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CEPA - 8. BASICS OF BUSINESS VALUATION
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CEPA - 8. BASICS OF BUSINESS VALUATION
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CEPA - 8. BASICS OF BUSINESS VALUATIONPurposes for Business Valuation: Right Ans - A) Selling a business to a third
party
B) Transferring ownership to family via gifting
C) Litigation between shareholders
D) Divorce between husband and wife
E) Establishing value for estate tax determination
F) Installing an Employee Stock Ownership Plan and Trust (ESOP)
G) Acquiring a business
Some of the reasons why "Price" doesn't always equal "Value" are Right
Ans - • Hold-Back of Proceeds (escrow)
• Seller Financing
• Performance Payments / Earn-Out Provision
• Non-Competition Agreement
• Employment Agreement and/or Consulting Agreement
• Contingent and Unknown Liabilities
There are five standard of value. Right Ans - - Fair market value (FMV)
- Investment value
- Intrinsic or fundamental value
- Fair value
- Emotional value
Which one of the 5 standard of value should be considered in a valuation
depends on its ___. Right Ans - purpose
Fair Market Value Right Ans - The price at which the property would
change hands between a "hypothetical" willing buyer and a "hypothetical"
willing seller, when the former is not under any compulsion to buy and the
latter is under no compulsion to sell, both parties having reasonable
knowledge of relevant facts.
Investment Value Right Ans - The value to a particular investor based on
individual investment requirements and expectations (Buyer-Specific).
, Intrinsic or Fundamental Value Right Ans - The value that an investor
considers, on the basis of an evaluation of available facts, to be the "true" or
the
"real" value that will become the market value when other investors reach the
same conclusion.
When the term applies to options, it is the difference between the exercise
price or the strike price of an option and the market value of the underlying
security.
Fair Value - VALUATION DEFINITION Right Ans - The price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction
between "actual" market participations at the measurement date.
Fair Value - LITIGATION DEFINITION Right Ans - With respect to
dissenter's shares, means "restore me to equity" with the valuation on an
enterprise level (no minority position discount and no lack of marketability
discount).
Emotional Value Right Ans - • What a buyer and seller perceive
• Most commonly an unrealistic
seller expectation
If the purpose(s) of the valuation are to determine the profit gap, value gap, or
wealth gap, which standard of value can be used?
A) Calculation of Value
B) FMV
C) Investment Value
D) Intrinsic or fundamental value
E) FV
F) Emotional value Right Ans - A) Calculation of Value
Notes: low complexity/Discover gate
If the purpose(s) of the valuation are to determine for stock options, profit
interest plan, shareholder buy-in/out, litigation, or strategic (acquire a
business), which standard of value can be used?
A) Calculation of Value
B) FMV
C) Investment Value
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