Deck 7: The Purchase Alternative: How Do I Buy or Buy Into an Existing Business

Question 1

Which of the following is an "income" method of business valuation?

A)capitalization of earnings.
B)capitalized cash flow.
C)discounted cash flow.
D)all of the above.

Answer 1

D

Question 2

Explain the concept of ratio analysis.Identify several key ratios and explain what they might indicate about the health of a company..

Answer 2

Half of the marks are given for explaining that the pure numbers only have meaning within the ratios and then only when compared to industry averages.At least three ratios should be explained in terms of what they indicate about the firm.

Question 3

The "core" business refers to a firm's primary services/products and primary market segments.

Answer 3

True

Question 4

"Asset" methods of valuation are also known as "balance sheet" methods.

Question 5

On average, the risk of buying an existing business is

A)the same as for starting a brand new business.
B)higher than for starting a brand new business.
C)lower than for buying a franchise.
D)lower than for starting a brand new business.

Question 6

Cash skimming is a legal but misleading practice.

Question 7

You must know your desired "rate of return" to use the Capitalization of
Earnings method.

Question 8

The single biggest danger for the naive business buyer is:

A)overvalued assets.
B)interference from the previous owner.
C)lack of market.
D)hidden company debts.

Question 9

Setting a value for a business by using a "price multiplier" is:

A)a discounted cash flow approach.
B)a balance sheet approach.
C)a rule of thumb approach.
D)a liquidation value approach.

Question 10

"Goodwill" is classified as:

A)intellectual property.
B)licensing rights.
C)a key ratio.
D)an intangible asset.

Question 11

The critical question to ask a business seller is "what is the price?"

Question 12

Buying an independent business is on average lower risk than buying a franchise.

Question 13

It is relatively easy to change an existing negative image of a firm.

Question 14

A negotiating plan for purchasing a business will include values for:

A)a fair market price.
B)the lowest reasonable price.
C)the maximum the buyer is willing to pay.
D)all of the above.

Question 15

Typically, the business valuation method showing the lowest value is:

A)discounted future earnings.
B)net book value.
C)modified book value.
D)liquidation value.

Question 16

Which of the following is an "asset" method of business valuation?

A)liquidation value.
B)book value.
C)adjusted book value.
D)all of the above.

Question 17

The ratio that indicates the "liquidity" of a company is:

A)the current ratio.
B)debt to equity.
C)gross margin.
D)the average collection period.

Question 18

A company's financial statements are interpreted by using:

A)ratio analysis.
B)business valuation.
C)the present value method.
D)the discount rate.

Question 19

"Taking over" a company means buying more than 50% ownership.

Question 20

Real estate agents often act as intermediaries for the sale of a business.

Question 21

Explain and contrast both Asset and Income methods of business valuation giving clear examples of each.Explain how these values can be used to produce a weighted average business value.