CH. 14

"Why is the business being sold?" is not an important question to ask when analyzing the viability of buying a business. a. True b. False

F

Emotional bias is not an underlying issue in valuing a business. a. True b. False

F

Knowing a venture's pre-money valuation is not possible. a. True b. False

F

Adjusted tangible book value is a popular method of valuation. a. True b. False

T

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

b. ownership positions.

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

b. personal expenses

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

c. avoiding start-up costs has value

Business valuation is essential when attempting to buy out a partner. a. True b. False

T

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

c. increase the valuation

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

d. potential earning power.

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

d. historical financials.

One of the most common reasons for acquiring a business is developing more growth-phase products. a. True b. False

T

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

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

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

a. Due diligence

The price/earnings ratio (multiple of earnings) method is determined by dividing the market price of common stock by retained earnings. a. True b. False

F

Buyers and sellers assign different values to a business. a. True b. False

T

Replacement value of a business is based upon the value of each asset if it had to be replaced at a certain cost. a. True b. False

T

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

a. is net profit divided by investment.

Tangible assets as well as intangible assets of a business need to be assessed for proper venture evaluation. a. True b. False

T

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

a. profits, sales, and operating ratios.

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

b. a lack of management depth

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

c. high equity/low debt

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

c. which facilities are owned versus leased.

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

d. discounted earnings