Fin303 chap 18

32. Starting a business is _________ risky than buying and growing a business that someone else has already established. A) more B) less C) equally D) none of the above

A

41. Which one of the following statements is NOT true? A) Two tools are particularly useful in understanding the cash requirements of a business and in estimating how much financing a new business will require—cash flow break-even analysis and the cash budget. B) The cash flow break-even point calculation focuses on the importance of maximizing a product's per unit contribution. C) The cash flow break-even point does not tell one how much money will be needed to launch a new product or business. D) The cash flow break-even point estimates how long it will take for a product to reach the break-even point.

C

36. A limited liability company (LLC) is A) a hybrid of a limited partnership and a corporation. B) more costly to form than sole proprietorships C) less constrained than general partnerships because they can raise money from limited partners. D) All of the above

D

38. Which one of the following statements is NOT true? A) An Scorporation can have no more than100 stockholders. B) All profits of an Scorporation pass directly to the stockholders as they would pass to the partners in a partnership. C) An Scorporation is a variation of the Ccorporation form that is used by public corporations. D) Only some Ccorporations can become an Scorporation with approval from the IRS.

D

51. The adjusted book value approach involves A) restating the value of the individual assets in a business to reflect their fair market values. B) valuing all tangible and intangible assets. C) valuing holding companies whose main assets are publicly traded or other investment securities but are generally less applicable for operating businesses. D) All of the above

D

35. All of the following are organizational forms EXCEPT A) sole proprietorships, partnerships, and Z-corporations. B) sole proprietorships, S-corporations, and limited liability companies. C) C- Corporations, S-corporations, and LLCs. D) C- Corporations, S-corporations, and partnerships.

A

33. According to the text, businesses fail for a number of different reasons but not due to A) poorly thought-out strategy. B) a very competitive market. C) poor management skills to properly execute a good strategy. D) underestimating how much money it will take to get their businesses up and running.

B

37. Which one of the following statements is true? A) Limited partnerships are no more costly to form than sole proprietorships. B) Like a corporation, an LLC provides limited liability for the people who make the business decisions in the firm while enabling all investors to retain the tax advantages of a limited partnership. C) The lives of partnerships and LLCs are not flexible. D) Limited partners and LLCs are more constrained than general partnerships because they can raise money only from limited partners or "members."

B

39. Which one of the following statements is true? A) An Scorporation can have more than100 stockholders. B) All profits of an Scorporation pass directly to the stockholders as they would pass to the partners in a partnership. C) An Scorporation is a variation of the LLC. D) Only foreign investors can own the shares of an S-corporation.

B

40. Which one of the following statements is NOT true? A) A sole proprietorship is the least expensive type of business to start. B) The life of a sole proprietorship is unlimited C) Sole proprietorships must rely on equity contributions from the proprietor and debt or lease financing. D) All profits of the sole proprietorship pass directly to the owner and are taxed at the owner's marginal tax rate.

B

47. Which one of the following statements about business valuation is NOT true? A) The value of a business changes over time. B) There is a single value for any business. C) There is no such thing as the value for a business. D) Actions by competitors also affect the value of a business.

B

50. Which one of the following statements is NOT true? A) Replacement cost and adjusted book value are cost-based valuation approaches. B) The replacement cost approach involves restating the value of the individual assets in a business to reflect their fair market values. C) The replacement cost of a business is the cost of duplicating the assets of the business in their present form as of the valuation date. D) The replacement cost valuation approach is generally used to value individual assets within a business when they are being insured.

B

56. In the free cash flow from the firm (FCFF) approach, the total value of the firm, VF, is computed as the present value of the FCFF, A) discounted by the firm's cost of equity B) discounted by the firm's WACC C) discounted by the firm's cost of debt D) None of the above.

B

59. In contrast to the FCFE approach, the dividend discount model (DDM) approach values A) cash flows that are available for distribution to stockholders. B) the stream of cash flows that stockholders expect to receive through dividend payments. C) cash flows that remain after payments to all lenders. D) None of the above.

B

34. A business's chances of success improve if you do all EXCEPT A) not jump into a business without careful thought. B) not overanalyze opportunities to the point where you are just convincing yourself not to proceed. C) Take no risks. D) not think that failure will ruin your chances of ultimately achieving business success.

