38) Life insurance differs from all other types of insurance in that:
A) it cannot be purchased by the one who benefits from the loss.
B) it does not pertain to avoiding risk.
C) it is federally insured.
D) it doesn’t pay unless there is a loss.
Topic: Types of Insurance
AACSB: Analytic Skills
39) In a(n) ________, managers and/or employees borrow money from a financial institution and
pay the owner the total agreed-upon price at closing; they then use the cash generated from the
company’s operations to pay off the debt.
A) irrevocable trust
B) buy/sell agreement
C) LBO
D) estate freeze
Topic: Selling to Insiders
AACSB: Analytic Skills
40) ________ is the transfer of risk from one entity (an individual, a group, or a business) to an
insurance company.
A) Risk management
B) Trust
C) Pension and annuities
D) Insurance
Topic: The Basics of Insurance
AACSB: Analytic Skills
41) A dentist or an attorney would buy malpractice insurance to transfer the risk of lawsuits. This
is a type of ________ insurance.
A) casualty
B) surety
C) liability
D) comprehensive
Topic: Types of Insurance
AACSB: Reflective Thinking
11
42) ________ protects against damage a business causes clients due to a mistake on their part.
A) Worker’s compensation
B) Professional liability insurance
C) Surety insurance
D) Employment practices liability insurance
Topic: Types of Insurance
AACSB: Reflective Thinking
43) One of the fastest growing forms of insurance that protects companies against claims due to
suits on grounds of the Americans with Disabilities Act and the Medical Leave Act, etc., is:
A) worker’s compensation.
B) professional liability insurance.
C) surety insurance.
D) employment practices liability insurance.
Topic: Types of Insurance
AACSB: Reflective Thinking
44) ________ offer(s) liability coverage that protects against losses resulting from injuries,
damage, or theft involving the use of company vehicles.
A) Worker’s compensation
B) Surety insurance
C) Professional liability insurance
D) Auto insurance policies
Topic: Auto Insurance Policies
AACSB: Analytic Skills
45) Small business owners have a number of options for controlling health care costs, such as:
A) increasing policy deductibles.
B) conducting a safety audit.
C) pursuing a loss-control program.
D) decreasing the dollar amount of employee contributions.
Topic: Controlling Insurance Costs
AACSB: Analytic Skills
12
46) The creation of a safety team, conduct of a safety audit, and creation of a safety manual are
all techniques for controlling:
A) property and casualty insurance costs.
B) professional liability insurance costs.
C) health care insurance costs.
D) worker’s compensation insurance costs.
Topic: Controlling Insurance Costs
AACSB: Reflective Thinking
47) The most basic type of trust is the ________ trust, which allows a business owner to put
assets into a trust naming his spouse as the beneficiary upon his death.
A) irrevocable
B) grantor
C) bypass
D) ESOP
Topic: Bypass Trust
AACSB: Reflective Thinking
48) Jackson Fast Food restaurant lost thousands of dollars’ worth of food when a freezer broke.
To cover the loss, Jackson should have:
A) liability insurance.
B) loss of business insurance.
C) machinery and equipment insurance.
D) There is no insurance for this type of loss.
Topic: Machinery and Equipment Insurance
AACSB: Reflective Thinking
49) What are the exit strategies available to entrepreneurs when it is time to step down?
A) Close the business
B) File for Chapter 7
C) Sell to outsiders
D) Force a family member to take over
Topic: Exit Strategies
AACSB: Analytic Skills
13
50) What types of financing requirement dramatically reduces the number of potential buyers?
A) 80% financing, 20 % cash
B) 100% cash only
C) 100% financing by the seller
D) All of the above
Topic: Selling to Outsiders
AACSB: Analytic Skills
51) In ________, managers or employees, or both, borrow money from a financial institution and
pay the owner the total agreed-upon price at closing; then they use the cash generated from the
company’s operations to pay off the debt.
A) a leveraged sellout
B) a leveraged buyout
C) owner financing
D) 100% bank financing
Topic: Leverage Buyouts
AACSB: Reflective Thinking
52) When selling a business to insiders, available options are:
A) leveraged buyout.
B) sale for cash plus a note.
C) an employee stock ownership plan.
D) All of the above
Topic: Selling to Insiders
AACSB: Analytic Skills
53) Employees contribute a portion of their earnings over time toward purchasing shares of the
company’s stock from the founder until they own the company outright. This is a characteristic of
a(n):
A) leveraged buyout.
B) sale for cash plus a note.
