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BV 202 (2015) - American Society of Appraisers questions with actual answers.
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BV 202 (2015) - American Society of Appraisers questions with actual answers.
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BV 202 (2015) - American Society ofAppraisers questions with actual
answers.
What are the Three valuation approaches ANS - Market, Income and Asset (Cost)
Capitalization Rate is Equal to ANS - Discount Rate minus Growth
The Typical LTGR assumed ANS - 3 to 5 percent
Terminal Year Cash Flow is calculated as ANS - Last Projection Year Cash flow multiplied by 1 + LTGR
Terminal Gross Value is equal ANS - Terminal Year Cash Flow divided by Capitalization Rate (Percent)
Terminal Value Present Value ANS - Terminal Gross Value multiplied by PVF
Present Value Factor ANS - 1 / (1 + k) ^ n
Terminal Value: Capitalization of NCF Should NOT be used when: ANS - The fortunes of the a business
are declining and expected to do so. Exit or Liquidation value preferred.
How do you calculate the percent of Total Value contributed by the Terminal Value ANS - Terminal
Value / Total Value
Define the Relationship between Value and Rates of Return ANS - Inverse but NOT linear
Discount Rate Definition ANS - A rate of return used to convert a monetary sum, payable or receivable
in the future, into a present value
,Cost of Capital ANS - The expected rate of return that the market requires in order to attract funds to a
particular investment. EQUAL to the discount rate.
NOPAT is equal to ANS - Net Income + Interest Expense (1 - tax rate) or EBIT - [EBIT x (tax rate)]
GCF (invested capital) equals ANS - NOPAT + depreciation/amortization
NCF (invested capital) equals ANS - GCF - inc WC - Capex
The two components of a Discount Rate ANS - Risk Free Rate and Risk Premium
Principal of Substitution (Discount Rate) ANS - The discount rate is equal to the return that could be
earned on alternative investments with the same level of risk
Risk Free Rate ANS - Rate of Return on a risk-free Government Bond ... available in the market on an
investment free of default (On the Exam: 20 Year Risk Free Rate)
Risk (Definition: context Discount Rate) ANS - Degree of uncertainty as to the realization of the future
benefits stream
The greater the Risk... ANS - ... the greater the Required Rate of Return
Systematic Risk ANS - The risk common to all risky securities and cannot be eliminated through
diversification
Unsystematic Risk ANS - The risk SPECIFIC to an individual security that can be avoided through
diversification. Diversifiable.
The Two Factors that Effect the Discount Rate ANS - Internal Factors and External Factors (specific lists
of factors not needed for exam)
, WACC ANS - Weighted Average Cost of Capital - Invested Capital Discount Rate
Cost of Equity ANS - Equity Discount Rate
Components of the Cost of Equity ANS - Risk Free Rate + ERP + Size Premium + Industry Risk Premium +
Company-specific Risk Premium (+ Country Risk Premium [not in materials])
General Equity Risk Premium ANS - A rate of return added to a risk-free rate to reflect the additional
risk of equity instruments over risk-free investments
Size Premium ANS - a risk of premium for Size
Industry Risk Premium ANS - a premium to reflect risks unique to the industry in which the subject
company operaties
Company-specific risk premium ANS - a risk premium for the unsystematic risk of the subject company
Adjusted or Modified CAPM Definition ANS - Based on capital market theory and relies on the efficient
market theory
The Build Up Method (BUM) - Equity ANS - A rate of return developed by summing different rates of
return on investments of different risk
components (US Treasuries, public company equities, size risk, risks specific to the
subject company) until the concluded rate of return captures:
Rf + ERP + SP +/- IRP +/- CSRP
Why use the 20-year Treasury Bond ANS - Because the horizon for investing in closely held business is
usually long-term
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