Financial Analysis & Valuation Flashcards

When valuing a closely held business interest for charitable gift planning, which factors does Revenue Ruling 59-60 require consideration of?

Answer: Eight factors including earnings capacity, dividend-paying capacity, goodwill, and prior arm's-length sales of the stock

Revenue Ruling 59-60 identifies eight factors for valuing closely held business interests including the nature of the business, economic outlook, book value, earnings capacity, dividend-paying capacity, goodwill, prior sales, and market prices of comparable companies.

A donor wishes to contribute a limited partnership interest to a charitable organization. Which concern is most important for the CAP advisor to address first?

Answer: Whether the partnership agreement permits transfer of the interest, and whether the charity can hold it without incurring UBTI

Limited partnership interests often have transfer restrictions and may generate UBIT for the charitable recipient—these structural issues must be resolved before the gift can proceed.

In the context of charitable gift annuities, the exclusion ratio determines:

Answer: The percentage of the annuity payment that is a tax-free return of the donor's basis

The exclusion ratio for a charitable gift annuity is the portion of each annuity payment that represents a tax-free return of the donor's investment, calculated by dividing the investment in the contract by the expected return.

A donor-advised fund sponsor must exercise which control over DAF assets after the donor's contribution?

Answer: The sponsor has exclusive legal control over DAF assets and must independently evaluate grant recommendations

The DAF sponsor (public charity) has exclusive legal control over contributed assets; it evaluates donor grant recommendations and may reject those that do not satisfy charitable purposes—this control is what makes the donor's contribution irrevocable and immediately deductible.

Which financial metric is most relevant when assessing whether a nonprofit is overly dependent on a single funding source?

Answer: Revenue concentration ratio—the percentage of total revenue from the largest source

Revenue concentration measures what percentage of total revenue comes from any single source; high concentration signals financial vulnerability to that source's withdrawal.

The concept of program-related investments (PRIs) allows private foundations to:

Answer: Make loans or equity investments in charitable projects that count toward the 5% minimum distribution requirement

PRIs are investments whose primary purpose is to accomplish charitable objectives; they count toward the foundation's 5% minimum distribution requirement and are not treated as jeopardizing investments.