Ch.18 Business Formation, Growth, And + Test Bank + Answers

Fundamentals of Corporate Finance, 5e (Parrino)

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.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

2) The founder of a company needs to be a part of many critical decisions taken by the board but does not need to be a part of any related to strategies to sell the firm's products.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

3) A reason that businesses fail is management's inability to accurately estimate the amount of funds required to get their businesses up and running.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

4) Access to capital for a sole proprietorship is excellent compared to a C-corporation.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

5) A startup business has a better chance to succeed if calculated risks are taken into consideration.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

6) A limited liability company (LLC) leads to unlimited liability for the people who make business decisions in the firm while enabling all investors to retain the tax advantages of a limited partnership.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

7) Limited liability partnerships are inexpensive to form compared to sole proprietorships.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

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.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

9) A drawback of raising equity capital from other people is that an entrepreneur must inevitably share control with other investors.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

10) An S-corporation allows the stockholders to avoid double taxation but places limits on the ownership of the firm's stock.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

11) An S-corporation can have no more than 50 stockholders.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

12) Corporations, which are "legal persons" under state law, automatically have a finite life.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

13) 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.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

14) The cash flow break-even analysis helps identify how much money is required to launch a new product or business.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

15) A cash budget summarizes the cash flows into and out of a firm over a period of time.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

16) A business plan presents the results from a strategic planning process that focuses on how a business will be developed over time.

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

17) A business plan includes a detailed discussion of the marketing and sales activities that will enable a business to achieve the sales and profit levels reflected in the financial forecasts.

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

18) An important thing to remember in valuing a business is that the value of a business changes over time.

Learning Objective: LO 3

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

19) Decision makers must understand business valuation concepts in order to identify the optimal capital structure and dividend payout policy.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

20) A strategic investor is interested in buying the firm and not just its financial performance.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

21) Cost approaches for valuing business include replacement cost and multiples analysis.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

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.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

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.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

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.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

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 in valuing business.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

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.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

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.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

28) Differences in marketability can result in premiums of 30 percent or more for shares of private companies.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

29) An important issue when valuing a business is whether a controlling ownership interest or a minority interest is being valued.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

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.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

31) During the startup of a company, the founder makes several critical decisions including which of the following?

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.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

32) Which of the following forms of business organization have the least access to capital?

A) A sole proprietorship

B) A general partnership

C) An S-corporation

D) A C-corporation

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

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

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

34) A business's chances of success increase 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 into consideration.

D) have a unique idea even if the strategy is poor.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

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.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

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.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

37) Which of the following statements is true of a limited liability company?

A) A limited liability company is not as costly to form as 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 life of a limited liability company is not flexible.

D) A limited liability company is more constrained than general partnerships because they can raise money only from members.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

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) C-corporations have better access to capital compared to S-corporations.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

39) Which of the following statements is true of an 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.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

40) Which of the following statements is true of a 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.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

41) Which of the following statements is true of a 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 costs of goods sold break-even.

C) It summarizes the cash flows into and out of a firm, usually on a monthly basis.

D) It helps an entrepreneur in understanding where the money is coming from and where it is going.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

42) Which of the following statements is true about a cash budget?

A) 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) A cash budget focuses on the importance of maximizing a product's per-unit contribution.

C) A 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) A cash budget summarizes the cash flows into and out of a firm over a period of time.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

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.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

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

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

45) Identify which one of the following statements is FALSE:

A) A business plan is a tool that can help an entrepreneur set the goals and objectives for the company.

B) A business plan serves as a benchmark for evaluating and controlling the company's performance.

C) A business plan is a document that describes the details of how a business was developed.

D) A business plans helps to communicate the entrepreneur's ideas to managers and stakeholders.

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

46) Which of the following mathematical expressions reflects 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.

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

47) 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.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

48) 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 the investment manager's decisions.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

49) 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 reflect the timing of what economic, industry, and firm conditions are at the time of valuation.

D) the factors influencing the valuation can be controlled.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

50) Which of the following statements is true of the 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.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

51) Which of the following statements is true of the replacement cost approach to valuation?

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.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

52) 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.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

53) 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 potentially large marketability discount.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

54) The transaction approach is difficult to use because:

A) transactions data are typically as reliable as the data available for multiples analysis, especially when they are associated with a private firm.

