Finance 201 Brau Chapter 13 quiz

Quiz

23 questions

About 14 minutes. Every answer comes with the right one.

Quiz

Question types

All 23 questions

Which valuation method focuses on the cost to recreate a business from scratch?
Answer
Replacement Cost Method
What is a significant limitation of the Replacement Cost Method?
Answer
It cannot account for intangible assets.
The Replacement Cost Method effectively values intangible assets like brand recognition.
Answer
False
The ___ method values a firm by estimating the current market prices of its individual components.
Answer
Replacement Cost
The Discounted Cash Flow (DCF) method values an asset based on:
Answer
Its expected future cash flows.
In the DCF formula $V_a = \sum_{t=1}^{T} \frac{CF_t}{(1+k)^t}$ , what does 'k' represent?
Answer
The relevant discount rate
In DCF analysis, a dollar received in the future is worth more than a dollar received today.
Answer
False
When using FCFF as the numerator in a DCF, the appropriate discount rate is the ___.
Answer
WACC
Which cash flow measure is available to all capital providers (creditors and stockholders)?
Answer
Free Cash Flow to the Firm (FCFF)
When using Free Cash Flow to the Firm (FCFF) in a DCF analysis, what is the appropriate discount rate?
Answer
Weighted Average Cost of Capital (WACC)
When valuing a firm using FCFE, the appropriate discount rate is the WACC.
Answer
False
The ___ represents the value of all cash flows beyond the explicit forecast horizon in a DCF model.
Answer
Terminal Value
What does Free Cash Flow to the Equity (FCFE) represent?
Answer
Cash flow available only to equity holders.
If you calculate $V_{equity}$ using FCFE, how can you find the total firm value?
Answer
Add the market value of debt.
The Comparables Method is a market-based approach to valuation.
Answer
True
A '___' is often paid when an entity seeks to obtain a majority share in a company, compensating existing shareholders for losing control.
Answer
Control Premium
What is the purpose of calculating Terminal Value (TV) in a DCF analysis?
Answer
To estimate the value of cash flows beyond the explicit forecast horizon.
Which valuation method compares a firm to similar companies in the market?
Answer
Comparables Method
A 'Liquidity Discount' is applied to private firm shares because they are generally more easily sold than public shares.
Answer
False
The Price-to-Earnings (P/E) ratio is calculated as:
Answer
Price per share / Earnings per share (EPS)
Why is the Price-to-Sales (P/S) ratio useful for certain companies?
Answer
It can be used for companies with negative or no earnings.
Explain the difference between Free Cash Flow to the Firm (FCFF) and Free Cash Flow to the Equity (FCFE) and the discount rates associated with each.
Answer
FCFF is the cash flow available to all capital providers (debt and equity holders) after operating expenses and investments. It is discounted using the WACC. FCFE is the cash flow available only to equity holders after all expenses, debt payments, and investments. It is discounted using the cost of equity ( $k_e$ ).
Describe the 'Unpaid Salary Issue' and how appraisers address it when valuing private firms.
Answer
The 'Unpaid Salary Issue' occurs when private firm owners don't take a formal salary, instead using distributions, which understates operating expenses. Appraisers address this by adding a hypothetical salary expense to reflect the cost of hiring someone to perform the owner's role, thus providing a more accurate profitability picture.