Business 165 Fall 2008 Test 4-7 Brazie Name___________________________________ MULTIPLE CHOICE.

Choose the one alternative that best completes the statement or answers the question. 1)7 The process of determining whether an entrepreneur's idea is a viable 1) _______ foundation for creating a successful business is known as a: A) feasibility analysis. B) strategic analysis. C) industry analysis. D) business plan. 2) /22 Porter's five forces model assess industry attractiveness by surveying these five factors: A) Potential entrants, competitors, buyers, substitutes, and rivalry among existing firms. B) Potential entrants, suppliers, buyers, similar products, and rivalry among existing firms. C) Potential entrants, suppliers, buyers, substitutes, and rivalry among existing firms. D) Potential entrants, suppliers, raw materials, substitutes, and rivalry among existing firms. 3) The process in which entrepreneurs test their business models on a small scale before committing serious resources to launch a business that might not work is known as: A) business prototyping. B) business modeling. C) product or service feasibility analysis. D) business planning. 4) A solid business plan: A) requires a potential entrepreneur to assess the venture's chances of success more objectively. B) forces potential entrepreneurs to look at their business idea in the harsh light of reality. C) helps prove to outsiders such as potential lenders and investors that a business idea can be successful. D) All of the above 5) The three "tests" associated with a business plan are: A) reality, value and litmus. B) reality, competitive, and value. C) competitive, profitability, and value. D) value, reality, and profitability. 6) Potential investors tend to believe that if an entrepreneur cannot develop a good plan, the entrepreneur: A) is just like the majority of entrepreneurs and will probably do quite well. B) probably lacks the discipline to run a business. C) needs to hire a consultant to write the plan for him. D) is probably the action-oriented sort of person they need running a business. 2) _______

3) _______

4) _______

5) _______

6) _______

7) The executive summary section of the business plan: A) is the last section of the plan but should be the first part written. B) should summarize the essence of the plan in a capsulated form and should capture the reader's attention. C) should be no more than 8 or 10 pages long. D) All of the above 8) The ________ serves as the thesis statement for the entire business plan. A) mission statement B) company history C) executive summary D) marketing strategy 9) The ________ highlights significant financial and operational events in the company's life and should concentrate on the company's accomplishments. A) business and industry profile B) marketing strategy C) company history D) executive summary 10) ________ are broad, long-range statements of what a company plans to achieve in the future that guide its overall direction and addresses the question, "Why am I in business?" A) Strategies B) Objectives C) Key performance factors D) Goals 11) ________ are short-term, specific targets which are attainable, measurable, and controllable. A) Objectives B) Standard operating procedures C) Goals D) Policies 12) Which of the following statements about the preparation of a business plan is/are not true? A) Grammatical and spelling errors in a business plan don't really count since potential lenders and investors judge the quality of a plan by its content. B) The business plan should be "crisp," long enough to say what it should but not so long that it is a chore to read. C) Always tell the truth. D) Always include cash flow projections for the venture, in addition to projected income statements and balance sheets. 13) The key to choosing the right form of ownership is: A) irrelevant since choosing a form of ownership is merely a technicality and has little impact on the business and its owner(s). B) understanding the characteristics of each form and knowing how they affect your business and personal circumstances. C) forming either an S corporation or a limited liability company since they are the only forms that offer owners liability protection. D) envisioning where your business will be in 10 years.

7) _______

8) _______

9) _______

10) ______

11) ______

12) ______

13) ______

14) Which of the following issues would influence an entrepreneur's choice of a form of business ownership? A) Liability exposure B) Management succession plans C) Tax considerations D) All of the above 15) The most common form of business ownership that is also the simplest to create is the: A) S corporation. B) corporation. C) sole proprietorship. D) partnership. 16) The most critical disadvantage of the sole proprietorship is: A) lack of continuity. B) the owner's unlimited personal liability. C) limited skills and abilities of the owner. D) limited access to capital. 17) A partnership agreement defines how the partners will be compensated. Normally, A) the general partner's salary is set at two times the salaries of the limited partners. B) both general and limited partners are permitted salaries, but all silent or dormant partners are compensated only by sharing in the profits. C) partners are not entitled to salaries or wages, but are compensated by a share of the profits of the business. D) while the agreement establishes payout schedules, it does not spell out what constitutes profit. 18) Probably the most important reason to have a partnership agreement is that: A) it identifies the name of the partnership and protects that name from infringement by others. B) it resolves potential sources of conflict that, if not addressed in advance, could later result in partnership battles and dissolution of an otherwise successful business. C) it determines how the partnership and the partners will pay taxes. D) it states the location and the purpose of the business. 19) In a partnership, the ________ partner(s) has (have) unlimited liability for the partnership's debts. A) limited B) general C) nominal D) dormant 20) A special type of limited partnership in which all partners who, in many states must be considered to be professionals, are limited partners. A) Master limited partnership (MLP) B) Limited partnership C) Limited liability partnership (LLP) D) General partnership