B) transactions involving the purchase or sale of an entire business in an industry tend to occur frequently and hence the amount of data is immense.

C) the terms of the transactions can be easy to assess.

D) the terms of the transactions can be difficult to assess.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

55) Which of the following statements about the free cash flow from the firm (FCFF) approach is true?

A) The present value of these cash flows exceeds the total value of the firm, or its enterprise value.

B) We include the cash necessary to pay short-term liabilities that do not have interest charges associated with them, such as accounts payable and accrued expenses.

C) The costs associated with noninterest-bearing current liabilities, which are included in the firm's cost of sales and other operating expenses, are added in the calculation of FCFF.

D) The total value of the firm, VF, is computed as the present value of the FCFF, discounted by the firm's weighted average cost of capital, WACC.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

56) The costs associated with noninterest-bearing current liabilities, which are included in the firm's cost of sales and other operating expenses:

A) are subtracted in the calculation of free cash flow from the firm (FCFF).

B) are added in the calculation of FCFF.

C) are not a factor in the calculation of FCFF.

D) are added to the value of equity claims.

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

57) In the free cash flow from the firm (FCFF) approach, the total value of the firm, VF, is computed as the present value of the FCFF using which of the following as a discount rate?

A) The firm's cost of equity

B) The firm's WACC

C) The firm's cost of debt

D) The inflation rate prevailing in the economy

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

58) The free cash flow to equity (FCFE) approach uses only the portion of the cash flows that are available for distribution to:

A) bondholders.

B) bondholders and stockholders.

C) stockholders.

D) board of directors.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

59) The three specific cash flows associated with lenders that are included in the free cash flow to equity (FCFE) approach are:

A) the interest expense on existing debt, the repayment of debt principal, and the proceeds from new debt issues.

B) the interest expense on existing term debt, the repayment of debt principal, and the proceeds from new equity issues.

C) the interest expense on existing debt, the repayment of debt principal, and the payment of dividends.

D) the interest expense on existing term debt, the repayment of debt principal, and the payment of dividends.

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

60) In contrast to the FCFE approach, the dividend discount model (DDM) approach uses:

A) cash flows that are available for distribution to stockholders.

B) the stream of cash flows that stockholders expect to receive through dividend payments.

C) the stream of cash flows that stockholders expect to receive through bonus issue.

D) the stream of cash flows that stockholders expect to receive through stock repurchase.

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

61) Important issues that one must consider in valuing young private firms include:

A) whether key people remain in the firm, the amount of dividends that one may receive in the coming years, and whether a controlling ownership interest or a minority interest is being valued.

B) the difficulty in valuing young, rapidly growing companies in contrast to mature, stable companies, the amount of dividends that one may receive in the coming years, and whether a controlling ownership interest or a minority interest is being valued.

C) the difficulty in valuing young, rapidly growing companies in contrast to mature, stable companies, whether key people remain in the firm, and whether a controlling ownership interest or a minority interest is being valued.

D) whether the key people remain in the firm, the pretax operating cash flows generated by the firm in the coming years, and whether a controlling ownership interest or a minority interest is being valued.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

62) Sonicmony Soft makes designer gold bracelets. Its annual costs include shop rent of $15,000, salaries for two jewelers of $125,000, design software costs of $12,000, and other overhead costs of $15,000. An average bracelet is priced at $6,500. It costs $2,200 in raw material, $1,500 in labor, and $400 in other expenses. What is the minimum number of bracelets that need to be sold to earn a profit? (Round to nearest whole unit.)

A) 18 bracelets

B) 47 bracelets

C) 70 bracelets

D) 14 bracelets

Learning Objective: LO 1

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

63) Atamony makes circuit boards and markets them to electronic goods manufacturers. The firm has nonsalary fixed costs of $112,000 and salary costs of $64,250. Each circuit board is sold at a price of $69 and involves variable costs of $46 per unit. What is the break-even point for Atamony? (Round to nearest whole unit.)

A) 5,105 circuit boards

B) 7,663 circuit boards

C) 6,237 circuit boards

D) 2,714 circuit boards

Learning Objective: LO 1

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

64) Warren Soft makes period pieces. The firm has total fixed costs of $500,000. The average piece is sold at a price of $2,500 and involves variable costs of $1,800 per unit. What is the break-even point for this firm? (Round to nearest whole unit.)

