CFA 2018 Quest bank 01 Equity Valuation Valuation Concepts

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Test ID: 7440683

Equity Valuation: Valuation Concepts

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ᅞ A) ᅞ B) ᅚ C)

Questions #3-8 of 76

Morgan Bondillo, CFA, is attempting to calculate the value of Smith Sprockets. She is using a supply-side model to estimate the equity risk premium and a build-up model to estimate returns.

Based on the strategies Bondillo is using, Smith Sprockets is leastlikely to:

be closely held.

need its beta adjusted for drift. be located in a developed market.

Explanation

Supply-side models work best in developed countries, where public equities represent a significant share of the economy, suggesting that there is a relationship between macroeconomic variables and asset prices. The use of a supply-side model suggests Smith Sprockets is in a developed market. Build-up models are generally used for closely held companies for which betas are not easy toobtain. Bondillo's use of a build-up model suggests Smith Sprockets is probably closely held. Betas of publiccompanies must be adjusted for drift. However, since the use of the build-up method suggests the company is closely held and has no beta available, beta drift is probably not relevant for Smith Sprockets.

Junior analyst Quentin Haggard is struggling with a required returncalculation. His mainconcern is compensating for exchange rate fluctuations between the country where his company is based and the home country of a portfolioof stocks he is analyzing. Haggard should calculate the return in his home country's currency, then adjust:

for expected changes in the foreign country's inflation rate. the beta to account for exchange-rate fluctuations.

for expected changes in the foreigncountry's currency value.

Explanation

The proper method ofcompensating for changes in exchange rates is tocalculate the required return in the home currency, then adjust the returnusing forecasts for changes in the exchange rate.

Jaden Hoyle is evaluating the MegaFood Market chainof grocery stores and StrinsonCarburetors, a maker of automobile and industrial engine parts. MegaFood is publicly traded, while Strinson is a private company. Hoyle's firm, Janssen and

Associates, is considering the purchase of a 50% equity stake inone or both of the companies, and may be willing topurchase the companies outright. Janssenonly invests incompanies with a weighted average cost ofcapital of less than11%.

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MegaFoodMarketStrinson Carburetors

Beta 0.87

Market value of equity $173 million $993 million

Market value of debt $38 million $567 million

Marginal taxrate 42.8% 31%

Target debt/equity ratio 35% 78%

Equity risk premium 4.6%

Requiredreturn on debt 9% 6.5%

The risk-free rate of return is 5.2%. Hoyle must make recommendations regarding both MegaFood Market and Strinson Carburetors.

Hoyle does not have all of the data she needs and knows she will have to estimate some values using the data she does possess. To help estimate the required returnon equity for StrinsonCarburetors, Hoyle takes three actions:

ActionA: She selects a benchmark company, unlevers the beta of that company, then levers up the adjusted beta using Strinson's debt and equity allocation.

ActionB: She calculates a risk premium, then adds that premium to the yield to maturity of the company's long-term debt. ActionC: She prepares a supply-side multifactor model considering expected inflation, expected GDP growth, and expected changes in P/E ratio.

Before she finishes her analysis of MegaFood Market and StrinsonCarburetors, Hoyle must construct valuation models for twoother companies, Halberd Hardware, a maker of hand tools, and the Jones Group, one of the world's largest consultants. She has assembled the following information about each company.

Halberd Hardware

Gary Halberd, the founder, still owns 85% of the company, and all the rest is in the hands ofcompany directors and friends of Halberd who bought stakes 20 years ago.

Halberd Hardware has publicly traded debt.

Historical data on equity returns is sparse, as there have been very few trades over the last two decades. Halberd Hardware is headquartered in New York City.

The company plans to gopublic in the next six months, with Gary Halberd selling 30% of his ownership interest. Jones Group

Jones Group, one of the world's largest consulting companies, has beenpublicly traded for four years on the South Pittson Island stock market. Its ADR trades on the U.S. market.

South PittsonIsland is a small island nation in the Mediterranean knownfor its business-friendly tax code.

For her analysis of Halberd Hardware, Hoyle is considering three models tocalculate the estimated return. But she has already decided touse the Gordon Growth model tocalculate the equity risk premium.

