CVA Online Practice Questions and Answers

Valuation reports should contain a set of limiting conditions, and one of the typical limiting conditions is as follows:

A. Legal and estate tax factors

B. The valuation is valid only for the valuation date or dates specified herein. No other purpose is intended or should be inferred

C. Litigation over business valuation is commonplace

D. The purpose of the valuation encompasses the use to which the valuation exercise is expected to be put

When the valuation subject is a controlling ownership interest in the company, the existing total compensation less _________________compensation may be considered excess compensation.

A. Abnormal compensation

B. Overtime charges

C. Non-controlling interest

D. Normal compensation

In creating employee stock options, the issuing company usually endeavors to set the option's strike price at the fair market value of the underlying shares. When the strike price is set at the fair market value, the intrinsic value is ________, and the only value of the option is its __________.

A. One Value, market value

B. Zero value, time value

C. Current market value, zero value

D. Par value, zero value

There is an additional ____________ valuation rule, which requires that the appraiser determine whether any of the extraordinary payment rights, if exercised in conjunction with any qualified distribution rights, would lower the total value of the preferred security.

A. Lower of

B. Separate Command

C. Mandatory redemption rights

D. Lower in

______________ is defined as the sum of cash and cash equivalents plus receivables (usually all current assets listed above inventory) divided by current liabilities. For most companies, the only other significant current asset is inventory usually the slowest of the current assets is to be converted to cash.

A. Current ratio

B. Inventory turnover ratio

C. Quick (Acid-Test) ratio

D. Sales to Net Working Capital

The direction and magnitude of the company-specific risk premium may be based on an analysis of some factors. Which of the following is/are out of such factors?

A. Leverage

B. Size

C. Level of current competition

D. Industry risk

In setting the interest rate in Buy-Sell agreement, we face the problem that market interest rates fluctuate considerably over time, and we have no way of knowing at what time in the future the Buy-Sell transaction will be triggered nor what the market level of interest rates will be at that time. There are several possible approaches to dealing with this dilemma. One approach is

A. Simply to agree on an interest rate despite these uncertainties

B. To set the interest rate by trying it to some index of interest rates

C. Might be appropriate to use an interest rate index that represents securities

D. Spread out the tax on the seller's gain

If the funding of the forgoing requirements has been provided for through life insurance taken out in prior years that insurance should be reviewed as to both amount and type. The necessary amounts of insurance can change for several reasons. All of the following are those reasons EXCEPT:

A. Inflation

B. Increased value of the business

C. Makeup of business ownership

D. Potential earnings

1.

Direct capitalization

2.

Yield capitalization

These above are the two categories of valuation methods under:

A. Capitalization excess earnings method

B. Income capitalization approach

C. Market capitalization approach

D. Cost approach

A general category of taxable events relates to the amount of recognition of income (if any) associated with economic benefits received by a business. Examples of this category of taxable events include all of the following EXCEPT:

A. The valuation of property received, such as rents

B. The valuation (or the solvency/insolvency test) related to the recognition (or nonrecognition)

C. A valuation that is needed when a business (whether the business is a proprietorship, corporation or partnership)

D. A valuation when a tax payer claims a deduction