RFC Business Planning & Owner Strategies 1

Question 1

Under a cross-purchase buy-sell agreement, who purchases a departing owner's business interest?

Accepted Answer

The surviving owners individually

Answer

In a cross-purchase agreement, the surviving owners personally purchase the departing owner's interest, giving them a stepped-up cost basis.

Question 2

Which primary advantage does a cross-purchase buy-sell agreement provide to surviving owners compared to an entity purchase (stock redemption) agreement?

Accepted Answer

Surviving owners receive a stepped-up cost basis in the purchased interest

Answer

Because surviving owners personally purchase the interest, they receive a stepped-up basis equal to the purchase price, reducing future capital gains on a later sale.

Question 3

A 'wait-and-see' buy-sell agreement is best described as one in which:

Accepted Answer

The entity has first right to purchase, followed by the surviving owners if the entity declines

Answer

A wait-and-see agreement gives the entity the first option to redeem shares; only if the entity declines do the individual owners have the option to purchase.

Question 4

Which business valuation approach estimates value by dividing a company's normalized earnings by an appropriate capitalization rate?

Accepted Answer

Income approach using capitalization of earnings

Answer

The capitalization of earnings method, an income approach, divides stabilized earnings by a capitalization rate that reflects the business's risk and growth prospects.

Question 5

Which business entity form avoids double taxation while providing all owners with limited liability protection?

Accepted Answer

S Corporation

Answer

An S Corporation is a pass-through entity, so income is taxed only at the shareholder level, while all shareholders enjoy limited liability.

(RFC) Registered Financial Consultant Practice Test

(RFC) Registered Financial Consultant Practice Test

RFC Business Planning & Owner Strategies 1