MANILA ADVENTIST COLLEGE

SCHOOL OF BUSINESS
Accountancy Department
nd
2 Semester A.Y. 2021-2022
Valuation Concepts and Methodologies
Midterm Exam
70 points
I. True or False

1. Enterprise-wide Risk Management allows the company to increase performance

variability.
2. Sensitivity analysis is the common methodology in valuation exercises wherein multiple
other analyses are done to understand how changes in an input or variable will affect
the outcome (i.e. firm value).
3. Going concern 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.
4. Borrowings that are contracted to be paid after 24 months is classified as current
liabilities.
5. Market dictates appropriate rate of return for investors.
6. Replacement value is an estimate of cost of reproducing, creating, developing or
manufacturing a similar asset.
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. Merger is the general term which describes the transaction two companies have their
assets combined to form a wholly new entity.
9. Brown field investment is the term used to describe businesses that are starting from
scratch.
10. Activities 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.
11. Divestiture is the sale of a major component or segment of a business (e.g. brand or
product line) to another company.
12. Synergy can be attributable to more efficient operation, cost reductions, increased
revenues, combined products/markets or cross-disciplinary talents of the combined
organization.
13. An acquisition 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.
14. Methods to value for real estate can may be different on how to value an entire
business.
15. Reproduction value is easy to validate despite not having comparable assets in the
industry.
II. Multiple Choice

1. ______________ deals with prioritizing and distributing financial resources to activities

