Q&A Hero

Q: 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.

Q: 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.

Q: 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 thevalue for a business. D) The value of a business is solely affected by investment managers' decision.

Q: 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.

Q: 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

Q: _____ 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

Q: Whichof 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.

Q: Whichof 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.

Q: Whichof 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.

Q: Whichof 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.

Q: Whichof 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.

Q: Whichof 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.

Q: Whichof 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.

Q: 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.

Q: The life of an entity is flexible for: A) a general partnership. B) a sole proprietorship. C) an S-corporation. D) a C-corporation.

Q: 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.

Q: 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

Q: 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

Q: 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.

Q: 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

Q: 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

Q: Differences in marketability can result in premiums of 30 percent or more for shares of private companies. A) True B) False

Q: 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

Q: 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

Q: The free cash flow from the firm (FCFF) approachuses only the portion of the cash flows that are available for distribution to stockholders. A) True B) False

Q: 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

Q: 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

Q: 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

Q: Cost approaches include replacement cost and multiples analysis. A) True B) False

Q: A strategic investor is interested in buying the firm and not just its financial performance. A) True B) False

Q: 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

Q: An important thing to remember in valuing a business is that the value of a business changes over time. A) True B) False

Q: 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

Q: 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

Q: A cash budget summarizes the cash flows into and out of a firm over a period of time. A) True B) False

Q: 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

Q: 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

Q: Corporations, which are "legal persons" under state law, automatically have a finite life. A) True B) False

Q: An S-corporation can have no more than 50 stockholders. A) True B) False

Q: 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

Q: 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

Q: 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

Q: Limited liability partnerships are inexpensive to form compared to sole proprietorships. A) True B) False

Q: 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

Q: A business at the start up has a better chance to succeed if calculated risks are taken. A) True B) False

Q: Access to capital for a sole proprietorship is excellent compared to a C-Corporation. A) True B) False

Q: 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

Q: 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

Q: Starting a business is less risky than buying and growing a business that someone else has already established. A) True B) False

Q: In the 2005 follow-up to the Lintner study, the researchers found that managers choose their firm's dividend policies in a way that enables them to continue making the investments necessary for a firm to complete in its product markets. What does this imply about a firm that operates in a low-growth industry?

Q: Discuss why investor perception of a stock repurchases is weaker than that of a cash dividend.

Q: Describe the four general types of cash dividends and the purpose of each.

Q: GoodSignal Co. is currently trading for $10 with 1 million shares outstanding. Which of the following actions would be the most credible signal that management believes that the long-term prospects for a company have improved? A) Pay a $0.20 extra dividend in addition to the company's $0.20 regular quarterly dividend B) Increase the company's regular quarterly dividend from $0.20 to $0.40 C) Initiate an open-market stock repurchase of 2 percent of the company's stock D) Pay a $0.20 special dividend by selling a major fixed asset

Q: Which of the following considerations should NOT be related to management's concerns when setting a stock repurchase policy? A) Over the long term, how much does a company's level of earnings exceed its investment requirements? How certain is this level? B) Is the stock currently undervalued? Can the management add value to the company by initiating a stock repurchase? C) Does a firm have enough financial reserves to meet the short-term obligations in periods when earnings are down or investment requirements are up? D) Can a firm quickly raise equity capital if necessary?

Q: Which of the following statements describes the finding from academic studies on corporate dividend policy? A) Managers tend to increase regular cash dividends in response to unexpectedly high earnings. B) Managers tend to maintain a level dividend payment at an amount that they are relatively certain they can maintain in the future. C) Managers tend to focus on dividends rather than stock repurchases because institutional investors tend to prefer regular dividends. D) Dividend policy doesn't matter because investors can re-create dividends by selling a fraction of their shares.

