Question 1

It is rare that the owner or a family member is either an investor in or an owner of a vendor supplying products or services to the family owned firm.

Accepted Answer

It is not rare for an owner or family member to be an investor in or owner of a vendor supplying products or services to the family owned firm, which can lead to potential conflicts of interest. It is important for proper disclosure and management of these relationships to avoid ethical or legal issues.

Question 2

Shell corporations may be attractive for investors interested in capitalizing on the intangible value associated with the existing corporate shell.This could include name recognition; licenses,patents,and other forms of intellectual properties; and underutilized assets such as warehouse space and fully depreciated equipment with some economic life remaining.

Accepted Answer

Shell corporations can have value beyond just their physical assets, including intangible assets such as intellectual property or name recognition. These intangible assets may be attractive to investors looking to capitalize on them.

Question 3

A family owned firm's board faces the sometimes daunting challenge of achieving the proper balance between monitoring and collaboration to minimize the emotionality and overlapping roles that often characterize such firms.

Accepted Answer

This statement is true. Family owned firms often have emotional and overlapping roles, making it challenging for the board to find the right balance between monitoring and collaboration.

Question 4

Because of the need to satisfy both the demands of stockholders and regulatory agencies,public companies need to balance the desire to minimize taxes with the goal of achieving quarterly earnings levels consistent with investor expectations.Failure to do so frequently results in an immediate loss in the firm's market value.

Accepted Answer

Public companies have a responsibility to their stockholders to maintain profitability and meet regulatory requirements. This includes finding ways to minimize taxes while also meeting quarterly earnings expectations. Failing to do so can result in a decrease in the company's market value.

Question 5

An investor in a small company generally has little difficulty in selling their shares because of the high demand for small businesses.

Accepted Answer

This statement is false. The demand for shares in small businesses is typically lower than for those in larger, more established companies, making it potentially more difficult for investors to sell their shares.

Question 6

If the cash flows of the firm are not expected to grow or are expected to grow at a constant rate indefinitely,the discount rate used by practitioners often is referred to as the capitalization rate.

Accepted Answer

This statement is true. The capitalization rate is used to determine the present value of a firm's expected cash flows when those cash flows are expected to grow at a constant rate indefinitely. It is often used in valuation models such as the dividend discount model and the discounted cash flow model.

Question 7

EBITDA has become an increasingly popular measure of value for privately held firms in recent years.

Accepted Answer

EBITDA has become a popular measure of value for privately held firms in the recent years.

Question 8

It is generally easier to sell a minority interest than a majority interest in a business without loss of the value of the original investment.

Accepted Answer

Selling a minority interest in a business is often more challenging because buyers may be less interested in acquiring a stake that does not offer control over business decisions, potentially reducing the interest's marketability and value.

Question 9

Shell corporations rarely have any value.

Accepted Answer

Shell corporations may have value in terms of potential future use, such as for mergers and acquisitions or for tax planning. However, they typically do not have any actual assets or operations, which is why they are called "shell" corporations.

Question 10

Private investment in public entities (PIPES)is a commonly used method of financing reverse mergers.

Accepted Answer

Private investment in public entities (PIPES) is a commonly used method of financing reverse mergers.

Question 11

Despite the lack of public exchanges for privately held firms,Wall Street analysts have ample incentive to analyze such firms in search of emerging companies.

Accepted Answer

The answer of Despite the lack of public exchanges for...

Question 12

Owners of private businesses attempting to minimize taxes may overstate their contribution to the firm by giving themselves or family members unusually low salaries,bonuses,and benefits.

Accepted Answer

Owners of private businesses attempting to minimize taxes may understate their contribution to the firm by giving themselves or family members unusually low salaries, bonuses, and benefits, thereby reducing the taxable income of the business.

Question 13

A sudden improvement in operating profits in the year in which the business is being offered for sale may suggest that both revenue and expenses had been overstated during the historical period.

Accepted Answer

A sudden improvement in operating profits in the year in which the business is being offered for sale may suggest that either revenue has been increased, possibly through one-time sales or price increases, or expenses have been understated or reduced, rather than both revenue and expenses being overstated during the historical period.

Question 14

The control model of corporate governance may be more applicable where ownership tends to be highly diverse and the right to control the business is separate from ownership.

Accepted Answer

The control model of corporate governance is more applicable in situations where ownership is concentrated among a few individuals or entities who have significant control over the business, rather than in scenarios where ownership is highly diverse and separated from control.

Question 15

The fair value concept is applied when no strong market exists for a business or it is not possible to identify the value of substantially similar firms.

Accepted Answer

The statement correctly describes the circumstances under which the fair value concept is applied.

Question 16

In many countries,family owned firms have been successful because of their shared interests and because investors place a higher value on short-term performance than on the long-term health of the business.

Accepted Answer

Family-owned firms often succeed due to long-term planning, shared values, and a focus on the long-term health of the business rather than prioritizing short-term performance, which contrasts with the practices of some publicly traded companies.

Question 17

Small firms may lack product,industry,and geographic diversification,which add to their specific business risk.

Accepted Answer

Small firms often have a limited product line, operate within a particular industry, and may have a limited geographic reach, which increases their specific business risk.

Question 18

A control premium is the additional premium a buyer is willing to pay for the right to direct the activities of a firm.

Accepted Answer

A control premium is indeed the additional premium a buyer is willing to pay for the ability to control the activities of the acquired firm. This control allows the buyer to make strategic decisions and benefit from the company's future growth and profitability. The premium reflects the value of this control and is typically higher than the price a passive investor would pay for the company.

Question 19

Private companies are generally not subject to the same level of rigorous controls and reporting systems as are public companies.

Accepted Answer

Private companies are not required to follow the same strict regulations and reporting requirements as public companies that are listed on stock exchanges. Private companies may have less transparency and accountability to stakeholders compared to public companies.

Question 20

If the discount rate is assumed to be 8% and the current cash flow is $1.5 million and is expected to remain at that level in perpetuity,the implied valuation is $18.75 million.

Accepted Answer

The calculation for the perpetual cash flow valuation is cash flow divided by discount rate. In this case, $1.5 million divided by 8% equals $18.75 million, so the implied valuation is $18.75 million.

Quiz 10: Analysis and Valuation of Privately Held Companies