As soon as Hoyle finishes determining which models are best suited to her purposes, her boss comes into the office and tells her touse the capital asset pricing model (CAPM)for all four of the companies she is reviewing. Hoyle is concerned about the effectiveness of the CAPM. With regards to Jones Group, her three main worries are:

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Question #3 of 76

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ᅚ A) ᅞ B) ᅞ C)

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Worry B:The CAPM's effectiveness because of Jones Group's ADR. Worry C:The need tocreate a beta estimate using anunlevered beta.

Assuming MegaFood Market has a required returnon equity (ROE)of13.6% and StrinsonCarburetors has a required ROEof 15.3%, what recommendation should Hoyle give her superiors at Janssen regarding each company?

MegaFood Market StrinsonCarburetors

Buy the company Buy the company Don't buy the company Buy the company Don't buy the company Don't buy the company

Explanation

To determine whether the investments fit Janssen's requirements, we must calculate the weighted average cost ofcapital. We have the target debt/equity ratio, from which we can derive the debt/capital rationeeded tocalculate WACC. Debt/capital = (debt / equity)/ (1+ debt / equity)

For MegaFood, the target debt/capital ratio is 25.93%. For Strinson, the target debt/capital ratio is 43.82%. WACC = [debt /capital × required returnon debt × (1 − tax rate)] + (equity /capital) × required returnon equity. MegaFood WACC = [(25.93% × 9% × (1 − 42.8%)] + (1 − 25.93%) × 13.6% = 11.41%.

Strinson WACC = [(43.82% × 6.5% × (1 − 31%)] + (1 − 43.82%) × 15.3% = 10.56%.

For MegaFood, WACC is 11.41%, higher than the Janssen's 11% target. For Strinson, WACC is 10.56%, below the target. Thus, Janssen should buy Strinson, but not MegaFood.

(Study Session10, LOS 31.g)

Which of Strinson's actions is least helpful in the calculationof required returnon equity for StrinsonCarburetors? Action C.

ActionB. ActionA.

Explanation

ActionA is a useful method for calculating beta for private or thinly traded companies. With that estimated beta, Hoyle has all the pieces needed tocalculate required returnusing the capital asset pricing model. ActionB reflects the bond-yield plus risk premium method for calculating required returnon equity for companies with publicly traded debt. This strategy would provide Hoyle with a target return. The model created inActionC is useful for estimating an equity risk premium. But Hoyle already has an equity risk premium. (Study Session10, LOS 31.b)

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Corporate governanceis important, but is not oneof theprimary steps.

Which of thefollowing is leastlikelyauseofequity valuation?

Projecting the value of corporate actions. Assessing Corporate governance.

Issuing fairness opinions.

Explanation

Equity valuation has manyuses including stock selection, reading the market, projecting the valueofcorporateactions, issuing fairness opinions, and valuing private businesses. Equity valuationis not specifically related tocorporate governance.

A valuation of a firm based on a review of other firms' price to earnings, price tosales, and price to return on investment ratios is an

example of a:

broad-based valuation.

relative strength valuation.

relative valuation.

Explanation

An approach using market multiplesto establish the value of the subject firm in relation tosimilar firms is an example of a relative

valuation approach.

JoeBates, CFA, has prepared a scheduleof realcash flows for his company's plant expansion. Bates generallyuses the weighted averagecost ofcapital to discount such cash flows, but inorder toaccurately determine thepresent valueof those realcash flows, he should adjust the discount rate to reflect:

the company's cost of bothdebt and equity. expected changes in the market growth rate. expected inflation.

Explanation

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ᅞ A)

Laura's Chocolates, is a maker ofnut-based toffees. Thecompany holds shares inoneofits suppliers, and wants to know what the holding period return was last year.

January 1 (purcha

s

e da

t

e)

$40

December 31

$45

Dividend paid (December

31)

$5

C

ost

o

f equi

t

y

11%

C

ost

o

f deb

t

8%

Deb

t

: equi

t

y

1:3

What is the holding period return (ignore taxes)?

25.00%.

12.50%. 22.50%.

Explanation

Types ofestimates of theequity risk premium areleastlikely toinclude: ex-ante estimates.

macroeconomic modelestimates. extemporized estimates.

Explanation

Therearefour types ofestimates of theequity risk premium: historicalestimates, forward-looking (ex-ante)estimates, macroeconomic modelestimates, and surveyestimates.

Currently the market index stands at 1,190.45. Firms in theindex areexpected topaycumulative dividends of35.71over the coming year. Theconsensus 5-year earnings growth forecast for thesefirms is expected toincrease to6.2% upfrom last year's forecast of4.5%. Thelong-term government bond is yielding 5.0%. According to the Gordon growth model, what is the equity risk premium?

