Question #24 - Reading 24 Private Company Valuation

Reading: Reading 24 Private Company Valuation

PDF File: Reading 24 Private Company Valuation.pdf

Page: 12

Status: Incorrect

Correct Answer: B

Your Answer: A

Shared Context

- Compared to a public company, it is most likely that as a private company Timber Industries will have greater: A) focus on the short-term. B) quality and depth of management. C) concerns related to taxes.

Question

One valuation method that Smith is considering for Timber Industries involves using a growing perpetuity formula to estimate the value of intangible assets, and then adding this value to the values of working capital and fixed assets. This method is most accurately described as the:

Answer Choices:

A. free cash flow method

B. excess earnings method

Explanation

The excess earnings method values tangible and intangible assets separately; this method is useful for small firms and when there are intangible assets to value. In the free cash flow method, a firm is valued by discounting a series of discrete cash flows plus a terminal value. In the capitalized cash flow method, a firm is valued by discounting a single cash flow by the capitalization rate.

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