Practice Test GeeksABV - Accredited in Business Valuation Practice Test
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ABV Discount Rates & Capital Structure Flashcards

6 cards from real ABV practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

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  1. What is the Capital Asset Pricing Model (CAPM) formula for the cost of equity?

    Answer: Ke = Rf + Beta × (Rm – Rf)

    CAPM states that cost of equity equals the risk-free rate plus beta multiplied by the equity risk premium (market return minus risk-free rate).

  2. In CAPM, what does beta measure?

    Answer: A company's systematic (market) risk relative to the overall market

    Beta measures how much a stock's returns move relative to the broader market; a beta of 1.2 means 20% more volatility than the market.

  3. What is the 'build-up method' for estimating the cost of equity in a private company valuation?

    Answer: An additive model that sums the risk-free rate, equity risk premium, size premium, industry risk premium, and company-specific risk premium

    The build-up method is preferred for private companies where no observable beta exists, stacking individual risk components to arrive at a total required return.

  4. Which published source is most commonly cited for the historical equity risk premium and size premium used in U.S. business valuations?

    Answer: Duff & Phelps (now Kroll) Cost of Capital Navigator / SBBI Yearbook

    The Kroll/Duff & Phelps Cost of Capital Navigator and the historical SBBI data are the standard U.S. sources for ERP and size premium estimates.

  5. What is the 'company-specific risk premium' (CSRP) in the build-up method?

    Answer: An adjustment for idiosyncratic risks unique to the subject company not captured by other premium components

    The CSRP captures risks such as key-person dependency, customer concentration, or weak management that are not reflected in systematic risk measures.

  6. How does an increase in the risk-free rate affect the cost of equity under both CAPM and the build-up method?

    Answer: It increases cost of equity because the risk-free rate is an additive component in both models

    Both CAPM and the build-up model begin with the risk-free rate as a base; a higher risk-free rate directly increases the required return on equity.