Fundamentals of Corporate Finance 3e Test Bank
Chapter 18: Business Formation, Growth, and Valuation
1.
Starting a business is less risky than buying and growing a business that someone else
has already established.
A)
True
B)
False
Ans:
B
2.
The founder of a company needs to be a part of many critical decisions taken by the
board but need not be a part of any related to strategies to sell the firm’s products.
A)
True
B)
False
Ans:
B
3.
Businesses fail because of the management’s inability to accurately estimate the amount
of funds required to get their businesses up and running.
A)
True
B)
False
Ans:
A
4.
Access to capital for a sole proprietorship is excellent compared to a C-Corporation.
A)
True
B)
False
Ans:
B
5.
A business at the start up has a better chance to succeed if calculated risks are taken.
A)
True
B)
False
Ans:
A
6.
A limited liability company, LLC, leads to unlimited liability for the people who make
a business decisions in the firm while enabling all investors to retain the tax advantages
of a limited partnership.
A)
True
B)
False
Ans:
B
7.
Limited liability partnerships are inexpensive to form compared to sole proprietorships.
A)
True
B)
False
Ans:
B
8.
Limited partnerships are more costly to form than sole proprietorships because the
partners must hire an attorney to draw up and maintain the partnership agreement.
A)
True
B)
False
Ans:
A
9.
The downside of being able to raise equity capital from other people is that an
entrepreneur must inevitably share control with other investors.
A)
True
B)
False
Ans:
A
10.
An S-corporation allows the stockholders to avoid double taxation but places limits on
the ownership of the firm’s stock.
A)
True
B)
False
Ans:
A
11.
An S-corporation can have no more than 50 stockholders.
A)
True
B)
False
Ans:
B
12.
Corporations, which are “legal persons” under state law, automatically have a finite
life.
A)
True
B)
False
Ans:
B
13.
The two tools that are particularly useful in understanding the cash requirements of a
business and in estimating how much financing a new business will require are the cash
flow break-even analysis and the cash budget.
A)
True
B)
False
Ans:
A
14.
The cash flow break-even analysis helps identify how much money will be needed to
launch a new product or business.
A)
True
B)
False
Ans:
A
15.
A cash budget summarizes the cash flows into and out of a firm over a period of time.
A)
True
B)
False
Ans:
A
16.
A business plan presents the results from a strategic planning process that focuses on
how a business will be developed over time.
A)
True
B)
False
Ans:
A
17.
A business plan includes a detailed discussion of the marketing and sales activities that
will enable a business to achieve the sales and margin levels reflected in the financial
forecasts.
A)
True
B)
False
Ans:
A
18.
An important thing to remember in valuing a business is that the value of a business
changes over time.
A)
True
B)
False
Ans:
A
19.
Decision makers must understand business valuation concepts in order to be able to
identify the optimal capital structure and payout policy
A)
True
B)
False
Ans:
A
20.
A strategic investor is interested in buying the firm and not just its financial
performance.
A)
True
B)
False
Ans:
A
21.
Cost approaches include replacement cost and multiples analysis.
A)
True
B)
False
Ans:
B
22.
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.
A)
True
B)
False
Ans:
A
23.
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.
A)
True
B)
False
Ans:
A
24.
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.
A)
True
B)
False
Ans:
B
25.
The free cash flow from the firm (FCFF) approach uses only the portion of the cash
flows that are available for distribution to stockholders.
A)
True
B)
False
Ans:
B
26.
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.
A)
True
B)
False
Ans:
A
27.
In contrast to the financial statements of publicly held firms, private company financials
often include personal expenses of the owner and excess compensation expenses.
A)
True
B)
False
Ans:
A
28.
Differences in marketability can result in premiums of 30 percent or more for shares of
private companies.
A)
True
B)
False
Ans:
B
29.
An important issue that must be considered when valuing a business is whether a
controlling ownership interest or a minority interest is being valued.
A)
True
B)
False
Ans:
A
30.
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.
A)
True
B)
False
Ans:
A
31.
During the startup of a company, the founder makes several critical decisions including:
A)
innovating the product(s) to sell.
B)
formulating the best marketing strategy for selling the products manufactured.
C)
raising the funds necessary to develop the product(s).
D)
formulating an efficient plan for its expansion.
Ans:
C
32.
In which of the following forms of business organization access to capital is the least?
A)
A sole proprietorship
B)
A general partnership
C)
An S-corporation
D)
A C-corporation
Ans:
A
33.
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.
A)
non convertibility
B)
liquidity
C)
limitation
D)
risk
Ans:
B
34.
A business’s chances of success improve if you:
A)
jump into a business with capital that is just enough to set up a business.
B)
overanalyze opportunities to the point where you are just convincing yourself not
to proceed.
C)
take reasonable risk.
D)
have a unique idea even if the strategy is poor.
Ans:
C
35.
The life of an entity is flexible for:
A)
a general partnership.
B)
a sole proprietorship.
C)
an S-corporation.
D)
a C-corporation.
Ans:
A
36.
A limited liability partnership is:
A)
a partnership agreement which can never be written for a fixed life.
B)
less costly to form than sole proprietorships.
C)
an agreement where partners face the possibility that their personal assets can be
taken from them to satisfy claims on their businesses.
D)
less constrained than general partnerships because they can raise money from
limited partners.
37.
Which of the following statements is true of limited liability company?
A)
Limited liability company is no more costly to form than sole proprietorships.
B)
Like a corporation, an LLC provides limited liability for the people who make the
business decisions in the firm while enabling all investors to retain the tax
advantages of a limited partnership.
C)
The lives of limited liability company are not flexible.
D)
Limited liability company is more constrained than general partnerships because
they can raise money only from members.
Ans:
B
38.
Which of the following statements is true of a corporation?