Q: Pluto, Co. stock is currently trading for $54. Assume there is no new information about the company. If the company issues a 10 percent stock dividend, what will the approximate price of the stock be after the stock dividend is issued? (Round your final answer to two decimal places.) A) $47.80 per share B) $48.60 per share C) $49.09 per share D) $54.00 per share

Q: You own 1,200 shares of Harry, Co. The company has recently announced a 1-for-3 reverse stock split. How many shares will you own after the reverse split? A) 300 shares B) 400 shares C) 3,600 shares D) 4,800 shares

Q: Split-Div, Inc. has issued quarterly dividends of $0.10 per share each quarter over the last few years. This quarter the company initiated a 2-for-1 stock split. What is the minimum quarterly dividend the company's board should approve to avoid sending a bad signal to the investors? A) $0.02 per share B) $0.05 per share C) $0.10 per share D) $0.20 per share

Q: You own 3,000 shares of Split-Holdings Co. The shares are currently selling for $48. The company has just announced a 4-for-1 stock split. How many shares will you own after the split, and approximately what will your holdings in Split-Holdings Co. be worth?A) 12,000 shares worth about $144,000B) 12,000 shares worth about $576,000C) 15,000 shares worth about $144,000D) 15,000 shares worth about $720,000

Q: Split-Gram, Inc. has announced a 4-to-1 stock split. If the company currently has 1 million shares outstanding, how many outstanding shares will it have after the split? A) 4 million B) 3 million C) 2 million D) 1 million

Q: Generally, management undertakes a reverse stock split to A) send a signal to investors that the company is expected to perform poorly. B) meet the minimum requirements to be listed on one of the major stock exchanges. C) increase the liquidity of shares by decreasing the number of share available. D) reduce the administrative costs associated with investor relations.

Q: Suppose you own shares of ThreeFor, Inc. which has just announced a 3-for-1 stock split. Immediately after the announcement, the price of the company's shares rose by 5 percent. You don't expect any new information about the company until after the stock split. Ignoring any discounting for time, if you intend to sell your shares soon, you should A) sell the stock nowthe single share you have now is likely to be worth more than the three shares you'll have after the split. B) sell the stock after the splittypically, the marker reacts positively to stock splits. The three shares you'll have after the split will be worth more than the single share you have now. C) sell the stock nowthe stock is likely to be more liquid before the split when there are fewer shares. D) sell the stockirrespective of when the stock is sold. If there is no new information about the stock, then the value of three shares after the split should be the same as the value of the single share you hold now.

Q: The Wyoming Boot, Co. has paid a regular dividend of $0.25 quarterly for the last several years. The company has 1 million shares outstanding. Over the next year, the company will have to spend $600,000 to service its debt and spend $500,000 in capital expenditures. The company has $600,000 of cash and cash equivalents. Over the next year, how much cash must be provided from operations to continue to make the same quarterly dividend payment and still have $250,000 in cash at the end of the year?A) 1,000,000B) 1,100,000C) 1,750,000D) 2,100,000

Q: The Dimples Golf Ball, Co. has paid a regular dividend of $0.20 quarterly for the last three years. The company has 2 million shares outstanding. Over the next year the company will have to spend $800,000 to service its debt and spend $200,000 in capital expenditures. The company has $500,000 of cash and cash equivalents. Over the next year how much cash must be provided from operations to continue to make the same quarterly dividend payment and still have $500,000 in cash at the end of the year?A) 1,000,000B) 1,600,000C) 2,000,000D) 2,600,000

Q: You own 7,000 shares of No-Drip Co. The company has decided to pay a special dividend of $1.00 per share. Dividend payments are taxed at 15 percent. You intend to reinvest your dividend back into the company, but the company does not have a dividend reinvestment program. To reinvest through your broker, you will have to pay a $46 commission. If the company's stock is trading at $12.43 following the dividend payment, how many additional shares will you be able to purchase? (Round your final answer to the nearest unit of shares.)A) 563 sharesB) 481 sharesC) 478 sharesD) 475 shares

