Deck 14: Valuation of Entrepreneurial Ventures

Question 1

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

Answer 1

True

Question 2

Buyers and sellers assign different values to a business.

Answer 2

True

Question 3

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

Answer 3

False

Question 4

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

Question 5

Entrepreneurs should try to be as objective as possible in determining the fair market value for their enterprise.

Question 6

Increasing market share by acquiring a firm in the company's industry is one reason for the acquisition.

Question 7

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

Question 8

An entrepreneur does not need to know how to calculate the value of a competitor's operation.

Question 9

Weaknesses in small closely held businesses call for careful analysis of the business being valued.

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

Avoiding start-up costs is a factor to consider when valuing a business.

Question 15

The real value of any venture is its potential earning power.

Question 16

Insufficient controls signify strength when analyzing the business being valued.

Question 17

When a company is liquidated, preferred stockholders received a certain fixed amount after assets are distributed to common stockholders.

Question 18

Adjusted tangible book value is a popular method of valuation.

Question 19

The timing of projected income or cash flows is not a critical factor in establishing the value of a firm.

Question 20

Brazil's human, mineral, and agricultural resources are on par with those of the United States.

Question 21

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

Question 22

When considering sales and distribution, the entrepreneur should be concerned about

A) whether any sales are made on consignment.
B) how many sales are internal.
C) how sales vary with social demographics.
D) how many distributors are necessary.

Question 23

The discounted earnings method of valuation establishes

A) potential earning power.
B) an appropriate rate for replacement.
C) expectancy of the business expenses.
D) future profits.

Question 24

When considering employees, the entrepreneur should be concerned about

A) total number of single employees.
B) total number of female employees.
C) total number of employees by function.
D) employee productivity.

Question 25

What is a rollup?

A) the acquisition and merging of small companies in the same market
B) of a dissolution of a partnership
C) a product-line acquisition
D) the amount of risk involved in an acquisition

Question 26

__________ refers to conducting a thorough analysis of every facet of an existing business.

A) Due diligence
B) Industry capitalization
C) Knowledge acquisition
D) Risk assessment

Question 27

Emotional bias is likely to have what effect on a seller's valuation of a business?

A) increase the valuation
B) decrease the valuation
C) have no net effect on the valuation
D) none of the above

Question 28

A drawback to the price/earnings ratio method is that

A) the stock of a private company is publicly traded.
B) the stated net income of a private company may not truly reflect its actual earning power.
C) it is relatively easy to find a truly comparable publicly held company, even in the same industry.
D) it distorts profits earned.

Question 29

When Facebook went public in May of 2012, what was its starting valuation?

A) more than $10 billion but less than $50 billion
B) more than $50 billion but less than $100 billion
C) more the $100 billion but less than $150 billion
D) more than $150 billion

Question 30

When considering physical facilities, the entrepreneur should be concerned about

A) which facilities are owned versus leased.
B) which facilities are used for production.
C) whether adequate capital is maintained.
D) facility upkeep.

Question 31

Besides the purchase price, what else should be considered when buying a business?

A) new inventory and living expenses
B) three months' operating expenses and sales tax
C) none of the above
D) all of the above

Question 32

On what occasion is a business valuation not usually essential?

A) when giving a gift of stock
B) when going public
C) when selling a business division
D) when hiring a new director of operations

Question 33

Traditional valuation methods includes all of the following except:

A) adjusted tangible book value
B) price/earnings ratio
C) high equity/low debt
D) discounted earnings

Question 34

Which of the following is not a shortcoming that many closely held ventures possess?

A) insufficient controls
B) lack of management depth
C) high equity and low debt
D) divergent goals

Question 35

The primary advantage of the price/earnings approach to valuation is that

A) it reflects "top value" of the firm.
B) it pays off assets and sells liabilities.
C) it assumes business begins operations.
D) it is simple to use.

Question 36

Return on investment

A) is net profit divided by investment.
B) provides a replacement value.
C) establishes a value for the business.
D) is equal to the current prime rate.

Question 37

Price/earnings ratio is a method of valuation that is

A) most common with public corporations.
B) not affected by market conditions.
C) not sensitive to market conditions.
D) not affected by competitors.

Question 38

Specific factors of a venture being offered for sale that should be examined include

A) age, trends, and future.
B) profits, sales, and operating ratios.
C) employees, suppliers, and competitors.
D) profits, price, product.

Question 39

When considering management, the entrepreneur should be concerned about

A) ownership positions.
B) pension and profit sharing.
C) total number of employees.
D) employee benefits.

Question 40

Closely held ventures usually suffer from which of the following shortcomings?

A) a lack of management depth
B) overcapitalization
C) insufficient controls
D) internal conflict

Question 41

Goodwill, family members on the payroll, and planned losses are examples of

A) analyzing the business.
B) underlying issues.
C) emotional bias.
D) establishing the value of a firm.

Question 42

The price/earnings ratio is determined by

A) patents.
B) dividing market price of common stock by earnings per share.
C) goodwill.
D) deferred financing costs.

Question 43

One reason to keep projections in perspective is

A) long histories.
B) fluctuating markets.
C) certain environments.
D) both a and b

Question 44

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) avoiding start-up costs has value
C) property values are variable
D) the value of a founder's stock decreases over time

Question 45

When is the size of the labor force in Africa expected to top that of China?

A) by 2015
B) by 2020
C) by 2030
D) by 2040

Question 46

An adjusted tangible book value method includes

A) goodwill.
B) patents.
C) common price.
D) both a and b

Question 47

Which of the following methods of valuation was developed by the U.S. Treasury to determine a firm's intangible assets?

A) market value
B) replacement value
C) excess earnings
D) multiple of earnings

Question 48

List and briefly explain the three methods utilized for business evaluation.

Question 49

Sales and earnings of a venture are projected from

A) historical projections
B) historical financials
C) data on start-ups
D) property values

Question 50

Which of the following are considered methods for valuation of a venture?

A) return on investment
B) stock market method
C) multiple of earnings
D) a and c are correct

Question 51

Explain the purpose of a letter of intent.

Question 52

What does a post-money valuation include that a pre-money valuation does not?

A) market value
B) replacement value
C) excess earnings
D) venture capital investment

Question 53

List some of the questions to ask before making a potential purchase and explain why each is important.

Question 54

List and describe the sources an entrepreneur should examine to find available business buying opportunities.

Question 55

What hidden costs are involved when establishing the value of a firm?

A) insufficient controls and costs
B) divergent expenses
C) personal expenses
D) travel expenses

Question 56

Some buyers are willing to pay more for a business than what valuation methods determine its worth to be. What are these buyers attempting to avoid?

A) start-up costs.
B) earlier losses.
C) previous profits.
D) all of the above.

Question 57

Potential earning power, which determines the True value of the firm, is best calculated using

A) the price/earnings ratio method.
B) the adjusted tangible book value method.
C) the discounted earnings method.
D) the adjusted tangible book value method.

Question 58

If you agree that the real value of a business venture is its potential earning power, which valuation method, more than the others, would best determine its True value?

A) adjusted tangible book value
B) price/earnings ration
C) discounted earnings method
D) either a or b

Question 59

Book value of a firm is also known as

A) balance sheet method.
B) income statement method.
C) capitalized earnings approach.
D) fixed price method.

Question 60

What should be considered in analyzing a business and what are some weaknesses of small business?