Question 1

An IPO occurs when a company offers its shares to:

Accepted Answer

An IPO (Initial Public Offering) is when a company makes their shares available for sale to the general public for the first time. This is done to raise capital and increase the company's visibility in the market. Option A would refer to institutional investors, not investment practitioner organizations. Option B involves offering shares to family members, which is not a common practice for an IPO. Option C involves offering shares to private investors within the state where the company is located, which is known as an intrastate offering and is less common than a public offering to the general public.

Question 2

Two years ago, Dewald inherited R30 000 and decided to open a coffee shop in his hometown instead of buying shares in Tesla Motor Company.The rate of return he could have earned on his investment in Tesla shares represents his:

Accepted Answer

The concept of opportunity cost refers to the cost of the next best alternative foregone. In this case, if Dewald had chosen to invest in Tesla shares, the return he could have earned on that investment is the opportunity cost of the funds he used to open the coffee shop. Therefore, B is the correct answer.

Question 3

Which statement best characterises business valuation?

Accepted Answer

The answer of Which statement best characterises business valuation?
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Question 4

An employee share ownership plan represents:

Accepted Answer

An employee share ownership plan provides an opportunity for employees to acquire an ownership interest in their company, which can increase their motivation and loyalty to the company. It is not a good way for a business founder to build their position in the company, nor is it a harvest method of choice or an effort to ease investor concerns.

Question 5

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 cost of forgoing the next best alternative. In this case, Eleanor's opportunity cost is the rate of return she could earn on a similar investment if she chooses to buy the company. This is important to consider when comparing her alternatives and making a decision on where to invest her money. A) Projected future value is the expected value of an investment at a future point in time. B) Sunk cost is a cost that has already been incurred and cannot be recovered. C) Present value is the value of an investment at the current point in time.

Question 6

Going public can be beneficial to a business by helping it:

Accepted Answer

Going public allows a company to issue stocks and raise capital from the public, which creates a liquid currency that can be used to fund future acquisitions. This can help the company grow and expand more rapidly. Going public does not necessarily help a company avoid becoming a takeover target, and it does not necessarily provide a shield against market fluctuations. While going public may help a company offer better compensation packages to attract management talent, this is not as significant a benefit as creating a liquid currency to fund future growth.

Question 7

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

The given arrangement where Marvin is financing part of the purchase is known as a Leveraged Buyout (LBO). In an LBO, the buyers usually don't have enough capital to make the purchase outright, and hence, they take on debt to finance the acquisition.

Question 8

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

Accepted Answer

Private placement is suitable for transferring ownership within a family or to a specific group, allowing the next generation to take over the business.

Question 9

Siyabonga has invested all of his money in his thriving business.He would like to recoup some of investment, but not completely sell off his business.This might be a good time for him to consider selling shares to the public in a(n):

Accepted Answer

An initial public offering (IPO) is the best choice for Siyabonga to sell shares to the public and recoup some of his investment. An IPO can provide liquidity to the business and allow Siyabonga to retain control while still accessing the capital markets. ESOPs, MBOs, and LBOs are not suitable options for Siyabonga's current situation.

Question 10

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

Accepted Answer

Offering to finance the remaining 30% and accepting payments over the next few years would be the best option in this situation, as it allows Jan to sell his business and receive some form of payment for it. This also shows the buyer's commitment and willingness to make payments over time. Additionally, if Jan does not necessarily need all the money immediately, financing the remaining amount could potentially result in a higher overall profit for him.

Question 11

The value of a business is determined by:

Accepted Answer

The value of a business is ultimately determined by what a buyer with cash is willing to pay for it. While the owner may have a subjective belief about the worth of the business, and a valuation formula may provide some guidance, the final determination of the value is made when a buyer is ready to make an offer.

Question 12

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

Accepted Answer

A harvesting owner would prefer cash over shares because they are looking to exit the business and want immediate liquidity rather than potential future gains from shares.

Question 13

Nettie's Knits, Inc., paid taxes on its net income 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 is the taxation of corporate earnings at both the corporate level and the individual level when distributed as dividends to shareholders. This is a commonly criticized aspect of corporate taxation.

Question 14

The mere fact that a business is earning high rates of return on the business's asset indicates that:

Accepted Answer

High rates of return on assets indicate that the business is generating profits and is worth more as a going concern than as a dead one. This suggests that it would be wise to continue to invest in the business and grow it further. Downsizing or limiting cash flows returned to investors would not be recommended in this case.

Question 15

Pat, owner of Pat's Welding (Pty) Ltd., 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 a (Pty) Ltd., Pat will not have to be concerned about:

Accepted Answer

Since Pat's Welding is a (Pty) Ltd., Pat will not have to worry about double taxation on his income. This is because the (Pty) Ltd. structure is a separate legal entity which means that the company pays its own taxes on its profits, and Pat will only be taxed on his income as an individual.

Question 16

Mohammed 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 business is:

Accepted Answer

By systematically withdrawing funds from the business, Mohammed can retain control of the company rather than selling it to someone else. This may be important to him if he values the legacy of his company or wants to maintain a certain level of involvement in its operations. The other options do not necessarily apply to systematically withdrawing funds from the business.

Question 17

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

Accepted Answer

Having publicly traded shares means that owners can easily sell their shares in the open market, increasing the liquidity of their investment. This liquidity enables easier access to cash, and can provide diversification opportunities that are not available with privately held shares.

Question 18

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

Accepted Answer

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

Question 19

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

Accepted Answer

Buying the business's assets would limit Jill's liability to the assets she acquires. If she were to buy the shares, she would also acquire any liabilities the company may have, including potential lawsuits related to the patented technology. Merging the company with her present business would also result in potential liabilities being transferred. Therefore, buying the assets is the safest option for Jill.

Question 20

Matt owns a car dealership that is very profitable.Since he plans to retire in 5-10 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 harvesting method does this example illustrate?

Accepted Answer

The example illustrates a strategy to release the business's free cash flows to the owners, as Matt plans to retain ownership for now and invest some of the cash generated for retirement without continuing to grow the business.

Quiz 13: Planning for the Harvest