A)
An S-corporation can have no more than 500 stockholders.
B)
All profits of an S-corporation do not pass directly to the stockholders as they
would pass to the partners in a partnership.
C)
Profits earned in C-corporations are taxed only once at the corporate tax rate.
D)
S-corporations have less limited access to capital compared to C-corporations.
Ans:
D
39.
Which of the following statements is true of S-corporation?
A)
An S-corporation can have more than 100 stockholders.
B)
All profits of an S-corporation pass directly to the stockholders as they would
pass to the partners in a partnership.
C)
An S-corporation is a variation of the LLC (limited liability company).
D)
Only foreign investors can own the shares of an S-corporation.
Ans:
B
40.
Which of the following statements is true of sole proprietorship?
A)
A sole proprietorship is the most expensive type of business to start.
B)
The life of a sole proprietorship is limited.
C)
Sole proprietorships must rely on equity contributions from the public.
D)
The liability of owners of a sole proprietorship is limited.
Ans:
B
41.
Which of the following statements is true of cash flow break-even analysis?
A)
It is useful in understanding the cash requirements of a business and in estimating
how much financing a new business will require.
B)
As per the cash flow break-even analysis, the cash flow break-even point
calculation usually focuses on the computation of EAT break-even.
C)
It summarizes the cash flows into and out of a firm, usually on monthly basis.
D)
It helps an entrepreneur in understanding where the money is coming from and
where it is going.
Ans:
A
42.
Which of the following statements is true about a cash budget?
A)
Cash budget helps an entrepreneur understand the concept of EBITDA break-
even and how to calculate this point for each product a business’s produce.
B)
Cash budget focuses on the importance of maximizing a product’s per unit
contribution.
C)
Cash budget provides a means of estimating how long it will take for a product to
reach the break-even point and, therefore, how much money will be needed to
launch a new product.
D)
Cash budget summarizes the cash flows into and out of a firm over a period of
time.
Ans:
D
43.
Which of the following statements is true about business plans?
A)
A well-prepared business plan always avoids contingent liabilities as the plan
helps to predict and change the occurrence of a contingent liability.
B)
A business plan is useful only in case of exigency in the business environment
otherwise a business plan is not important.
C)
A business plan is a trivial part in the overall strategy formulation and its impact
on business operations in the long run is miniscule.
D)
A well-prepared business plan makes it easier for an entrepreneur to
communicate to potential investors precisely what returns an investor might
expect to receive.
Ans:
D
44.
_____ is a road map for a business.
A)
A cash budget
B)
A cash flow break-even analysis
C)
A business plan
D)
A transaction analysis
Ans:
C
45.
Which of the following mathematical expressions is used while calculating the value of
a firm using the income approach?
A)
The present value of the free cash flows (FCF) that a business is expected to
produce over the next T years + The present value of all free cash flows after year
T + The value of all of the nonoperating assets in the firm
B)
The present value of the free cash flows (FCF) that a business is expected to
produce over the next T years – The present value of all free cash flows after year
T – The value of all of the nonoperating assets in the firm
C)
The present value of the free cash flows (FCF) that a business is expected to
produce over the next T years + The present value of all free cash flows after year
T – The value of all of the nonoperating assets in the firm
D)
The present value of the free cash flows (FCF) that a business is expected to
produce over the next T years – The present value of all free cash flows after year
T + The value of all of the nonoperating assets in the firm
Ans:
A
46.
Decision makers must understand business valuation concepts in order to be able to:
A)
prepare the financial statements of the business.
B)
identify the optimal capital structure and the payout policy.
C)
identify the break-even point and the payout policy.
D)
calculate the deferred tax assets.
Ans:
B
47.
Which of the following statements is true about business valuation?
A)
The valuation of business is solely about how much return a business provides to
its stockholders.
B)
There is a single value for any business.
C)
There is no such thing as the value for a business.
D)
The value of a business is solely affected by investment managers’ decision.
Ans:
C
48.
The value of a business changes over time because:
A)
the impact of the business valuation is minimized when timed properly.
B)
the risk involved in operations do not change.
C)
the estimates reflects the timing of what economic, industry, and firm conditions
are at the time of valuation.
D)
the factors influencing the valuation can be controlled.
Ans:
C
49.
Which of the following statements is true of business valuation principle?
A)
As per first valuation principle, the value of business does not change over time.
B)
The value of a business is solely affected by managers’ financing decisions.
C)
The fair market value of a business is the value of that business to a hypothetical
person who is knowledgeable about the business.
D)
Estimating the fair market value of a business includes the value of synergies or
the effects of any investor-specific management style.
Ans:
C
50.
Which of the following statements is true of replacement cost approach?
A)
Replacement cost is an income-based valuation approach.
B)
This approach should include only tangible assets, whether they are actually
included on the accounting balance sheet or not.
C)
The replacement cost of a business is the cost of duplicating the assets of the
business in their present form as of the valuation date.
D)
The replacement cost valuation approach is generally used to value the whole of
assets within a business when they are being insured.
Ans:
C
51.
The adjusted book value approach involves:
A)
restating the value of the individual assets in a business to reflect their historical
costs.
B)
valuing individual assets within a business when they are being insured, but it is
rarely used to value an entire business.
C)
the cost of duplicating the assets of the business in their present form as of the
valuation date.
D)
valuing all tangible and intangible assets.
Ans:
D
52.
When using the multiples analysis approach to valuing a business, one must be aware:
A)
of the presence of a marketability premium that can be sizable.
B)
of the adjusted book value of a business which is the cost of duplicating the assets
of the business in their present form as of the valuation date.
C)
of the stock value of similar companies whose shares are not publicly traded.
D)
of the presence of a marketability discount that can be sizable.
Ans:
D