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______________________ Course Title: Entrepreneurship Student I.____________ Course #: BUAD351.W01 Final Exam Instructions: This is your final exam...

I need assistance with answering number 4

Name : ______________________ Student I.D. # :____________ Course Title : Entrepreneurship Course # : BUAD351.W01 Final Exam Instructions : This is your final exam based on the materials we have covered in this class. You have to answer ALL four (4) questions . Therefore, I expect your answers to be detailed. Also, remember that you need to clearly explain your answers, and the importance of grammar, spelling, and punctuation . Good Luck. Ques # 1 : In creating a new business, a firm has a number of ways in which it can organize itself. Discuss the differences among sole proprietorships, partnerships, corporations, and limited liability companies. Ques # 2 : It is suggested that business plans are essential to the success of a venture. What is a business plan? Identify the components of the plan and discuss the important issues that help a business plan to be successful. Ques # 3 : Why is developing a financial plan important to an entrepreneur? How can a break-even analysis aid an entrepreneur who is attempting to launch a new business? Ques # 4 : You are interested in purchasing a construction company that is primarily involved in the rehabilitation of homes. The business is 25 years old and has seen steady growth in revenues and profits each year since its founding, except during periods of economic recession. Assume that net income has been the following for the past 4 years: 2012 - $9,000,000 2011 - $7,500,000 2010 - $6,000,000 2009 - $4,500,000 The owner has given you the following balance sheet for your review. ASSETS Current Assets Cash $10,000,000 Accounts Receivable $ 7,000,000 Inventory $ 3,000,000 Total Current Assets: $20,000,000 Fixed Assets Equipment $ 9,500,000 Less accumulated depreciation ($ 2,500,000) Total Fixed Assets: $ 7,000,000 TOTAL ASSETS $27,000,000 LIABILITIES Current Liabilities Accounts Payable $ 5,000,000 1
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Other Liabilities $ 2,500,000 Accrued Taxes $ 2,000,000 Total Current Liabilities: $ 9,500,000 Long-term Liabilities Long-term Debt $ 4,500,000 Total Long-term Liabilities: $ 4,500,000 TOTAL LIABILITIES $14,000,000 OWNER’S EQUITY $13,000,000 TOTAL LIABILITIES AND OWNER’S EQUITY $27,000.000 Valuation Methods It is now your task to establish a valuation for the business using the following: 1. BASIC BALANCE SHEET METHOD 2. ADJUSTED BALANCE SHEET TECHNIQUE 3. EARNINGS APPROACH o EXCESS EARNINGS METHOD 4. MARKET APPROACH Use the following assumptions: 1. 20 percent of the accounts receivable are over 120 days old. 2. 10 percent of the remaining accounts receivable are 90 days old. 3. 5 percent of the remaining accounts receivable are likely to be paid on the basis of 3 net 30. 4. 15 percent of the inventory is outdated and essentially useless 5. An appraisal of the firm’s equipment reveals that it is worth 5 percent more than the stated value on the balance sheet. 6. A vendor has informed you that your bill has been under estimated by $150,000 due to a billing error. 7. Assume a 10 percent rate of return. 8. Assume an additional opportunity cost of $275,000 for salary forgone if you purchase the business. 9. We are now emerging from a recession and sales are expected to increase by 5% in the coming year. 10. Assume a years-of-profit figure of 3 for this business. 11. Assume that the four publicly traded firms that are in the same business trade at P/E ratios of 5, 7, 6, and 8, respectively. 2
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