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ᅞ A) ᅞ B)

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Correct Correct

Incorrect Correct

Correct Incorrect

Explanation

Wewegeis incorrect becausepurchaseofacontrolling interest justifies apremium, not a discount. Larrazais correct that lack of marketabilityand lack ofliquidityare both justifications for a discount in the valueofaposition. (Study Session12, LOS

37.k)

Ananalyst is performing anequity valuationas part of theplanning and executionphaseof theportfolio management process. The results willalso beusefulfor:

communication with analysts and investors.

benchmarking. technicalanalysis.

Explanation

Communication with analysts and investors is oneof thecommonuses ofanequity valuation. Technicalanalysis and benchmarking donot requireequity valuation. (Study Session10, LOS 30.d)

Are Wewegeand Larrazacorrect in their statements concerning absoluteand relative valuation models? Wewege Larraza

Incorrect Incorrect

Correct Correct

Correct Incorrect

Explanation

Wewegeis correct that anasset-based modelis anabsolute valuation model. Larrazais incorrect becausea dividend discount modelis alsoconsidered anabsolute, not a relative, valuation model. (Study Session10, LOS 30.f)

Are Wewegeand Larrazacorrect in their statements about appropriate valuationapproaches for a going concern? Wewege Larraza

Incorrect Correct

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ᅚ C)

ᅞ A)

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Correct Correct

Explanation

Wewegeis correct that aliquidation valuationis aninappropriate method of valuing a going concern sinceliquidation valueis based on theassumption that thefirm willceaseoperationand its assets will be sold. Larrazais correct that a dividend discount modelis anappropriate valuationapproach for a going concern since theassumptionis that thefirm continues operating and thefuture dividends arisefrom its continued operations. (Study Session10, LOS 30.b)

Which of thefollowing qualityofearnings issues is leastlikely to be directlyaddressed in thefootnotes toaccounting statements and other disclosures?

Choice of depreciation and amortization rates.

Reclassificationofnon-operating items as operating income. Sustainabilityof growth.

Explanation

Sustainabilityof growth is not anissue directlyaddressed in thefootnotes tofinancial statements, although various disclosures mayprovideinformation that has indirect implications for sustainabilityof growth. Choiceof depreciationand amortization rates and reclassificationofnon-operating items as operating incomeare both issues of management discretion that may be discerned through a detailed examinationof thefootnotes. (Study Session10, LOS 30.e)

Are Wewegeand Larrazacorrect in their statements about Graham and Dodd? Wewege Larraza

Incorrect Incorrect

Correct Correct

Correct Incorrect

Explanation

Larrazais incorrect because Graham and Dodd determined the valueofa security based onananalysis of thefirm's income statement and balance sheet. The dividend discount framework was advanced by JohnBurr Williams. Wewegeis incorrect because thefinancial statement analysis approach put forth by Graham and Dodd is theforerunner of modern relative valuation models. Williams' approach provided thefoundationfor modern dividend discount and freecash flow models, which areabsolute valuation models. (Study Session10, LOS 33)

Overestimating the growth rate of a firm in using a valuation model would result in a value that islikely to be:

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ᅚ B) ᅞ C)

ᅚ A)

ᅞ B) ᅞ C)

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too high.

toolow.

Explanation

Using an estimate for a firm's growth rate that istoo high would overstate the amountoffuture returns, resulting in a present value that is

too high.

Liquidation valueis the:

cashgeneratedby terminating a business, selling its assets, andrepaying liabilities.

market valueof the totalassets less the market valueof the totalliabilities. present valueoffuturecash flow less thepossibleliquidationcost.

Explanation

Liquidation valueis thecash generated by terminating a business, selling allofits assets, and repaying liabilities.

Which ofthe following would cause an analystto have concern about a firm'squality of earnings?

The gain on the sale of a plant was included in operating earnings.

The firm took a write offfor a recently impaired asset.

A firm bookssales when orders are shipped.

Explanation

The inclusion of gainsfrom the sale of assets asoperating income would cause the analysttoquestion the quality ofthe firm's earnings.

Inanefficient market, a mutualfund's required returnis the sameas the:

internal rate of return.

holding period return. net asset value return.

Explanation

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To determine thepresent valueofaninvestment based onafutureestimateof theinvestment's value, ananalyst should use the:

internal rate of return.

discount rate. required return.

