Question 1

Harvey 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 stock to the public in a(n):

Accepted Answer

An IPO (Initial Public Offering) is when a company sells its stock to the public for the first time, allowing anyone to buy shares in the company. This would allow Harvey to recoup some of his investment while still maintaining some ownership and control of the business. ESOP (Employee Stock Ownership Plan) is a type of retirement plan where a company's employees own shares in the company. MBO (Management Buyout) and LBO (Levaraged Buyout) both involve the purchase of a company, either by its current management or by a group of investors using borrowed money, but neither would allow Harvey to maintain ownership and control of the business while recouping some of his investment.

Question 2

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

This type of arrangement is a Leveraged Buyout (LBO), where the management team buys the company using a combination of their own funds and financing from the seller. The seller, in this case Marvin, typically finances part of the purchase through a loan or other financing agreement. ESOP (Employee Stock Ownership Plan) is a plan where employees own a portion of the company's stock, while IPO (Initial Public Offering) is the first sale of a company's stock to the public, and PPO (Private Placement Offering) is a private sale of securities to a limited number of qualified investors.

Question 3

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

The opportunity cost is the cost of the next best alternative forgone when a decision is made. In this case, it represents the return that Eleanor could have earned if she had invested in a similar opportunity instead of buying the company. Therefore, D is the correct answer. A represents the expected future value of an investment, B represents a cost that has already been incurred and cannot be recovered, and C represents the discounted value of future cash flows.

Question 4

Going public can be beneficial to a firm by helping it

Accepted Answer

Going public can create a liquid currency, in the form of the sale of shares on the stock market, which can then be used to fund future acquisitions or investments. This can be a significant benefit to a firm, as it provides a source of capital that is not tied up in debt and can be used to fuel growth and expansion. While the other options listed may also be benefits of going public, A is the most clear and direct benefit.

Question 5

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

By purchasing the firm's assets, Jill would not be responsible for any pre-existing liabilities of the company. If she were to buy the stock or merge with the company, she would be taking on all of the company's existing liabilities.

Question 6

An employee stock ownership plan represents

Accepted Answer

An employee stock ownership plan, or ESOP, is a retirement plan that allows employees to acquire an ownership interest in their company. It is not a method for a founder to build their own position, a harvest method, or an effort to ease investor concerns.

Question 7

Pat, owner of Pat's Welding, LLC, 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 an LLC, Pat will not have to be concerned about:

Accepted Answer

As an owner of an LLC, Pat's income will not be subject to double taxation as the company's profits and losses flow through to the owner's personal tax return.

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

The best option for transferring ownership to the next generation would be a private placement, where the ownership would be transferred to a select group of individuals such as family members or trusted employees. This allows for greater control over who will be owning and running the business in the future. A cash flow distribution would simply distribute profits to the current owners, without transferring ownership. An initial public offering would involve selling shares to the public and would not necessarily ensure ownership transfer to the next generation. Selling to a strategic buyer would also result in a transfer of ownership outside of the family.

Question 9

Paul 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 firm is:

Accepted Answer

By systematically withdrawing cash from the firm, Paul is able to retain control over the company. Selling the company would mean giving up ownership and control to someone else. Additionally, siphoning off funds allows Paul to have a steady stream of income during retirement without having to sell the company all at once.

Question 10

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 11

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

Accepted Answer

Harvesting owners, like Vasily, typically prefer cash over stock when selling their business because cash provides immediate liquidity and certainty of value, whereas stock can be subject to market fluctuations and future uncertainties.

Question 12

Two years ago, Harold inherited $30,000 and decided to open a coffee shop in his hometown instead of buying stock in Ford Motor Company. The rate of return he could have earned on his investment in Ford stock represents his

Accepted Answer

The opportunity cost of funds refers to the returns that could have been earned by investing in the next best alternative. In this case, the next best alternative was investing in Ford stock, and the returns that could have been earned on that investment represent Harold's opportunity cost of funds.

Question 13

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 firm's free cash flows to the owners. Matt plans to retain ownership for now but without continuing to grow the business, which means he will not reinvest the profits back into the business, but instead invest some of the cash generated for his retirement. This strategy involves harvesting the profits generated by the business and using them to benefit the owners without necessarily selling the business.

Question 14

The value of a business is determined by

Accepted Answer

The value of a business is ultimately determined by what a buyer with the cash is prepared to pay. The value is not solely based on the owner's beliefs or a valuation formula, but rather on the market demand and competition for the business. The buyer's perceived value of the business based on their own strategic goals and potential return on investment is what ultimately determines the sale price.

Question 15

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

Accepted Answer

High rates of return on assets suggest that the firm's assets are generating significant profits and cash flows, which increases the overall value of the firm. This indicates that the firm is worth more as a going concern than if it were to be liquidated.

Question 16

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

Accepted Answer

Publicly traded stock provides greater liquidity, meaning that it can be easily bought and sold on a public market. This allows owners to quickly and easily sell their shares if they need to raise funds or otherwise divest from the company.

Question 17

An IPO occurs when a company offers its stock to

Accepted Answer

An IPO (initial public offering) occurs when a company offers its stock to the general public for the first time, allowing individuals to buy shares of ownership in the company.

Question 18

Which statement best characterizes business valuation?

Accepted Answer

The answer of Which statement best characterizes business valuation?
...

Question 19

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 know as:

Accepted Answer

The practice of paying taxes at both the corporate level and individual level on the same earnings is known as double taxation.

Question 20

Leonard 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 Steve in this situation?

Accepted Answer

Since the bank is unable to lend the full amount to the buyer, offering to finance the remaining 30% would be a good option. This would allow the buyer to purchase the business, while also providing Leonard with regular payments over the next few years. Additionally, this would reduce the need for Leonard to find a different buyer or lower the asking price. Retaining a 30% ownership in the business and a seat on the advisory board would also be an option, but this may not be desirable for Leonard if he is looking to fully exit the business.

Quiz 13: Planning for the Harvest

Harvey 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 stock to the public in a(n) :

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:

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

Going public can be beneficial to a firm by helping it

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?

An employee stock ownership plan represents

Pat, owner of Pat's Welding, LLC, 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 an LLC, Pat will not have to be concerned about:

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?

Paul 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 firm is:

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

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