FUNDAMENTALS PRINCIPLES OF VALUATION

BFAC01

1. This refers to the relationships between interrelated products and services in the industry.
a. New Entrants
b. Industry Rivalry
c. Buyer Power
d. Substitutes and Complements

2. This refers to how suppliers can negotiate better terms in their favor.
a. Buyer Power
b. New Entrants
c. Supplier Power
d. Industry Rivalry

3. This refers to the barriers to entry to industry by new market players.

a. New Entrants
b. Substitutes and Complements
c. Industry Rivalry
d. Buyer Power

4. This refers to inherent technical and economic characteristics of an industry and the trends
that may affect this structure.
a. Assess Industry Structure
b. Competitive position
c. Understanding the Business Model

5. This refers to how the products, services and the company itself is set apart from other
competing market players.
a. Competitive position
b. Cost Leadership
c. Differentiation

6. It involves managing the firm’s capital structure, including funding source and strategies that
the business should pursue to maximize firm value.
a. Corporate Finance
b. Legal and Tax Purposes

7. Valuation is also important to businesses because of what?

a. Corporate Finance
b. Legal and Tax Purposes

8. It also enables communication about significant corporate matters between management,

shareholders, consultants, and investment analysis.
a. Intrinsic Value
b. Liquidation Value
c. Valuation Methodology
 d. Going Concern Value

9. It is the ultimate goal of corporate finance.

a. To unbalance the profitability and risk appetite
b. To increase the firm value
c. To increase risk appetite
d. To decrease the firm value

10. This value says that transferability of future cash flows is also important especially to
potential acquirers.
a. Value is influenced by transferability of future cash flows.
b. Value varies based on the ability of the business to generate future cash flows
c. The value of a business is defined only at a specific point in time
d. Market dictates the appropriate rate for investors

11. It is the value of any asset based on the assumption that there is a hypothetical complete
understanding of its investment characteristics.
a. Fair Market Value
b. Going Concern Value
c. Intrinsic Value
d. Liquidation Value

12. ______ is often used in valuation exercises involving tax assessments

a. Fair Market Value
b. Going Concern Value
c. Intrinsic Value
d. Liquidation Value

13. This value assumes that the entity will realize assets and pay obligations in the normal course
of business.
a. Fair Market Value
b. Going Concern Value
c. Intrinsic Value
d. Liquidation Value

14. It is the net amount that would be realized if the business is terminated and the assets are
sold piecemeal
a. Fair Market Value
b. Going Concern Value
c. Intrinsic Value
d. Liquidation Value

15. The following are some red flags indicating aggressive accounting, except one:
a. Disputes or frequent changes with auditors
b. Unusually high return provided by an investment
c. Excessive loans to company insiders
d. Pressure to meet debt covenants or earnings expectations
16. What is the primary goal of valuation?
a. Determining the estimated value of an asset
b. Assessing the financial performance of a business
c. Analyzing market conditions and potential future outcomes
d. Evaluating the importance or price of an investment

17. Which aspect of business assessment focuses on analyzing market trends, industry
developments, competitive landscape, technological advancements, and the company's own
capabilities and resources?
a. Current Operations
b. Future Prospects
c. Embedded Risks

18. Why is it important to include earnings, cash flow, and balance sheet forecasts when
conducting comprehensive financial forecasting?
a. They provide insights into historical financial performance.
b. They help in identifying patterns and trends for future projections.
c. They enable strategic decision-making, budgeting, and resource allocation
d. They give an idea of how the industry operates.

19. Which approach starts with a general perspective and then narrows down to a specific
understanding?
a. Top-down approach
b. Bottom-up approach
c. Generalized approach
d. Specific approach

20. Which approach starts with specific details and progresses towards a general understanding?
a. Top-down approach
b. Bottom-up approach
c. Neither, both approaches start with a general perspective
d. Both approaches follow the same process

21. It is a role of valuation that largely depends on the investment objectives of the investors or
financial managers managing the investment portfolio.
a. Legal and Tax Purposes
b. Corporate Finance
c. Portfolio Management
d. Analysis in Business Transactions

22. It is under Portfolio Management that usually “do takeovers”.

a. Activists Investors
b. Fundamental Analysis
c. Chartists
d. Information Traders

23. What are the two valuation techniques?

 a. Sell-side analyst and buy-side analyst
b. Stock Selection and Deducting Market Expectation
c. Passive and Active Investors
d. Portfolio Management and Activists Investors

