Essentials Of Forensic Accounting 2nd Edition Michael A Crain, William S Hopwood - Solutions

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What are the potentially deleterious effects that kickbacks and off-the-books arrangements have on a company?
Search the Internet and read about how courts of law have interpreted "fair market value." Write a brief report describing your findings.
Search the Internet and read about the history of the Gordon growth model. Write a brief report describing your findings.
Search the Internet and read about which inputs of the Gordon growth model cause the results to be highly sen- sitive. Write a brief report describing your findings.
Search the Internet and find three membership organizations with business valuation certifications. Write a brief report describing your findings in terms of criteria for certification.
Search the Internet and read about the capital structure of firms in terms of theories explaining capital structure. Write a brief report describing your findings.
You are valuing some shares of stock in a large private firm that is over 50 years old and has been regularly pay- ing dividends to its shareholders. You believe the shareholders will continue to receive dividends similar to what has occurred in the past. Assume the annual dividend for 20X0 is
You are valuing a mature firm using a constant growth model. Assume the firm's annual cash flows are $$1$ million for 20X0. Required Value the firm as of January 1, 20X1, assuming the required rate of return for the firm is 8 percent, 10 percent, and 12 percent, and the expected growth rate is
You are valuing a firm experiencing high growth. You expect the firm's growth will moderate to a steady state after five years. Expected cash flows during the high-growth stage are $$2,000$ (Year 20X1), $$3,000$ (Year 20X2), $$4,000$ (Year 20X3), $$5,000$ (Year 20X4), and $$6,000$ (Year
Your boss has just assigned you to two valuation projects. However, she did not tell you the standard of value for each project before dashing out of town on a business trip. The first project is for U.S. estate tax purposes, and the second project is for a potential merger and acquisition
You work as a valuation analyst for an accounting firm that follows AICPA Professional Standards VS section 100. You are meeting with a potential new client who is interested in hiring your firm to value his business for a possible sale. The prospect wants to manage the cost for this
ABC Co. has a CAPM beta of 0.6. Its capital structure of debt and equity is $$110,000$ and $$200,000$ at book value and $$100,000$ and $$185,000$ at market value. The firm is paying an interest rate of 8 percent on its debt, and the market borrowing rate for similar debt is now 7 percent.
One can obtain a good conceptual understanding of CAPM beta by reading texts, but they cannot fully appreci- ate what it represents until they calculate a beta themselves and without relying on someone to give them the beta value. In this case, you will use real-world pricing data to calculate
When applying absolute value models, constant growth models tend to be used when.a. There is no need to forecast future cash flows.b. Required returns are constant.c. Expected cash flows are uneven.d. A firm is in a steady state.
The denominator of constant growth models of r-g is known as thea. Capital asset pricing model.b. Required return.c. Capitalization rate.d. Discount rate.
In the standard two-stage absolute value model, the numerator of the second stage is.a. A constant growth model.b. The discounting factor for the terminal period.c. The present value of the terminal period.d. A form of the capital asset pricing model.
The mid-year discounting convention.a. Addresses cash flows received throughout a time period.b. Is mathematically equivalent to a single cash-flow in the middle of a year.c. Cannot be easily applied in constant growth models.d. All of the above.
Mid-year discounting compared to end-of-year discounting results in a present value that is.a. Higher.b. Lower.c. Higher or lower, depending on the number of time periods.d. Higher or lower, depending on the required return.
Measuring net cash flow to the firm requires adjusting net income for all of the following items EXCEPTa. Changes in debt.b. Changes in working capital requirements.c. Interest expense adjusted for the tax effect.d. Capital expenditures.
The discount rate in discounted cash flow (DCF) models that determine enterprise value is.a. Cost of debt.b. Cost of equity.c. Weighted average cost of capital.d. Capitalization rate.
DCF models with cash flow to the firm in the numerator and weighted average cost of capital in the denominator produce an estimate of a firm's.a. Equity value.b. Enterprise value. c. Fair value.d. Investment value.
The discount rate in DCF models that determine the value of a firm's equity is.a. Cost of debt.b. Cost of equity.c. Weighted average cost of capital.d. Capitalization rate.
DCF models with cash flow to equity in the numerator and weighted average cost of capital in the denominator produce an estimate of a firm'sa. Equity value.b. Enterprise value. c. Fair value.d. None of the above.