Explanation

The discount rateis the rateused tofind thepresent valueofaninvestment.

What are three factorsthat would make a firm's accounting earningslessof a gauge offuture economic performance? Late filings,

unusually:

high amounts of loans to company insiders, and short tenure of senior management.

high amountsofloansto company insiders, and long tenure ofsenior management.

low amountsofloansto company insiders, and shorttenure ofsenior management.

Explanation

Quality of earningslooks atthe relationship between accounting earnings and economic profit potentialofthe firm. An analyst is

concerned about anything that would render accounting earningsless useful as a gauge ofthe firm'sfuture expected economic earnings.

Warning signals include late filings, unusually high amountsofloansto company insiders, and shorttenure ofsenior management.

Marina Syltus, chieffinancialofficer of Worcester Water Treatment, wants to know thecost of thecompany's capital soit can make wiser budgeting decisions. Syltus has assembled thefollowing data:

Worcester's long-term debt has a market valueof $230 million. Worcester's shares havea total market valueof $782 million. The marginal tax rateis 37%.

The required returnonequityis 14.6%.

Worcester's long-term debt has a weighted averageinterest rateof 9.4%. Tocalculate the weighted averagecost ofcapital, Syltus needs:

both the requiredreturn on debt and the target debt/equity ratio.

the target debt/equity ratio. the required returnon debt.

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Theequationfor the weighted averagecost ofcapitalis as follows:

Market valueof debt / market valueof debt and equity × required returnon debt × (1 − tax rate) + market valueofequity/

market valueof debt and equity × required returnonequity.

As such, weneed the required returnon debt to determine the WACC. However, analysts normallyassume debt and equity areat their target ratio tocalculate thecost ofcapital. If thecurrent capitalallocation does not match the target weighting, we use the target weighting. Thus, wealsoneed the target weights for debt and equity, which wecan derivefrom a target debt/equity ratio.

To determine which rateof return touseas a discount rate, ananalyst should consider the:

length of the holding period.

natureof thecash flows being discounted.

likely returnof the stock market over thenext year.

Explanation

The discount rate should correspond to the typeofcash flow being discounted. The holding period determines how we calculate thepresent value, but not the discount rate. Expected stock-market returns area suitable discount ratefor some investments, but not all.

Ben Jacobs, CFA, is attempting tocalculatea historicalequity risk premium. His first estimateuses geometric meanequity returns and long-term bond yields. His second estimateuses arithmetic mean returns and short-term bond yields. Theeffect of thechanges in methodologyin the second estimate, relative to thefirst, will:

both increase the size of the risk premium.

haveoffsetting effects.

both decrease the sizeof the risk premium.

Explanation

Switching from a geometric mean toanarithmetic mean willincrease the meanequity return. Allelse being equal, that will

increase theestimated risk premium. When theyield curve slopes upward, short-term bonds yield less thanlong-term bonds. Thus, theequity risk premium estimate will belarger when short-term bond rates areused.

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Question #36 of 76

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invested in, the controlofthe operationsofthe company still remains with the majority shareholders. Thislack of control needsto be

quantified and discounted from Gold Star's valuation.

A wise analyst will examine a valuation to determine:

ways to enhance a client's valuation.

how well it will be received by the firm's management.

itssensitivity to changes in expectations.

Explanation

The resultsof valuation models can be very sensitive to changes in the expectations incorporated in the model. Analysisof a valuation's

sensitivity tothe expectations and a review ofthe confidence the analyst has in the expectations may lead tothe use of a valuation range

rather than a pin-point value.

Analyst Charlie Howell, CFA, is trying tocalculate the required returnonequityfor Yazz Jazz, a maker of saxophones. However, Yazz Jazz operates inacountry with rapidlychanging inflation rates. Which method should Howelluse?

Build-up.

A multifactor model.

Bond-yield plus risk premium.

Explanation

The build-up method assigns premiums based oncompany sizeand other company-specificfactors. It is designed for useon closely held companies and does not takeinflationchanges intoaccount. The bond-yield method adds a risk premium to the yield on thecompany's publicly traded debt. The bond yields will reflect inflationindirectly, but the model does not easilyadjust

for inflationchanges. For taking rapid inflationchanges intoaccount, a multifactor model works the best.

A valuation of a firm based on the current market price of its assets - liabilities is referred to asthe firm's:

liquidation value.

operating value.

going-concern value.

