Leen EXERCISES True or False. Write TRUE if the Statem true and the word FALSE if you find the statement inconsistent with the truth. ee Eee an 1. Value pertains to how much a particular object is worth to a particular set of eyes. 2. Methods to value for real estate can may be different (Que y Tews oneal an entire business. teue via 3. Businesses treat capital as a scarce resource that they Should compete to obtain and efficiently manage. 4. According to the CFA Institute, valuation is the qeut estimation of an asset's value based on variables Perceived to be related to future investment returns, on comparisons with similar assets, or, when relevant, on estimates of immediate liquidation proceeds. - Valuation includes the use of forecasts to come up with eur reasonable estimate of value of an entity's assets or its equit | A= Valuation techniques may differ across different Tue assets, but all follows similar fundamental principles that drives the core of these approaches. 7. As valuation mostly deals with projections about future events, analysts should hone their ability to balance eur and evaluation different assumptions used in each phase of the valuation exercise, assess validity of available empirical evidence and come up with rational choices that aligns with the ultimate objective of the valuation activity '8._ In the corporate setting, the fundamental equation of value is grounded on the principle that Alfred Marshall “TRUE popularized — a company creates value if and only if the return on capital invested exceed the cost of acquiring capital 9. Value, in the point of view of corporate shareholders, relates to the difference between cash inflows Teue generated by an investment and the cost associated with the capital invested which captures both time value of money and risk premium. intrinsic value refers to the value of any asset based on the assumption assuming there is a hypothetically complete understanding of its investment characteristicsCo ES 553 Tae VALUATION CONCEPTS AND METHODOLOGIES STATEMENT 11. Going Concern firm value is determined under the going concern assumption. The going concern | __ assumption believes that the entity will continue to do its business activities into the foreseeable future. TUE 12. Liquidation Value is the net amount that would be realized if the business is terminated and the assets are sold piecemeal. FALSE Ser Market Value is the price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm's length in an open and unrestricted market, when neither is under compulsion to buy or sell and when in understanding and measuring the intrinsic value of a both have reasonable knowledge of the relevant facts. we Fundamental analysts are persons who are interested firm. Fundamentals refer to the characteristics of an entity True related to its financial strength, profitability or risk appetite FASE ‘Activities investors usually do “takeovers” — they use their equity holdings to push old management out of the company and change the way the company is being run TUE 17. Chartists relies on the concept that stock prices are significantly influenced by how investors think and act. Chartists rely on available trading KPIs such as price movements, trading volume, short sales - when making their investment decisions your 18. Information Traders are Traders that react based on new information about firms that are revealed to the stock market. The underlying belief is that information traders are more adept in guessing or getting new information about firms and they can make predict how the market will react based on this. 19. An acquisition usually has two parties: the buying firm and the selling firm. The buying firm needs to determine the fair value of the target company prior to offering a bid price. 20. Merger is the general term which describes the transaction two companies have their assets combined to form a wholly new entitVALUATION CONCEPTS AND METHODOLOGIES (EP hie rE Sate 21. Divestiture is the sale of a major component or We— Segment of a business (e.g. brand or product line) to ____another company 22. Spin-off 's separating a segment or component business and transforming this into a separate legal entity whose ownership will be transferred to shareholders. Leveraged buyout is the acquisition of another business by using significant debt which uses the . acquired business as a collateral. Synergy can be attributable to more efficient Operations, cost reductions, increased revenues, combined products/markets or cross-disciplinary talents of the combined organization. Corporate finance mainly involves managing the firm's capital structure, including funding sources and strategies that the business should pursue to maximize firm value. Valuation is also important to businesses because of legal and tax purposes Top-down forecasting approach — Forecast starts from international or national macroeconomic projections with utmost consideration to industry specific forecasts. Teur Bottom-up forecasting approach — Forecast staris from the lower levels of the firm and builds the forecast as it captures what will happen to the company. Teug eur 29. Sensitivity analysis is the common methodology in valuation exercises wherein multiple other analyses are done to understand how changes in an input or variable will affect the outcome (i.e. firm value). Uncertainty is captured in valuation models through cost of capital or discount rate. Tewe Tee 32. 33. Uncertainty is captured in valuation models through cost of capital or discount rate. Valuation is the estimation of an asset's value based on variables perceived to be related to future investment returns, on comparisons with similar assets, or, when relevant, on estimates of immediate liquidation proceeds Definition of value may vary depending on the context. Different definitions of value include intrinsic value, going concern value, liquidation value and fair market value.Bua 34. Valuation plays significant role in the business world reat] with respect to portfolio management, business transactions or deals, corporate finance, legal and tax purposes. 