains, voting versus nonvoting, litigation, investment company discount, small-company risk discount.

Very few of these are ever applied in practice.

Front 101

What is FASB ASC 820?

Back 101

It is a principles-based standard that consolidates the definition of fair value, and establishes a framework for measuring fair value. It also enhances disclosures with respect to fair value measurements. Defines fair value as the price that would be received to sell and asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit value).

Front 102

What are the types of market approaches for valuing intangible assets?

Back 102

1. Comparable Uncontrolled Transactions Method

2. Comparable Profit Margin Method

3. Relief from Royalty Method

Front 103

Describe the US News and World Report cases

Back 103

Retirees claimed that the company's stock had been undervalued. Issues were: control v. non control, DLOM, real estate and other assets, and subsequent events. A major lesson from this case is that a minority stock holder does not have the ability to reach the underlying assets of the corporation. Therefore, only a minor amount of weight, if any, should be given to the value of these assets.

Front 104

Describe Estate of Joyce C. Hall v. Commissioner

Back 104

This case extended the interpretation of "same or similar line of business" mentioned in revenue ruling 59-60, especially when the number of comparable companies is very limited. Hallmark cards was being valued, was compared to Coca-Cola, IBM, McDonald's and others.

Front 105

Describe Estate of Samuel I. Newhouse v. Commissioner

Back 105

This case identifies multiple classes of "willing buyers". The passive investor, the active investor, the control investor, and the public investor.

Front 106

Describe Bernard Mandelbaum v. Commissioner

Back 106

The focus of this case is on the DLOM as it relates to the gift tax valuation of minority blocks of a company. Both valuations were thrown out and the judge identified his own list of factors to be considered.

1. Financial statement analysis

2. Company's divided policy

3. The nature of the company, it's history, its position in the industry, and its economic outlook

4. Company's management

5. Amount of control in transferred shares

6. Restrictions on transferability of stock

7. Holding period for stock

8. Company's redemption policy

9. Costs associated with making a public offering

Front 107

Describe Estate of Richard R. Simplot v. Commissioer

Back 107

This case focused on DLOM, built-in gains tax, and voting v. non-voting stock. The court ruled that the minority interest in voting shares was worth the same as non-voting shares given that voting rights had little value when the holder was a minority owner.

Front 108

Describe Gross v. U.S. Court of Appeals

Back 108

The court affirmed that it is not proper to tax affect S corporation earning for valuation purposes.

Front 109

Describe Dunn v. Commissioner

Back 109

The court reversed and remanded a prior case, it determined that 100% of the tax on the trapped-in taxable gain for a C corporation must be subtracted under the Asset Approach. The lesser the likelihood of a company's liquidation, the greater the weight that must be assigned to the income approach versus the asset approach.

Front 110

Describe Daubert v. Merrell Dow Pharmaceuticals, Inc.

Back 110

This case did not involve a business valuation, but the Supreme Court articulated factors regarding the admissibility of expert testimony. The court articulated 4 important factors in determining expert scientific testimony.

Whether the theory or techniques:

1. can be tested

2. has been subject to peer review

3. employed by the expert have a known or potential rate of error and standards controlling the technique's operations

4. has it been generally accepted by the scientific community

Testimony may be admissible even when one or more of these factors are unsatisfied.

Front 111

Describe Kumho Tire Co. v. Carmichael

Back 111

This case expanded the Daubert factors to testimony of engineers, and other experts who are not scientists, and instead rely instead on technical or specialized knowledge.

Front 112

Describe Estate of Jelke v. Commissioner

Back 112

This case ruled that the analyst should reduce value by built-in-capital gains as if the assets would be sold on the valuation date.

Front 113

Describe Delaware Open MRI Radiology Assoc. v. Kessler

Back 113

Similar to the Gross case, this case addressed whether S corporations should be tax affected. However, unlike Gross, the court concluded that S corporation, income should be tax affected in such a way as to reflect the tax advantages over C corporations that S corporations provide to shareholders.

Front 114

Describe Astleford v. Commissioner

Back 114

This case addressed the FMV of farmland, whether a 50% interest should be valued as a general partnership, and the applicability and amount of DLOC and DLOM to the gifted limited partnership interests.

Front 115

Describe Estate of Mirowski v. Commissioner

Back 115

The court ruled that the family LLC was a successful vehicle for substantial valuation discounts. The IRS tried to challenge this given that the facts were in dispute and the entity allowed for tax avoidance. The IRS lost, was an exception to IRS 2036.

Front 116

Define Measures of Central Tendency

Back 116

The purpose of a measure of central tendency is to determine the "center" of a distribution of date values or possibly the "most typical" data value. Mean, median, and mode are measures of central tendency.

Front 117

Define Measures of Dispersion

Back 117

The purpose of measures of dispersion is to develop an understanding of the dispersion, or spread, of a data sheet.