24. It is under Portfolio Management that is interested in understanding and measuring the
intrinsic value of a firm.
a. Activists Investors
b. Fundamental Analysis
c. Chartists
d. Information Traders

25. It is under Portfolio Management that relies on the concept that stock prices are significantly
influenced by how investors think and act.
a. Activists Investors
b. Fundamental Analysis
c. Chartists
d. Information Traders

26. General term which describes the transaction wherein two companies had their assets
combined to form a wholly new entity.
a. Spin-off
b. Merger
c. Leveraged Buyout
d. Acquisition

27. It needs to determine the fair value of the target company prior to offering a bid price.
a. Selling Firm
b. Buying Firm

28. It should have a sense of its firm value to gauge reasonableness of bid offers.
a. Selling Firm
b. Buying Firm

29. The potential increase in firm value that can be generated once two firms merge with each
other.
a. Divesture
b. Control
c. Acquisition
d. Synergy

30. It is a common methodology in valuation exercises wherein multiple analyses are done to
understand how changes in an input or variable will affect the outcome (i.e. firm value).
a. Preparing Valuation Model based on Forecasts
b. Selecting the Right Valuation Model
c. Sensitivity Analysis
d. Situational Adjustments
FUNDAMENTALS PRINCIPLES OF VALUATION
BFAC02

1. Value pertains to how much a particular object is worth to a particular set of eyes.

2. Value, in the point of view of a corporate shareholder, relates to the difference between cash
inflows generated by an investment and the cost associated with the capital invested which
captures both time value of money and risk premium.

3. Valuation techniques may differ across different assets, but all follow similar fundamental
principles that drive the core of these approaches.

4. Merger is the general term which describes the transaction wherein two companies are
combined to form a wholly new entity.

5. Fair market value is the price expressed in terms of cash equivalents, at which property would
change hands between hypothetically willing and able to buyer and a hypothetically willing
and able seller, acting at arm's length in an open and unrestricted market, when neither is
under compulsion to buy or sell and when both have reasonable knowledge of the relevant
facts.

6. Valuation includes the use of forecasts to come up with a reasonable estimate of the value of
an entity's assets or its equity.

7. Intrinsic value refers to the value of any asset based on the assumption assuming there is a
hypothetically complete understanding of its investment characteristics.

8. Businesses treat capital as a scarce resource that they should compete to obtain and
efficiently manage.

9. Activity investors usually do "takeovers" - they use their equity holdings to push old
management out of the company and change the way the company is being run.

10. Leverage buyout is the acquisition of another business by using significant debt which uses
the acquired business as a collateral.

11. Going concerned firm value is determined under the going concern assumption. The going
concern assumption believes that the entity will continue to do its business activities into the
foreseeable future.

12. According to the CFA Institute, valuation is the estimation of an asset's value based on
variables perceived to be related to future investment returns, on comparisons with similar
assets, or, when relevant, on estimates of immediate liquidation process.

13. Value is impacted by liquidity.

14. Liquidation value is the net amount that would be realized if the business is terminated and
the assets are sold piecemeal.
15. As valuation mostly deals with projections about future events, analysts should hone their
ability to balance and evaluate different assumptions used in each phase of the valuation
exercise, assess validity of available empirical evidence and come up with rational choices
that aligns with the ultimate objective of the valuation activity.

16. This refers to the value of any asset based on the assumption that there is hypothetically
complete understanding of its investment characteristic.
a. Intrinsic value
b. Fair market value

17. This refers to the possible range of values where the real firm value lies.
a. Solvency
b. Uncertainty

18. The relevance of valuation largely depends on the investment objectives of the investors or
financial managers managing the investment portfolio.
a. Corporate finance
b. Portfolio management

19. Deals with prioritizing and distributing financial resources to activities that increases firm
value by appropriate planning and the implementation of resources while balancing
profitability and risk appetite.
a. Corporate finance
b. Risk management

20. General term which describes the transaction of two companies combined to form a wholly
new entity.
a. Mergers
b. Divestiture

21. Usually has two parties: the buying firm and the selling firm. The buying firm needs to
determine the fair value of the target company prior to offering a bid price. On the other
hand, the selling firm (or sometimes, the target company) should have a sense of its firm value
as well as to gauge reasonableness of bid offers.
a. Acquisition
b. Merger

22. Refer to the characteristics of an entity related to its financial strengths, profitability, or risk
appetite.
a. Financial value
b. Fundamentals