In business valuation practice, what asset is generally observed for determining the risk-free return in cost of capital models to value private firms? a U.S. Treasury securities with 90 days left until maturity.b. U.S. Treasury securities with 180 days left until maturity.c. U.S. Treasury
What asset prices might be observed to price a private firm when applying the market approach?a. Fractional shares of firms trading on a public exchange.b. Merger and acquisition transactions.c. Earlier equity sales of a private firm being valued.d. All of the above.
Which of the following pairs of earnings measures estimate a firm's enterprise value and equity value when ap- plying a price multiple to the measure?a. EBITDA (enterprise value); net income (equity value).b. EBITDA (equity value); net income (enterprise value).c. EBITDA (enterprise value); EBIT
Which statement about non-operating assets is generally TRUE?a. The income approach produces valuations that include a firm's non-operating assets.b. The market approach produces valuations that include a firm's non-operating assets.c. The asset approach produces valuations that include a firm's
Arguments that pass-through tax entities have higher prices than standard corporations that pay taxes are usu- ally supported by-a. Present-value calculation.b. Application of price multiples from comparables.c. Asset-approach methodology.d. Comparing prices of pass-through tax entities to standard
Fair market value is generally the standard of value for which of the following purposes?a. Generally accepted accounting principles.b. Minority shareholder litigation.c. Strategic acquisitions.d. Taxation.
Which item is NOT a premise of value?.a. Going concern.b. Orderly liquidation.c. Forced liquidation.d. Fair market value.
Common standards of value include all of the following EXCEPT.a. Equitable value.b. Fair value. c. Fair market value.d. Investment value.
Which of the following assumptions is a hypothetical condition?a. Financial statements are assumed to be accurate.b. Valuation analysis assumes a business merger that has not yet occurred. c. Value assumes that management expertise will continue to be maintained.d. Value assumes the firm has good
Search the Internet and read about "reasonable certainty" in terms of proving business damages. Write a brief report describing your findings.
Search the Internet and read Federal Rules of Evidence 702 and 703 and summaries of the Daubert and Kumho Tire cases. Write a brief report about how these rules and cases on evidence admissibility affect experts when measuring damages.
Search the Internet and read about damages measured as either lost profits or loss of business value. Write a brief report comparing and contrasting the two approaches.
Search the Internet and read about when punitive damages are allowed in lawsuits and ways the magnitude might be determined by a jury. Write a brief report describing your findings.
Search the Internet and read about damages for unestablished businesses. Write a brief report describing your findings in terms of an injured party proving damages.
You receive a telephone call from an attorney who needs an expert witness for a business damages case. The at- torney represents the plaintiff (the injured party). You determine right away that you have no conflicts of interest with any of the parties and carry on with the initial discussion about
An attorney is interested in hiring you as a damage expert to testify in a lawsuit. The attorney represents a busi- ness and has filed suit against a bank that did not renew the firm's line of credit. The plaintiff and defendant-bank had a prior business relationship (the loan). The lawsuit claims
You have been hired in a commercial lawsuit by the defendant to analyze the plaintiff's lost profits damage claim. The plaintiff is claiming the equipment that it purchased from the defendant was faulty. The lawsuit says the problems with the equipment interfered with the plaintiff's operations,
You have been hired by a defendant who is being sued by a business that is claiming that the defendant interfered with plaintiff’s construction of a planned new tourist attraction. The plaintiff had already purchased the land for the attraction using cash, but it was unable to obtain the
Assume the information in the preceding case, and you are now the plaintiff’s expert. The trial is taking place at the end of the second year. The statutory interest rate in the jurisdiction is 5 percent, and you believe the appropriate discount rate for discounting future lost profits is 10
Evidentiary laws generally require injured parties to prove they suffered lost profits by what standard?a. Certainty.b. Reasonable certainty.c. Beyond a reasonable doubt.d. More likely than not.
In U.S. federal courts, Daubert-type evidentiary rules on the admissibility of expert testimony explicitly address the expert's. 1. Qualifications II. Methodology III. Application of the case facts a. I onlyb. II only.c. I and II.d. II and III.
General kinds of damages include which of the following? a. Causal damages.b. Liability damages.c. Compensatory damages.d. Mitigation damages.
