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Finance
Q:
Suppose your venture's expected mean cash flows are $85,000 initially, followed by expected mean cash flows at the end of the first, second, and third years of $40,000, $40,000, and $35,000, respectively. What is the internal rate of return?
a. 13.9%
b. 14.7%
c. 16.2%
d. 17.2%
Q:
Determine the net income of a comparable firm based on the following information: value of the target firm = $4,000,000; net income of the target firm = $200,000; stock price of the comparable firm = $30; and number of shares of stock outstanding for the comparable firm = 300,000.
a. $450,000
b. $500,000
c. $550,000
d. $600,000
Q:
For early-stage ventures, which of the following is a strong reason for having an equity component in employee compensation?
a. the expected deferred and tax-preferred compensation allows the venture to pay a lower current compensation to employees
b. it is a way to motivate employees to strive for a goal of low equity value
c. any dividends received as part of the equity compensation reduces taxable income
d. it reduces the percentage of ownership held by debtholders
Q:
A potential investor is willing to provide $500,000 in first-round financing with the expectation of a 50% annual compound rate of return over the next five years. Founders currently hold 1,000,000 million shares of stock. The venture is expected to produce $500,000 in net income in year 5. A similar firm with annual net income of $1,000,000 sold shares to the public for $10,000,000. What is the number of shares that must be issued to the new investor in order for the investor to earn his target return?
a. 3,156,276
b. 1,578,138
c. 4,156,276
d. 2,578,138
Q:
Financing provided in sequences of rounds rather than all at one time is known as:
a. pre-money valuation
b. post money valuation
c. staged financing
d. the capitalization rate
Q:
The value of the existing venture plus the proceeds from the potential new equity issue is known as:
a. pre-money valuation
b. post money valuation
c. staged financing
d. the capitalization rate
Q:
The following Multiple-Choice Questions relate to Learning Supplements 11A and 11BThe two just-in-time capital methods are:a. DDA and VCSCb. DDA and PDMc. VSCS and MDMd. MDM and PDM
Q:
Determine the future value of a target venture which has net income expected to be $40,000 at the end of four years from now. A comparable firm currently has a stock price of $20 per share, 100,000 shares outstanding, and net income of $50,000.a. $1.0 millionb. $1.4 millionc. $1.6 milliond. $2.0 million
Q:
Which of the following is not a variation of the venture capital valuation method?
a. venture capital method
b. expected present value
c. utopian discount process
d. actual dividend payments
Q:
The following Multiple-Choice Questions relate to Learning Supplements 11A and 11BWhen a firm has growth that only meets, rather than exceeds, the cost of capital, we would expect its price-earnings multiple to be approximately equal to:a. the reciprocal of its required return on equityb. its earnings per sharec. its book-to-market ratiod. its debt-to-value ratio
Q:
To obtain the percent ownership to be sold in order to expect to provide the venture investor's target return, one must consider the cash investment today and the cash return at exit __________ by the venture investor's target return, then __________ today's cash investment by the venture's NPV.
a. multiplied; divide
b. discounted; divide
c. multiplied; divide
d. discounted; multiply
Q:
The utopian approach to valuation ignores which of the following venture scenarios?
a. black-hole scenarios
b. living-dead scenarios
c. black-hole scenarios and living-dead scenarios
d. venture utopia scenarios
Q:
Which of the following financing rounds does not dilute the ownership of founders?
a. first round
b. second round
c. incentive ownership round
d. founder's round
Q:
The value of the existing venture without the proceeds from the potential new equity issue is known as:
a. pre-money valuation
b. post money valuation
c. staged financing
d. the capitalization rate
Q:
Estimate the value of a privately held firm based on the following information: total market value (or capitalization value) of a comparable firm = $200,000; net income of the comparable firm = $40,000; number of shares outstanding for the comparable firm = 20,000; net income for the target firm = $15,000; and number of shares outstanding for the target firm = 10,000.
a. $7.50
b. $10.00
c. $12.50
d. $15.00
Q:
The utopia discount process allows the venture investors to value their investment using only the business plan's explicit forecasts, discounting it at a bank loan interest factor.a. Trueb. False
Q:
The discount rate that one applies in a multiple scenario valuation will usually be lower than the discount rate that would be applied to the business plan cash flows.
a. True
b. False
Q:
The VSCS and DDA methods are "just-in-time" capital methods which do not assess capital charges for idle cash.
a. True
b. False
Q:
The capitalization rate is the sum of the discount rate and the growth rate of the cash flow in the terminal value period.
a. True
b. False
Q:
In staged financing, the expected effect of future dilution is borne by both founders and the investors currently seeking to invest.
a. True
b. False
Q:
All of the scenarios in a multiple scenario analysis must have exit cash flows in the same year.
a. True
b. False
Q:
The venture capital valuation method which capitalizes earnings using a cap rate implied by a comparable ratio is known as direct capitalization.
a. True
b. False
Q:
For the typical business plan having current and early cash outflows and later-stage cash inflows, the VCSC and DDA methods will typically give lower valuations than the MDM and PDM.
