Chapter 4 Practice Questions
1. The process of relative valuation analysis, or “benchmarking,” is associated with all of the following except:
A. Comparable companies analysis
B. Forecasting cash flows
C. Removing outliers
D. Comparison with peers
2. You are assisting a client that is a manufacturer in a niche market and is seeking a comparable companies analysis. Which of the following examples provides the best “comp” for the target company?
I. A manufacturer with the same relative financial profile but from a different niche market than that of the target company
II. A manufacturer with similar financial ratios but in a different non-niche market
III. A manufacturer with a similar financial profile that distributes the same niche products as the target company
IV. A manufacturer that makes different products than the target company but is located in its geographic region
A. I and II
B. I and III
C. III and IV
D. II and III
3. To determine whether an acquisition is accretive or dilutive, subtract:
A. The buyer’s EPS from the target’s EPS
B. The combined EPS from the target’s EPS
C. The combined EPS from the buyer’s EPS
D. The buyer’s EPS from the combined EPS
4. Your customer, an investor interested in purchasing a 60% stake in a private company named Alpha, has asked you to value the company. He would like a valuation that is within 20% of the median for comparable companies. You have found that five companies from the same industry as Alpha are valued at $13 million, $47 million, $50 million, $54 million, and $111 million. Not accounting for any control premium, what would you advise the investor is an appropriate value range for his prospective investment?
A. $22 million to $39 million
B. $24 million to $36 million
C. $26 million to $40 million
D. $40 million to $60 million
5. Company A proposes to purchase the shares of Company B for $20.00 per