50 MCQS ON EQUITY / BUSINESS VALUATION FOR IBBI VALUATION EXAMINATION PRACTICE
WITH A FOCUS ON 1 MARK
General Overview of SFA in Insolvency
Below are 50 multiple-choice questions (MCQs) with answers covering the topics for the IBBI Valuation Examination of Securities or Financial Assets.
1. Which of the following is part of an entity’s business environment analysis?
A. Cash Flow Projection
B. SWOT Analysis
C. Discounted Cash Flow Analysis
D. Business Model Assessment
Answer: B. SWOT Analysis
2. What does the “EIC” framework in business valuation refer to?
A. Economic, Industry, and Competitive Analysis
B. Earnings, Investment, and Capitalization
C. Equity, Investment, and Capital Assessment
D. Economic, Investment, and Capital Framework
Answer: A. Economic, Industry, and Competitive Analysis
3. Which of the following is NOT a part of Michael Porter’s Five Forces?
A. Bargaining Power of Suppliers
B. Threat of New Entrants
C. Business Cycle Analysis
D. Industry Rivalry
Answer: C. Business Cycle Analysis
4. What is the primary objective of a SWOT analysis?
A. To evaluate the financial health of the business
B. To identify Strengths, Weaknesses, Opportunities, and Threats
C. To forecast future business trends
D. To determine market price fluctuations
Answer: B. To identify Strengths, Weaknesses, Opportunities, and Threats
5. Which of the following is included in a PEST analysis?
A. Political, Environmental, Social, and Technological factors
B. Product, Economic, Social, and Technological factors
C. Political, Economic, Social, and Technological factors
D. Profit, Economic, Societal, and Technological factors
Answer: C. Political, Economic, Social, and Technological factors
6. What does the GE/McKinsey Matrix help analyze?
A. Market risk
B. Industry profitability
C. Business portfolio and strategic planning
D. Revenue growth
Answer: C. Business portfolio and strategic planning
7. The ADL Matrix is used for:
A. Market growth analysis
B. Industry life cycle analysis
C. Profitability analysis
D. Business product differentiation
Answer: B. Industry life cycle analysis
8. Core competencies refer to:
A. The financial strengths of a business
B. The market share of a business
C. Unique strengths or capabilities that provide competitive advantage
D. A business’s marketing strategies
Answer: C. Unique strengths or capabilities that provide competitive advantage
9. Which of the following is NOT a typical business combination?
A. Amalgamation
B. Merger
C. Consolidation
D. Forecasting
Answer: D. Forecasting
10. What is due diligence in the context of business combinations?
A. A method of assessing current market prices
B. A comprehensive investigation to evaluate risks and opportunities
C. A technique for forecasting financial performance
D. A method of employee performance evaluation
Answer: B. A comprehensive investigation to evaluate risks and opportunities
11. Which of the following is a typical source of information used during due diligence?
A. Historical financial statements
B. External market forecasts
C. Internal management reviews
D. All of the above
Answer: D. All of the above
12. In business combination analysis, the “top-to-bottom” approach involves:
A. Starting with market analysis and moving towards individual business operations
B. Starting with detailed financial analysis and moving towards a broader strategic view
C. Analyzing from a high-level strategic view to detailed financials
D. Both A and C
Answer: D. Both A and C
13. What is the purpose of a business risk assessment in a business combination?
A. To evaluate the profitability of the company
B. To assess the possible risk factors associated with the business combination
C. To analyze the competitors
D. To analyze market trends
Answer: B. To assess the possible risk factors associated with the business combination
14. Which of the following is a common technique for forecasting financial performance?
A. Moving averages
B. Cash flow projections
C. Profit and loss statements
D. Internal rate of return calculations
Answer: B. Cash flow projections
15. Which convention is typically used for forecasting cash flows in valuation?
A. End-of-year convention
B. Mid-year convention
C. Quarterly convention
D. None of the above
Answer: A. End-of-year convention
16. The Cost of Capital is typically calculated using:
A. Future market trends
B. Weighted Average Cost of Capital (WACC)
C. Historical financial data
D. External market forecasts
Answer: B. Weighted Average Cost of Capital (WACC)
