Question 1

The costs associated with non-interest-bearing current liabilities, which are included in the company's cost of sales and other operating expenses,

Accepted Answer

Non-interest-bearing current liabilities are included in the company's cost of sales and other operating expenses, which are subtracted in the calculation of FCFC.

Question 2

Which one of the following elements is included in a business plan?

Accepted Answer

All of the listed elements are important components that should be included in a comprehensive business plan. A detailed description of the product(s) and services the company will sell gives investors and stakeholders a clear understanding of the market needs the business aims to fill, while a detailed discussion of marketing and sales activities provides insight into how the business plans to achieve its revenue goals. Finally, a detailed discussion of capital requirements and uses is important to ensure the business has sufficient funding to operate and grow.

Question 3

In the free cash flow from the company (FCFC) approach, the total value of the company, V_C, is calculated as the present value of the FCFC,

Accepted Answer

The FCFC approach calculates the total value of the company as the present value of its free cash flows, discounted by the company's weighted average cost of capital (WACC). This reflects the cost of both equity and debt financing for the firm. Therefore, choice B, which states that the FCFC should be discounted by the company's WACC, is the most appropriate choice.

Question 4

Break-even analysis: Sherwin Furniture makes period pieces. The company has total fixed costs of $632,750. The average piece is sold at a price of $2,125 and involves variable costs of $1,675 per unit. What is the break-even point for this company?

Accepted Answer

The break-even point is calculated by dividing the total fixed costs by the contribution margin per unit (selling price per unit minus variable cost per unit). Here, it is $632,750 / ($2,125 - $1,675) = 1,406 units.

Question 5

Break-even analysis: Johnstone company wants to break even at 20,000 units on its only product. Its unit variable cost is $63.75, and its fixed cost is $742,000. What should be the company's unit selling price?

Accepted Answer

To break even, total revenue must equal total costs. The break-even point in units is given by fixed costs divided by the difference between selling price and variable cost. Solving for the selling price: $742,000 / (20,000) + $63.75 = $100.85.

Question 6

The transaction approach is difficult to use because

Accepted Answer

All of the options mentioned in the statements are true. Transaction data may suffer from reliability issues, the data may not be timely, and it could be tough to assess the terms of the transactions. Due to these difficulties, the transaction approach is usually considered less reliable compared to multiples analysis.

Question 7

Which one of the following statements is NOT true?

Accepted Answer

The other statements are all true. However, the market value of a business may not always be higher than the strategic value. In some cases, a strategic investor may be willing to pay a premium over the market value in order to acquire specific assets, capabilities or market share that are of strategic importance to them. Therefore, the strategic value of a business may sometimes be higher than the market value.

Question 8

The adjusted book value approach involves

Accepted Answer

The adjusted book value approach involves valuing all tangible and intangible assets, as well as restating the value of individual assets to reflect their fair market values. It is generally less applicable for operating businesses, but is often used to value holding companies whose main assets are publicly traded or other investment securities.

Question 9

The key elements in a business plan include all but

Accepted Answer

A dividend policy is not a key element in a business plan. The other options listed (executive summary, company overview, market analysis) are all essential components of a comprehensive business plan.

Question 10

The value of a business changes over time because

Accepted Answer

The value of a business is affected by changes in general economic conditions, industry conditions, decisions made by the managers, actions of competitors, and investment, operating, and financing decisions made by managers. Therefore, all of the above factors affect the value of a business over time.

Question 11

Which one of the following statements about the free cash flow from the company (FCFC) approach is NOT true?

Accepted Answer

The statement that the present value of these cash flows exceeds the total value of the company, or its enterprise value, is not true. The FCFC approach is used to value the enterprise value of a company, and therefore the present value of these cash flows should be equal to or lesser than the total value of the company.