a. True
b. False
Q:
The basic venture capital method estimates a venture's value using only terminal/exit flows to all of the venture's owners.
a. True
b. False
Q:
For most early-stage ventures, there are no strong motives for having an equity component in employee compensation.
a. True
b. False
Q:
The discount rate applied in an expected PV approach should be the same rate across scenarios.
a. True
b. False
Q:
The expected present value method incorporates the present values of different scenarios, as well as their probabilities, into the valuation process.
a. True
b. False
Q:
The internal rate of return is the simple (noncompounded) interest rate that equates the present value of the cash inflows received with the initial investment.
a. True
b. False
Q:
Almost without exception, professional venture investors demand that some equity or deferred equity compensation be structured into any valuation.
a. True
b. False
Q:
The basic venture capital method estimates a venture's value using intermediate and terminal/exit flows to founders.
a. True
b. False
Q:
A direct application of the earnings-per-share ratio to venture earnings is known as the direct comparison valuation method.
a. True
b. False
Q:
The venture capital shortcut (VCSC) method is a post-money version of the delayed dividend approximation (DDA).
a. True
b. False
Q:
Multiplying a venture's earnings by a price-earnings ratio represents a form of direct comparison valuation.
a. True
b. False
Q:
Post-money valuation of a venture is the pre-money valuation plus money injected by new investors.
a. True
b. False
Q:
The return on book equity equals the sustainable growth rate when all earnings are paid out in the form of dividends.
a. True
b. False
Q:
If a venture issues debt prior to the exit period, the initial equity investors will still receive first claims on the venture's net worth at exit time.
a. True
b. False
Q:
Staged financing is financing provided in sequences of rounds rather than all at one time.
a. True
b. False
Q:
A price-earnings ratio is related to the level and growth of earnings.
a. True
b. False
Q:
The internal rate of return (IRR) is the compound rate of return that equates the present value of the cash inflows received with the initial investment.
a. True
b. False
Q:
The value of the venture's equity is equal to the value the financing contributed in the first venture capital round.
a. True
b. False
Q:
The market value of a venture's equity is equal to the market value of the venture's total assets minus its total liabilities.
a. True
b. False
Q:
Venture investors' returns depend on the venture's ability to generate cash flows or to find an acquirer for the venture.
a. True
b. False
Q:
The utopian venture valuation approach uses probability-weighted outcomes that are summed to get an expected present value for the venture.
a. True
b. False
Q:
Failure to account for any additional rounds of financing and its accompanying dilution in order to meet projected earnings will result in the investor not receiving an adequate number of shares to ensure the required percent ownership at the time of exit.
a. True
b. False
Q:
The alternative to a utopian venture valuation approach is a mean venture valuation approach which considers that two or more outcomes could occur.
a. True
b. False
Q:
The DDA and VCSC methods give the same valuation.
a. True
b. False
Q:
Indicate whether the statement is true or falseThe following True/False Questions relate to Learning Supplements 11A and 11BFor the typical business plan having current and early cash outflows and later-stage cash inflows, the VSCS will give a higher valuation than the DDA.a. Trueb. False
Q:
Determine the market value of a comparable firm based on the following information: value of the target firm = $4,000,000; net income of the target firm = $200,000; and net income of the comparable firm = $500,000.
a. $15 million
b. $7.5 million
c. $10 million
d. $12.5 million
Q:
The following Multiple-Choice Questions relate to Learning Supplements 11A and 11BFor the typical venture investing project, the valuation will be highest under:a. DDAb. PDM and MDMc. VCSCd. initial book value of equity
Q:
Which of the following are components of the mean venture valuation approach?a. the present value of each outcome is calculatedb. each outcome's present value is multiplied by the probability that the outcome will occurc. the probability-weighted outcomes are summed to get an expected present value for the ventured. the future value of each outcome is calculated
Q:
During the exit period, which of the following will have last crack at the venture's wealth?
a. banks giving loans to the venture
b. convertible debtholders of the venture
c. initial equity investors of the venture
d. participating preferred equity holders
Q:
Which of the following does a P/E multiple refer to?
a. price/expectations multiple
b. price/earnings multiple
c. profit/EBIT multiple
d. profit/earnings multiple
Q:
An individual's work-related, nonfinancially compensated contribution to the enhancement of a venture's value is referred to as:
a. money equity
b. sweat equity
c. goodwill
d. intangible work
Q:
The equity valuation method involving explicitly forecasted dividends to provide surplus cash of zero involves:
a. maximum dividends
b. pseudo dividends
c. sustainable growth dividend retention
d. actual dividend payments
Q:
The equity valuation method involving zero explicitly forecasted dividends and an adjustment to working capital to strip surplus cash involves:
a. maximum dividends
b. pseudo dividends
c. sustainable growth dividend retention
d. actual dividend payments
Q:
When estimating the terminal value of a venture using an equity valuation method, a perpetuity growth equation that uses the capitalization (cap) rate for discounting purposes is often applied. This cap rate is measured as the __________ rate __________ the perpetuity growth rate.