17. Which of the following is included in the Capital Asset Pricing Model (CAPM)?
A. Beta, risk-free rate, and market return
B. Risk-free rate and business growth rate
C. Expected dividend yield and market return
D. Inflation rate and market return
Answer: A. Beta, risk-free rate, and market return
18. The modified CAPM adjusts the CAPM by including:
A. Specific asset risk
B. Risk-free rate
C. Dividend yields
D. Taxes
Answer: A. Specific asset risk
19. What is the Weighted Average Rate of Return (WARR)?
A. A method of assessing business strategy
B. The average return across multiple investment options, weighted by their size
C. A technique for calculating cost of capital
D. A measure of inflation adjustments in financial forecasting
Answer: B. The average return across multiple investment options, weighted by their size
20. The Internal Rate of Return (IRR) is used to:
A. Evaluate the profitability of an investment over time
B. Assess market competition
C. Calculate the total equity value
D. Forecast future earnings growth
Answer: A. Evaluate the profitability of an investment over time
21. Arbitrage Pricing Theory (APT) is:
A. A method for calculating the value of stock options
B. A model for asset pricing based on multiple factors affecting returns
C. A technique for forecasting long-term business growth
D. A method for predicting stock price movements based on historical data
Answer: B. A model for asset pricing based on multiple factors affecting returns
22. Which of the following is an example of a valuation adjustment?
A. Discount for lack of marketability
B. Forecasting future cash flows
C. Analysis of industry competition
D. All of the above
Answer: A. Discount for lack of marketability
23. Which is NOT a reason for applying a discount in business valuation?
A. Limited liquidity
B. High level of debt
C. Inconsistent financial performance
D. High growth potential
Answer: D. High growth potential
24. A premium in business valuation is typically applied when:
A. The company is experiencing declining revenues
B. The company has significant market share and a competitive advantage
C. The market is highly volatile
D. The company operates in a highly regulated industry
Answer: B. The company has significant market share and a competitive advantage
25. The concept of ‘Due Diligence’ includes assessing:
A. Legal risks
B. Operational performance
C. Financial health
D. All of the above
Answer: D. All of the above
26. Which of the following is most closely related to the concept of ‘Amalgamation’ in business?
A. Merging two or more businesses to form a new entity
B. Splitting a business into multiple entities
C. Restructuring ownership of assets without changing the entity
D. Moving a business to a new market
Answer: A. Merging two or more businesses to form a new entity
27. What is an example of a business demerger?
A. A company acquires another business
B. A company divides its operations into separate business units
C. A company merges with a competitor
D. A company restructures its debt
Answer: B. A company divides its operations into separate business units
28. What does a “merger” in business combinations generally involve?
A. One company purchasing another
B. Two companies combining to form a new entity
C. A company splitting into two distinct parts
D. A company acquiring assets from multiple businesses
Answer: B. Two companies combining to form a new entity
29. In forecasting cash flows, the Mid-year convention assumes that:
A. Cash flows are received at the end of each year
B. Cash flows are received at the middle of each year
C. Cash flows are received at the start of each year
D. All cash flows are discounted to present value
Answer: B. Cash flows are received at the middle of each year
30. What is the primary purpose of the Capital Asset Pricing Model (CAPM)?
A. To determine the market share of a business
B. To calculate the cost of debt for a company
C. To estimate the return on an asset based on its risk and the market return
D. To forecast long-term business trends
Answer: C. To estimate the return on an asset based on its risk and the market return
31. The concept of “discount rate” is used to:
A. Adjust for future inflation
B. Account for the time value of money
C. Estimate future stock prices
D. Determine tax liabilities
Answer: B. Account for the time value of money
32. What is the most important factor in determining the appropriate rate of return for an investment?
A. Inflation
B. Market interest rates
C. Risk and volatility
D. The company’s revenue growth
Answer: C. Risk and volatility
33. Which financial model helps in determining the cost of equity?
A. Capital Asset Pricing Model (CAPM)
B. Weighted Average Cost of Capital (WACC)
C. Dividend Discount Model (DDM)
D. Arbitrage Pricing Theory (APT)
Answer: A. Capital Asset Pricing Model (CAPM)
