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.

Accepted Answer

Capitalization of earnings, capitalized cash flow, and discounted cash flow are all methods that are used to determine the value of a business based on its expected income or cash flow. Therefore, the correct choice is D - all of the above.

Question 2

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

Accepted Answer

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.

Accepted Answer

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

Question 4

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

Accepted Answer

Asset methods of valuation focus on valuing a company based on its tangible and intangible assets, which are recorded on the balance sheet. Therefore, they 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.

Accepted Answer

Buying an existing business has lower risks than starting a brand new business because the business already has an established customer base, reputation, and track record. The new owner can also potentially benefit from existing contracts, relationships with suppliers, and trained employees.

Question 6

Cash skimming is a legal but misleading practice.

Accepted Answer

Cash skimming is not legal, it is a form of fraud where cash is stolen before it is recorded in the accounting system. It is a criminal activity that can result in penalties and legal action.

Question 7

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

Accepted Answer

In the Capitalization of Earnings method, the desired rate of return is used to calculate the present value of future earnings. Without knowing the desired rate of return, this method cannot be accurately applied.

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.

Accepted Answer

The answer of The single biggest danger for the naive...

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.

Accepted Answer

Setting a value for a business by using a "price multiplier" is a rule of thumb approach. This method involves applying a multiple to a certain financial metric, such as revenue or earnings, to estimate the value of the business. While this approach is not as rigorous or precise as other valuation methods, such as discounted cash flow or balance sheet approaches, it can be a useful starting point for getting a rough estimate of a business's value.

Question 10

"Goodwill" is classified as:
A)intellectual property.
B)licensing rights.
C)a key ratio.
D)an intangible asset.

Accepted Answer

Goodwill is an intangible asset, meaning it is a non-physical asset that adds value to a company but cannot be touched, like brand recognition or reputation.

Question 11

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

Accepted Answer

While price is certainly an important factor, it is not the critical question to ask a business seller. Before discussing price, it is important to ask a variety of other questions to determine if the business is a good fit for your needs and goals. These may include questions about the business's financials, operations, customer base, industry trends, and competition. Only once you have a clear understanding of the business's strengths and weaknesses should you move on to discussing price.

Question 12

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

Accepted Answer

Buying a franchise comes with a proven business model, established brand recognition, and ongoing support from the franchisor. This can make it a lower risk option compared to starting an independent business. However, there are also strict guidelines and regulations that must be followed, as well as ongoing fees and royalties to the franchisor. Buying an independent business can have more flexibility and control, but it also means creating a business plan from scratch and taking on all the risk independently.

Question 13

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

Accepted Answer

It is not relatively easy to change an existing negative image of a firm. It usually requires a lot of effort, time, and resources to rebuild trust and credibility with stakeholders. It involves a comprehensive strategy that addresses the root causes of the negative image and communicates the firm's commitment to improving its performance and behavior.

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.

Accepted Answer

A negotiating plan for purchasing a business should include all of the above values. A fair market price will help ensure that the buyer is not overpaying for the business. The lowest reasonable price will be the starting point for negotiations and will help the buyer set a maximum price that they are willing to pay. The maximum price the buyer is willing to pay is the ultimate limit and should be established beforehand to avoid overspending.

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.

Accepted Answer

The liquidation value method typically shows the lowest value because it assumes that the business is being sold in a distressed situation, where assets are sold quickly and not at full value. This method does not take into account the value of intangible assets such as goodwill or the potential for the business to generate future earnings. Therefore, it tends to result in a lower valuation than other methods.

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.

Accepted Answer

All the options listed are asset-based methods of business valuation. Liquidation value assesses the net cash that would be received if all assets were sold and liabilities paid off. Book value is derived from the financial statements and represents the value of the company's equity. Adjusted book value modifies the book value to reflect assets and liabilities at their fair market value rather than their cost on the books.

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.

Accepted Answer

The current ratio, which measures a company's ability to pay its short-term liabilities with its short-term assets, is the best choice for indicating a company's liquidity. A higher current ratio indicates that a company has more assets that can be quickly converted into cash to pay off its obligations.

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.

Accepted Answer

Ratio analysis is the most common tool used to interpret a company's financial statements. It involves calculating relevant ratios (such as liquidity ratios, profitability ratios, and efficiency ratios) to evaluate a company's financial health and performance. This provides insight into a company's strengths and weaknesses, and helps inform investment decisions. Business valuation, the present value method, and discount rates are also important concepts in finance, but are not specific methods for interpreting financial statements.

Question 19

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

Accepted Answer

Taking over a company means acquiring more than 50% ownership, giving the acquiring party control over the company's operations and decision-making processes.

Question 20

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

Accepted Answer

Real estate agents can also assist in the sale of a business that includes commercial real estate. They often have expertise in negotiating deals and preparing contracts, making them valuable intermediaries in the sale of a small business.

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

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

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

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

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

On average, the risk of buying an existing business is

Cash skimming is a legal but misleading practice.

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

The single biggest danger for the naive business buyer is:

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

"Goodwill" is classified as:

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

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

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

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

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

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

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

A company's financial statements are interpreted by using:

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

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