A) 714 pieces

B) 928 pieces

C) 617 pieces

D) 738 pieces

Learning Objective: LO 1

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

65) Neucon company needs to sell 6,000 circuit breakers to break even. Its unit variable cost is $441, and each unit sells for $800. What is the fixed cost of this company?

A) $1,497,250

B) $2,154,000

C) $2,855,250

D) $4,652,500

Learning Objective: LO 1

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

66) FifeSiete Corp. wants to break even at 15,000 units on its only product. Its unit variable cost is $55, and its fixed cost is $750,000. What should be each unit's selling price?

A) $85

B) $92

C) $105

D) $78

Learning Objective: LO 1

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

67) Settetocol, Inc., has cash of $12,000, receivables of $35,000, and inventory of $28,000. In addition, the firm has fixed assets of $120,000. Management believes that you can reasonably expect to collect 93 percent of the receivables, that the inventory could be sold to realize 84 percent of its book value, and that the sale of the property, plant, and equipment would yield $94,000. What is the liquidation value of this company? (Round to the nearest dollar.)

A) $162,070

B) $139,695

C) $174,866

D) $138,695

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

68) Foursonic Labs has cash of $26,000, receivables of $85,000, and inventory of $118,000. In addition, the firm has property, plant, and equipment of $165,000. Management has also told you that you can reasonably expect to collect 89 percent of the receivables, that the inventory could be sold to realize 85 percent of its book value, and that the sale of the property, plant, and equipment would yield $125,000. What is the liquidation value of this company? (Round to the nearest dollar.)

A) $201,950

B) $229,000

C) $394,000

D) $326,950

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

69) FifeSiete. has debt of $230 million and generated a net income of $121 million in the last fiscal year. In attempting to determine the total value of the firm, an investor identified a similar firm in Neuncon, Inc., an all-equity firm. This firm had 150 million shares outstanding, a share price of $14.25, and net income of $182 million. What is the implied total value of FifeSiete? (Round to the nearest million dollars.)

A) $1,421 million

B) $1,651 million

C) $1,191 million

D) $1,715 million

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

70) Cervil had an EBIT of $247 million in the last fiscal year. Its depreciation and amortization expenses amounted to $84 million. The firm has 135 million shares outstanding and a share price of $12.80. A competing firm that is very similar to Cervil has an enterprise value/EBITDA multiple of 5.40. What is the enterprise value of Cervil? (Round to the nearest million dollars.)

A) $1,334 million

B) $453 million

C) $1,787 million

D) $1,315 million

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

71) Cervil had an EBIT of $247 million in the last fiscal year. Its depreciation and amortization expenses amounted to $84 million. The firm has 135 million shares outstanding and a share price of $12.80. A competing firm that is very similar to Cervil has an enterprise value/EBITDA multiple of 5.40. What is the value of Cervil's debt? (Round to the nearest million dollars.)

A) $121 million

B) $165 million

C) $97 million

D) $59 million

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

72) Factrack Inc., a biotech firm, is expected to grow rapidly in the next three years and then have a level growth rate for the foreseeable future. The firm expects free cash flows of $342.5 million, $512.3 million, and $750 million over the next three years, and thereafter its cash flows will grow at a steady rate of 8 percent per year. The company has no nonoperating assets (NOA). If the appropriate WACC is 11.25 percent, what is the enterprise value of this business? (Round to the nearest million.)

A) $19,367 million

B) $18,101 million

C) $26,190 million

D) $24,923 million

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

73) ProtoSeis Corp. is expected to grow rapidly in the next four years and then have a zero-growth rate for the foreseeable future. The firm expects free cash flows of $42.5 million, $64.3 million, $77.1 million and $92 million over the next four years, and thereafter its cash flows will stay constant. The company has cash to the tune of $23.4 million. If the appropriate WACC is 10 percent, what is the enterprise value of this business? (Do not round intermediate computations. Round final answer to the nearest million.)

A) $628 million

B) $864 million

C) $811 million

D) $818 million

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

74) Symbyrec Phonic, an electronics manufacturer, is expected to grow rapidly in the next five years and then have a stable growth rate for the foreseeable future. The firm expects free cash flows of $262.5 million next year. These cash flows are expected to grow at a 30 percent rate over the following four years, and thereafter its cash flows will grow at a steady rate of 6 percent per annum. The company has nonoperating assets (NOA) of $31 million in the form of cash. If the appropriate WACC is 9 percent, what is the enterprise value of this business? (Do not round intermediate computations. Round final answer to the nearest million.)

