BA109 Quiz 7 UPDATED Exam Questions
and CORRECT Answers
The due diligence process in analyzing and evaluating an existing business can be just as time
consuming as the development of a comprehensive business plan for a start-up. - Correct
Answer- True
Goodwill is the difference between an established successful business and one that has yet to
prove itself. - Correct Answer- True
When evaluating a business as a potential candidate for purchase, an entrepreneur should
determine the real reason the current owner wants to sell. - Correct Answer- True
A toy manufacturer is sued based on the claim of injuries caused by a product it makes. This
is an example of a: - Correct Answer- product liability lawsuit.
Important factors to investigate regarding the business to be purchased include: - Correct
Answer- All of these
If a business has a lien against any of its assets at the time of the sale, the buyer must assume
them and is financially responsible for them. - Correct Answer- True
se the following information to answer the question(s) below.
Baubles and Bells, a small business, is up for sale. The book value of its assets is $397,650,
and its liabilities have a book value of $148,500. After adjusting for market value, total assets
are worth $386,475, and total liabilities are $153,600. The business is considered to be a
"normal risk" venture. The new owner (if he buys) plans to draw a salary of $28,000.
Estimated earnings for the upcoming year are $88,400. Complete net earnings estimates for
the next five years are:
, Using the excess earnings method, what is the company's "goodwill"? - Correct Answer-
$6,543
The best method for determining a business's worth is the discounted future earnings
approach. - Correct Answer- False
The discounted future earnings approach to valuing an existing business involves estimating
the company's net income for several years into the future and then discounting those future
earnings back to their present value. - Correct Answer- True
An entrepreneur who is considering purchasing a business is analyzing a company's accounts
receivable. The following table summarizes her findings.
How much should this potential buyer be willing to pay for these accounts receivable? -
Correct Answer- $17,877
Skimming is the act of taking money from sales without reporting it as income and it is an
illegal and unethical practice. - Correct Answer- True
An entrepreneur should never purchase a business that is losing money. - Correct Answer-
False
The reliability of the discounted future earnings approach to valuing a business depends on
making accurate forecasts of future earnings and on choosing a realistic present value rate. -
Correct Answer- True
A letter of intent is a nonbinding document stating that a business buyer and a seller have
reached a sufficient "meeting of the minds" to justify the time and the expense of negotiating
a final agreement. - Correct Answer- True
Which of the following valuation techniques is best suited for determining the value of
service businesses? - Correct Answer- Discounted future earnings approach
and CORRECT Answers
The due diligence process in analyzing and evaluating an existing business can be just as time
consuming as the development of a comprehensive business plan for a start-up. - Correct
Answer- True
Goodwill is the difference between an established successful business and one that has yet to
prove itself. - Correct Answer- True
When evaluating a business as a potential candidate for purchase, an entrepreneur should
determine the real reason the current owner wants to sell. - Correct Answer- True
A toy manufacturer is sued based on the claim of injuries caused by a product it makes. This
is an example of a: - Correct Answer- product liability lawsuit.
Important factors to investigate regarding the business to be purchased include: - Correct
Answer- All of these
If a business has a lien against any of its assets at the time of the sale, the buyer must assume
them and is financially responsible for them. - Correct Answer- True
se the following information to answer the question(s) below.
Baubles and Bells, a small business, is up for sale. The book value of its assets is $397,650,
and its liabilities have a book value of $148,500. After adjusting for market value, total assets
are worth $386,475, and total liabilities are $153,600. The business is considered to be a
"normal risk" venture. The new owner (if he buys) plans to draw a salary of $28,000.
Estimated earnings for the upcoming year are $88,400. Complete net earnings estimates for
the next five years are:
, Using the excess earnings method, what is the company's "goodwill"? - Correct Answer-
$6,543
The best method for determining a business's worth is the discounted future earnings
approach. - Correct Answer- False
The discounted future earnings approach to valuing an existing business involves estimating
the company's net income for several years into the future and then discounting those future
earnings back to their present value. - Correct Answer- True
An entrepreneur who is considering purchasing a business is analyzing a company's accounts
receivable. The following table summarizes her findings.
How much should this potential buyer be willing to pay for these accounts receivable? -
Correct Answer- $17,877
Skimming is the act of taking money from sales without reporting it as income and it is an
illegal and unethical practice. - Correct Answer- True
An entrepreneur should never purchase a business that is losing money. - Correct Answer-
False
The reliability of the discounted future earnings approach to valuing a business depends on
making accurate forecasts of future earnings and on choosing a realistic present value rate. -
Correct Answer- True
A letter of intent is a nonbinding document stating that a business buyer and a seller have
reached a sufficient "meeting of the minds" to justify the time and the expense of negotiating
a final agreement. - Correct Answer- True
Which of the following valuation techniques is best suited for determining the value of
service businesses? - Correct Answer- Discounted future earnings approach