Explanation

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ᅚ A)

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Which ofthe following two ratios are likely to be used for determining value as a function of company peer benchmarks?

Price-to-sales and debt/equity.

Return on equity and net profit margin.

Price-to-earnings and price-to-book.

Explanation

Relative valuation looks at market-based ratiosof comparable companies in the industry. Price-to-sales, price-to-book, price-to-earnings,

and price-to-cash flow are examplesof ratios used in relative valuation analysis.

Cash flows to thefirm should be discounted at the:

firm's weighted average cost of capital.

rate determined by thecapitalasset pricing model. market's estimated rateof return.

Explanation

The weighted averagecost ofcapitalis thepreferred discount ratefor cash flows to thefirm, as it reflects thecost of both debt and equity.

Ananalyst is mostlikely to review thefootnotes toafirm's financial statements tofind informationabout thefirm's:

cash flow activities.

accounting practices. operation.

Explanation

Anumber ofimportant disclosures regarding afirm's accounting practices and the basis on which incomeand expenseare recognized arecontained in thefootnotes to thefinancial statements. Theprofit and loss statement provides informationon theoperationof thefirm. The statement ofcash flows is the best sourceof dataonacompany's cash flow activities such as operating, investing and financing.

Which ofthe following is NOT a use of asset valuation?

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ᅞ B) ᅞ C)

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Projecting the value of corporate actions.

Issuing fairnessopinions.

Explanation

Asset valuation has many uses including stock selection, reading the market, projecting the value of corporate actions, issuing fairness

opinions, and valuing private businesses. Asset valuation is not used to project inflation rates.

Jaime Moreno, anew hireat the venture-capitalfund Burkhart Partners, has been tasked with assessing theappealof various potentialequityinvestments. Moreno has been given the weighted averagecost ofcapital (WACC)for each company. To determine the valueofeach company's equity, Moreno should:

calculate the equity value using the WACC, then incorporate the value of debt.

strip theeffects of debt out of the WACC, thencalculate the valueofequity. calculate thefirm valueusing the WACC, then stripout the valueof debt.

Explanation

WACCis used to valueanentirefirm. To value theequity, use the WACC tocalculate thefirm's value, then subtract the market valueofits long-term debt.

CandaceElwinceis attempting tocalculate the required returnof SkeunInc., a machine-tool manufacturer ina smallEastern Europeancountry. Elwince has solid datafrom the German market but is not sure how toaccount for theexchange-rate risk Skeuninvestors would face. Her bestchoicefor creating a risk premium is the:

difference between the inflation rates of bothmarkets.

Gordon Growth model.

difference between the bond yields of both markets.

Explanation

Thecountry spread model suggests ananalyst canapproximate the risk premium betweena developed market and an emerging market by subtracting the bond yields in the developed market from yields in theemerging market.

Equityanalyst Mason Kramer wants tocalculate the returnonequityfor anumber of stocks. Kramer values predictivepower over allother factors and is inno hurry tofinish the work. Which modelis Kramer's bestoption?

Capital asset pricing. Build-up.

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Question #44 of 76

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Explanation

Multifactor models are more robust than theother alternatives. Theyarealso morecomplex, but given Kramer's goals, a multifactor model makes the most sense.

Equityanalyst YasmineCordovaof Substantial Securities is trying to determine theinvestment appealof shares of Maxwell

Mincemeat, a smallfood company. Cordova has assembled thefollowing dataabout thecompany: Internal rateof return: 9.4%.

Maxwell's 20-year bond yield to maturity:7.9%. Maxwell's two-year bond yield to maturity:6.1%. Treasury billyield:3.4%.

Maxwell's estimated beta: 2.1.

Maxwell's 20-year bonds arepriced at $102.65. Maxwell's two-year bonds arepriced at $101.47. Estimated returnofRussell 2000Index:12.3%.

Substantial's credit analyst estimates that Maxwell's equity warrants apremium of4.9% over its bonds.

Cordova wants to make sure her estimates areaccurate, so she decides tocalculate theestimated required returnin two ways. Sheopts for the bond-yield plus risk premium method and thecapitalasset pricing model. Tocheck her work, she wants tocompare theestimates derived under each method. The difference between the required returns is closest to:

5.30%.

5.89%. 9.29%.

