Certified Valuation Analyst (CVA) Practice Exam

When is the adjusted net asset valuation method typically used?

1. When sales projections are declining

2. When a business has regular earnings

3. When the company is a holding company or has no earnings

4. When cash flows are highly variable

The correct answer is: When the company is a holding company or has no earnings

The adjusted net asset valuation method is typically employed when a company is a holding company or has minimal or no earnings. This valuation approach focuses on the value of a company's tangible and intangible assets, adjusted to reflect their current market values, minus any liabilities. In instances where a business does not generate regular earnings or operates primarily as a holding entity—perhaps with investments in other companies or real estate assets—the adjusted net asset method becomes particularly relevant. This is because traditional earnings-based valuation methods, such as the income approach, are less applicable due to the lack of consistent cash flows or profitability. Using the adjusted net asset method allows analysts to evaluate the underlying assets of the business effectively, providing a clearer picture of its net worth in situations where earnings are not reliable indicators of value. Other scenarios, like declining sales projections or highly variable cash flows, might necessitate different approaches, but they do not specifically correlate with the strategic use of this particular valuation method.