Question 12

Break-even analysis: Trident Ltd makes designer gold bracelets. Their annual costs include shop rent of $12,500, salaries for two jewellers of $118,000, design software costs of $10,000, and other overhead costs of $13,000. An average bracelet is priced at $5,500. It costs $2,000 in raw material, $1,250 in labour, and $250 in other expenses. What is the minimum number of bracelets that need to be sold to earn a profit?

Accepted Answer

The total cost of producing one bracelet is $2,000 + $1,250 + $250 + ($12,500 + $118,000 + $10,000 + $13,000) / 5,500 = $3,500. So, the minimum number of bracelets that need to be sold to earn a profit is 77.

Question 13

When using the multiples analysis approach to valuing a business, one must be aware

Accepted Answer

All three options are important to consider when using the multiples analysis approach. A marketability discount can be significant and must be factored in, finding comparable companies can be challenging, and differences in capital structures can affect the values obtained through the multiples analysis. Thus, option D is the best answer.

Question 14

Which one of the following statements about business valuation is NOT true?

Accepted Answer

There is no single value for any business as valuations can vary depending on the purpose of the valuation, the timeframe, and the methods used.

Question 15

Which one of the following statements about business plans is true?

Accepted Answer

All of the above statements are true. A business plan serves as a roadmap for a business, presenting the strategic planning process and outlining how the business will be developed over time. Additionally, a well-prepared business plan can aid in communicating potential returns to investors.

Question 16

Which one of the following statements is true?

Accepted Answer

All of the statements are true. The cash budget is a useful planning tool for entrepreneurs as it helps them understand the cash flows in and out of their company over a period of time. This understanding is necessary for managing their finances effectively and identifying where external financing may be needed.

Question 17

A business plan is a tool that

Accepted Answer

A business plan can serve multiple purposes such as raising capital, setting goals and objectives, and evaluating and controlling the company's performance.

Question 18

Break-even analysis: Jackson Electronics makes circuit boards and markets them to electronic goods manufacturers. The company has non-salary fixed costs of $212,000 and salary costs of $134,250. Each circuit board is sold at a price of $111.50 and involves variable costs of $81.73 per unit. What is the break-even point for Jackson?

Accepted Answer

The answer of Break-even analysis: Jackson Electronics makes circuit boards...

Question 19

Break-even analysis: Triad Electrical Supply Company needs to sell

Accepted Answer

The answer of Break-even analysis: Triad Electrical Supply Company needs...

Question 20

Which one of the following statements is NOT true?

Accepted Answer

The replacement cost approach involves restating the value of the individual assets in a business to reflect their fair market values. This is not true because the replacement cost approach involves restating the value of the individual assets in a business to reflect their current cost to replace.

Quiz 18: Business Formation, Growth and Valuation

The costs associated with non-interest-bearing current liabilities, which are included in the company's cost of sales and other operating expenses,

Which one of the following elements is included in a business plan?

In the free cash flow from the company (FCFC) approach, the total value of the company, VC, is calculated as the present value of the FCFC,

Break-even analysis: Sherwin Furniture makes period pieces. The company has total fixed costs of $632,750. The average piece is sold at a price of $2,125 and involves variable costs of $1,675 per unit. What is the break-even point for this company?

Break-even analysis: Johnstone company wants to break even at 20,000 units on its only product. Its unit variable cost is $63.75, and its fixed cost is $742,000. What should be the company's unit selling price?

The transaction approach is difficult to use because

Which one of the following statements is NOT true?

The adjusted book value approach involves

The key elements in a business plan include all but

The value of a business changes over time because

Which one of the following statements about the free cash flow from the company (FCFC) approach is NOT true?

When using the multiples analysis approach to valuing a business, one must be aware

Which one of the following statements about business valuation is NOT true?

Which one of the following statements about business plans is true?

Which one of the following statements is true?

A business plan is a tool that

Break-even analysis: Triad Electrical Supply Company needs to sell

Which one of the following statements is NOT true?

In the free cash flow from the company (FCFC) approach, the total value of the company, V_C, is calculated as the present value of the FCFC,