23. This pertains to how much a particular object is worth a particular set of eyes.
a. Value
b. Price

24. Tend to look for companies with good growth prospects that have poor management.
a. Activists investors
 b. Charitists

25. According to the CFA Institute, is the estimation of an asset's value based on variables
perceived to be related to future investment returns, on comparisons.
a. Appraisal
b. Valuation

26. They believe that these metrics imply investor psychology and will predict future movements
in stock prices.
a. Charitists
b. Information traders

27. Value is determined under the going concern assumption.

a. Liquidation value
b. Going concern value

28. Sale of a major component or segment of a business (e.g. brand or product line) to another
company is called.
a. Acquisition
b. Divesture

29. The price expressed in terms of cash equivalents, at which property would change hands
between a hypothetical willing and able buyer and a hypothetical willing and able seller,
acting at arm's length in an open and unrestricted market, when neither is under compulsion
to buy or sell and when both have reasonable knowledge of the relevant facts.
a. Fair market value
b. Intrinsic value

30. One major factor linked to the value of business that shows how is the operating performance
of the firm in the recent year.
a. Future prospects
b. Current operations
ASSET VALUE METHOD
BFAC01

1. What is the denominator in the calculation of book value per share?

a. Weighted Average outstanding shares
b. Number of issued shares
c. Number of Outstanding Shares
d. Number of Authorized Shares

2. The reproduction value method requires ________.

a. Size of the asset
b. Reproduction cost analysis
c. Age of the asset
d. Cost equivalent

3. What information can be used in the reproduction value method?

a. Asset Based
b. Limited Market
c. Benchmark
d. Convenient

4. Receivables that are collectible after 60 days are classified as

a. Current Assets
b. Non-current Liabilities
c. Current Liabilities
d. Non-current Assets

5. Cost of similar assets that have the nearest equivalent value as of the valuation date.
a. Book Value
b. Replacement Cost
c. Fair Market Value
d. Reproduction Value

6. The factor that affects the replacement value of an asset are the following except
a. Competitive advantage of an asset
b. Size of the Asset
c. Original acquisition cost of the asset

7. Enterprise-Wide Risk Management: improve management and distribution of ______ across

the enterprise.
a. Money
b. Resources
c. Equipment

8. Which of the following is true in the steps of determining value using the reproduction value
method?
a. Conduct reproduction costs analysis on all assets
 b. Adjust the book values to reproduction costs values
c. Apply the replacement value formula
d. All of the above

9. __________ is an estimate of cost of reproducing, creating, developing, or manufacturing a

a. Replacement Value
b. Book Value
c. Asset Based Valuation
d. Reproduction Value

10. Should be realized within operating cycle

a. Current Liability
b. Current Assets
c. Non- Current Assets
d. Non- Current Liability

11. Book Value can be defined as?

a. the price at which something can be sold in a particular market
b. a method for determining what an insurance company will pay you in case your
property is stolen or destroyed.
c. Value Recorded in the accounting records of a company.

12. What is the formula in getting the value of an equity using the replacement value method?
a. Replacement Adjustment / Outstanding Shares
b. (Book Value + Replacement Adjustment) / Outstanding Shares
c. (Net Book Value +- Replacement Adjustment) / Outstanding Shares
d. (Total Asset - Total Liabilities) / Outstanding Shares

13. In the replacement value method, we must adjust first the affected items and get their
replacement value to be able to get the _______ on the second step of the computation.
a. Adjusted Asset
b. Total Asset – Replacement Value
c. Net Book Value

14. What is the limitation of the book value method?

a. It is affected by subjective considerations to a market extent.
b. It assumes the existence of a liquid real estate market
c. It does not account for the full value of the net assets recorded in the books.
d. It offers convenient determination of the company value

15. Asset Value is dependent on the economic _______

a. Condition
b. Events
c. Benefits

16. _______ are investments that started from scratch.

a. Brown field
 b. Company
c. Green field

17. This will enable the valuator to determine the costs related in order to upkeep a similarly aged
asset.
a. Age of the Asset
b. Replacement Value
c. Size of the Asset
d. Competitive advantage of the asset

18. When determining replacement costs of assets, valuators tend to consult with______.
a. Actuaries
b. Board of Directors
c. Appraisers

19. Jimmy Company revealed certain information in their statement of financial position:
Current Assets = 250,000
NCA = 760,000
CL = 60,000
NCL = 350,000
How much is the book value of Jimmy Company?
a. Php 190,000
b. Php 660,000
c. Php 600,000
d. Php 1,010,000
Solution: (CA+NCA) - (CL+NCL)