that increases firm value. The ultimate goal is to maximize the firm value by appropriate
planning and implementation of resources, while balancing profitability and risk
appetite.
a. Financial management
b. Corporate finance
c. Risk management
d. Portfolio management
2. Reproduction value is the
a. Estimate of cost of reproducing, creating, developing or manufacturing a similar
asset internally
b. Salvage value of the asset
c. Net value reflected in the company’s financial statements
d. Cost of similar assets that have the nearest equivalent value as of the valuation
date
3. The following describes the benefits of having a sound Enterprise-wide Risk
Management system except
a. Facilitates elimination of all business risks
b. Management performance variability
c. Enhance business resilience against changes
d. Improve distribution of resource across the firm
4. The key principles in valuation refers to general concepts for most valuation techniques
put emphasis on future cash flows except for some circumstances where value can be
better derived from asset liquidation is
a. The value of a business is defined only at a specific point in time.
b. Value varies based on the ability of business to generate future cash flows.
c. Firm value can be impacted by underlying net tangible assets.
d. Market dictates the appropriate rate of return for investors.
5. Generally, the valuation process considers these steps, except __________.
a. Understanding the Business
b. Forecasting Financial Performance
c. Preparing Valuation model based on forecasts
d. All of the above
6. General term which describes the transaction two companies’ combined to form a
wholly new entity
a. Mergers
b. Acquisitions
c. Divestiture
d. Spin-off
7. 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
8. What is the imitation imposed by the use of reproduction value method?
a. It considers only the original cost of the assets at the time they are acquired
b. High professional fees of appraisers
c. Difficulty in validating reasonableness of calculated value because of limited
comparators
d. Inability to forecast future cash flows accurately because of uncertainties in the
market
9. The underlying belief is that __________ are more adept in guessing or getting new
information about firms and they can make predict how the market will react based on
this. Hence, ____________ correlate value and how information will affect this value.
a. Fundamental analysts
b. Activist Investors
c. Chartists
d. Information traders
10. One major factor linked to the value of business that reflects what is the long-term and
strategic decision of the company.
a. Current operations
b. Future prospects
c. Embedded risks
d. All of the above
11. What method is appropriate in valuing assets which do not have available external
information even after consulting with appraisers?
a. Book value method
b. Replacement value method
c. Reproduction value method
d. Liquidation value method
12. The net book value of the assets may also represent
a. Total shareholder’s equity
b. Total assets
c. Total liabilities
d. Total long-term debt
13. The following methods shows the most recent value of the firm assets in the market as
of the valuation date, except
a. Replacement value method
b. Liquidation value method
c. Reproduction value method
d. Book value method
14. The relevance of valuation ___________ largely depends on the investment objectives
of the investors or financial managers managing the investment portfolio.
a. Portfolio management
b. Fundamental management
c. Financial management
 d. Investment management
15. __________ refers to the possible range of values where the real firm value lies.
a. Risk of the unknown
b. Volatility
c. Uncertainty
d. None of the above
16. __________ refers to the value of any asset based on the assumption assuming there is
a hypothetically complete understanding of its investment characteristics.
a. Going concern value
b. Liquidation value
c. Intrinsic value
d. Fair market value
17. Separating a segment or component business and transforming this into a separate legal
entity whose ownership will be transferred to shareholders.
a. Mergers
b. Acquisitions
c. Divestiture
d. Spin-off
18. One of the advantages of using asset-based methods in valuation is
a. Relies on the ability of the firm to generate revenues in the coming years
b. Considers future cash flows that can be derived from the use of assets
c. Incorporates how the market perceives the value of the company
d. Enables stockholders to validate firm value based on the value of assets it
currently own
19. __________ 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 to gauge reasonableness of bid offers.
a. Mergers
b. Acquisitions
c. Divestiture
d. Spin-off
20. Book value also reflects the company’s
a. Historical value
b. Liquidation value
c. Intrinsic value
d. Fair market value
21. Which key principles in valuation refers to Market forces are constantly changing, and
they normally provide guidance of what rate of return should investors expect from
different investment vehicles in the market?
a. The value of a business is defined only at a specific point in time.
b. Value varies based on the ability of business to generate future cash flows.
c. Firm value can be impacted by underlying net tangible assets.
d. Market dictates the appropriate rate of return for investors
22. __________ pertains to how much a particular object is worth to a particular set of
eyes.
a. Price
b. Value
c. Cost
d. Fundamentals
23. Sale of a major component or segment of a business (e.g. brand or product line) to
another company
a. Mergers
b. Acquisitions
c. Divestitures
d. Spin-off
24. This has been defined by the industry as transactions that would yield future economic
benefits as a result of past transactions.
a. Asset
b. Equity
c. Net assets
d. Shares of stocks
25. _______________ particularly relevant for companies who are experiencing severe
financial distress.
a. Going concern value
b. Liquidation value
c. Intrinsic value
d. Fair market value
26. When computing for book value, which of the following items should be deducted the
asset value?
a. Total liabilities
b. Total shareholders equity
c. Long-term debt only
d. Ordinary share capital
27. Receivables that are collectible after 60 days are classified as
a. Current liabilities
b. Non-current liabilities
c. Current assets
d. Non-current assets
28. Which key principles in valuation refers to Market forces are constantly changing, and
they normally provide guidance of what rate of return should investors expect from
different investment vehicles in the market?
a. The value of a business is defined only at a specific point in time
b. Value varies based on the ability of business to generate future cash flows
c. Firm value can be impacted by underlying net tangible assets
d. Market dictates the appropriate rate of return for investors
29. The main basis to determine the value of the insurance premium to be paid to cover the
risk for an asset is
 a. Original acquisition cost
b. Replacement cost
c. Book value as of premium payment date
d. Acquisition cost less accumulated depreciation and impairment losses
30. The use of reproduction value method is appropriate for the following except
a. When calculating value of new technology or start-up businesses
b. Ventures with highly specialized equipment
c. Companies that are highly reliant with intangible assets
d. Businesses that use equipment supplied by third-party manufacturer
31. 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
c. Earnings per share
d. Fair market value
32. Acquisition of another business by using significant debt which uses the acquired
business as a collateral.
a. Mergers
b. Acquisitions
c. Divestiture
d. Leveraged buy-out
33. 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
c. Shows a transparent view on firm value
d. Can easily be validated by reviewing the company’s audited financial statements
34. When determining replacement cost of assets, valuators tend to consult with
__________.
a. Actuaries
b. Board of directors
c. Appraisers
d. Equity analysts
35. These are investments which are already in the going concern state, as most business
are 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
c. Blue field investments
d. Black field investments
36. The factor that affects the replacement value of an asset are the following except
a. Competitive advantage of the asset
b. Size of the asset
c. Original acquisition cost of the assets
 d. Asset age
37. Under portfolio management, the following activities can be performed through the use
of valuation techniques, except _____________.
a. Stock selection
b. Deducing market expectation
c. Both can be performed
d. None of the above
38. _________________ assumes that the combined value of two firms will be greater than
the sum of separate firms. ____________ can be attributable to more efficient
operations, cost reductions, increased revenues, combined products/markets or cross-
disciplinary talents of the combined organization.
a. Synergy
b. Control
c. Synergy and control
d. None of the above
39. One major factor linked to the value of business that shows what are the business risks
involved in running the business.
a. Current operations
b. Future prospects
c. Embedded risks
d. All of the above
40. These are persons who are interested in understanding and measuring the intrinsic
value of a firm.
a. Fundamental analysts
b. Activist investors
c. Chartists
d. Information

III. Problem Solving (5 points each)

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

Current assets P750,000

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, additional 250,000 shares were issued by Jean Company.

Requirements:
a. How much is the book value of Jean Company as of December 31, 2019?
b. How much is the book value per share in 2019?
c. How much is the net working capital as of December 31, 2020?
d. How much is the book value per share as of December 31, 2020?

-END-
Name:
ANSWER SHEET:

TEST 1
1. 11.
2. 12.
3. 13.
4. 14.
5. 15.
6.
7.
8.
9.
10.

TEST II.

1. 11. 21. 31.

2. 12. 22. 32.
3. 13. 23. 33.
4. 14. 24. 34.
5. 15. 25. 35.
6. 16. 26. 36.
7. 17. 27. 37.
8. 18. 28. 38.
9. 19. 29. 39.
10. 20. 30. 40.

TEST III. PROBLEM SOLVING