Circle your answers.
| T |
F |
1. |
A business has no fair market value
if it is not actually sold on the free market. (2.2) (2.4)
|
| T |
F |
2. |
The IRS provides that a fixed mathematical
formula is typically adequate for valuing a closely held business interest.
(2.3)
|
| T |
F |
3. |
The value of assets on the balance
sheet is generally not equal to their fair market value.
|
| T |
F |
4. |
The total adjusted book value of
tangible assets less liabilities is not necessarily close to the fair market
value for an established ongoing business. (2.5)
|
| T |
F |
5. |
It is possible to have intangible
values that can be realized only if the business is sold to certain types
of buyers. (2.5-2.6)
|
| T |
F |
6. |
The capitalization-of-earnings
method is based on the idea that the value of property results from its
income-producing capability. (2.6-2.9)
|
| T |
F |
7. |
The capitalization-of-earnings method
is most appropriate for a holding company that primarily holds assets for
investment. (2.6-2.9)
|
| T |
F |
8. |
If the capitalization-of-earnings
method is based on prior earnings, the IRS will generally require that at
least 15 years be examined. (2.6-2.9)
|
| T |
F |
9. |
In using the capitalization-of-earnings
method, earnings for a year in which an extraordinary event occurred should
be disregarded when making the calculation. (2.6-2.9)
|
| T |
F |
10. |
It may be appropriate to use a weighted-average-earnings
figure in the capitalization method to reflect the fact that recent earnings
are the most reliable for determining the value of the business. (2.9-2.10)
|
| T |
F |
11. |
The discounted-future-earnings
method is based on capitalization principles. (2.9)
|
| T |
F |
12. |
The DFE method is valuable because
it can provide good results with very sketchy data. (2.9)
|
| T |
F |
13. |
The DFE method is likely to be the
best method of valuing a holding company. (2.9)
|
| T |
F |
14. |
In the DFE method future-earnings
projections are discounted to their present value by using a discount rate
that is based on the rate of return on investments that have a risk comparable
to an investment in the particular business to be valued. (2.9-2.10)
|
| T |
F |
15. |
The use of comparative analysis
involves the comparison of a closely held business with another business
with a known or readily determined value. (2.12-2.13)
|
| T |
F |
16. |
There should be no discount in
the per-share value of a minority stockholding if the stock is listed on
a recognized stock exchange. (2.14-2.15)
|
| T |
F |
17. |
A majority stock interest in a
closely held corporation might be entitled to a discount for lack of marketability.
(2.15)
|
| T |
F |
18. |
A blockage discount is typically
applicable to a small minority interest in corporate stock. (2.15)
|
| T |
F |
19. |
Inventory tends to be worth more
than real property when a business is liquidated. (2.16)
|
| T |
F |
20. |
Service-type firms should probably
be valued with a technique that focuses primarily on asset values. (2.16-2.18)
|
| T |
F |
21. |
The IRS mandates that preferred
stock in a closely held corporation valued for estate tax purposes be compared
to high-grade publicly traded preferred stock with respect to several factors
that are a proxy for real value. (2.18-2.19)
|
| T |
F |
22. |
The IRS generally does not permit
the use of a simple valuation formula in a buy-sell agreement. (2.19-2.21)
|
| T |
F |
23. |
The value of the business interest
for a buy-sell agreement should include goodwill value and a measure of
the life insurance funding used with the agreement. (2.20-2.21)
|
| T |
F |
24. |
Current law requires that an ESOP
established by a closely held corporation use an independent appraiser to
value the stock held by the ESOP. (2.20-2.21)
|
| T |
F |
25. |
A valuation resulting in an understatement
of taxes may result in a substantial tax penalty that varies by the degree
of error in the valuation. (2.22)
|
| 1. |
Fair market value is a valuation
concept that applies when there are no actual market transactions.
|
| 2. |
The IRS prescribes factors for
consideration but will generally look unfavorably on a valuation determined
solely by formula.
|
| 7. |
The capitalization method would
not be appropriate because of the lack of reliable earnings figures. The
adjusted-book-value method would usually be preferable.
|
| 8. |
The IRS rulings require that at
least 5 years of prior earnings be examined.
|
| 12. |
The DFE method is only as valid
as the information that goes into it.
|
| 13. |
See the answer to question 7; the
DFE method is based on capitalization principles, and a holding company
can be valued accurately by asset valuation methods.
|
| 18. |
Blockage discounts apply only to
substantial blocks of stock.
|
| 19. |
Real property will probably receive
the closest liquidation price to fair market value of any assets of a liquidating
business.
|
| 20. |
Service firms should be valued by
a method focusing on the primary source of their value--earnings.
|
| 22. |
Formula approaches may be accepted
in a prearranged binding buy-sell agreement. The formula should be consistent
with a method appropriate for the business and be comparable to those used
in arm's-length agreements.
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