Explanation

Thecapitalasset pricing modeluses thefollowing equation:

Required re

t

urn = ri

s

k-free ra

t

e + be

t

a × equi

t

y ri

s

k premium

Tocalculate the required returnunder CAPM, use theRussell 2000index return, the beta, and the risk-free rate.

Required re

t

urn = 3.4% + 2.1 × (12.3% − 3.4%) = 22.09%.

The bond-yield modeluses thefollowing equation:

Required re

t

urn = yield

to

ma

t

uri

t

y

o

n l

o

ng-

t

erm b

o

nd

s

+ ri

s

k premium.

Required re

t

urn = 7.9% + 4.9% = 12.8%.

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Thereis a multistepprocess used toestimate the betaofnonpubliccompanies. What extra step must be taken touse the process on thinly traded publiccompanies?

Beta must be reduced using a liquidity factor.

Noextra step must be taken.

Beta must beadjusted to reflect debt and equitylevels.

Explanation

The sameprocedureis used for both nonpublicand thinly traded publiccompanies. Betais adjusted to reflect debt and equity

levels for both types ofcompanies. Theprocedurefor estimating betafor privateor thinly traded publiccompanies does not involvealiquidityfactor.

A valuation of a firm based on the intrinsic value ofthe firm's investment characteristics is known as an:

asset based valuation.

absolute valuation.

absolution valuation.

Explanation

An absolute valuation approach attemptsto determine the value ofthe firm based on itsspecific characteristics without regard tothe

market pricesofother firms.

Important considerationsfor choosing an appropriate approach for valuing a given company are leastlikelyto include:

Is the model consistent with the investor's IPS?

Is the modelappropriate based on thequalityand availabilityofinput data?

Is the model suitable given thepurposeof theanalysis?

Explanation

Important considerations whenchoosing a valuation modelinclude:

Does the modelfit thecharacteristics of thecompany?

Is the model suitable given thepurposeof theanalysis?

Is the modelappropriate based on thequalityand availabilityofinput data?

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stock's priceis mostlikelyusing the valuationfor:

projecting the value of corporate actions.

reading the market.

generating afairness opinion.

Explanation

Asset valuation has manyuses including stock selection, reading the market, projecting the valueofcorporateactions, issuing

fairness opinions, and valuing private businesses. Reading the market entails detecting investor's expectations about the

future valueof the variables that affect a stock's price.

In theprocess ofestimating betafor aprivatecompany, unlevering the betacalculated for thepublicly traded comparable companyaccomplishes what goal?

Isolatingmarket risk.

Establishing a baselinelevelofleverage.

Improving theaccuracyof theestimatein theevent that theprivatecompany's debt is oflow quality.

Explanation

Market risk, also knownas systematic risk, is the risk common toallassets withinacertainclass. Deleveraging the beta strips out thecompany-specific risk related to the target company's leverage, therebyisolating market risk. Betacalculations donot requirea baselinelevelofleverage. Theequationfor calculating betafor privatecompanies assumes thecompanyinquestion has high-grade debt. The deleveraging process willnot helpif theassumptionis incorrect.

Theequity risk premium is the difference between:

the required equity return and the risk-free return.

estimated equity returns and estimated bond returns. theestimated equity returnand the risk-free return.

Explanation

Theequity risk premium reflects the returninexcess of the risk-free rate that investors requirefor holding stocks. It is derived by subtracting the risk-free returnfrom the required return.

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status quo value.

operating value.

going-concern value.

Explanation

The going-concern value is based on the assumption thatthe firm will continue tooperate and the firm's value isthe present value of its

future dividends.

Whenattempting to build a risk premium into the required returns of stocks ina developing country, ananalyst should use the:

country's weighted average cost of capital.

country spread model.

modified Gordon Growth model.

Explanation

Thecountry spread modeluses datafrom a developed market, thenadjusts it using the difference between the bond yields for theemerging and developed markets. Neither a modified Gordon Growth modelnor a weighted averagecost ofcapital will do this job.

The valueofaconglomerate derived using a sum-of-the-parts valuation would leastaccurately becalled the:

liquidation value.

breakup value. private market value.

Explanation

Sum-of-the-parts valuation totals theestimated values ofeach of thecompany's business divisions as independent going concerns. The value derived using a sum-of-the-parts valuationis also sometimes called theprivate market valueor the breakup value, even when such a restructuring is not necessarilyexpected.

Valuation modelsfor equities contain estimatesof required returns and:

expected future cash flows.

an assumed continuation of past cash flows.