C) ESOP.
D) ESPO.
Topic: Selling to Insiders
AACSB: Reflective Thinking
14
54) ________ refers to coping with financial realities of estate and gift taxes.
A) Stage 2
B) Stage 3
C) Stage 4
D) Stage 5
Topic: Select the Successor
AACSB: Analytic Skills
55) A ________ is a special type of irrevocable trust and has become one of the most popular
tools for entrepreneurs to transfer ownership of a business while maintaining control over it and
minimizing estate taxes.
A) grantor retained leverage trust
B) grantor retained annuity trust
C) guarantee retained annuity trust
D) grantor retained life insurance
Topic: Cope with the Financial Realities of Estate and Gift Taxes
AACSB: Analytic Skills
56) Under GRAT, the beneficiaries are required:
A) to pay $11,000 gift tax.
B) to deduct the gift tax.
C) to pay gift tax on the value of the assets placed in the GRAT.
D) Beneficiaries are not required to pay any gift tax.
Topic: Cope with the Financial Realities of Estate and Gift Taxes
AACSB: Analytic Skills
57) One-third of the Fortune 500 companies are family businesses.
Topic: Family Businesses
AACSB: Analytic Skills
58) The majority of first-generation family businesses do not survive into the second generation.
Topic: The Dark Side of Family Businesses
AACSB: Analytic Skills
15
59) Most business founders intend to pass their companies on to their children, and have a formal
management succession plan for doing so.
Topic: Shared Values
AACSB: Analytic Skills
60) Key to a successful family business is shared values.
Topic: Shared Values
AACSB: Analytic Skills
61) The nice thing about a family business is that there is always a guaranteed successor within
the family whenever the owner decides to step down.
Topic: Shared Values
AACSB: Analytic Skills
62) It may be valuable for family members to work outside of the business for the purpose of
learning how others conduct business.
Topic: Shared Values
AACSB: Analytic Skills
63) The concept of shared power in the family business means that family members allow those
with the greatest expertise in a particular area of the business to make decisions for that area.
Topic: Shared Power
AACSB: Analytic Skills
64) Tradition, while important, is not essential to a successful family business.
Topic: Tradition
AACSB: Analytic Skills
65) A willingness to learn is not as important to a family business as a nonfamily business
because the variety of talents and personalities within the family minimize the importance of new
ideas and techniques from the outside.
Topic: A Willingness to Learn
AACSB: Reflective Thinking
16
66) “Playing together” at leisure activities makes it easier for family members to cooperate at
work activities in the family business.
Topic: A Willingness to Learn
AACSB: Reflective Thinking
67) Playing together is so important to the success of a family business that family members
should be forced to play together even when they don’t want to.
Topic: A Willingness to Learn
AACSB: Reflective Thinking
68) A straight sale of the family business to outsiders is best for the founder because it is quick,
easy, and has minimal tax consequences to the owner.
Topic: Selling to Outsiders
AACSB: Reflective Thinking
69) ESOPs are simply another version of LBOs, used to buy companies from their owners.
Topic: Employee Stock Ownership Plans (ESOPs)
AACSB: Analytic Skills
70) Experts estimate that $10.4 trillion dollars in wealth will be transferred from one generation
to another by 2040.
Topic: Management Succession
AACSB: Analytic Skills
71) One barrier to management succession planning is that the founder often becomes so
identified with the business it is difficult for him/her to let go.
Topic: Management Succession
AACSB: Analytic Skills
72) It is important to remember that the succession planning process inevitably creates tension
and distrust as family members envy the “chosen one.”
Topic: Management Succession
AACSB: Analytic Skills
17
73) Succession planning should begin when the children reach college age.
Topic: Management Succession
AACSB: Analytic Skills
74) At Stage II, when the successor graduates from college, real decision-making authority
begins to grow rapidly.
Topic: Management Succession
AACSB: Analytic Skills
75) The successor to the business owner needs to have both technical ability—knowledge of the
business and financial ability—and understanding of the financial aspects of the business for the
transition to succeed.
Topic: Management Succession
AACSB: Use of IT
76) Whenever a business has shared leadership, such as co-presidents, it is critical that the board
of advisers have members on it from outside the family.
Topic: Management Succession
AACSB: Analytic Skills
77) It is generally safe for the small business owner to assume that his/her children will succeed
him/her into the business.
Topic: Management Succession
AACSB: Analytic Skills
78) You should never keep your decision as to your successor a secret.
Topic: Management Succession
AACSB: Analytic Skills
18