C

45. The key elements in a business plan include all but A) an executive summary B) a company overview C) a dividend policy D) a market analysis

C

49. Which one of the following statements is NOT true? A) A strategic investor is one who has an interest in acquiring the business. B) The investment value of the firm to a strategic investor will take into consideration the benefits that can accrue from the acquisition. C) The market value of a business is likely to carry a higher value than the investment value. D) A financial investor, on the other hand, is only interested in the financial performance of the firm and not in acquiring the business.

C

57. The free cash flow to equity (FCFE) approach uses only the portion of the cash flows that are available A) for distribution to bondholders. B) for distribution to bondholders and stockholders. C) for distribution to stockholders. D) None of the above.

C

60. Important issues that one must consider in valuing private firms include A) whether key people remain in the firm, the amount of dividends that one may receive in the coming years, and whether a controlling ownership interest or a minority interest is being valued. B) the difficulty in valuing young, rapidly growing companies in contrast to mature, stable companies, the amount of dividends that one may receive in the coming years, and whether a controlling ownership interest or a minority interest is being valued. C) the difficulty in valuing young, rapidly growing companies in contrast to mature, stable companies, whether key people remain in the firm, and whether a controlling ownership interest or a minority interest is being valued. D) None of the above.

C

53. The transaction approach is difficult to use because A) transactions data are not typically as reliable as the data available for multiples analysis, especially when they are associated with a private firm. B) transactions involving the purchase or sale of an entire business in an industry tend to occur relatively infrequently and hence the data is not very timely. C) the terms of the transactions can be difficult to assess. D) All of the above.

D

54. Which one of the following statements about the free cash flow from the firm (FCFF) approach is NOT true? A) The present value of these cash flows exceeds the total value of the firm, or its enterprise value. B) We do not include the cash necessary to pay short-term liabilities that do not have interest charges associated with them, such as accounts payable and accrued expenses. C) The costs associated with noninterest-bearing current liabilities, which are included in the firm's cost of sales and other operating expenses, are subtracted in the calculation of FCFF. D) the total value of the firm, VF, is computed as the present value of the FCFF, discounted by the firm's WACC.

A

55. The costs associated with noninterest-bearing current liabilities, which are included in the firm's cost of sales and other operating expenses, A) are subtracted in the calculation of free cash flow from the firm (FCFF). B) are added in the calculation of FCFF. C) are not a factor in the calculation of FCFF D) none of the above

A

58. The three specific cash flows associated with lenders that are included in the free cash flow to equity (FCFE) approach are A) the interest expense on existing debt, the repayment of debt principal, and the proceeds from new debt issues. B) the interest expense on existing term debt, the repayment of debt principal, and the proceeds from new equity issues. C) the interest expense on existing debt, the repayment of debt principal, and the payment of dividends. D) None of the above.

A

31. The founder of a company must start from scratch and make several critical decisions including A) choosing the product(s) to sell. B) choosing the best strategy for selling them. C) raising the money necessary to develop the product(s). D) All of the above.

D

42. Which one of the following statements is true? A) The cash budget is also a very useful planning tool for entrepreneurs B) The cash budget summarizes the cash flows into and out of a firm over a period of time. C) Preparing a cash budget helps an entrepreneur better understand where money is coming from, where it is going, and how much external financing is likely to be needed and when. D) All of the above are true.

D

43. Which one of the following statements about business plans is true? A) A business plan is like a road map for a business. B) A business plan presents the results from a strategic planning process that focuses on how the business will be developed over time. C) A well-prepared business plan makes it easier for an entrepreneur to communicate to potential investors precisely what returns an investor might expect to receive. D) All of the above are true

D

44. A business plan is a tool that A) can help raise capital B) can help an entrepreneur set the goals and objectives for the company, C) serve as a benchmark for evaluating and controlling the company's performance D) All of the above

D

46. Which one of the following elements is included in a business plan? A) A detailed description or the product(s) and services the company will sell B) A detailed discussion of the marketing and sales activities that will enable the business to achieve the sales and margin levels reflected in the financial forecasts. C) A detailed discussion of capital requirements and uses. D) All of the above

D

48. The value of a business changes over time because A) changes in general economic conditions, industry conditions, and decisions that are made by the managers all affect the value of the cash flows that a business is expected to generate in the future. B) actions by competitors also affect the value of a business. C) the investment, operating, and financing decisions made by managers also affect the value of a business. D) All of the above

D

52. When using the multiples analysis approach to valuing a business, one must be aware A) of the presence of a marketability discount that can be sizable. B) that identifying one or more comparable firms is not an easy task. C) of differences in the capital structures of the firms being compared. D) All of the above.

D