14) ______

15) ______

16) ______

17) ______

18) ______

19) ______

20) ______

21) Acme Corporation is chartered in Delaware, but its primary area of operation is in South Carolina. In South Carolina, Acme would be considered a(n) ________ corporation. A) foreign B) domestic C) local D) alien 22) A corporation receives its charter from: A) the board of directors. B) the state. C) the federal government. D) the stockholders. 23) Which of the following is not an advantage of the corporate form of ownership? A) Perpetual life B) Limited liability for the owners C) Easy transfer of ownership D) It is the easiest and least expensive form of ownership to create. 24) In the ________ form of ownership, the business itself pays income taxes. A) corporation B) partnership C) proprietorship D) All of the above 25) An S corporation form of ownership overcomes which disadvantage of the regular or C corporation form of ownership? A) The expense and difficulty of formation B) The double taxation issue C) The amount of regulation and red tape involved in its operation D) The potential loss of control by the founder 26) A limited liability company: A) prevents owners who want to maintain their limited liability status from actively managing the company. B) is similar to an S corporation in that it is a cross between a partnership and a corporation. C) can have a maximum of 50 owners. D) All of the above 27)5// A franchise is a system of distribution in which semi-independent / business owners pay ________ and ________ to a parent company in return for the right to become identified with its trademark, to sell its product or services, and often to use its business format and system. A) fees; royalties B) percentage of sales; royalties

21) ______

22) ______

23) ______

24) ______

25) ______

26) ______

27) ______

C) upfront costs; incremental costs a percentage of sales; royalties D) royalties; monthly consulting charges

28) Which of the following is not a potential advantage of franchising for the franchisee? A) National advertising program B) Limited product line C) Management training and assistance D) Centralized buying power 29) Franchisers generally do which of the following regarding financial assistance to franchisees? A) Provide direct financing. B) Waive royalty fees for franchisees not making an adequate profit. C) Assist in finding financing and occasionally provide direct assistance in a specific area. D) Generally do nothing, as having or finding financing is a requirement for qualifying for a franchise. 30) 8//When it comes to purchasing products, equipment, and incurring other expenses, the franchiser: A) cannot require franchisees to buy from an "approved" supplier. B) can set prices franchisees pay for the products but cannot set the retail price the franchisees charge. C) cannot require the franchisees to buy from the franchise company. D) is permitted to set the retail price for the franchisee. 31) Which of the following is an indication of a dishonest franchiser? A) A "get-rich-quick" scheme B) Attempts to discourage you from getting an attorney to review the contract C) A high-pressure sale D) All of the above 32)20 Which of the following should make a potential franchisee suspicious about a franchiser's honesty? A) Claims that the franchise contract is a standard agreement and that there is no need to read it or have an attorney look it over B) Requiring franchisees to spend a certain percentage of profits on advertising C) Not providing detailed operational information until 10 days before signing the contract D) An offer of direct financing of a specific element of the franchise package

28) ______

29) ______

30) ______

31) ______

32) ______

33) In addition to reading the franchiser's UFOC, it would be wise for the potential franchisee to seek a franchise that offers which of the following? A) A positive relationship with franchisees B) A registered trademark C) A unique concept or marketing approach D) All of the above 34) A method of franchising in which a franchise opens more than one unit in a broad territory within a specific time period is referred to as: A) conversion franchising. B) multiple-unit franchising (MUF). C) product distribution franchising. D) master franchising.

33) ______

34) ______

35) 9// Chris Jaffe, the owner of a small independent doughnut shop, is worried that a large doughnut franchise will open an outlet near her location and take away much of her business. Taking a proactive approach, Jaffe contacts the franchise, and after a few months of negotiations, becomes a francbhisee. Jaffe is an example of which trend in franchising? A) Piggyback B) Master C) Conversion D) Subfranchising 36) Establishing a Baskin-Robbins franchise inside a Blimpee's franchise is an example of ________ franchising. A) master B) diversionary C) piggyback D) multi-unit 37) When done correctly, the due diligence process will: A) most often result in the purchase of the business. B) rarely prove to be beneficial. C) reveal both the positive and negative aspects of an existing business. D) be time consuming and expensive. 38) 13.//Advantages to buying an existing business that you do not have with a startup include: A) the opportunity to participate in a national advertising campaign. B) greater access to venture capital. C) easy implementation of innovations and changes from past policies. D) inventory is in place and trade credit is established. 39) Which of the following is a potential disadvantage of purchasing an existing business? A) The previous owner may have created ill will among the company's customers. B) The employees inherited with the business may not be suitable. C) Equipment and facilities may be obsolete or inefficient. D) All of the above 40) The inventory in an existing business: A) is always current and salable. B) usually appreciates over time, making the business a bargain. C) is usually stated honestly and does not need an independent audit. D) should be judged on the basis of its market value, not its book value.

