Question 1

An IPO occurs when a company offers its stock to

Accepted Answer

An IPO (Initial Public Offering) occurs when a company offers its stock to the general public for the first time. The company makes the shares available for purchase on a public stock exchange, allowing anyone to buy shares and become a part owner of the company.

Question 2

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

Accepted Answer

Private equity recapitalization would be the best harvesting form in this scenario, as it involves selling a portion of the business to a private equity firm in exchange for capital and expertise. This form allows Charles and Nancy to retain some ownership and control while also bringing in new resources to help the next generation of the family business succeed. Selling to a strategic buyer would involve giving up all ownership and control, while an initial public offering may not be feasible or desirable for a small family business. Cash flow distribution could be an option, but it does not provide the same level of resources and support as a private equity recapitalization.

Question 3

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 selling his company to his management team and financing part of the purchase is a form of leveraged buyout (LBO). In an LBO, the acquiring party (in this case, the management team) borrows a significant amount of money to fund the purchase, often with the assets of the acquired company as collateral. The seller (Marvin) can also finance part of the purchase, as in this case. ESOPs (A) are Employee Stock Ownership Plans, IPOs (B) are Initial Public Offerings, and PPOs (C) are Preferred Provider Organizations, none of which relates to this scenario.

Question 4

The mere fact that a firm is earning high rates of return on its asset indicates that

Accepted Answer

High rates of return on assets indicate that the firm is earning more than the cost of the assets, which means the assets are being used efficiently and adding value to the firm. This suggests that the firm is worth more as a going concern than as a dead one, as it is generating positive returns on its investment. Therefore, option A is the best choice. Downsizing (B) or limiting cash flows returned to investors (D) may not be economically sound options for a firm that is generating high returns on its assets. Option C is also not a necessary action as the firm may have reached a level of growth that is sustainable and does not require further expansion.

Question 5

Whatever the negotiating skills of the respective parties, harvesting a company requires a

Accepted Answer

While a business broker and a precise valuation formula can certainly assist in the harvesting process, the most essential element is a willing buyer who is willing to pay a fair price for the company's assets. Without a buyer, the process of harvesting is essentially meaningless. Positive cash flows are also important but do not necessarily guarantee a successful harvest.

Question 6

An employee stock ownership plan represents a(n)

Accepted Answer

An employee stock ownership plan (ESOP) is a benefit plan that provides employees with an ownership interest in their company. It is not intended for a business founder to build his or her position in the company, nor is it a harvest method or a way to ease investor concerns.

Question 7

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 percent of the asking price. Which of the following options would be best for Leonard in this situation?

Accepted Answer

Offering to finance the remaining 30 percent would allow the buyer to secure the necessary funds and Leonard would receive payments over time. This option could also potentially lead to a higher selling price as the buyer may agree to pay more over time through financing.

Question 8

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

Accepted Answer

Double taxation occurs when a company pays taxes on its net income and then shareholders pay taxes on the dividends they receive from the company. This is because dividends are considered to be a distribution of the company's profits and are taxed as such.

Question 9

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

By systematically withdrawing cash from the firm, Paul is able to retain control over the company. Selling the company would mean giving up ownership and control to someone else. Additionally, siphoning off funds allows Paul to have a steady stream of income during retirement without having to sell the company all at once.

Question 10

Harvey has invested all of his money in his thriving business. He would like to recoup some of his 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

Selling stock to the public in an initial public offering (IPO) would allow Harvey to recoup some of his investment without completely selling off his business.

The other options are not applicable in this scenario:
- ESOP (employee stock ownership plan) is a retirement plan that allows employees to own stock in the company they work for. This would not help Harvey recoup his investment.
- MBO (management buyout) involves the current management team buying out the company from its current owner(s). This would involve Harvey completely selling off his business.
- LBO (leveraged buyout) involves using borrowed funds to buy a company. This would not be relevant for Harvey as he is the current owner, not a buyer.

Question 11

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, Pat's Welding will not be subject to double taxation, meaning that the company's income will not be taxed at both the corporate level and the individual level. This is a benefit of choosing the LLC business structure. The other options (reduction in company value, seller financing, and brokerage fees) may still be concerns for Pat, depending on how he decides to transfer management or ownership of the business.

Question 12

Which of the following statements best characterizes business valuation?

Accepted Answer

The answer of Which of the following statements best characterizes...

Question 13

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 return that could have been earned on the next best alternative investment. In this case, the next best alternative investment was investing in Ford stock, so the rate of return he could have earned on the stock represents his opportunity cost of funds.

Question 14

Matt owns a car dealership that is very profitable. Because he plans to retire in 5 to 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 of the following harvesting methods does this example illustrate?

Accepted Answer

Option B, "Distribute the cash flows generated by the business to its owners," is the most appropriate harvesting method for Matt's situation, as the objective is to generate cash for his retirement without continuing to grow the business. Selling the firm or offering stock to the public would require continued growth, which is not Matt's goal, while a private equity recapitalization involves bringing in external investors and likely changing the company's structure, which may not be desirable.

Question 15

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

Accepted Answer

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

Question 16

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 next best alternative foregone when investing in a particular project or asset. In this case, Eleanor needs to consider the rate of return she could earn on a similar investment as the opportunity cost when considering which company to buy. Projected future value, sunk cost, and present value are all important considerations, but they do not necessarily factor in the opportunity cost of choosing a particular investment.

Question 17

Going public can be beneficial to a firm by helping it

Accepted Answer

Going public allows a firm to create a liquid currency by selling shares to the public, which can then be used to fund future acquisitions. This can be beneficial for the firm's growth and expansion plans. Option B is not necessarily true as going public does not provide a shield against takeover attempts. Option C is not valid as going public exposes the firm to the fluctuations of the stock market. Option D is not correct as a public firm may have to offer competitive compensation packages to retain and attract management talent, but it does not necessarily offer better compensation packages than private firms.

Question 18

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

Accepted Answer

By buying the firm's assets, Jill can limit her liability to only those assets purchased. This would protect her from any potential liabilities that the web design company may have. Buying the firm's stock or merging with her present company could potentially expose her to the liabilities of the web design company.

Question 19

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

Accepted Answer

Harvesting owners, like Vasily, typically prefer cash over stock when selling their business because cash provides immediate liquidity and certainty of value, whereas stock can be subject to market fluctuations and future uncertainties.

Question 20

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

Accepted Answer

Publicly traded stock can be easily bought and sold on a public market, providing greater liquidity for owners who may want to sell their shares. This liquidity can also increase the overall value of the company as more investors are willing to invest in a company with a public market for its stock.

Quiz 13: Planning for the Harvest