Question 1

A limited liability partnership is:

Accepted Answer

A limited liability partnership is a type of partnership where some partners have limited liability, meaning they are not personally responsible for the debts and obligations of the partnership. This allows the partnership to raise money from limited partners without those partners being personally liable for the business's debts. Thus, option D is the correct answer. Option A is incorrect because a limited liability partnership agreement can be written for a fixed life. Option B is incorrect because forming a limited liability partnership can be more complex and costly than forming a sole proprietorship. Option C is incorrect because limited liability partnerships offer limited liability for partners, meaning they are not personally responsible for business debts and obligations.

Question 2

The life of an entity is flexible for:

Accepted Answer

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

Question 3

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 4

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 contrasts the FCFE approach with the DDM approach in terms of the cash flows they value.

Question 5

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 6

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.

Question 7

Which of the following statements is true of a corporation?

Accepted Answer

S-corporations generally have more limited access to capital compared to C-corporations due to restrictions on the number and type of shareholders they can have.

Question 8

In which of the following forms of business organization access to capital is the least?

Accepted Answer

Access to capital for a sole proprietorship is limited to the owner's personal savings or loans, making it the form of business organization with the least access to capital. General partnerships and S-corporations also have limited access to capital, but C-corporations have the most extensive access to capital through various sources such as issuing bonds or stocks.

Question 9

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

Accepted Answer

An LLC provides limited liability for all members, not just those who make business decisions, while allowing for tax advantages similar to those of a limited partnership. Additionally, the formation of an LLC is often more costly than that of a sole proprietorship, and the lives of the LLC can be flexible. While an LLC may raise funds from members, it may also secure financing from external sources.

Question 10

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

Accepted Answer

An S-corporation is a type of corporation that passes all profits and losses directly to the stockholders, as in a partnership. Option A is incorrect because an S-corporation cannot have more than 100 stockholders. Option C is wrong because an S-corporation is not a variation of the LLC. Option D is incorrect because S-corporation shares are restricted to certain individuals who are U.S. citizens or residents.

Question 11

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

Accepted Answer

Raising funds is a critical decision during the startup of a company because without sufficient funds, it will be difficult to develop and manufacture the product(s) or service(s) to be sold. While innovation, marketing strategy, and expansion plans are important, they may not be possible without the necessary financial resources.

Question 12

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 company financial statements may include personal expenses of the owner and excess compensation expenses, as they are not required to adhere to the same reporting standards as publicly held firms.

Question 13

Which of the following statements is true of sole proprietorship?

Accepted Answer

A sole proprietorship has a limited life because it is tied to the owner's personal circumstances, such as their decision to close the business or their death.

Question 14

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

This statement is true. The transaction analysis approach involves using information on comparable mergers or acquisitions to estimate the value of a company. This is done by examining the amount paid for similar companies in the same industry or market.

Question 15

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 primarily used for holding companies that hold investments and not for operating businesses that have a significant amount of non-investment assets and liabilities.

Question 16

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

Accepted Answer

Whether a controlling ownership interest or a minority interest is being valued can significantly impact the value of the business. A controlling interest typically comes with greater decision-making power and therefore may be valued at a higher amount than a minority interest. Additionally, discounts may be applied to the valuation of a minority interest due to lack of control and marketability.

Question 17

A business's chances of success improve if you:

Accepted Answer

Taking reasonable risk can help a business make progress and grow. It is important to assess the potential risks and benefits before making decisions, but being too cautious can also hinder progress. Jumping into a business with just enough capital or having a unique idea with a poor strategy may not yield success, and over-analyzing opportunities can lead to missed opportunities.

Question 18

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

The potential departure of key people can impact the future performance and value of a business, so it is important for analysts to factor this into their valuation.

Question 19

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

The ability to make the business independent of the founder increases the liquidity of the ownership interests. This means that the ownership interests can be easily bought or sold, which makes it easier for the business to raise capital.

Question 20

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 uses the portion of cash flows available to both stockholders and debt holders. It is a measure of the amount of cash available to all providers of capital after taking into account investments in fixed assets and working capital.

Quiz 18: Business Formation, Growth, and Valuation