Q: You purchased 4,000 shares of High-Div Co. several years ago at $50 per share. The company has decided to pay a special dividend of $2.00 per share. Dividend payments are taxed at 15 percent. You intend to reinvest in the company through the dividend reinvestment program. If the company's stock is trading at $48.20 following the dividend payment, how many additional shares can you buy through the dividend reinvestment program? (Round your final answer to the nearest unit of shares.)A) 166 sharesB) 141 sharesC) 134 sharesD) 125 shares

Q: You purchased 8,000 shares of Wallflower Technologies several years ago at $20 per share. The company does not pay a regular cash dividend. You want to manufacture your own dividend by selling a little bit of stock each quarter. The company's stock is currently trading at $60. If capital gains are taxed at 15 percent, how many shares would you have to sell to receive $2,000 in cash? (Round your final answer to the nearest unit of shares.)A) 30 sharesB) 33 sharesC) 37 sharesD) 39 shares

Q: You purchased 2,000 shares of Crimson Treat Technologies several years ago at $50 per share. The company does not pay a regular cash dividend. You want to manufacture your own dividend by selling a little bit of stock each quarter. The company's stock is currently trading at $75. If capital gains are taxed at 15 percent, how many shares would you have to sell to receive $3,420 in cash?A) 27 sharesB) 46 sharesC) 48 sharesD) 51 shares

Q: Suppose you are advising a retiree who holds 2,000 shares of LargeDiv Corp. The company is largely held by tax-paying institutional investors and has announced that it will shortly be issuing a large dividend. Because the shares are held in the retiree's Roth IRA, she will not incur taxes on either capital gains or dividends. The retiree has decided to sell the shares sometime this year, and use the money for living expenses. You expect the only upcoming change in the stock price will result from the dividend. Ignoring any discounting for time, what advice should you give? A) Sell the stock nowthe stock price is likely to decrease more than just the dividend amount. B) Sell the stock ex-dividendthe stock price is likely to decline, but by less than the dividend amount. C) Sell the stockirrespective of when the stock is sold. D) Sell the stock nowit is always better to sell the stock immediately regardless of the tax consequences.

Q: In early 2003, the U.S. government cut the tax rate on dividends to a flat 15 percent instead of treating dividend payments as other income. All else being equal, how would we expect the number of companies paying dividends to change? A) We would expect the number of dividend-paying companies to increase. B) We would expect the number of dividend-paying companies to decrease. C) We would expect the number of dividend-paying companies to stay relatively constant. D) None of these

Q: Which of the following statements about the relative advantages of stock repurchases over dividends is NOT true? A) Since most ongoing stock repurchase programs are as visible as dividend programs, they can be used effectively to send a positive signal about a firm's prospects to investors. B) Open-market stock purchases allow management more flexibility because investors are less likely to react if the management cuts back or ends a stock repurchase as compared to cutting back on dividend payments. C) Stock repurchases allow stockholders to choose whether or not to participate in the stock repurchase. This allows stockholders to have more control over their tax burden. D) Historically, taxes on dividend payment have been higher than those on stock repurchases.

Q: Which of the following explanations is NOT a possible benefit of dividends? A) Some investors prefer dividend-paying stocks and will be willing to pay a higher price for stocks with regular dividends. B) Paying out large regular dividends can force management to regularly raise more capital. The extra scrutiny involved in raising capital can increase the incentives of management to run the company efficiently. C) Dividends can be used to manage the capital structure of a company. D) Paying dividends reduces the probability that a firm will enter financial distress.

Q: You purchased 500 shares in Div Choice, Inc. several years ago for $20. The company previously announced it will be distributing cash to shareholders in a novel way. First, the company will have a tender offer stock repurchase at $30 per share. After the repurchase, it will issue a special dividend of $5.00 per share to the remaining stockholders. Suppose that you want to convert your holdings in Div Choice, Inc. into cash. Assume the tax on dividends is 30 percent and the tax on capital gains is 15 percent. The shares are currently trading for $30. Assume no new information comes out about the company. Approximately, how much will you receive by waiting until after the ex-dividend day and then selling the shares in the market? (Do not round intermediate calculation. Round your final answer to the nearest dollar.)A) You will receive about $13,500 by selling after the ex-dividend day.B) You will receive about $14,775 by selling after the ex-dividend day.C) You will receive about $14,513 by selling after the ex-dividend day.D) You will receive about $15,000 by selling after the ex-dividend day.

