Question 1

The adjusted book value approach is useful in valuing holding companies whose main assets are publicly traded or other investment securities but is generally less applicable for operating businesses.

Accepted Answer

The adjusted book value approach is mainly used for holding companies that have investment securities as their primary assets. It may not be suitable for operating businesses that have other assets such as property, plant, and equipment, or intangible assets.

Question 2

Starting a business is _________ risky than buying and growing a business that someone else has already established.

Accepted Answer

Starting a business is generally considered more risky than buying and growing an already established business because the new business lacks a proven track record, customer base, and established operations.

Question 3

In valuing a business, analysts must also consider whether it is appropriate to adjust the estimated value of the business for the likelihood that these "key people" may not remain with the company as long as expected.

Accepted Answer

It is important to consider the impact of key people leaving the company on the estimated value of the business. If it is likely that they will leave sooner than expected, this may have a negative impact on the business and should be taken into account in the valuation process.

Question 4

Which of the following organisational form offers protection for personal liability?

Accepted Answer

A company offers protection for personal liability as it is a separate legal entity from its owners/shareholders. This means that the liabilities of the company are separate from the personal liabilities of its owners/shareholders. In the event of legal action or bankruptcy, the owners/shareholders are only liable for the amount of capital they have invested in the company.

Question 5

Differences in marketability can result in premiums of 30 per cent or more for shares of private companies.

Accepted Answer

The answer of Differences in marketability can result in premiums...

Question 6

All of the following are organisational forms are easy to dissolve EXCEPT

Accepted Answer

A company is a legal entity with a separate legal existence from its owners. It requires formal procedures to be followed in order to dissolve, which can be time-consuming and expensive. Sole traders, partnerships, and cooperatives, on the other hand, can be dissolved relatively easily without significant legal formalities.

Question 7

An important issue that must be considered when valuing a business is whether a controlling ownership interest or a minority interest is being valued.

Accepted Answer

The value of a controlling ownership interest is typically higher than that of a minority interest, as the former has the ability to make important decisions that will affect the overall value of the business. The valuation method used will vary depending on the type of interest being valued.

Question 8

The founder of a company must start from scratch and make several critical decisions including

Accepted Answer

All of the above choices are critical decisions that a founder must make to successfully start and grow a company. Choosing the product(s) to sell is crucial as it determines the direction and focus of the business. Deciding on the best strategy for selling the product(s) is important for reaching the target audience and generating revenue. Raising the necessary funds to develop the product(s) is also crucial as it enables the founder to bring the product(s) to market and grow the business.

Question 9

Which one of the following statements regarding a company is NOT true?

Accepted Answer

This statement is not true as there is no limit to the number of shareholders a company can have. However, some companies may choose to limit the number of shareholders for strategic reasons.

Question 10

The free cash flow from the company (FCFC) approach uses only the portion of the cash flows that are available for distribution to shareholders.

Accepted Answer

The free cash flow to the firm (FCFF) approach considers cash flows available to all capital providers, including both equity and debt holders, not just shareholders.

Question 11

Which one of the following statements is NOT true?

Accepted Answer

This statement is not completely true as other business structures such as a partnership and a trust also allow the employment of staff and subcontractors, not just a company.

Question 12

In the transaction approach, analysts use the information on what someone has paid for a comparable company in a merger or an acquisition to estimate a value for the company.

Accepted Answer

The statement is true. The transaction approach involves using data from completed mergers and acquisitions to determine the value of a similar company. It assumes that the value of a company can be estimated based on the price that a buyer is willing to pay for a similar company with similar characteristics.

Question 13

Which one of the following statements is true?

Accepted Answer

In partnerships, all profits flow through to the owners in proportion to their ownership interest. Partnerships can have more than 2 owners and are generally less costly to form than a trust. The lives of partnerships are flexible and can be dissolved or restructured as needed.

Question 14

In contrast to the FCFE approach, which values cash flows that are available for distribution to shareholders, the DDM approach values the stream of cash flows that shareholders expect to receive through dividend payments.

Accepted Answer

The statement is true. The DDM approach is specifically focused on valuing the expected dividend payments to shareholders, whereas the FCFE approach looks at the cash flows that are available to be distributed to shareholders, including any debt servicing or reinvestment needs.

Question 15

A business's chances of success improve if you do all EXCEPT

Accepted Answer

Taking no risks is not a good approach to achieve success in business because it may lead to missed opportunities and lack of innovation. Successful businesses take calculated risks and are willing to step out of their comfort zones.

Question 16

Which one of the following statements is NOT true?

Accepted Answer

The answer of Which one of the following statements is...

Question 17

According to the text, businesses fail for a number of different reasons but not due to

Accepted Answer

A very competitive market is not listed as a reason for business failure in the text.

Question 18

Which one of the following statements is NOT true?

Accepted Answer

The life of a sole proprietorship is limited to the life of the owner, not unlimited.

Question 19

In contrast to the financial statements of publicly held companies, private company financials often include personal expenses of the owner and excess compensation expenses.

Accepted Answer

Private company financial statements are often prepared differently from those of publicly held companies. As private companies are not required to adhere to the same reporting standards as public companies, they may not provide as much detail about their financial performance. This lack of transparency can make it difficult for outsiders to properly evaluate the company's financial health. Additionally, private company financials may include personal expenses of the owner and excess compensation expenses, which are typically not included in the financial statements of publicly held companies.

Question 20

In the free cash flow to equity (FCFE) approach, an analyst values the free cash flows that the assets of the company are expected to produce in the future.

Accepted Answer

The FCFE approach values the free cash flows available to equity shareholders after accounting for expenses, taxes, and reinvestment needs, not the cash flows produced by the company's assets.

Quiz 18: Business Formation, Growth and Valuation

The adjusted book value approach is useful in valuing holding companies whose main assets are publicly traded or other investment securities but is generally less applicable for operating businesses.

Starting a business is _________ risky than buying and growing a business that someone else has already established.

In valuing a business, analysts must also consider whether it is appropriate to adjust the estimated value of the business for the likelihood that these "key people" may not remain with the company as long as expected.

Which of the following organisational form offers protection for personal liability?

Differences in marketability can result in premiums of 30 per cent or more for shares of private companies.

All of the following are organisational forms are easy to dissolve EXCEPT

An important issue that must be considered when valuing a business is whether a controlling ownership interest or a minority interest is being valued.

The founder of a company must start from scratch and make several critical decisions including

Which one of the following statements regarding a company is NOT true?

The free cash flow from the company (FCFC) approach uses only the portion of the cash flows that are available for distribution to shareholders.

Which one of the following statements is NOT true?

In the transaction approach, analysts use the information on what someone has paid for a comparable company in a merger or an acquisition to estimate a value for the company.

Which one of the following statements is true?

In contrast to the FCFE approach, which values cash flows that are available for distribution to shareholders, the DDM approach values the stream of cash flows that shareholders expect to receive through dividend payments.

A business's chances of success improve if you do all EXCEPT

Which one of the following statements is NOT true?

According to the text, businesses fail for a number of different reasons but not due to

Which one of the following statements is NOT true?

In contrast to the financial statements of publicly held companies, private company financials often include personal expenses of the owner and excess compensation expenses.

In the free cash flow to equity (FCFE) approach, an analyst values the free cash flows that the assets of the company are expected to produce in the future.