Deck 14: Valuation of Entrepreneurial Ventures

Question 1

Adjusted tangible book value is a popular method of valuation.

Answer 1

True

Question 2

Vesting on founders' stock refers to holders of preferred stock having the right to purchase additional shares when issued by the company.

Answer 2

False

Question 3

Knowing a venture's pre-money valuation is not possible.

Answer 3

False

Question 4

Replacement value of a business is based upon the value of each asset if it had to be replaced at current cost.

Question 5

Avoiding start-up costs is a factor to consider when valuing a business.

Question 6

Entrepreneurs should try to be as objective as possible in determining the fair market value of their enterprise.

Question 7

The "timing" of projected income or cash flows is not a critical factor in establishing the value of a firm.

Question 8

One of the most common reasons for acquiring a business is developing more growth-phase products.

Question 9

Insufficient controls are a strength for a small business and should be considered when the business is being valued.

Question 10

When a company is liquidated, preferred stockholders receive a certain fixed amount after assets are distributed to common stockholders.

Question 11

The price/earnings ratio is determined by dividing the market price of common stock by retained earnings.

Question 12

Buyers and sellers assign different values to a business.

Question 13

An entrepreneur does not need to know how to calculate the value of a competitor's operation.

Question 14

Tangible assets as well as intangible assets of a business need to be assessed for proper venture evaluation.

Question 15

Business valuation is essential when attempting to buy out a partner.

Question 16

Emotional bias is not an underlying issue in valuing a business.

Question 17

"Why is the business being sold?" is not an important question to ask when analyzing the viability of buying a business.

Question 18

The real value of any venture is its potential earning power.

Question 19

Increasing market share by acquiring a firm in the company's industry is one reason for the acquisition.

Question 20

Weaknesses in small, closely held businesses do not call for careful analysis of the business being valued.

Question 21

Which of the following hidden costs are involved when establishing the value of a firm?

A)insufficient controls and costs
B)divergent expenses
C)personal expenses
D)travel expenses

Question 22

If cash flow is deemed to be the most important consideration in buying a business, which of the following valuation methods is likely to be used?

A)adjusted tangible assets
B)price/earnings
C)high equity/low debt
D)discounted future earnings

Question 23

When comparing and contrasting major competitors along core competitive dimensions, you should include

A)product, technology, and distribution.
B)profits, sales, and operating ratios.
C)employees, suppliers, and competitors.
D)profits, price, and product.

Question 24

Goodwill, patents, deferred financing costs, and other intangible assets are considered when computing

A)inventory value.
B)the adjusted tangible book value.
C)capitalized earnings.
D)the fixed price value.

Question 25

How much revenue did Facebook raise with its initial public offering (IPO) in 2012?

A)$10 billion
B)$16 billion
C)$50 billion
D)$150 billion

Question 26

Many closely held ventures are undercapitalized, which often indicates

A)insufficient controls.
B)lack of management depth.
C)a high level of debt.
D)divergent goals.

Question 27

Potential earning power, which determines the true value of the firm, is best calculated using the _____ method.

A)price/earnings ratio
B)adjusted tangible book value
C)discounted earnings
D)multiple of earnings

Question 28

Which of the following methods of valuation was developed by the U.S. Treasury to determine a firm's intangible assets?

A)market value
B)replacement value
C)excess earnings
D)multiple of earnings

Question 29

A drawback to the price/earnings ratio method is that

A)the stock of a private company is publicly traded.
B)the stated net income of a private company may not truly reflect its actual earning power.
C)it is relatively easy to find a truly comparable publicly held company, even in the same industry.
D)it distorts profits earned.

Question 30

The price/earnings ratio is a method of valuation that is mostly used

A)with publicly held corporations.
B)when competition is high.
C)for sensitive market conditions.
D)for small corporations.

Question 31

In the context of buying a business, a known commodity may command a higher price for which of the following reasons?

A)Historical projections have intrinsic value.
B)Avoiding start-up costs has value.
C)Property values are variable.
D)The value of a founder's stock decreases over time.

Question 32

Which of the following provides an absolute bottom line value of a firm?

A)return on investment
B)price/earnings ratio
C)market value
D)liquidation value

Question 33

When considering management, the entrepreneur should be concerned about

A)ownership positions.
B)pension and profit sharing.
C)the total number of employees.
D)employee benefits.

