CSP Financial & Risk Assessment in Succession 3

Question 1

When using a self-canceling installment note (SCIN) in succession planning, what unique risk does the seller accept?

Accepted Answer

Death before receiving full payment cancels the remaining balance

Answer

A SCIN cancels automatically at the seller's death, meaning if the seller dies early, unpaid principal disappears from the estate—but the seller risks dying before receiving full payment.

Question 2

Which of the following best describes 'succession risk' in the context of enterprise risk management (ERM)?

Accepted Answer

The risk that leadership gaps will disrupt operations and erode business value

Answer

In ERM, succession risk refers to the potential for operational disruption and value destruction when key leadership positions are vacated without qualified replacements ready.

Question 3

A business is valued at $4 million. The owner gifts a 10% minority interest to a child, applying a combined discount of 30%. What is the taxable gift value?

Accepted Answer

$280,000

Answer

10% of $4M = $400,000 pro-rata value; applying a 30% combined discount yields $400,000 × 0.70 = $280,000 taxable gift.

Question 4

Which financial statement is MOST useful for assessing a company's liquidity position during succession due diligence?

Accepted Answer

Statement of cash flows

Answer

The statement of cash flows reveals actual cash generation and usage, providing direct insight into whether the business can meet near-term obligations during a succession transition.

Question 5

A private company uses the excess earnings method for valuation. Which two components does this method combine?

Accepted Answer

Asset value and capitalized excess earnings (goodwill)

Answer

The excess earnings method adds the net asset (tangible) value to a capitalized stream of earnings above a normal return on assets, which represents intangible/goodwill value.

(CSP) Certified Succession Planner Practice Test

(CSP) Certified Succession Planner Practice Test

CSP Financial & Risk Assessment in Succession 3