Question 1

Which of the following statements about locating acquisition candidates is not true

Accepted Answer

Brokers typically represent the seller, not the buyer, in acquisition transactions.

Question 2

In a leveraged buyout,the entrepreneur wants to raise as much of the capital needed as possible in the form of long-term debt.This makes it particularly critical for the entrepreneur to assess the firm's

Accepted Answer

In a leveraged buyout, the entrepreneur seeks to fund as much of the purchase as possible through long-term debt. Therefore, it is crucial for the entrepreneur to assess the debt capacity of the firm, or how much debt the company can handle without jeopardizing its financial stability. This assessment helps ensure that the company can make the required debt payments and meet other financial obligations without causing financial distress. Hence, option A is the correct answer. Options B, C, and D are not directly related to debt capacity and are less relevant to the buyout process.

Question 3

A common procedure to determine the value of a merger candidate is to estimate the present value of ________ and the expected after-tax earnings attributable to the merger.

Accepted Answer

The answer of A common procedure to determine the value...

Question 4

A ________ is an arrangement whereby the manufacturer or sole distributor of a trademarked product or service gives exclusive rights of local distribution to independent retailers in return for their payment of royalties and conformance to standardized operating procedures.

Accepted Answer

The arrangement described in the statement is that of a franchise. In a franchise, the franchisee (independent retailer) pays royalties to the franchisor (manufacturer or sole distributor) in exchange for the right to distribute their product or service exclusively in a certain area, using the brand and following standardized operating procedures. This allows the franchisor to expand their business without having to establish and manage each distribution location themselves.

Question 5

Which of the following is not an advantage of franchising to the franchisee

Accepted Answer

No entry cost is not an advantage of franchising to the franchisee. In fact, franchisees typically have to pay an initial franchise fee and ongoing royalties to the franchisor. The other options, such as availability of management expertise, product acceptance, and knowledge of the market, are advantages of franchising for the franchisee.

Question 6

A ________ occurs when an entrepreneur or an employee group uses borrowed funds to purchase an existing venture for cash.

Accepted Answer

A leveraged buyout (LBO) is a type of acquisition in which an entrepreneur or an employee group uses borrowed funds (i.e. leverage) to purchase an existing venture for cash. In an LBO, the assets of the target company (i.e. the existing venture) are used as collateral for the loans taken out to finance the acquisition. The goal of an LBO is typically to acquire a controlling interest in the company and improve its financial performance in order to sell it or take it public and earn a profit.

Question 7

Franchisees usually contribute ________ of sales to an advertising pool.

Accepted Answer

Franchisees typically contribute 1-2 percent of sales to an advertising pool, which is used for collective marketing efforts benefiting all franchise locations.

Question 8

An unproven franchise:

Accepted Answer

An unproven franchise may not have a clear business plan or defined structure, leading to higher chances of reorganization or mismanagement.

Question 9

The disclosure document provided by the franchisor:

Accepted Answer

The disclosure document, also known as the Franchise Disclosure Document (FDD), is required by the Federal Trade Commission (FTC) under the Franchise Rule. It provides important information about the franchisor and the terms of the franchise agreement to potential franchisees. The other options are incorrect as the FDD does not state a guaranteed yearly return, is not voluntary, and is not always certified by a CPA and the FTC.

Question 10

Which of the terms in a franchise agreement is the most likely cause of a lawsuit

Accepted Answer

Termination clauses can lead to lawsuits if either party feels the termination was unjust or not in accordance with the agreement terms.

Question 11

Which franchise below is an example of the most popular type of franchise

Accepted Answer

KFC is an example of the most popular type of franchise, which is a fast food franchise. Fast food franchises are among the most well-known and successful franchises, with popular brands such as McDonald's, Burger King, and Subway.

Question 12

Which statement about capital requirements in franchising is not true

Accepted Answer

The franchisee benefits from the established credibility and brand recognition of the franchisor, which means they do not have to spend resources to establish the business's credibility. This is one of the key advantages of buying into a franchise.

Question 13

Protection against an unwarranted takeover,technical obsolescence,or protection against market encroachment,are some of the reasons why a company would opt for

Accepted Answer

Mergers are often used as a way to protect against an unwarranted takeover, technical obsolescence, or market encroachment.

Question 14

Franchising opportunities have often evolved from changes in the environment as well as important social trends.Which is not one of the factors responsible discussed in the textbook

Accepted Answer

Acceptance of different cultures is not typically listed as a factor responsible for the evolution of franchising opportunities in the context of environmental changes and social trends.

Question 15

Which of the following was not a recommended method of evaluating the potential market for a new franchise in the text

Accepted Answer

While evaluating foot traffic in the area (option A) and evaluating demographics (option D) are both recommended methods, the text does not suggest hiring a marketing firm specifically to survey foot traffic near the proposed location (option B). The text does recommend locating competitors and evaluating their proximity to the proposed location (option C).

Question 16

In most ________,the debt capital usually exceeds the equity by a ratio of 5:1.

Accepted Answer

In leveraged buyouts, the acquiring company typically uses a significant amount of debt to finance the purchase of the target company. This results in a higher ratio of debt capital to equity capital, often around 5:1. The other options listed do not necessarily have this same financing structure.

Question 17

Which of the following is not a subjective technique an entrepreneur can use to evaluate the asking price of an LBO

Accepted Answer

Price-earnings ratio is an objective technique that evaluates the asking price of an LBO by comparing the firm's stock price to its earnings per share. The other options (A, B, and D) are subjective techniques as they involve more qualitative evaluations of the firm's position and performance.

Question 18

Which of the following would be a quantitative way to ascertain the fairness of an LBO's asking price

Accepted Answer

All the options provided are quantitative measures that can be used to evaluate the fairness of an LBO's asking price. The price-earnings ratio gives insight into the market's valuation of the company relative to its earnings, the book value provides a snapshot of the company's net asset value, and the present value of future earnings helps in understanding the value of the company's future profitability.

Question 19

The best negotiated outcomes likely arise from ________,where the parties find mutually beneficial trade-offs.

Accepted Answer

Integration refers to the approach where the parties seek to find mutually beneficial trade-offs that benefit both parties. This ensures that the negotiated outcome is equitable and satisfactory to both parties, resulting in a sustainable and lasting agreement. Distribution, conflict resolution, and assessment do not necessarily involve finding mutually beneficial trade-offs and may not result in the best negotiated outcomes.

Question 20

Acquisitions are so similar to ________ that at times the two terms are used interchangeably.

Accepted Answer

Acquisitions and mergers both involve combining two companies into one entity. While there may be slight differences in terms of the structure and ownership of the resulting company, the two terms are often used interchangeably in business contexts. Leveraged buyouts, joint ventures, and franchises are all types of business transactions that involve different levels of investment, control, and ownership, and are not necessarily the same as acquisitions or mergers. Therefore, the best choice is C, mergers.

Quiz 14: Accessing Resources for Growth From External Sources