Which of the following characteristics about punitive damages is FALSE?a. Makes an injured party whole.b. Awarded in addition to compensatory damages.c. Could be based on a wrongdoer's net worth.d. Could be based on a wrongdoer's liquidity.
In case law, "profits" in the term lost profits generally means.a. Net income.b. Pretax income.c. Cash flow. d. Whatever measure is appropriate given the facts and circumstances of a particular case.
When a mature injured firm has a sudden and permanent impairment of profits, the best compensatory damage measure is most likelya. Lost profits. b. Diminution of value. c. Unjust enrichment.d. Punitive.
When a mature injured firm has a temporary impairment of profits, the best compensatory damage measure is most likely. 3.a. Lost profits. b. Diminution of value. c. Unjust enrichment.d. Extra out-of-pocket costs.
Damage models using yardstick (or benchmark) methodologies might use all of the following observations EXCEPTa. Injured firm's performance at another location.b. Industry average performance.c. Injured firm's performance before the injury.d. Average performance of similar firms.
Unjust enrichment is a damage remedy applying which general damage model?a. Before-and-after methodologies.b. Yardstick (or benchmark) methodologies.c. Market share methodologies.d. Wrongdoer's ill-gotten profits methodologies.
When measuring lost profits damages, avoided costs are best described as. a. Variable costs. b. Fixed costs.c. Extra out-of-pocket costs.d. Costs not incurred.
Practical constraints that may limit an injured firm's lost profits include all of the following EXCEPTa. Managerial capacity.b. Legal capacity. c. Production capacity.d. Financing capacity.
In terms of calculations of prejudgment interest and present values of lost profits, an ex post approach generally applies. I. All lost profits-discount to the date of injury II. Future lost profits-discount to the date of trial III. Prejudgment interest-calculated on the present value of all lost
Using an ex ante approach, what is the amount of damages for the theft of a high school yearbook having Janis Joplin's signature using the following information? a. $$5.$b. $$5$ plus prejudgment interest to date of trial.c. $$1,000.$d. Present value of $$1,000$ as of date of theft. Date of
The 1933 U.S. Supreme Court opinion that viewed circumstances using the "book of wisdom" is best explained as a. Use all information up to the present time.b. Use only information known as of the time of injury. c. Use present lost profits discounted back to the date of injury.d. Use past
In civil litigation, mitigation is best explained as-a. A wrongdoer has the duty to minimize harm.b. An injured party has the burden of proving that its damages were caused by the wrongdoer. c. A wrongdoer must have violated some law.d. An injured party has a responsibility to act in a way that
In most jurisdictions, which of the following factors is the most important difference between business litigation and personal injury litigation?a. Time horizon for estimating losses.b. Prejudgment interest. c. Discount rate for present-value calculations.d. Preference of ex ante versus ex post
Which of the following statements about damages related to personal physical injuries is FALSE?a. Mitigation does not apply to parties with personal physical injuries.b. Damages are not taxable. c. Lost wages should be measured from after-tax wages, rather than gross wages.d. Future lost wages
What is the fundamental theory of asset pricing? An asset's price is...
What are elements of the business valuation process?
What are the three general valuation models in asset pricing?
What are the three general valuation approaches in business valuation?
What are the main premises in standard asset pricing theory?
What are the main components of the standard discounted cash flow model?
What are the two general sources from which firms obtain capital to finance their assets?
Describe the risk-return theory in finance.
Identify at least four components of the build-up model for estimating the cost of equity.
What is the equity risk premium?
In cost of capital models, risk-free assets are free from what kind of risk (provide the name of the risk and what it means)?
What are three factors that may cause measurements of the historical equity risk premium to differ from each other at a particular point in time?
What is the meaning of comparable as used in the market approach?
Identify three common price multiples using a firm's financial characteristics derived from its income statement.
What are four kinds of comparable sales transactions that might be observed in business valuation practice?
What is the general methodology of the asset approach to value a business enterprise?
Why might the asset approach be more costly than the income or market approaches for profitable operating firms?
What are two factors that practitioners tend to particularly consider when valuing fractional equity interests?
For the two factors in the preceding question, what are the names of the two related valuation adjustments?