Front 118

Define Dispersion

Back 118

The degree to which numerical data tend to spread around an average value. Variance, standard deviation, and coefficient of variation are ways to measure dispersion.

Front 119

Define Variance

Back 119

The variance is equal to the sum of the squared deviations between each observation and the mean value.

Front 120

Define Standard Deviation

Back 120

The square root of the variance.

Front 121

Define Coefficient of Variation

Back 121

The ratio of the standard deviation to the mean and measure of relative dispersion.

Front 122

Valuations involving buy-sell agreements generally require the use of what standard of value?

Back 122

The agreement's standard of value, if any.

Front 123

What is the applicable standard of value for the purposes of going private?

Back 123

In most states, the standard of value for any litigation involving corporate transactions is fair value, this is the same standard of value for dissenting shareholder actions.

Front 124

What do engagement letters typically include?

Back 124

1. Description of the scope of the assignment

2. Description of the subject appraisal

3. Effective date of the valuation

4. Standard of value to be used

5. Type of report

6. Responsibilities of client

7. Method for determining fees and payment

8. List of assumptions and limiting conditions

Front 125

What types of valuations use the Fair Value Standard?

Back 125

1. dissenting stock holder actions

2. Corporate or partnership dissolutions under minority oppressive statutes

3. Going private

Front 126

What types of valuations use the Fair Market Standard?

Back 126

1.Gift and Estate tax

2. Inheritance taxes

3. Ad valorem taxes

4. ESOPs

5. Financial aquisitions

Front 127

What should an analyst consider before he/she accepts an assignment?

Back 127

1. Conflict of interest

2. Purpose and function of the engagement

3. Amount of time required to do the job

4. Scope of the assignment

5. Type of report to be issued

Front 128

What are the analytical tools used by valuation analysts?

Back 128

1. Comparative company analysis

2. Common size financial statements

3. Financial ration analysis

4. Comparative industry analysis

5. Trend analysis

6. Operational analysis

Front 129

What are the types of discretionary adjustments?

Back 129

Interest expense, rent expense, and owner perquisites. Non-operating adjustments are not considered discretionary.

Front 130

How would you calculate the long-horizon equity risk premium?

Back 130

Long-horizon arithmetic mean return on S&P 500 (Market)

less

Long-horizon arithmetic mean return on 20-year government bonds

Front 131

In which document was the excess earnings method for calculating the value of intangible assets first introduced?

Back 131

ARM - 34 which was written in 1920, and updated in Revenue Ruling 68-609. Conceptually this method states that earnings in excess of the required market rate of return on the value of the net tangible assets is associated with the intangible assets of the business.

Front 132

When calculating the fair market value for stock for tax reporting purposes, what stock prices are used?

Back 132

The average of the high and low prices of the stock on the date of valuation.

Front 133

What are the premises of value under the asset approach?

Back 133

1. Going Concern

2. Orderly Liquidation

3. Forced Liquidation

4. Assemblage of Assets

Front 134

When synthesizing the results determined under the income approach (capitalization of earnings) and asset-based approach (excess earnings), how should the capitalization rate compare?

Back 134

The rate used to capitalize earnings under the income approach should generally equal the weighted average rate of return on the tangible and intangible assets under the excess earnings method.

Front 135

What are the costs of liquidation?

Back 135

Liquidation costs include commissions, administrative costs and losses, legal and accounting costs, and taxes on the disposal of assets as the results of liquidation. Property taxes are not the results of liquidation and are not a liquidation expense.

Front 136

Which type of inventory basis is most appropriate for balance sheet valuation?

Back 136

FIFO (First in First Out)

Front 137

Describe Technical Advice Memorandum (TAM) 9436005

Back 137

The TAM seeks to limit the availability or degree of applying a discount for lack of control in situations in which any two minority shareholders acting in concert with one another have the ability to control the vote or actions of an entity. This was issued in a gift tax context.

Front 138

Describe Revenue Ruling 77-287

Back 138

Relates to the valuation of restricted stocks and the effects on marketability. It amplifies Revenue Ruling 59-60, and deals with unregistered securities and letter stock.

Front 139

Define intangible assets.

Back 139

A non-physical asset such as a franchise, trademark, patent, copyright, goodwill, equities mineral rights, securities, and contracts that grant rights and privileges and have value for the owner. The value of an intangible asset is derived from the legal rights, the intellectual property content, or the expected economic benefits that are associated with the intangible asset.

Front 140

Define intellectual property.

Back 140

A special classification of intangible assets that have special legal recognition and competitive advantages. Trademarks, trade names, patents, copyrights, and trade secrets are all examples.

Front 141

Define Section 1060

Back 141

Discusses applying the residual method to assigning value to intangible assets. The purchase price must be allocated among the assets, other than goodwill and going-concern value, in accordance with their FMVs. The remainder is allocated to goodwill and going concern.