20. EFG Incorporated’s financial statements for 2019 reported the following balances:
CA = Php510,000
NCA = Php1,065,000
CL = Php355,000
NCL = 1,000,000
Outstanding Shares = 500,000
How much is the book value per share of EFG Incorporated?
a. Php2.15
b. Php4.15
c. Php0.44
d. Php5.67
Solution: (Total Assets - Total Liabilities) / Outstanding Shares

21. The following data were gathered from the annual report of Thorn Products:
Market Price per share Php30.00
Number of ordinary shares 10,000
Preferred stock, 5%, P100 par Php10,000
Ordinary equity Php120,000
The book value per share is:
 a. Php30.00
b. Php15.00
c. Php14.00
d. Php12.00
Solution: Equity / Outstanding Shares

22. Intense Corporation showed the following balances in its financial records as of December 31:
Current Assets Php 880,000
Current Liabilities 500,000
Non-current Assets 3,000,000
Non-current Liabilities 1,500,000
Outstanding ordinary shares, beginning 1,200,000
Outstanding ordinary shares, ending 1,500,000

Intense Corporation issued an additional 300,000 ordinary shares on June 1 as part of its
financing plan. What is the book value per share of Intense Corporation as of December 31?
a. Php1.57
b. Php1.39
c. Php1.37
d. Php1.25
Solution:
Compute for Outstanding Shares:
Shares Jan-May (1,200,000 x 5) 6,000,000.00
Shares June-Dec (1,500,000 x 7) 10,500,000.00
Outstanding Shares (Total Shares/12) 1,375,000.00

Book Value Per Share = (TA - TL) / Outstanding Shares

ILLUSTRATION FOR NUMBERS 23-26:

Hercules Company reported the following balances as of December 31, 2019:

Current Assets Php 750,000

Non-current assets 1,400,000
Current liabilities 400,000
Non-current liabilities 500,000
Outstanding ordinary shares 1,000,000 shares

In 2020, analytics showed that current assets increased by 25%, non-current assets increased
by 20% and current liabilities by 10%. Half of the non-current liabilities were also paid. At the
beginning of 2020. An additional 250,000 shares were issued by Hercules Company.

23. How much is the book value of Hercules Company as of December 31, 2019?
a. Php1,250,000
b. Php1,650,000
c. Php2,150,000
d. Php3,050,000
 Solution: Total Assets of 2019 - Total Liabilities of 2019

24. How much is the book value per share in 2019?

a. Php3.05
b. Php2.15
c. Php1.65
d. Php1.25
Solution: Book Value Per Share of 2019 (answer in previous question)
Divide: Outstanding Shares

25. How much is the net working capital as of December 31, 2020?
a. Php247,500
b. Php350,000
c. Php497,500
d. Php937,500
Solution:
Current Assets (750,000 x 125%) 937,500.00
Current Liabilities (400,000 x 110%) (440,000.00)
Net Working Capital 497,500.00

26. How much is the book value per share as of December 31, 2020?
a. Php1.93
b. Php1.54
c. Php1.25
d. Php1.00
Solution:
Current Assets (750,000 x 125%) 937,500.00
Non-current Assets (1,400,000 x 120%) 1,680,000.00
Total Assets 2,617,500.00
Current Liabilities (400,000 x 110%) 440,000.00
Non-current Liabilities (500,000 / 2) 250,000.00
Total Liabilities 690,000.00
Book Value (TA-TL) 1,927,500.00
Outstanding Shares (1,000,000+250,000) 1,250,000.00
Book Value Per Share 1.54
ILLUSTRATION FOR NUMBERS 27-28:

Samsan Company, a start-up company which developed its own data imaging algorithm, is trying to
estimate the value of their company their latest financial statements showed the following
information:

Current assets Php1,250,000

Non-current Assets 4,000,000
Current Liabilities 850,000
Non-current Liabilities 250,000

Part of their non-current assets is a patent for the technology they developed which has a recorded
balance of 2,500,000. An equity investor is looking at buying the company.

Samsan Company tried to trace back the costs of developing the patent and determined that the
reproduction cost of that particular patent is at P3,000,000.

