business valuation questions and answers pdf

Business Valuation Questions And Answers Pdf

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In brief, whenever you have an important decision to make involving value. Valuation professionals use these terms interchangeably.

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Last month, we published a quick guide to answering most frequently asked accounting questions during the finance interviews, and in this issue are sharing our thoughts on how to answer valuation questions, which make up the meat of the technical questions students can be expected to answer. All students who want to successfully complete the finance recruiting process must demonstrate their basic understanding of valuation. Such questions are typically not hard — if one takes the time to prepare and understand the basic valuation concepts.

Answers to Common Business Valuation Questions

Last month, we published a quick guide to answering most frequently asked accounting questions during the finance interviews, and in this issue are sharing our thoughts on how to answer valuation questions, which make up the meat of the technical questions students can be expected to answer. All students who want to successfully complete the finance recruiting process must demonstrate their basic understanding of valuation. Such questions are typically not hard — if one takes the time to prepare and understand the basic valuation concepts.

Below we have selected the most common valuation interview questions you should expect to see during the recruiting process. This question, or variations of it, should be answered by talking about 2 primary valuation methodologies:.

This approach is the more academically respected approach. The DCF says that the value of a productive asset equals the present value of its cash flows. Discount both the free cash flow projections and terminal value by an appropriate cost of capital weighted average cost of capital for unlevered DCF and cost of equity for levered DCF. Divide equity value by diluted shares outstanding to arrive at equity value per share. The second approach involves determining a comparable peer group — companies that are in the same industry with similar operational, growth, risk, and return on capital characteristics.

Truly identical companies of course do not exist, but you should attempt to find as close to comparable companies as possible. Calculate appropriate industry multiples. Apply the median of these multiples on the relevant operating metric of the target company to arrive at a valuation.

Since the free cash flows in an unlevered DCF analysis are pre-debt i. Thus, the discount rate is the weighted average cost of capital to all providers of capital both debt and equity. The cost of debt is readily observable in the market as the yield on debt with equivalent risk, while the cost of equity is more difficult to estimate.

The cost of equity is higher than the cost of debt because the cost associated with borrowing debt interest expense is tax deductible, creating a tax shield. Additionally, the cost of equity is typically higher because unlike lenders, equity investors are not guaranteed fixed payments, and are last in line at liquidation.

There are several competing models for estimating the cost of equity, however, the capital asset pricing model CAPM is predominantly used on the street. The formula is:. Risk free rate: The risk free rate should theoretically reflect yield to maturity of a default-free government bonds of equivalent maturity to the duration of each cash flows being discounted.

In practice, lack of liquidity in long term bonds have made the current yield on year U. Treasury bonds as the preferred proxy for the risk-free rate for US companies. Market risk premium: The market risk premium rm-rf represents the excess returns of investing in stocks over the risk free rate. Beta equals the covariance between expected returns on the asset and on the stock market, divided by the variance of expected returns on the stock market.

A company whose equity has a beta of 1. A company with an equity beta of 2. Calculating raw betas from historical returns and even projected betas is an imprecise measurement of future beta because of estimation errors i. As a result, it is recommended that we use an industry beta. Of course, since the betas of comparable companies are distorted because of different rates of leverage, we should unlever the betas of these comparable companies as such:.

The answer is enterprise value. The question tests whether you understand the difference between equity value and enterprise value and their relevance to multiples. EBIT, EBITDA, unlevered cash flow, and revenue multiples all have enterprise value as the numerator because the denominator is an unlevered pre-debt measure of profitability.

Conversely, EPS, after-tax cash flows, and book value of equity all have equity value as the numerator because the denominator is levered — or post-debt. Given that negative profitability will make most multiples analyses meaningless, a DCF valuation approach is appropriate here.

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Business valuations

Home Curation Policy Privacy Policy. Objective-subjective, physical-moral-morale, and pure-speculative. There are many more questions that can be asked in the valuation interview. Questions on Business Valuations are included in every Financial Management exam. Additional free resources to help you: Consult Business Valuation Guide for business valuation essentials, tips and techniques. Give a brief.

To browse Academia. Skip to main content. By using our site, you agree to our collection of information through the use of cookies. To learn more, view our Privacy Policy. Log In Sign Up. Download Free PDF. Syed Ramzan Ali.


MOST COMMON VALUATION QUESTIONS AND ANSWERS. Q1. WHY ARE BUSINESS VALUATIONS SO IMPORTANT? A Business Valuation tells you: 1.


Answers to Common Business Valuation Questions

During your investment banking interviews, you will likely be asked a variety of questions to test your self-awareness, technical skills, competencies and industry awareness. In this article, we focus on technical skills. You should be prepared to showcase your knowledge of the broad issues around how companies are valued. Valuing companies is one of the core functions of a financial analyst.

Business Valuation

The owners of a private company wish to dispose of their entire investment in the company. What is the minimum price per share which the owners should accept for the company? These shares are traded on an efficient capital market. Recent dividends of the company are as follows:. The finance director of Ring Co has been advised to calculate the net asset value NAV of the company.

These are the words used by many ACCA financial management tutors including myself when introducing this topic to students preparing for Advanced Financial Management. The words imply that when trying to value the equity capital of a business, there is range of possible correct answers, all of which can be justified as being the most appropriate. Questions on Business Valuations are included in every Financial Management exam. The Advanced Financial Management syllabus builds on those methods tested at the lower level paper.


1. Lesson 1. Overview of Business Valuation. Question 1. What do you understand by valuation and why there is a need for valuation? Answer.


BUSINESS VALUATION MANAGEMENT FINAL GROUP -IV PAPER -18

Frequently Asked Questions

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Company Valuation Interview Questions
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