Question 1

Pat,owner of Pat's Welding,LLC,would like to let someone else run the day to day operations while he continues to draw an income from the business.Because the business is an LLC,Pat will not have to be concerned about:

Accepted Answer

As an LLC owner, Pat's income will not be subject to double taxation, regardless of who is running the day to day operations of the business. However, the other options (A, B, and C) may still apply depending on the specifics of the situation.

Question 2

Valerie is beginning to think of harvesting her company.Which question should be asked first?

Accepted Answer

The answer of Valerie is beginning to think of harvesting...

Question 3

An IPO occurs when a company offers its stock to

Accepted Answer

An IPO (Initial Public Offering) refers to the first time a company offers its stock to the public for purchase. Therefore, the correct choice is D which states that it is the general public who can purchase the stock through an IPO.

Question 4

Going public can be beneficial to a firm by helping it

Accepted Answer

Going public can help a firm create a liquid currency through the sale of stocks, which can be used to finance future acquisitions and investments. Becoming a public company does not necessarily help a firm avoid becoming a takeover target and may expose it to market fluctuations. While offering better compensation packages may be a benefit of going public, it is not the primary benefit.

Question 5

Jill is purchasing a web design company that has patented a new form of technology.Which purchase would be best for her in relation to the web design company's liabilities?

Accepted Answer

By buying the firm's assets, Jill will acquire the patented technology but not the liabilities of the company. This will allow her to take advantage of the new technology without being responsible for any potential legal or financial liabilities of the previous owners. Buying the stock or merging with the company would mean inheriting all of the company's liabilities.

Question 6

The value of a business is determined by

Accepted Answer

The value of a business is ultimately determined by what a buyer with the cash is willing to pay for it. While the owner's beliefs and valuation formulas can be influential, the final decision is made by the buyer.

Question 7

Harvey has invested all of his money in his thriving business.He would like to recoup some of investment,but not completely sell off his business.This might be a good time for him to consider selling stock to the public in a(n):

Accepted Answer

An IPO (Initial Public Offering) is a process where a private company makes its shares available for purchase by the public for the first time. This would allow Harvey to recoup some of his investment by selling a portion of his company to the public without completely selling off his business. ESOP (Employee Stock Ownership Plan) involves giving employees ownership in the company, MBO (Management Buyout) involves management buying the company from the current owner, and LBO (Leveraged Buyout) involves using debt to buy a company. None of these options fit Harvey's situation as he wants to maintain ownership and recoup his investment without completely selling the business.

Question 8

An employee stock ownership plan represents

Accepted Answer

An employee stock ownership plan (ESOP) is a benefit plan that allows employees to acquire an ownership interest in their company. It is often used as a way to reward and incentivize employees, as well as to create a sense of ownership and commitment to the company's success. It is not a harvest method or a way to ease investor concerns, and while it may benefit a business founder, that is not the primary purpose of an ESOP.

Question 9

Having publicly traded stock can be beneficial to owners in that a public market offers

Accepted Answer

Publicly traded stock provides greater liquidity, meaning it can be easily bought or sold on the open market, allowing owners to quickly turn their investment into cash if necessary.

Question 10

The mere fact that a firm is earning high rates of return on the firm's asset indicates that

Accepted Answer

A high rate of return on assets indicates that the firm is utilizing its resources efficiently, is generating profits, and is a valuable business as a going concern. This suggests that investors can expect to receive higher returns over time and that the firm has potential for growth and expansion. Downsizing or limiting cash flows returned to investors may not be necessary or beneficial in this scenario.

Question 11

Matt owns a car dealership that is very profitable.Since he plans to retire in 5-10 years,Matt has decided to retain ownership for now,but without continuing to grow the business.This change would also allow him to invest for retirement some of the cash that the business is now generating.Which harvesting method does this example illustrate?

Accepted Answer

The strategy described in the example is to release the firm's free cash flows to the owners without continuing to grow the business. This aligns with the harvesting method of releasing cash flows to investors, which is option B. Delayed sellout, IPO, and private placement involve selling or exiting the business, which is not the intention of the owner in this scenario.

Question 12

Charles and Nancy have decided to sell their family business and would like to transfer ownership to the next generation.Which harvesting form would be best?

Accepted Answer

Private placement is suitable for transferring ownership within a family or to a select group of investors, allowing for a smoother transition to the next generation.

Question 13

Paul is approaching retirement and has decided to siphon off funds from his company rather than sell it.From his perspective,the advantage of systematically withdrawing cash from the firm is:

Accepted Answer

Paul wants to retain control of his company, which is why he has decided to systematically withdraw funds instead of selling it.

Question 14

Two years ago,Harold inherited $30,000 and decided to open a coffee shop in his hometown instead of buying stock in Ford Motor Company.The rate of return he could have earned on his investment in Ford stock represents his

Accepted Answer

The opportunity cost of funds refers to the potential gain or return that could have been earned by using the funds in an alternative investment. In this case, choosing to open a coffee shop instead of investing in Ford stock means that Harold gave up the potential return he could have earned from the stock, making B the best choice.

Question 15

Eleanor has money to invest and is considering buying a company.When comparing her alternatives,her ________ on any investment is the rate of return that she could earn on a similar investment

Accepted Answer

Opportunity cost is the cost of forgoing the next best alternative. In this case, Eleanor is considering buying a company, but she could also invest her money in other ways. The rate of return she could earn on a similar investment represents the opportunity cost of buying the company. Therefore, option D is the best choice.

Question 16

Marvin is planning to sell his company to his management team.Marvin will be financing part of the purchase.This type of arrangement is a form of:

Accepted Answer

Marvin financing part of the purchase indicates that the management team will be using leverage to acquire the company, making it a leveraged buyout (LBO). ESOP is an employee stock ownership plan, IPO is an initial public offering, and PPO is a preferred provider organization, which are not applicable to this scenario.

Question 17

Vasily is selling his business.As a harvesting owner we would expect him to prefer _____ over _____.

Accepted Answer

As a harvesting owner, Vasily would prefer to receive cash over stock. This is because, as the owner of a business, Vasily has already put in the effort and time required to build the company and generate a profit. Selling the business for cash would allow him to realize the financial gains of his hard work immediately, rather than having to wait and potentially lose value on the stock. Additionally, as a harvesting owner, Vasily may be looking to retire or move on to other ventures, so cash would provide more flexibility and liquidity for his future plans.

Question 18

Nettie's Knits,Inc.paid taxes on its net income then distributed part of the earnings as dividends to investors.These investors paid tax on the dividends they received.This practice is know as:

Accepted Answer

Double taxation refers to the fact that corporate income is taxed at the corporate level, and then again when it is distributed to shareholders as dividends and they pay taxes on those dividends at their own individual tax rates. This is a common practice in many countries, including the United States.

Question 19

Which statement best characterizes business valuation?

Accepted Answer

The answer of Which statement best characterizes business valuation?
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Question 20

Leonard wants to sell his business but the bank will not lend the buyer enough money.Between personal savings and the bank loan,the buyer has about 70% of the asking price.Which of the following options would be best for Steve in this situation?

Accepted Answer

Offering to finance the remaining 30% of the asking price and accepting payments over the next few years allows the buyer to secure the necessary funds and close the sale. This option allows Leonard to transition out of the business completely, while still receiving regular payments and potentially earning interest on the remaining balance. It also ensures that the buyer is highly motivated to make the business successful, as their payments will be tied to its performance.

Quiz 13: Planning for the Harvest