Q: You purchased 500 shares in Catalyst, Inc. several years ago for $20. The company previously announced it will be distributing cash to shareholders in a novel way. First, the company will have a tender offer stock repurchase at $30 per share. After the repurchase, it will issue a special dividend of $5.00 per share to the remaining stockholders. Suppose that you want to convert your holdings in Catalyst, Inc. into cash. Assume the tax on dividends is 30 percent and the tax on capital gains is 15 percent. The shares are currently trading for $30. Assume no new information comes out about the company. How much cash will you receive from taking part in the repurchase?A) You will receive $14,250 by taking part in the repurchase.B) You will receive $15,000 by taking part in the repurchase.C) You will receive $15,750 by taking part in the repurchase.D) You will receive $16,000 by taking part in the repurchase.

Q: Cosmic crew, Co has 3 million shares outstanding. The shares are currently selling for $40. If the firm repurchases $10 million worth of shares at market prices, approximately how much will the stock be worth after the repurchase? Ignore taxes.A) $40B) $38C) $42D) $50

Q: You purchased 2,500 shares of Digital Vision, Corp. several years ago for $40 per share. The company is offering a fixed-price tender offer repurchase for $54 per share. What is the amount of after-tax proceeds you would receive from taking part in the repurchase, if capital gains are taxed at 15 percent?A) $120,000B) $121,250C) $129,750D) $135,000

Q: You purchased 3,000 shares of Purple Stuff Beverage Co. four years ago at $30 per share. You have just received a mailing from the company announcing a fixed-price tender offer stock repurchase at $36 per share. Capital gains are taxed at 15 percent. If you participate in the repurchase, how much will you receive?A) $18,000B) $91,800C) $105,300D) $108,800

Q: You purchased 3,000 shares of Space Apparition Co. four years ago at $40 per share. You have just received a mail from the company announcing a fixed-price tender offer stock repurchase at $70 per share. Capital gains are taxed at 20 percent. If you participate in the repurchase, how much will you receive?A) $31,500B) $192,000C) $178,000D) $210,000

Q: Calciya, Co. has a policy of returning a minimum of 40 percent of earnings to shareholders every year through dividend issues and open-market stock repurchases. In each quarter this year, the company earned $0.20 per share. In each of the first three quarters, the company paid a regular cash dividend of $0.05 per share. The company has 8 million shares of common stock outstanding. What combination of dividends and stock repurchases could the company's board approve to meet their target payout percentage?A) A regular cash dividend of $0.05B) A regular cash dividend of $0.05 per share and an open-market stock repurchase of $960,000 in stockC) A regular cash dividend of $0.05 per share and an extra dividend of $0.12D) Both A regular cash dividend of $0.05 per share and an open-market stock repurchase of $960,000 in stock and A regular cash dividend of $0.05 per share and an extra dividend of $0.12

Q: Neonia, Co. has a policy of returning a minimum of 25 percent of earnings to shareholders every year through dividend issues and open-market stock repurchases. In each quarter this year, the company earned $0.25 per share. In each of the first three quarters, the company paid a regular cash dividend of $0.05 per share. The company has 2 million shares of common stock outstanding. What combination of dividends and stock repurchases could the company's board approve to meet their target payout percentage?A) A regular cash dividend of $0.05B) A regular cash dividend of $0.05 per share and an open-market stock repurchase of $100,000 in stockC) A regular cash dividend of $0.05 per share and an open-market stock repurchase of $400,000 in stockD) A regular cash dividend of $0.05 per share and an open-market stock repurchase of 500,000 in stock