A) $26,490 million

B) $22,222 million

C) $19,014 million

D) $22,191 million

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

75) Simpltar Co. is expected to grow rapidly in the next three years and then have no growth for the foreseeable future. The firm expects free cash flows of $9.1 million, $11.4 million, and $17.7 million over the next three years, and thereafter its cash flows will stay constant. The company has no nonoperating assets. If the appropriate WACC is 12 percent and debt of 44.5 million, what is the equity value of this business? (Round final answer to the nearest million.)

A) $135 million

B) $105 million

C) $45 million

D) $90 million

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

76) You are using the FCFF approach to value a business. The estimated FCFF for next year will be $13.6 million, and it will increase at a rate of 6 percent for each of the following five years. After that point, the FCFF will increase at a rate of 3 percent forever. If the WACC for this firm is 8 percent, what is it worth? (Round final answer to the nearest million.)

A) $301 million

B) $354 million

C) $241 million

D) $144 million

Learning Objective: LO 3

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

77) Phosfranc Inc. is valuing the equity of a company using the free cash flow from equity, FCFE, approach and has estimated that the FCFE in the next three years will be $6.25, $7.70, and $8.36 million respectively. Beginning in year 4, the company expects the cash flows to increase at a rate of 4 percent per year for the indefinite future. Phosfranc estimates that the cost of equity is 12 percent. What is the value of equity in this company? (Do not round intermediate computations. Round final answer to the nearest million.)

A) $77 million

B) $95 million

C) $109 million

D) $60 million

Learning Objective: LO 3

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

78) You are valuing the equity of NewNil Corp. using the FCFE approach and have estimated that the FCFE in the next three years will grow at 8 percent rate from last year's FCFE of $2.1 million. Beginning in year 4, you expect the cash flows to increase at a constant rate of 5 percent per year for the indefinite future. The cost of equity for the firm is 10 percent. What is the value of equity in this company? (Round final answer to the nearest million dollars.)

A) $42 million

B) $56 million

C) $48 million

D) $6 million

Learning Objective: LO 3

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

79) You are interested in investing in a private company. Based on earnings multiples of similar publicly traded firms, you estimate the value of the private company's stock to be $13.44 per share. You plan to acquire a majority of the shares in the company. The expected control premium is 12 percent, while the marketability discount for such a firm is 15 percent. The discount for the key person, one of the founders who may leave the firm upon your control of the firm, is 15 percent. What price should you be willing to pay for these shares? (Round final answer to two decimal places.)

A) $14.92 per share

B) $16.65 per share

C) $11.80 per share

D) $10.88 per share

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

80) Shuman Wolf is interested in investing in a private company. Based on earnings multiples of similar publicly traded firms, he estimates the value of the private company's stock to be $20 per share. He plans to acquire a majority of the shares in the company. The expected control premium is 9 percent. Shuman estimates the marketability discount for such a firm to be 11 percent. The discount for the key person, one of the founders who may leave the firm upon Shuman's control of the firm, is 19 percent. What price should he be willing to pay for these shares? (Round final answer to two decimal places.)

A) $16.47 per share

B) $31.45 per share

C) $15.72 per share

D) $32.94 per share

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

81) Alfred Sautin wants to invest in Dieciring, Inc., a private company. Based on earnings multiples of similar publicly traded firms, Alfred estimates the value of the private company's stock to be $19 per share. He plans to acquire a majority of the shares in the company. The expected control premium is 11 percent. He estimates the marketability discount for such a firm to be 14 percent. The discount for the key person, one of the founders who may leave the firm upon Alfred's control of the firm, is 16 percent. What price should he be willing to pay for these shares? (Round final answer to two decimal places.)

A) $15.24 per share

B) $18.10 per share

C) $14.05 per share

D) $20.70 per share

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

82) What difficulties are associated with valuing real assets compared to financial assets?

Learning Objective: LO 4

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

83) Explain how valuations can differ between public and private companies and between young and mature companies as well as the importance of marketability, control, and key person considerations in valuation.

Learning Objective: LO 4

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

84) What are some things to watch out for when doing multiples analysis?

Learning Objective: LO 3

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

85) Why does the value of a business change over time?

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

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