Mergers Acquisitions And Other Restructuring Activities 7th Edition By Donald DePamphilis – Test Bank

Mergers Acquisitions And Other Restructuring Activities 7th Edition By Donald DePamphilis – Test Bank

Chapter 10: Analysis and Valuation
of Privately Held Companies

Examination Questions and Answers

True/False Questions: Answer true or false to the following questions:

1. Both public and private firms always attempt to maximize earnings growth. True or False
Answer: False

2. Financial information for both public and private firms is equally reliable because their statements are audited by outside accounting firms to ensure that are developed in a manner consistent with GAAP.
True or False
Answer: False

3. For privately held firms, firm specific risk may include lack of product, industry, and geographic
diversification; limited management depth, volatile stock markets, and unionized workforces.
True or False
Answer: False

4. Private firms are likely to understate revenue and understate costs in order to minimize their tax liabilities. True or False
Answer: False

5. Revenue may be inflated by booking as revenue products shipped to resellers without adequately
adjusting for probable returns. True or False
Answer: True

6. If a buyer expects that the target firm’s revenue has been overstated, the buyer can reconstruct revenue by examining usage levels of the key inputs required to produce the product or service. True or False
Answer: True

7. The purpose of adjusting the target’s income statement is to provide an accurate estimate of the
current year’s reported operating income or operating cash flow. True or False
Answer: True

8. Employee benefit levels in private firms are almost always mandated by state or federal law and
therefore cannot be changed. True or False
Answer: False

9. An increase in the target firm’s reserves for doubtful accounts increases taxable income, while a
decrease reduces the firm’s taxable income. True or False
Answer: False

10. It is easier to obtain the fair market value of private companies than for public companies because of the
absence of volatile stock markets. True or False
Answer: False

11. Methodologies employed to value private firms are substantially different from those employed to value
public firms. True or False
Answer: False

12. Asset valuation includes specific business risks but ignores any adjustment for liquidity risk. True or False
Answer: False