27. What is the book value of Samsam Company?

a. Php5,250,000
b. Php5,000,000
c. Php4,150,000
d. Php4,000,000
Solution: TA - TL

28. What is the reproduction value of Samsam Company?

a. Php5,000,000
b. Php4,650,000
c. Php4,150,000
d. Php4,000,000
Solution:
Current Assets 1,250,000.00
Non-current Assets (4M - 2.5M + 3M) 4,500,000.00
Total Liabilities 1,100,000.00
Reproduction Value (TA-TL) 4,650,000.00

ILLUSTRATION FOR NUMBERS 27-28:

Caramel Company showed the following balances in its balance sheet as at year-end:

Current assets 450,000

Non-current Assets 1,150,000
Current Liabilities 300,000
Non-current Liabilities 900,000
Weighted average of outstanding shares 120,000shares

According to the appraisal, 60% of the non-current assets can be replaced at 150% of their
reported book value while the remaining balance of the non-current assets has a replacement value
of 65%. Reported balance of other items approximates their replacement value.
29. How much is the book value per share of caramel company?
a. Php3.33
b. Php4.87
c. Php13.33
d. Php14.87
Solution: (TA - TL) / Outstanding Shares

30. How much is the replacement value of Caramel Company at year end?
a. Php584,000
b. Php400,000
c. Php1,784,000
d. Php1,600,000
Solution:
Compute for NCA:
Unadjusted NCA 1,150,000.00
60% of NCA x 150% replacement Value 1,035,000.00
40% of NCA x 65% replacement Value 299,000.00
Total NCA 1,334,000.00

Current Assets 450,000.00

Non-current Assets (Replacement Value) 1,334,000.00
Total Liabilities 1,200,000.00
Replacement Value (TA-TL) 584,000.00
ASSET VALUE METHOD
BFAC02

1. Asset has been defined by the industry as transactions that would yield future economic
benefits as a result of past transactions

2. Brown field investment is the term used to describe businesses that are starting from scratch

3. Enterprise wide risk management allows the company to increase performance variability

4. Risk identification is important to allow investors to assess impact of the risk to their
investment

5. Brown field investments are easier to evaluate as information is already available from prior
years

6. Book value is the term used to describe the value derived from the amounts reflected in the
financial statements

7. Borrowings that are contracted to be paid after 24 months is classified as current liabilities

8. Equipment is classified as non current assets

9. Replacement cost is the cost of similar assets that have the nearest value as the valuation
date

10. Replacement value is affected by asset age, size and its competitive advantage

11. Insurance companies use replacement value as basis to determine the appropriate insurance
premium to be charged to the clients

12. For real properties, it is more important to look at the age of the asset than its size.

13. Replacement value method is superior to book value as it gives an indication of true value of
the firm as of the valuation date

14. Replacement value is an estimate cost of the of reproducing, creating, developing or

manufacturing a similar asset

15. If there is no comparable assets found in the market, it is more appropriate to use
reproduction value method

1. Receivables that are collectible after 60 days are classified as

a. Non-current Liabilities
b. Current Assets

2. The net book value of assets may also represents

a. Total shareholder's equity
b. Total assets
3. Book value also reflects the company's
a. Historical value
b. Fair market value

4. Using the book value has its advantages, the following statements provide them except
a. Information necessary for computation can be quickly gathered
b. Validated by a third-party expert with knowledge on how much assets are sold in the
open market

5. Cost of similar assets that have the nearest equivalent value as of the valuation date.
a. Book value
b. Replacement cost

6. The factor that affects the replacement value of an asset are the following except
a. Competitive advantage of the asset
b. Original acquisition cost of the asset

7. Reproduction value is the

a. Estimate of cost of reproducing, creating, developing or manufacturing a similar asset
internally
b. Salvage value of the asset

8. What is the limitation imposed by the use of the reproduction value method?
a. High professional fees of appraisers
b. Difficulty in validating reasonableness of calculated value because of limited
comparators

9. The following methods shows the most recent value of the firm assets in the market as of the
valuation date, except
a. Reproduction value method
b. Book value method

10. When computing for book value, which of the following items should be deducted the asset
value?
a. Total liabilities
b. Total shareholders equity

11. These are examples of methods under this asset based valuation, except:
a. Liquidation Value Method
b. Income Value Method

12. This has been defined by the industry as transactions that would yield future economic
benefits as a result of past transactions.
a. Equity
b. Asset

13. These are investments which are already in the going concern state, as most business are in
the optimistic perspective that they will grow in the future because of historical proof
 a. Green Field Investments
b. Brown Field Investments

14. When determining replacement costs of assets, valuators tend to consult with
a. Appraisers
b. Equity Analysts

15. This refers to the value recorded in the accounting books of a firm as reflected in the audited
financial statements.
a. Exit Value
b. Book Value