Free CVA sample questions

Correct answer: The distinction between personal and enterprise goodwill.

The core issue is segregating the value attributable to the individual founder (personal goodwill) from the value that resides within the business itself (enterprise goodwill). Because the algorithm's value is tied to the founder's ongoing personal insights, a significant portion of the firm's value may be personal goodwill, which might not be transferable or considered a divisible asset in a dispute. A key person discount is a related concept, but identifying the nature of the goodwill is the primary analytical step.

Correct answers: Heavy reliance on a single, non-contractual customer for over 60% of its revenue.; The lack of management depth, with operational control exclusively held by the 70-year-old founder.

Correct answer: False

According to NACVA Professional Standards, a Calculation Engagement results in a calculated value or range of values, not a conclusion of value. A conclusion of value can only be issued in a Valuation Engagement, where the analyst is free to apply the valuation approaches and methods they deem appropriate.

Correct answer: Underfunded pension liability

An underfunded pension liability represents a claim on the company's future cash flows that is economically similar to debt. It must be paid out to retirees and is not part of the company's core operations. Therefore, it should be subtracted from enterprise value to arrive at equity value. Accounts receivable is a current asset, deferred revenue is an operational liability, and goodwill is an intangible asset.

Correct answer: Simply average the results of the different approaches without justification.

Averaging the results of different valuation approaches is a significant error because it implies that all methods are equally reliable and relevant, which is rarely the case. The reconciliation process requires the analyst to exercise professional judgment, considering the strengths and weaknesses of each approach in the context of the subject company, and to provide a clear rationale for the weights assigned to each.

Correct answer: Unlever the betas of the public comparables, and then relever the average unlevered beta using the private firm's capital structure.

When there is a significant difference in financial leverage, the financial risk profile of the companies differs. The standard procedure is to remove the effect of leverage from the public companies' betas (unlevering), calculate an average or median unlevered beta, and then apply the private company's specific leverage to this unlevered beta (relevering). This adjusts the systematic risk measure for the subject company's unique capital structure, allowing for a more accurate cost of capital calculation.

Correct answer: Multi-Period Discounted Cash Flow (DCF) Method

For an early-stage company with negative current earnings but significant future potential, the Multi-Period DCF Method is most appropriate. This method allows the analyst to project cash flows through different stages of development (R&D, clinical trials, commercialization) and capture the expected future profitability. The Capitalization of Earnings method is unsuitable due to the lack of stable earnings. The Asset Approach would likely undervalue the company by ignoring the potential of its intangible intellectual property.

Correct answer: The after-tax amount of the gain should be subtracted from net income.

Normalization adjustments aim to present a company's financial performance as if non-recurring events had not occurred. A one-time gain from selling a subsidiary is not part of ongoing operations and inflates reported earnings. Therefore, the after-tax impact of this gain must be removed (subtracted) from net income to arrive at a normalized earnings figure that represents sustainable profitability.

Correct answer: A family-owned investment holding company with a portfolio of marketable securities and real estate.

The Adjusted Net Asset Method is most appropriate for companies whose value is primarily derived from the assets they hold, rather than the earnings they generate. An investment holding company fits this description perfectly, as its value is the sum of the fair market values of its underlying investments (securities, real estate, etc.), less liabilities. Service-based and technology companies' values are typically driven by intangible assets and future earnings, making income or market approaches more suitable.

Correct answer: Restricted stock studies.

Restricted stock studies compare the prices of publicly traded shares of a company that are freely tradable with those that are identical but restricted from sale for a period (e.g., under SEC Rule 144). This price difference is a direct measure of the lack of marketability. For a stable, dividend-paying company, these studies provide a strong benchmark, as the underlying asset is identical, isolating the marketability feature. Pre-IPO studies are more relevant for high-growth companies expecting a liquidity event.