Question 34

Emotional bias is likely to have which of the following effects on a seller's valuation of a business?

A)increase the valuation
B)decrease the valuation
C)no net effect on the valuation
D)an easier time negotiating

Question 35

_____ refers to conducting a thorough analysis of every facet of an existing business.

A)Due diligence
B)Industry capitalization
C)Knowledge acquisition
D)Risk assessment

Question 36

The adjusted tangible book value includes all of the following except

A)goodwill.
B)patents.
C)common price.
D)deferred financing costs.

Question 37

When considering employees, the entrepreneur should be concerned about

A)the total number of single employees.
B)the total number of female employees.
C)the total number of employees by function.
D)employee productivity.

Question 38

The price/earnings ratio is determined by

A)multiplying market price of common stock by earnings per share.
B)dividing market price of common stock by earnings per share.
C)dividing the average product price by overall earnings.
D)dividing market price of bonds by earnings per share.

Question 39

When considering sales and distribution, the entrepreneur should be concerned about

A)whether any sales are made on consignment.
B)how many sales are internal.
C)how sales vary with social demographics.
D)how many distributors are necessary.

Question 40

When considering physical facilities, the entrepreneur should be concerned about

A)which facilities are owned versus leased.
B)which facilities are used for production.
C)whether adequate capital is maintained.
D)facility upkeep.

Question 41

Which of the following is not an underlying issue when determining proper valuation of the venture set to be acquired?

A)the differing goals of a buyer and seller
B)the emotional bias of the seller
C)the reasons for the acquisition
D)the amount of risk involved in an acquisition

Question 42

Which of the following is the first step in the traditional pricing formula?

A)Determine the adjusted tangible net worth.
B)Estimate potential annual earnings of the buyer.
C)Determine the average annual net earnings.
D)Discount future earnings.

Question 43

Return on investment

A)is net profit divided by investment.
B)provides a replacement value.
C)establishes a value for the business.
D)is equal to the current prime rate.

Question 44

Some buyers are willing to pay more for a business than what valuation methods determine its worth to be to avoid

A)start-up costs.
B)earlier losses.
C)previous profits.
D)legal fees.

Question 45

Which of the following is a reason for buyers to keep projections in perspective?

A)vague histories
B)fluctuating markets
C)certain environments
D)start-up costs

Question 46

Which of the following does a post-money valuation include that a pre-money valuation does not?

A)market value
B)replacement value
C)excess earnings
D)venture capital investment

Question 47

What should be considered in analyzing a small, closely held business?

Question 48

Closely held ventures usually suffer from which of the following shortcomings?

A)a lack of management depth
B)overcapitalization
C)insufficient controls
D)internal conflict

Question 49

The discounted earnings method of valuation establishes

A)potential earning power.
B)an appropriate rate for replacement.
C)expectancy of the business expenses.
D)future profits.

Question 50

A business valuation is not usually essential when

A)giving a gift of stock.
B)going public.
C)selling a business division.
D)hiring a new director of operations.

Question 51

Goodwill, family members on the payroll, and planned losses are examples of

A)analyzing a business.
B)underlying issues.
C)emotional bias.
D)hidden costs.

Question 52

List some questions to ask before making a potential purchase, and explain why each is important.

Question 53

Sales and earnings of a venture are projected from

A)historical projections.
B)historical financials.
C)data on start-ups.
D)property values.

Question 54

When calculating the total amount needed to buy a business venture, which of the following would not be included?

A)new inventory
B)three months' operating expenses
C)professional services
D)employee retention

Question 55

Which of the followings venture valuation methods is the most effective if the business being valued needs to generate a return greater than investment?

A)adjusted tangible assets
B)price/earnings
C)discounted future earnings
D)replacement value

Question 56

Explain the purpose of a letter of intent.

Question 57

The primary advantage of the price/earnings approach to valuation is that it

A)reflects "top value" of the firm.
B)pays off assets and sells liabilities.
C)assumes business begins operations.
D)is simple to use.

Question 58

_____ gives investors some protection against founders selling their interest to a third party.

A)Right of first refusal
B)A voting right
C)A registration right
D)A co-sale right