Front 142

When is an ESOP appraisal required?

Back 142

1. When the ESOP purchases employer securities

2. At least annually

3. When there is a transaction between the ESOP and a party of interest (fiduciary, service provider, employer covered by the plan, members of plan, etc.)

4. When the ESOP sells some of all of its stick in the company.

Front 143

What is the standard of value for shareholder oppression suits?

Back 143

Fair value

Front 144

What are lost profits calculations?

Back 144

An attempt to quantify damages that a business or individual alleges have occurred due to a breach of contract or duty by another party.

Front 145

What are the differences between lost profits calculations and business valuations?

Back 145

1. Time Period - Lost profits are for a finite period whereas business valuations are assumed to continue into perpetuity

2. Incremental Focus - Lost profits are based on lost incremental profit, taking into account costs that would have been incurred had the revenues been realized. Business valuations assess the value of all expected future profits.

3. Income Taxes - Lost profits are before corporate and individual income taxes. Business valuations are prepared on an after-corporate tax basis.

4. Subsequent Events - Lost profits take into account all information through the trial date. Business valuations only consider information as of the date of value.

5. Use of Hindsight - In business valuations, use of hindsight is inadmissible. Loss profits can use the plaintiff's business plan or projections as the basis of the damage claim.

Front 146

What factors are considered in regards to blockage discounts?

Back 146

1. The period that might be required to liquidate the stock position, which takes into account the size of the block of shares and the average daily trading volume.

2. The historical impact on the stock price of larger blocks of shares that were traded.

3. The expected growth rate in the public company stock.

4. The required rate of return of the public company stock.

5. Restrictions affecting the timing at which the company securities can be sold in the market where the security is registered and traded.

Front 147

What are the differences between fair market value and fair value?

Back 147

Front 148

What are the appropriate levels of value for all valuation approaches?

Back 148

Front 149

What are the applicable standards of value for each valuation purpose?

Back 149

Front 150

Define observable and unobservable inputs.

Back 150

Relates to ASC 820 and valuations for financial reporting.

Observable inputs are assumptions based on market data obtained from sources independent of the reporting entity. Maximize usage.

Unobservable inputs are the reporting entity's own assumptions based on the best information available. Minimize usage.

Front 151

Describe the three-level hierarchy of inputs under ASC 820.

Back 151

Level 1 (Highest Priority) - Observable, quoted prices for identical assets or liabilities in active markets, Fair value = Price X Quantity, No blockage factor or other valuation adjustments

Level 2 - Quoted similar items in active markets, or identical items in inactive markets. may include factors such as transportation, may be considered a Level 3 input if measurements are adjusted by a significant amount.

Level 3 (Lowest Priority) - Unobservable inputs, market perspective is still required, requires significant disclosure.

Front 152

Describe obsolescence under the cost approach under ASC 820.

Back 152

Obsolescence encompasses physician deterioration, functional obsolescence, and economic obsolescence. This is broader than depreciation for financial reporting purposes.

Front 153

Describe ASC 805.

Back 153

ASC 805 defines a business as an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, increased share prices, or other economic benefits to investors, owners, or participants. This is related to business combinations. Applies to all transactions in which an entity obtains control of one or more businesses. It does not apply to joint ventures, a combination of entities under common control, or the acquisition of assets that does not constitute a business.

Front 154

How are transaction costs and in-process R&D handled in regards to business combinations?

Back 154

Transaction costs are not included as part of the business combination and are accounted for separately. They are the be charged to expense when incurred.

In process R&D has an indefinite life until completed or abandoned, and impairment testing is required under ASC 350. It is not included in the total consideration.

Front 155

Describe ASC 350.

Back 155

ASC 350 applies to goodwill, intangible assets acquired other than as part of a business combination, intangible assets subject to amortization, and indefinite-lived intangible assets. Goodwill is not amortized, and it tested for impairment. Finite-lived intangible assets are subject to impairment under ASC 360 NOT ASC 350.

Front 156

Describe ASC 820

Back 156

Defines fair value as the prices that would be received to sell and asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Excluded related parties, parties are willing, knowledgeable and able to transact.

Front 157

Describe IRC 2036

Back 157

Under IRC Section 2036 the estate tax return of the original donor should include previously gifted interests because the donor retained the use of the underlying property. Used by the IRS to attack family limited partnerships.

Front 158

What approach is generally the primary approach used to value brand names?

Back 158

The Income Approach. Brand names are rarely bough and sold making the market approach problematic. The cost approach can be considered, but only if no information was available on the future economic benefits for the brand name.

Front 159

Describe the Uniform Standards of Professional Appraisal Practice (USPAP).

Back 159

Written by the Appraisal Foundation, and are the quality control standards applicable to real property, personal property, intangibles, and business valuation appraisal analysis and reports.