34. What type of analysis is primarily used for assessing a company’s core competencies?
A. SWOT analysis
B. PEST analysis
C. Financial analysis
D. Market share analysis
Answer: A. SWOT analysis
35. The Weighted Average Cost of Capital (WACC) is calculated by:
A. Averaging debt and equity costs proportionally to their usage in the capital structure
B. Estimating future earnings growth
C. Evaluating the risk of capital markets
D. All of the above
Answer: A. Averaging debt and equity costs proportionally to their usage in the capital structure
36. In business valuation, a premium can be applied to:
A. Minority ownership stakes
B. Control of a company or asset
C. Debt financing
D. All of the above
Answer: B. Control of a company or asset
37. What type of model is typically used for analyzing business combinations?
A. Discounted Cash Flow (DCF) model
B. Comparative Company Analysis (CCA)
C. Precedent Transaction Analysis (PTA)
D. All of the above
Answer: D. All of the above
38. Which of the following best describes a “business amalgamation”?
A. Combining several companies into one new entity
B. Merging two companies while retaining their identities
C. Selling off parts of the business
D. Changing the leadership structure of a business
Answer: A. Combining several companies into one new entity
39. Which of the following frameworks is used to analyze an entity’s business environment?
A. SWOT analysis
B. Porter’s Five Forces
C. PEST analysis
D. All of the above
Answer: D. All of the above
40. In business valuation, an adjustment for liquidity risk might involve:
A. Applying a discount for lack of marketability
B. Applying a premium for control
C. Forecasting future market conditions
D. Using a higher cost of debt
Answer: A. Applying a discount for lack of marketability
41. What is the purpose of the ADL Matrix in business analysis?
A. Analyzing market structure
B. Determining industry attractiveness
C. Evaluating a business’s competitive strength
D. Both B and C
Answer: D. Both B and C
42. The PEST analysis is used to evaluate which external factors affecting a business?
A. Political, Economic, Social, Technological
B. Product, Economic, Social, Technological
C. Pricing, Economic, Social, Technological
D. All of the above
Answer: A. Political, Economic, Social, Technological
43. In forecasting, the end-of-year convention assumes:
A. Cash flows occur at the start of the year
B. Cash flows occur evenly throughout the year
C. Cash flows occur at the end of the year
D. Cash flows are discounted monthly
Answer: C. Cash flows occur at the end of the year
44. Which of the following models adjusts for market risk and individual asset risk?
A. Capital Asset Pricing Model (CAPM)
B. Arbitrage Pricing Theory (APT)
C. Weighted Average Cost of Capital (WACC)
D. Discounted Cash Flow (DCF)
Answer: B. Arbitrage Pricing Theory (APT)
45. A business “restructuring” often involves:
A. Changing the operational focus of a company
B. Merging multiple businesses
C. Reorganizing financial or operational elements of a business
D. Expanding into new markets
Answer: C. Reorganizing financial or operational elements of a business
46. What is the purpose of a risk adjustment in valuation?
A. To account for higher expected future returns
B. To adjust for uncertainties and potential volatility in projections
C. To determine the appropriate rate of return on equity
D. To adjust for inflation in forecasts
Answer: B. To adjust for uncertainties and potential volatility in projections
47. Which of the following statements is true about the internal rate of return (IRR)?
A. It is the rate that makes the net present value (NPV) of cash flows equal to zero
B. It is always higher than the weighted average cost of capital (WACC)
C. It only applies to debt investments
D. It adjusts for market volatility
Answer: A. It is the rate that makes the net present value (NPV) of cash flows equal to zero
48. Which of the following best describes a demerger in business?
A. Combining two or more companies to form a new entity
B. Dividing a company into separate entities or units
C. Merging with another business to create a larger entity
D. Acquiring a competitor to increase market share
Answer: B. Dividing a company into separate entities or units
49. Which financial metric is commonly used to assess the risk of an investment in CAPM?
A. Return on Equity
B. Beta coefficient
C. Internal Rate of Return
D. Weighted Average Cost of Capital
Answer: B. Beta coefficient
50. A significant part of due diligence involves analyzing:
A. The company’s industry regulations
B. The company’s historical financial data
C. The company’s competitive position in the market
D. All of the above
Answer: D. All of the above
These MCQs cover a range of topics and concepts based on the IBBI Valuation Examination of Securities or Financial Assets.
