Deck 23: Business Valuations

Question 1

Proboscis Ltd.is for sale.The company has been successful for many years, and its earnings for the past five years, in reverse order beginning with the current year are $500,000, $450,000, $410,000, $390,000, and $320,000.What is the weighted average earnings for Proboscis? $\begin{array}{|c|c|c|}\hline \$ 500,000 & 5 & \$ 2,500,000 \\\hline \$ 450,000 & 4 & \$ 1,800,000 \\\hline \$ 410,000 & 3 & \$ 1,230,000 \\\hline \$ 390,000 & 2 & \$ 780,000 \\\hline \$ 320,000 & 1 & \$ 320,000 \\\hline & 15 & \$ 6,630,000 \\\hline&&15\\\hline \text { Weighted average earnings: }&&\$442,000\\\hline\end{array}$

A)$386,000
B)$414,000
C)$442,000
D)$500,000

Answer 1

$442,000

Question 2

The real cost of some business assets might not be reflected in the calculation of future earnings streams.This issue is best addressed by which of the following?

A)The capitalization of earnings method is used for the business and all assets as reported in the financial statements.
B)The capitalization of earnings method is used for the business and all assets as reported in the tax statements.
C)The earnings multiplier is adjusted to better reflect the risk of the industry.
D)The assets are examined to determine if there is any appreciation in value for reasons other than their contribution to business operations.

Answer 2

D

Question 3

Pirate Co.is for sale.The company has recognized $50,000 in profits every year since it began three years ago.The industry has a capitalization rate of 25%.What is the value of Pirate?

A)$50,000
B)$150,000
C)$200,000
D)$600,000

Answer 3

C

Question 4

When a business being sold is no longer a going-concern due to declining profits, a liquidation value can be determined using

A)the earnings method.
B)the contingent business value method.
C)the annual gross revenues earned method.
D)the asset valuation approach.

Question 5

The value of a going-concern business is influenced primarily by its

A)length of time in business.
B)shareholders' personal wealth.
C)income-earning potential.
D)location.

Question 6

The contingent business value method determines the valuation of a business based on which of the following:

A)The likelihood of the sale taking place
B)The occurrence of events following the sale
C)The fair market value of the assets at the time of sale
D)The current profits of the business

Question 7

A contingent business value for a business sale is

A)based on events before the take-over date.
B)based on events after the take-over date.
C)always higher than the selling price.
D)always less than the selling price.

Question 8

The Alpine Inc.is for sale, and the sole shareholder, Billy Caprinae, is trying to determine the value of the company.The business has annual pre-tax financial profits of $55,000.The following items will be omitted in arriving at the business value as they will not pertain to the prospective buyer's objectives: donations of $2,000, personal travel of $1,500, and part-time wages to Billy's child, Rocky, of $8,000.
The store is run from a small building which has a fair market value of $105,000 (land = $45,000 and building = $60,000).The property was originally purchased for $75,000 (land = $40,000 and building = $35,000).The UCC on the building is $20,000.There is no mortgage remaining on the property.
Businesses similar to Alpine are generating a 15% rate of return.
Billy is selling the operations of the business using the earnings method, and the small store and land will be sold using the asset approach.
The corporate tax rate is 13% for active business income, and 50 2/3% on specified investment business income.
Required:
Determine the total value of the sale of Alpine Inc.

Question 9

Based on the premise of the capitalization of earnings method, if a business for sale is low risk with good growth potential, the value will be based on which of the following?

A)A high capitalization rate and a low earnings multiplier.
B)A low capitalization rate and a high earnings multiplier.
C)A high capitalization rate and a high earnings multiplier.
D)A low capitalization rate and a low earnings multiplier.