CFA Practice Question

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CFA Practice Question

Asset-based valuations don't work well for companies with ______.

I. a high proportion of intangible assets
II. a high proportion of current liabilities
III. significant property, plant and equipment
A. I and III
B. I and II
C. I, II and III
Explanation: It is hard to estimate their market values.

User Contributed Comments 8

User Comment
gill15 Why is II not included. It specifically say Asset and Liability fair values can be very different from the values at which they are carried on the BS of company.

Therefor if we have a high proportion of this specific liability --- NOT good....

Whats goin on
langy gill15 I think they were looking for a much simpler answer... but you probably have a good case.
jnptrsn1 Wouldnt companies with high levels of PPE be the prime targets for an asset based valuation, given that you'd be looking for replacement cost? For instance, a company that consisted of a number of widget machines that are commodity producing?
gordonp87 what other assets would you use? inventory and AR? that's stupid
gordonp87 the question should be "Asset based valuations are MORE DIFFICULT for companies with:"

How can you say doing an asset based valuation doesn't work well for a company with significant TANGIBLE ASSETS?
farhan92 ^lool.

I chose A and given i will end up reviewing this question in the future i would probably stick with A.
tomalot PPE need to be adjusted to Market Value i.e. looking into depreciation etc.
ascruggs92 In the case of both intangibles and PP&E, the carrying value on the balance sheet is net of depreciation/amortization and typically does not reflect what the assets could be sold for.

II is not included because it refers to CURRENT liabilities. Current liabilities are expected to be paid w/in a year and are carried on the balance at their un-discounted face value (also known as current cost). Because CL's are on the Balance sheet at the actual dollar value the firm will have to pay to settle them, having a high CL balance does not cause problems for an asset based valuation
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