QUESTION 1
1. Which of the following is true about private firm valuation?
a. Financial information for both public and private firms is equally reliable because their statements are audited by outside accounting firms to ensure that are developed in a manner consistent with GAAP.
b. It is easier to obtain the fair market value of private companies than for public companies because of the absence of volatile stock markets.
c. Methodologies employed to value private firms are substantially different from those employed to value public firms.
d. The availability and reliability of data for public companies tends to be much greater than for small private firms.
QUESTION 2
1. Which of the following is not true about valuing private firms?
a. There is no stock price data to directly estimate market beta.
b. Market beta is not a valid risk measure in a private-to-private transaction.
c. Deal makers should impose a liquidity discount in fixed fashion across all transactions.
d. Income statements need to be adjusted because reported earnings of private firms are often understated to minimize taxes.
QUESTION 3
1. Which of following is true about the private investors?
a. In a private-to-public transaction, market beta has to be scaled up to capture the risk exposure of investors.
b. In a private-to-private transaction, market beta has to be scaled down to capture the higher risk-aversion of the undiversified investor.
c. Undiversified investors require a higher rate of return from the same investment, leading to a lower value of the investment.
d. Undiversified investors view the same investments less risky than more diversified investors.
QUESTION 4
1. Empirical research finds which of the following factors is positively correlated with the liquidity discount of the restricted stocks?
a. Issuer size
b. Issuer profitability
c. Issuer's cash holding level
d. The restricted stocks' vesting period (the time period when you cannot trade the stock)
QUESTION 5
1. Question 5-8 are based on the following information.
You have been called in to value a dental practice by an old friend and have been provided with the following information:
- The practice generated pre-tax income of $ 550,000 last year for the dentist, after meeting all office expenses. The income is expected to grow at 2% in perpetuity, with no reinvestment needed. The tax rate is 40%.
- The dentist currently spends about 20 hours a week doing the accounting and administrative work. You estimate that hiring an external accounting service will cost you $25,000 annually. As an alternative to private practice, the dentist could work at a dental hospital nearby at an annual salary of $ 150,000. (Neither was considered when estimating the income above.)
- The office is run out of a building owned by the dentist. While no charge was assessed for the building in computing the income, you estimate that renting the space would have cost you $75,000 a year.
- The unlevered beta of publicly traded medical service companies is 0.80 but only 1/3 of the risk in these companies is market risk. The dental practice has no debt. (You can use a riskfree rate of 4.25% and a risk premium of 4%.) Estimate the value of the practice for sale in a private transaction to another dentist who is not diversified.
Question 5. The appropriate beta to be used in this valuation to get cost of equity would be:
a. 0.8
b. 1.39
c. 2.4
d. 2.7
QUESTION 6
1. Refer to Question 5 for background information.
The cost of capital that you would use in valuing this practice for the non-diversified dentist would be:
a. 12%
b. 13.85%
c. 15.6%
d. 20.2%
QUESTION 7
1. Refer to Question 5 for background information.
After cleaning up the financial statement, the adjusted EBIT(1-T) from last year that you will use for estimating future FCFs is:
a. 360,000
b. 240,000
c. 225,000
d. 180,000
QUESTION 8
1. Refer to Question 5 for background information.
The value of the practice you estimate for the non-diversified dentist would be:
a. $1.51 million
b. $1.549 million
c. $3.228 million
d. $3.443 million