35. Generally, valuation process involves these five steps: understanding of the business, forecasting financial Ess Ree Ui atare le cell ur performance, selecting right valuation model, preparing Valuation model based on forecasts and applying conclusions and providing recommendations. Toe 1736. Value is defined at a specific point in time Tee Value varies based on ability of business to generate future cash flows WUE 38._ Market dictates appropriate rate of return for investors TRue 39. Value is influenced by transferability of future cash flows TRUE 40. Value is impact by liquidityQa” VALUATION CONCEPTS AND METHODOLOGIES MULTIPLE CHOICE THEORY. Write the letter of the best answer before the number of the question or statement being answered. a pertains to how much a particular object is worth to a particular set of eyes. a. Price b. Value 7 =) c. Cost — d. Fundamentals A 2. Ac€ording to the CFA Institute, is the estimation of asset's value based on variables perceived to be related to future investment returns, on comparisons with similar assets, or, when relevant, on estimates of immediate liquidation proceeds. a. Valuation b. Price Estimation c. Fundamentals d. Appraisal luation places great emphasis on the that are ‘ssociated in the exercise. a. Professional judgment b. Human reasoning c. Professional Skepticism d. Due diligence fe value of a businesses can be basically linked to three major tors, except a. Current Operations b. Future Prospects c. Embedded Risks d. All of the above B é major factor linked to the value of business that shows how fe operating performance of the firm in the recent year. a. Current Operations b. Future Prospects c. Embedded Risks d. All of the aboveVALUATION CONCEPTS AND METHODOLOGIES ® 6.One major factor linked to the value of business that reflects fat is the long-term and strategic decision of the company. a. Current Operations b. Future Prospects c. Embedded Risks d. All of the above ( 7. One major factor linked to the value of business that shows what are the business risks involved in running the business. a. Current Operations b. Future Prospects c. Embedded Risks d. All of the above C 8. refers to the value of any asset based on the ption assuming there is a hypothetically complete derstanding of its investment characteristics. a. Going concern value b. Liquidation Value c. Intrinsic Value d. Fair Market Value particularly relevant for companies who are fencing severe financial distress. a. Going concern value b. Liquidation Value ic. Intrinsic Value d. Fair Market Value 10. Vlue is determined under the going concern assumption a. Going concern value b. Liquidation Value c. Intrinsic Value d. Fair Market Value D 11.Thepfice, expressed in terms of cash equivalents, at which propefly would change hands between a hypothetical willing and apie buyer and a hypothetical willing and able seller, acting at 4rm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.car - VALUATION CONCEPTS AND METHODOLOGIES a. Going concern value b. Liquidation Value c. Intrinsic Value d, Fair Market Value The-relevance of valuation in largely depends on vestment objectives of the investors or financial managers janaging the investment portfolio. a. Portfolio Management b. Fundamental Management c. Financial Management d. Investment Management 43-These are persons who are interested in understanding and Measuring the intrinsic value of a firm. a. Fundamental Analysts b. Activist Investors c. Chartists d. Information Traders ____ refer to the characteristics of an entity related to financial strength, profitability or risk appetite. a. Intrinsic Value b. Fundamentals c. Technical Characteristics d. Financial Value B4 tend to look for companies with good growth prospects that have poor management. a. Fundamental Analysts b. Activist Investors c. Chartists d. Jnformation Traders c hey believe that these metrics imply investor psychology and ‘vill predict future movements in stock prices. a, Fundamental Analysts b. Activist Investors c. Chartists d. Information TradersVALUATION CONCEPTS AND METHODOLOGIES are more adept in ing or getting new information about firms and they can make edict how the market will react based on this. Hence, correlate value and how information will affect this D 17. The gu derlying belief is that value. a. Fundamental Analysts b. Activist Investors c. Chartists d. Information Traders Onder portfolio management, the following activities can be erformed through the use of valuation techniques, except a. Stock Selection b. Deducing Market Expectation c. Both can be performed fone of the above ‘Separating a segment or component business and transforming {his into a separate legal entity whose ownership will be transferred to shareholders. a. Mergers b. Acquisitions c. Divestiture d. Spin-off ‘of a major component or segment of a business (¢.9. id or product line) to another company a. Mergers b. Acquisitions c. Divestiture d. Spih-off 21. Géheral term which describes the transaction two companies coptfbined to form a wholly newentity a. Mergers b. Acquisitions c. Divestiture d. Spin-offVALUATION CONCEPTS AND METHODOLOGIES B 22. usually has two parties: the buying firm and the selling firm. The. buying firm needs to determine the fair value of the tat ‘company prior to offering a bid price. On the other hand, the ing firm (or sometimes, the target company) should have a sense of its firm value as well to gauge reasonableness of bid offers. a. Mergers b. Acquisitions c. Divestiture 4. Spin-off D__23-Acquisition of another business by using significant debt which Uses the acquired business as a collateral. a. Mergers b. Acquisitions c. Divestiture d. Leveraged buy-out A aw assumes that the combined value of two firms will e greater than the sum of separate firms. can be attributable to more efficient operations, cost reductions, increased revenues, combined products/markets or cross-disciplinary talents of the combined organization. a. Synergy b. Control c. Synergy and Control d. None of the above deals with prioritizing and distributing financial fesources to activities that increases firm value. The ultimate goal to maximize the firm value by appropriate planning and implementation of resources, while balancing profitability and risk appetite. a. Financial Management b. Corporate Finance c. Risk Management 4d. Portfolio Management Nout OF 26. ME heove nerally, the valuation process considers these steps, except @, Understanding the Business b. Forecasting Financial Performance d. Preparing Valuation model based on forecastsLeesa d. All of the above principles in valuation refers to Business value tend fé every day as transaction happens? a. The value of a business is defined only at a specific point in time b. Value varies based on the ability of business to generate future cash flows ; ¢. Firm value can be impacted by underlying net tangible assets ; d. Market dictates the appropriate rate of return for investors refers to the possible range of values where the im value lies. a. risk of the unknown b. volatility ¢. uncertainty 4. None of the above Which key principles in valuation refers to Market forces are ‘constantly changing, and they normally provide guidance of what rate of return should investors expect from different investment vehicles in the market? a. The value of a business is defined only at a specific point in time b. Value varies based on the ability of business to generate future cash flows c. Firm value can be impacted by underlying net tangible assets farket dictates the appropriate rate of return for investors Cc 28. ® 30/the key principles in valuation refers to general concepts for st valuation techniques put emphasis on future cash flows ‘except for some circumstances where value can be better derived from asset liquidation is a. The value of a business is defined only at a specific point in time b. Value varies based on the ability of business to generate future cash flows c. Firm value can be impacted by underlying net tangible assets d. Market dictates the appropriate rate of return for investors