Structure and Taxation of Business Entities

Question 1

Non profit vs charity

Answer 1

Chairty can issue receipts and most be for relief of poverty, education, religion, charitable purposes

Question 2

Quick Ratio (Acid Test) Purpose

Answer 2

primary measure of company solvency

Question 3

Interest Coverage Ratio (Formula and acceptable figure)

Answer 3

Considered most important of debt ratios.
EBIT/interest expense. Ratio of 1.5 or lower indicates strong risk of default. less than 1 means cash will need to be used to pay debt

Question 4

Operating Profit Margin/Net Profit

Answer 4

-EBIT (Gross profit - fixed expenses like admin)
-Net Profit most useful for shareholders

Question 5

Business Valuation Factors

Answer 5

Earnings, assets, control, tax liabilities (important with share purchase), intangibles, depreciation, timelines, marketability, nature of assets (how profitable are assets)

Question 6

Valuation Methods

Answer 6

-Liquidation Value (not being sold under optimal circumstances)
-Going concern - most common for sme. EBIT, EBITDA, net income, seller’s discretionary earnings (owner working most of the time, based on all the money owner can take from business)
-Market value - public companies, controlled by market forces or based on recent share sale
-Discounted future earnings - analysts tool