Chapter 14 HW

T/F "Why is the business being sold?" is not an important question to ask when analyzing the viability of buying a business.

F

T/F Emotional bias is NOT an underlying issue in valuing a business.

F

T/F Knowing a venture's pre-money valuation is not possible.

F

T/F The price/earnings ratio (multiple of earnings) method is determined by dividing the market price of common stock by retained earnings.

F

T/F Adjusted tangible book value is a popular method of valuation.

T

T/F Business valuation is essential when attempting to buy out a partner.

T

T/F Buyers and sellers assign different values to a business.

T

T/F One of the most common reasons for acquiring a business is developing more growth-phase products.

T

T/F Replacement value of a business is based upon the value of each asset if it had to be replaced at a certain cost.

T

T/F Tangible assets as well as intangible assets of a business need to be assessed for proper venture evaluation.

T

__________ refers to conducting a thorough analysis of every facet of an existing business. a. Industry capitalization b. Due diligence c. Knowledge acquisition d. Risk assessment

b. Due diligence

Return on investment a. provides a replacement value. b. is net profit divided by investment. c. establishes a value for the business. d. is equal to the current prime rate.

b. is net profit divided by investment.

In the context of buying a business, a known commodity may command a higher price for what reason? a. historical projections have intrinsic value b. property values are variable c. avoiding start-up costs has value d. the value of a founder's stock decreases over time

c. avoiding start-up costs has value

Emotional bias is likely to have what effect on a seller's valuation of a business? a. decrease the valuation b. have no net effect on the valuation c. increase the valuation d. none of these

c. increase the valuation

What hidden costs are involved when establishing the value of a firm? a. travel expenses b. divergent expenses c. personal expenses d. insufficient controls and costs

c. personal expenses

Specific factors of a venture being offered for sale that should be examined include a. profits, price, product. b. age, trends, and future. c. profits, sales, and operating ratios. d. employees, suppliers, and competitors

c. profits, sales, and operating ratios.

If cash flow is deemed the most important consideration in buying a business, which valuation method is likely to be used? a. discounted earnings b. price/earnings ratio c. adjusted tangible book value d. high equity/low debt

a. discounted earnings

The discounted earnings method of valuation establishes a. potential earning power. b. future profits. c. an appropriate rate for replacement. d. expectancy of the business expenses.

a. potential earning power.

Due Dilligence

- Considers the acquisition of a venture. - Involves a thorough analysis of every facet of the existing business. - Addresses the future trends of the business, as well as determining how much capital is needed to buy the venture

Things to Consider when buying a business

- When analyzing small, closely held businesses, entrepreneurs should NOT make comparisons with larger corporations. - Many closely held ventures have the following shortcomings: 1. Lack of management depth 2. Undercapitalization 3. Insufficient controls 4. Divergent goals

Closely held ventures usually suffer from which of the following shortcomings? a. overcapitalization b. a lack of management depth c. insufficient controls d. internal conflict

b. a lack of management depth

Traditional valuation methods includes all of the following EXCEPT: a. price/earnings ratio b. high equity/low debt c. discounted earnings d. adjusted tangible book value

b. high equity/low debt

Sales and earnings of a venture are projected from a. property values. b. data on start-ups. c. historical financials. d. historical projections.

c. historical financials.

When considering management, the entrepreneur should be concerned about a. pension and profit sharing. b. employee benefits. c. ownership positions. d. total number of employees.

c. ownership positions.

When considering physical facilities, the entrepreneur should be concerned about a. facility upkeep. b. which facilities are used for production. c. which facilities are owned versus leased. d. whether adequate capital is maintained

c. which facilities are owned versus leased.

Valuation Methods

1. Adjusted Tangible Book Value - Computing a firm's net worth as the difference between total assets and total liabilities - Adjusting the value of assets to reflect their true economic worth such as balance sheet and income statement adjustments 2. Price/Earnings Ratio (Multiple of Earnings) Method - Useful in valuing publicly held corporations. - Valuation is determined by dividing the market price of the common stock by the earnings per share. 3. Discounted Earnings Method - The firm's discounted cash flows are dollars earned in the future (based on projections) that worth less than dollars earned today (due to the loss of purchasing power). - "Timing" of projected income or cash flows is a critical factor. 4. The process of discounting cash flows: - Expected cash flow is estimated. - An appropriate discount rate is determined. - A reasonable life expectancy of the firm is determined. - The firm's value is determined by discounting the estimated cash flow by the appropriate discount rate over the expected life of the business.

The price/earnings ratio is determined by a. goodwill. b. deferred financing costs. c. patents. d. dividing market price of common stock by earnings per share.

d. dividing market price of common stock by earnings per share.