You work for a firm providing business valuation services. If you accidentally met someone important in an elevator and had to tell them about these services, how would you describe business valuation in a short, casual encounter with someone (that is, what is your "elevator speech")?
You are a business valuation analyst meeting with a prospective client about a new project. This person asks how you go about performing your analytical work. How do you explain the income, market, and asset approaches to the prospective client in a straightforward way?
You are performing a business valuation of a private business and considering applying the income approach What general kinds of documents and other information will you likely collect for the cash flow portion of the income approach?
You are testifying as an expert witness before a jury about the valuation of a private firm that you performed. Assuming the average juror has graduated high school and has some college education, how do you explain the risk-return relation to the jury in a way they can understand?
You are explaining cost of equity models for private firms to someone and have discussed the modified CAPM. The person has an MBA and understands the Capital Asset Pricing Model. She asks you why "unique risk" is in the modified CAPM but not the standard CAPM when all firms, public and private,
You are valuing a firm using the income approach and need to determine the firm's cost of equity The equity risk premium parameter in cost of capital models is the expected equity risk premium, according to theory. How can you estimate the ERP on an expectational basis? Justify your methodology as
Your business valuation client does not understand the tax parameter in your weighted average cost of capital calculation. How do you explain it in terms that an average person can understand?
You are writing a report for a business valuation project drafting the market approach section. What would you write in your report to introduce average persons to what the market approach is about?
You are performing a business valuation project of a highly profitable manufacturer. Business valuation stan- dards require you to consider the income, market, and asset approaches and apply the ones that are relevant to a particular project. What do you consider when deciding whether to use the
Your business valuation client owns 5 percent of the equity shares in a private firm and wants to sell the shares to the firm. The client does not understand why you are using valuation discounts that lower the fair market value of the shares. How do you respond?
Visit www.aicpa.org and find the AICPA's resources for business valuation practitioners. Write a brief report on your findings.
Visit www.bvresources.com and observe the kinds of business valuation information this company offers. Write a brief report on your findings.
Find and visit the website of Professor Aswath Damodaran. Review his data sets related to business valuation and write a brief report on your findings.
Search the Internet and read about the Capital Asset Pricing Model as developed in the 1960s. Write a brief report on the history and initial development of the CAPM.
Search the Internet and find information that describes the study of corporate finance. Write a brief report com- paring and contrasting business valuation and corporate finance.
You are a financial analyst, and your boss has asked you to determine the cost of equity (required rate of return) of Apple and Ford. Assume the Capital Asset Pricing Model (CAPM) betas for Apple and Ford are 80 and 1.40, respectively. Also assume a risk-free rate of 2 percent and expected market
You are valuing a private firm and need to estimate its cost of equity. Assume a risk-free rate of 4 percent, ex- pected market return of 9 percent, the firm's CAPM beta is 1.4, a risk premium to account for the firm's size is 2 percent, and a risk premium for specific-firm factors is 3
You are valuing a private firm and need to estimate its total cost of capital. Assume the firm's cost of borrowing is 7 percent, its cost of equity is 13 percent, its tax rate is 35 percent, and the proportions of debt and equity financ- ing are 40 percent and 60 percent,
You have been asked to value an asset that has expected future cash flows of $$100$ (Year 20X1), $$200$ (Year 20X2), $$300$ (Year 20X3), $$400$ (Year 20X4), and $$500$ (Year 20X5). These cash flows occur on December 31 of each year, and no other cash flows are expected. The required rate
You are estimating the value of a private firm using the market approach. You have collected information about five comparable firms and determined their price-to-earnings ratios (P/E) are 10.5, 7.2, 12.5, 8.3, and 15.1. The net income of the private firm that you are valuing is $$1$
You are analyzing two investment opportunities for your employer. You must determine which of the investment opportunities is the best choice. Project I requires you to invest $$100,000$ on December 31, 20X0. You believe the investment will produce the cash flows on the dates shown in the
You are estimating the total cost of capital of two firms. ABC Co. has a CAPM beta of 0.6. Its capital structure of debt and equity is $$110,000$ and $$200,000$ at book value and $$100,000$ and $$185,000$ at market value. The firm is paying an interest rate of 8 percent on its debt, and

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Essentials Of Forensic Accounting 2nd Edition Michael A Crain, William S Hopwood - Solutions

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