Question 1

Differences in marketability can result in premiums of 30 percent or more for shares of private companies.

Accepted Answer

The answer of Differences in marketability can result in premiums...

Question 2

The life of an entity is flexible for:

Accepted Answer

The answer of The life of an entity is flexible...

Question 3

Which of the following forms of business organization have the least access to capital?

Accepted Answer

Sole proprietorships are generally owned and operated by a single individual who has limited access to external sources of capital. Banks and investors may be hesitant to lend to a sole proprietorship due to the lack of legal structure and potential risks involved in investing in a business owned by a single individual. As a result, sole proprietorships often rely on personal savings or loans, which may limit their ability to grow and expand.

Question 4

The adjusted book value approach is useful in valuing holding companies whose main assets are publicly traded or other investment securities, but it is generally less applicable for operating businesses.

Accepted Answer

The adjusted book value approach is based on the assumption that the value of a company's assets is equal to their fair market value, adjusted for any liabilities or intangible assets. This approach works well for holding companies that primarily hold investment securities that have a readily available market value. However, for operating businesses that have a mix of tangible and intangible assets, it may be less applicable as it does not take into account factors such as brand value, customer relationships, and other non-financial factors that can affect the company's value.

Question 5

A limited liability partnership is:

Accepted Answer

Limited liability partnerships (LLPs) offer a significant advantage over general partnerships by providing limited liability protection to the partners. This means that partners in an LLP are not personally responsible for the business debts and liabilities of the partnership beyond their investment in the LLP. This structure allows LLPs to raise funds more easily than general partnerships, as potential investors face less personal financial risk.

Question 6

Which of the following statements is true of limited liability company?

Accepted Answer

Limited liability companies (LLCs) provide limited liability for the people who make business decisions but also enable all investors to retain tax advantages of a limited partnership. LLCs are generally more costly to form than sole proprietorships. The lives of LLCs are generally more flexible than corporations, and they can raise money from non-members.

Question 7

In contrast to the free cash flow to equity (FCFE) approach, which values cash flows that are available for distribution to stockholders, the dividend discount model (DDM) approach values the stream of cash flows that stockholders expect to receive through dividend payments.

Accepted Answer

The statement correctly describes the differences between the FCFE approach and the DDM approach. The FCFE approach values the cash flows available for distribution to stockholders, while the DDM approach values the expected stream of future dividend payments.

Question 8

Which of the following statements is true of a corporation?

Accepted Answer

The answer of Which of the following statements is true...

Question 9

Cost approaches include replacement cost and multiples analysis.

Accepted Answer

Cost approaches typically include replacement cost and reproduction cost methods, not multiples analysis. Multiples analysis is a valuation technique used in the income or market approach.

Question 10

A business's chances of success increase if you:

Accepted Answer

Taking reasonable risk is important for a business's success because it allows for opportunities and growth. Jumping into a business with just enough capital may set the business up for failure, and overanalyzing opportunities may prevent the business from taking any action at all. Having a unique idea is beneficial, but it must also be paired with a strong and well-thought-out strategy.

Question 11

In valuing a business, analysts must also consider whether it is appropriate to adjust the estimated value of the business for the likelihood that the "key people" may not remain with the firm as long as expected.

Accepted Answer

This is true as the departure of key people may have a significant impact on the business's future performance and cash flows, which can ultimately affect its value. Therefore, it may be appropriate to adjust the estimated value of the business to reflect this risk.

Question 12

An important issue when valuing a business is whether a controlling ownership interest or a minority interest is being valued.

Accepted Answer

The value of a company can vary depending on whether the interest being valued is a controlling ownership interest or a minority interest. A controlling ownership interest generally commands a higher value because it gives the owner more control over the company's operations and decision-making. A minority interest, on the other hand, may have limited control and therefore be considered less valuable. As such, it is important to specify which type of interest is being valued in order to accurately determine the value of the business.

Question 13

Which of the following statements is true of an S-corporation?

Accepted Answer

An S-corporation is a type of corporation that is treated as a pass-through entity for tax purposes, which means that all profits and losses are passed directly to the stockholders as they would in a partnership. Option A is incorrect since an S-corporation is limited to having no more than 100 stockholders. Option C is incorrect since an S-corporation is a distinct type of legal entity that is different from an LLC. Option D is incorrect since S-corporation stock can only be owned by US citizens and resident aliens.

Question 14

The ability to make the life of a business independent of that of the founder increases the _____ of the ownership interests, making it easier for the business to raise capital.

Accepted Answer

If the life of a business is independent of the founder, it means that the business can continue to operate even if the founder is no longer involved. This increases the liquidity of the ownership interests, as potential investors are more likely to be willing to invest in a business that can function without its founder. As a result, it is easier for the business to raise capital. Options A, C, and D are not related to the concept described in the question.

Question 15

In contrast to the financial statements of publicly held firms, private company financials often include personal expenses of the owner and excess compensation expenses.

Accepted Answer

Private companies may choose to include personal expenses of the owner and excessive compensation expenses in their financial statements as there is typically less oversight and regulation compared to publicly held firms. However, this is not always the case and ultimately depends on the accounting practices and policies of the specific company.

Question 16

In the transaction analysis approach, analysts use the information on what someone has paid for a comparable company in a merger or an acquisition to estimate a value for the firm.

Accepted Answer

The transaction analysis approach does involve using the information from comparable company mergers or acquisitions to estimate a value for the firm. This approach is commonly used in valuation analysis.

Question 17

The free cash flow from the firm (FCFF) approach uses only the portion of the cash flows that are available for distribution to stockholders.

Accepted Answer

The free cash flow from the firm (FCFF) approach calculates the cash flows that are available for distribution to both stockholders and debt holders, not just stockholders.

Question 18

During the startup of a company, the founder makes several critical decisions including which of the following:

Accepted Answer

Raising funds to develop the product(s) is crucial in the early stages of a startup. Without sufficient funds, it would be difficult to create or manufacture the product(s) and take them to market. The other choices, while important, can come later after the company has secured its initial funding.

Question 19

Which of the following statements is true of a sole proprietorship?

Accepted Answer

The life of a sole proprietorship is limited to the life of the owner. Once the owner dies or decides to sell or transfer the business, the sole proprietorship ceases to exist. A is incorrect because sole proprietorship is one of the least expensive types of businesses to start. C is incorrect because a sole proprietorship does not have the option of raising equity capital through public offerings. D is incorrect because the liability of a sole proprietor is unlimited, meaning the owner is personally responsible for all debts and legal obligations of the business.

Question 20

In the free cash flow to equity (FCFE) approach, an analyst values the free cash flows that the assets of the firm are expected to produce in the future.

Accepted Answer

In the FCFE approach, an analyst values the free cash flows available to equity shareholders after paying off debts and reinvesting in the business, not the cash flows that the assets of the firm are expected to produce.

Quiz 18: Business Formation, Growth, and Valuation