Certified Valuation Analyst (CVA) Practice Exam

Which of the following best describes a framework for assessing value based on specific risk factors?

1. Build-up method

2. Discounted cash flow method

3. Comparable sales method

4. Income capitalization method

The correct answer is: Build-up method

The build-up method is a systematic approach to valuing a business or asset that specifically incorporates various risk factors into the value assessment. This method allows analysts to construct an expected return by adding together different components that reflect the risk profile of the investment. The components typically include a risk-free rate, equity market premiums, and specific risk adjustments associated with the particular business. This framework is particularly useful because it acknowledges that each investment may face unique risks that are not adequately captured by general valuation methods. By tailoring the expected return to specific risk factors, the build-up method provides a more nuanced and potentially accurate assessment of value, making it a preferred choice for analysts who wish to reflect the unique characteristics of the business or asset in question. In contrast, the other methods do not explicitly frame the valuation around specific risk factors in the same tailored manner. The discounted cash flow method focuses more broadly on the present value of expected future cash flows, the comparable sales method relies on market data from similar assets without adjusting for specific risks, and the income capitalization method transforms income into value without a detailed risk assessment. Thus, the build-up method stands out as the most relevant choice for assessing value based on specific risk factors.