35) ______

36) ______

37) ______

38) ______

39) ______

40) ______

41) An entrepreneur who is considering purchasing a business analyzed the company's accounts receivable. The following table summarizes her findings. Age of Accounts Collection 0 - 30 days 31 - 60 days 61 - 90 days 91 - 120 days 121 + days $12,000 $ 4,000 $ 2,500 $ 1,400 $ 800 .96 .87 .71 .65 .24 Amount Probability of

41) ______

How much should this potential buyer be willing to pay for these accounts receivable? A) $20,700 B) $17,877 C) $0. A buyer should never purchase existing accounts receivable. D) Not enough information given 42) The first step an entrepreneur should take when buying an existing business is to: A) analyze her skills, abilities, and interests in an honest self-audit. B) contact existing business owners in the area and ask if their companies are for sale. C) prepare a list of potential candidates. D) explore financing options. 43) Which of the following is (are) a potential source for tapping into the hidden market of companies that might be for sale but are not advertised? A) Industry contacts B) Business brokers C) "Networking" D) All of the above 44) Which of the following statements concerning financing the purchase of an existing business is true? A) The buyer should be able to make the payments on the loans out of the company's cash flow. B) It is usually more difficult than securing financing for a start-up business. C) Usually, the business seller is not a good source of financing. D) All of the above 45) To ensure a smooth transition when buying an existing business, a buyer should: A) communicate with employees to reduce their uncertainty and anxiety. B) consider asking the seller to stay on and serve as a consultant until the transition is complete. C) be honest with existing employees about upcoming changes and plans for the company's future. D) All of the above 42) ______

43) ______

44) ______

45) ______

46)15 Laurette has entered into a contract with Jackson to purchase his retail //// music shop. Jackson's lease on the existing building (which is in an excellent location) has five years remaining. If Laurette wants the lease to be part of the business sale: A) she should include a clause in the sales contract in which Jackson agrees to assign to her his rights and obligations under that lease. B) she should notify the landlord of Jackson's assignment of the lease agreement to her. C) A and B are correct. D) None of the above. Because Jackson does not actually own the building, he can transfer no rights to it to Laurette. 47) 3////During the acquisition process, the potential buyer usually must sign a ________, which is an agreement to keep all conversations and information secret and legally binds the buyer from telling anyone any information the seller shares with her. A) purchase agreement B) letter of intent C) nondisclosure document D) covenant not to compete 48) During the acquisition process, the buyer and the seller sign a ________, which spells out the parties' final deal and represents the details of the agreement that are the result of the negotiation process. A) covenant not to compete B) purchase agreement C) letter of intent D) nondisclosure document 49) 17, // Which of the following statements about valuing a business is true? A) The balance sheet technique is the best way to value a business. B) Business valuation processes are consistently misleading regarding the future earning potential of a business. C) Buyers should rely on the seller's industry expertise and years of experience to determine what his company is worth. D) Business valuation is partly art and partly science. 50) The main reason a buyer purchases an existing businesses is for: A) its tangible assets. B) its future income and profits. C) its customer base. D) its goodwill.

46) ______

47) ______

48) ______

49) ______

50) ______

Bonus: 6 points Using the provided information for Baubles and Bells, enter the information into the online What Its Worth spreadsheet. Print out the results and return them with the completed test.

Information for the bonus to chapter 4-7 test

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 and has a next best opportunity cost of 20%. Estimated earnings for the upcoming year are $88,400. Complete net earnings estimates for the next five years are: Year 1 Year 2 Year 3 Year 4 Year 5 Pessimistic $82,000 $85,000 $88,000 $91,000 $94,000 Most Likely $88,400 $90,000 $92,500 $95,000 $97,000 Optimistic $90,500 $93,000 $95,500 $97,000 $98,500

Estimates are that there is a 30% chance of the pessimistic scenario and a 20% chance of the optimistic scenario. Trinkets and Things, Bangles, and Bodda Bling, nationally traded corporations selling similar items, currently have PE ratios of 5, 4.7 and 5.3 respectively.