Valuation of Shares and Goodwill

MCQS On Valuation Of Shares And Goodwill

1. When valuing goodwill, which of the following methods is used?
   1.   Weighted profit method
   2.  Weighted profit method
   3. Super profit method
   4.  All of the above

Answer: (D)

Explanation: By comparing the company’s market capitalization to the book value of its net identifiable assets, an implied fair value of goodwill may be computed.

2. What is the basic objective of stock valuation?
   1.  Employees can buy shares and keep them for the duration of their employment.
   2.   To buy a block of shares in order to gain control of the company
   3. To make a loan backed by stock as collateral.
   4.  All of the above

Answer: (D)

Explanation: The purpose of stock valuation is to forecast future market values so that investors may schedule their sales and purchases of investments. The stock valuation basics strive to value the stock’s intrinsic value, which reflects the company’s profitability and future market worth.

3. Which of the following variables has no impact on a company’s goodwill?
   1. The managerial effectiveness of a corporation.
   2. Nature of business
   3. Customers’ locations are determined by a company’s customers.
   4. None of the above

Answer: (C)

Explanation: Higher purchasing prices are attracted to companies with a lot of goodwill. If the goodwill value is written down after the acquisition, it could mean the takeover isn’t going as intended.

4. On an annuity basis, goodwill is computed by
   1.  The discounted value of predicted future benefits is added together.
   2. Expected rate of return divided by super profit.
   3.  multiplying the number of years purchased by the average profit.
   4. The number of years bought multiplied by the super-profits.

Answer: (A)

Explanation: Goodwill is computed by calculating average super profit as the value of an annuity over a period of time. Discounting at the provided rate of interest yields the present value of this annuity.

5. Goodwill is determined on a capitalization based on
   1. by multiplying the number of years purchased by the average profit.
   2. The number of years purchased multiplied by the profit margin
   3.  The discounted value of predicted future benefits is added together.
   4. Taking the total profit and dividing it by the predicted rate of return

Answer:(D)

Explanation: One of the ways of valuing goodwill is the capitalization method. The value of goodwill is computed using this technique by subtracting actual capital used from the capitalization value of average profits based on the usual rate of return.

6. Goodwill is referred to …………..
   1.  A fixed asset
   2.  Realizable assets
   3.  An intangible asset
   4.  All of the above

Answer: (D)

Explanation: Goodwill is an intangible asset associated with the purchase of a company by another company. The percentage of the purchase price that is larger than the total of the net fair value of all assets purchased and liabilities assumed in the transaction is referred to as goodwill.

7. Goodwill is paid for procuring
   1. Present benefit
   2.  Past benefit
   3. Future benefit
   4.  None of the above

Answer: (C)

Explanation: Goodwill is computed by multiplying previous average profits by the number of years predicted to generate profits. Goodwill is a fee paid in exchange for a future benefit.

8. The term “super profit” means_______
9. 1. Extra profit earned
   2. Profit earned in abnormal circumstance
   3. Excess of average profit over normal profit
   4. Average profit earned by similar companies

Answer: (C)

Explanation: Super profit is the difference between the predicted future profit and the regular profit. It is a way of evaluating a company’s excess earnings. The value of superprofits is multiplied by a specific number, which is the number of years from the purchase.

9. The term normal profit relates to ___________
10. 1.  Average profit earned
    2.  Excess of average profit over super profit
    3.  Profit earned in abnormal circumstance
    4. Profit earned by similar companies in the same industry

Answer: (D)

Explanation:A profit figure that considers both explicit and implicit costs is known as normal profit. It can be considered in terms of monetary gain. Normal profit occurs when the differential between a company’s total revenue and its total explicit and hidden costs equals zero.

10. While computing the amount of capital to be employed________
11. 1.  Tangible trading assets should be taken into consideration
    2. Fictitious assets should be taken into consideration
    3.  Unrecorded assets should be avoided from consideration
    4. Assets written off are to be taken at original value as per books.

Answer: (A)

Explanation: Fixed assets, stocks, trade receivables, and accounts payable are the most significant things to identify on a balance sheet when doing a capital-employed analysis.

11. A partly paid equity share’s value is equal to:
12. 1.  the value of a fully paid share divided by the face value and multiplied by the paid-up value per share
    2.  the value of a completely paid share less the value of a partly paid share. Unpaid calls per share
    3.  The value of a fully paid share is less than the value of an unpaid call.
    4.  None of the above, divided by face value and multiplied by paid-up value per share.

Answer: (B)

Explanation: A partly paid share is a company’s stock that has only been paid in part compared to the full issuance price. This means that you and I, as investors, can purchase these shares without paying the full issue price. When the corporation makes calls, the balance for partially paid shares might be paid in installments.

12. The value of a share under the net asset approach is determined by ______.
13. 1.   accessible net assets to equity owners
    2.  net assets accessible to holders of debentures
    3.  the value of preference shareholders’ net assets
    4.  none of the preceding

Answer: (A)

Explanation: The worth of the company’s net assets must be determined first under the net asset approach. The net assets must then be divided by the number of shares to get the value of each share.

13. __________ is another term for net asset value.
14. 1.  the value of the asset backing
    2. the intrinsic worth
    3.  the value of liquidation
    4.  all the above

Answer: (D)

Explanation: An investing company’s “net asset value,” or “NAV,” is the sum of its total assets minus its total liabilities.

14. A share’s fair market value is equal to ________.
15. 1. Only the intrinsic worth
    2. Only the yield value
    3. average of the intrinsic and yield values.
    4. None of the above

Answer: (C)

Explanation: With slight changes, fair value is fairly similar to fair market value. It’s most commonly utilized in financial reporting or legal cases. The true value of a firm or asset, as opposed to its market value, is called intrinsic value. It’s also known as “basic value.”

15. Yield value is subject to ……………………….

1. 1. Gross profits
   2. Operating profits
   3. Net profit
   4. Losses

Answer: (C)

Explanation: The earnings made and realized on an investment over a specific time period are referred to as yield. It’s stated as a percentage based on the amount invested, the current market value, or the security’s face value.

16. The formula for estimating goodwill under the capitalization method is
17. 1. Super profits multiplied by the rate of return.
    2. Profits on average compounded by the rate of return
    3. The rate of return divided by the super-profits
    4. Profits on average divided by the rate of return

Answer: (C)

Explanation: The capitalization rate is computed using the formula net operating income divided by the asset’s current market value. The capitalization rate can be used to assess the riskiness of a potential investment; a high capitalization rate indicates greater risk, while a low capitalization rate indicates reduced risk.

17. When there is a change in the present partners’ relationship that leads to the previous agreement being terminated and a new agreement being formed, this is referred to as a breakup.
18. 1. Partnership Revaluation
    2. Partnership Reconstitution
    3. Partnership Realization
    4. None of the above

Answer: (B)

Explanation: Reconstitution of the partnership firm refers to any change to the current agreement. As a result, the existing agreement expires, and a new agreement is formed based on the changed relationship and composition of the partnership firm’s members.

18. The following is the amount of goodwill paid by the new partner:
19. 1. for the capital payment
    2. in exchange for a profit split
    3. for asset acquisition
    4. None of these apply.

Answer: (B)

Explanation: The existing partners share the sacrifice ratio when the entering partner brings his share of goodwill in cash.