NACVA CVA Exam with complete
solutions
History & Nature, Economy & Industry, Book Value, Earnings Capacity, Dividend
Paying Capacity, Intangibles, Prior Sales, Price in the market - ANSWER-
HEBEDIPP
Eliminate data older than 5 years, eliminate data 10x larger or smaller revenues,
eliminate data 10x larger or smaller earnings or EBITDA - ANSWER- 5/10/10 rule
specific tax matters, such as the valuation of businesses or equity interests. -
ANSWER- The Internal Revenue Service has substantially contributed to
valuation theory and is regarded by many as a primary theoretician in the field of
valuation of closely held businesses. Revenue Rulings do not have the force of
law, but they do present the position of the IRS
on:
(1) Issued in 1920
(2) Resulted from the enactment of Prohibition
(3) Issued as the result of the enactment of Prohibition, to assist taxpayers in
determining the amount of "intangible value" lost by businesses previously
involved in the alcoholic beverage industry - ANSWER- ARM 34 (IRS)
(1) Goodwill exists if a business has excess earnings
(2) Goodwill value is determined by capitalizing the excess earnings - ANSWER-
ARM 34 introduced two key concepts:
(1) What are excess earnings?
ARM 34 says that "excess earnings" are the earnings of the company in excess of
earnings above the norm of companies with similar activities and size.
,(2) What is an appropriate capitalization rate?
ARM 34 failed to define an appropriate capitalization rate. However, it gave
approximate ranges for tangible and intangible assets. - ANSWER- ARM 34 also
introduced two key problems:
Valuing Closely held Stock
(1) Issued in 1959
(2) Single most important piece of valuation literature
(3) Outlined methods and factors to be used in valuing closely held businesses
(4) Estate and Gift Taxes
(5) Is widely accepted for tax and non-tax purposes
(6) Provided for a series of valuation formulas or methods: (a) The various
formulas are not alternatives to one another; all of its methods should at least be
considered, (b) Many formulas are tied to "earnings" rather than "excess
earnings", (c) Earnings are multiplied or capitalized by certain industry factors or
"public"
company comparable factors
(7) Realized that due to certain circumstances other methods could be used
(8) Recognized that if "comparable" factors are not available, other methods
could be used
(9) The key 59-60 methods are: (a) Comparable price methods (just a few of the
many), i) Price/earnings ratio, ii) Dividend paying capacity, iii) Pric - ANSWER- RR
59-60 (IRS)
(1) Modified Revenue Ruling 59-60
(2) Deleted a portion of Section 4.02(f) of Revenue Ruling 59-60
(3) Concerned with separately valuing tangible and intangible property: "In some
instances it may not be possible to make a separate appraisal of the tangible and
intangible assets of the business. The enterprise
has a value as an entity. Whatever intangible value there is, which is supported
by the facts, may be measured by the amount by which the appraised value of the
tangible assets exceeds the net book value of such assets." - ANSWER- RR 65-
193 (IRS)
(1) Issued January 1, 1966
(2) Provided information and guidelines relative to appraisals of contributed
property for federal income tax purposes
(3) Required properly prepared appraisals by qualified individuals
(4) Provided guidelines regarding proper appraisal reports - ANSWER- RR 66-49
(IRS)
,Sometimes referred to as the "excess earnings method" or "treasury method",
this Ruling introduced a "formula" method to determine values for intangibles,
specifically goodwill. Required that adjusted net assets be considered in deriving
the total value of a business and discussed the possible use of the following
ranges of capitalization rates (generally assumed to be after-tax):
(1) Tangible Assets 8% to 10%
(2) Intangible Assets 15% to 20% - ANSWER- RR 68-609 (IRS)
(1) Issued in 1977
(2) Amplified Revenue Ruling 59-60 relative to discounts for lack of marketability
(3) Specifically recognized criteria for determining discounts for lack of
marketability
(4) Provided direction on discounts for publicly traded securities restricted under
federal securities laws - ANSWER- RR 77-287 (IRS)
(1) Issued in 1981
(2) Added to Revenue Ruling 59-60
(3) Stated that: "Absent family discord, no minority interest discount will be
available for blocks of stock transferred to family members when the family as a
group owns a controlling interest in the company."
(4) Superseded by Revenue Ruling 93-12 - ANSWER- RR 81-253 (IRS)
(1) Amplified Revenue Ruling 59-60
(2) Specified factors to be considered on valuing common and preferred stock for
gift and other tax purposes in a recapitalization of a closely held business -
ANSWER- RR 83-120 (IRS)
(1) Issued in 1993
(2) Superseded Revenue Ruling 81-253
(3) Stated that: "A minority discount will not be disallowed solely because a
transferred interest, when aggregated with interests held by family members,
would be a part of a controlling interest." - ANSWER- RR 93-12 (IRS)
(1) Issued in 1998
(2) Sets forth a methodology to value certain compensatory stock options
(3) Followed similar approach, as does FASB 123 - ANSWER- RR 98-34 (IRS)
States for estate, gift and other tax purposes, the value of any property is
determined without regard to any right or restriction relating to the property. Key
issues for a valuation analyst to be aware of:
, (1) An exception exists for any option, agreement right or restriction which, (a) is
a bona fide business arrangement, (b) is not a device to transfer property for less
than its fair market value, (c) is comparable to similar arm's length arrangements,
and (d) these safe harbors must be independently satisfied.
(2) The mere showing that a right or restriction is a bona fide business
arrangement is not sufficient to establish the absence of a device.
(3) Each right or restriction must be tested separately.
(4) A right or restriction is considered to meet the three 'safe harbor'
requirements if more than 50 percent of the applicable property is owned by
individuals who are not members of the transferor's family.
(5 - ANSWER- IRS Code §2703
a. Property to be valued
b. Interest to be valued
c. Effective valuation date
d. Purpose of valuation
e. Use of valuation
f. Statement of value
g. Standard and definition of value
h. Assumptions
i. Limiting conditions
j. Scope limitations
k. Restrictions, agreements and other factors that may influence value
l. Sources of information - ANSWER- Valuators should define the assignment and
determine the scope of work necessary by identifying the following:
Asset, Income, Market - ANSWER- Three valuation approaches:
reflect the appropriate asset value, income, cash flows and/or benefit stream, as
applicable, to be consistent with the valuation methodologies selected by the
valuator. - ANSWER- Historical financial statements should be analyzed and, if
necessary, adjusted to:
(1) The nature of the business
(2) The risk involved
(3) The stability or irregularity of earnings
(4) Other relevant factors - ANSWER- The valuator will determine an appropriate
discount and/or capitalization rate after taking into consideration:
A method within the asset approach whereby all assets and liabilities (including
off-balance sheet, intangible, and contingent) are adjusted to their fair market