a. equity discount; minus
b. equity discount; plus
c. risk-free; plus
d. risk-free; minus
Q:
The calculation of equity valuation cash flows nets the cash impact of all other balance sheet and income statement accounts to focus on the __________ account as the repository of any remaining cash flow.
a. cash
b. net income
c. equity
d. non-interest-bearing liabilities
Q:
Estimate a venture's cash flow expected next year based on the following information: current year's net sales = $400,000; terminal value = $500,000; constant future growth rate = 10%; and venture investors' required rate of return = 20%.
a. $80,000
b. $40,000
c. $50,000
d. $60,000
Q:
Which of the following is not a component of the equity valuation cash flow calculation?
a. net income
b. depreciation and amortization expense
c. change in net operating working capital (without surplus cash)
d. net equity repurchases
Q:
Which of the following equity valuation methods records surplus cash on the balance sheet but assumes that the surplus cash is paid out over time for valuation purposes?
a. the projection of maximum dividends
b. the calibration of pseudo dividends
c. sustainable growth dividend retention
d. return on equity method
Q:
Estimate a venture's terminal value based on the following information: current year's net income = $20,000; next year's expected cash flow = $26,000; constant future growth rate = 7%; and venture investors' required rate of return = 20%.
a. $356,846
b. $285,714
c. $200,000
d. $150,000
Q:
In a wildly successful first year in business that started and ended with no required cash, your firm has operating income of $989,000, net income of $637,000, current assets of $900,000, and current liabilities of $659,000. Net capital expenditures were $690,000, and depreciation was $460,000. The firm has never financed itself with debt. What is your equity valuation cash flow?
a. $48,000
b. $166,000
c. $218,000
d. $466,000
Q:
Most discounted cash flow valuations involve using cash flows from a(n):
a. historical period, an explicit forecast period, and a terminal value
b. historical period and a terminal value
c. historical period and an explicit forecast period
d. explicit forecast period and a terminal value
Q:
What is the present value of a set of future flows plus the current undiscounted flow called?
a. reversion value
b. horizon value
c. terminal value
d. net present value
Q:
Estimate a venture's required rate of return based on the following information: terminal value = $400,000; current year's net income = $20,000; next year's expected cash flow = $25,000; and constant growth rate = 7%.
a. 7.50%
b. 9.00%
c. 10.75%
d. 13.25%
Q:
The valuation approach involving maximum dividends suggests:
a. actual dividends expected to be paid
b. dividends that reflect cash not involved in venture operations
c. projecting dividends that exhaust any surplus cash
d. using a net operating working capital adjustment to foster valuation
Q:
A venture's going-concern value is the:
a. net present value of the current and expected future cash flows
b. future value of the expected cash flows
c. net future value of the current and expected cash flows
d. present value of the expected future cash flows
Q:
Estimate a venture's equity valuation cash flow based on the following information: net income = $6,372; depreciation = $4,600; change in net operating working capital = $2,415; capital expenditures = $6,900; and new debt issues = $1,000.
a. $6,787
b. $5,487
c. $4,487
d. $3,787
Q:
What is the present value of the terminal value called?
a. horizon value
b. net present value
c. reversion value
d. entity value
Q:
The present value of the terminal value is called the:
a. going-concern value
b. horizon value
c. terminal value
d. reversion value
Q:
What is the difference between pre-money valuation and post-money valuation?
a. the size of the capitalization rate
b. the amount of money injected by new investors
c. the terminal value
d. the amount of money previously contributed by founders
Q:
The purpose of the stepping-stone year is to:
a. assure that there is sufficient required cash
b. assure that future dividends are constant
c. assure that investment flows are consistent with terminal growth rates
d. allow for a final year of higher-than-sustainable growth
Q:
The value of the venture at the end of the explicit forecast period is called the:
a. going-concern value
b. net present value
c. terminal value
d. reversion value
Q:
Your firm has been in business for two years. In its first year, the firm ended with $227,000 of current assets, long-term assets of $143,000, $70,000 in surplus cash, current liabilities of $52,000, and long-term assets of $68,000. At the end of the second year, the firm had current assets of $279,000, long-term assets of $195,000, surplus cash of $90,000, current liabilities of $62,000, and long-term assets of $78,000. What is your firm's change in net operating working capital?
a. $22,000
b. $62,000
c. $42,000
d. $32,000
Q:
Required cash is:
a. the cash needed to pay interest expense
b. a valuation method for early-stage ventures
c. the cash needed to cover a venture's day-to-day operations
d. the cash available to pay as a dividend
Q:
Estimate a venture's constant growth rate (g) based on the following information: terminal value = $400,000; current year's net income = $20,000; next year's expected cash flow = $25,000; and required rate of return = 20%.
a. 4.00%
b. 13.25%
c. 7.75%
d. 15.50%
Q:
"Just-in-time" capital injections by equity investors is a reference to:
a. sustainable growth
b. the present value of the terminal value
c. equity investors providing money only when needed
d. dividend payout
Q:
The valuation approach involving pseudo dividends suggests:
a. actual dividends expected to be paid
b. dividends that reflect cash not involved in venture operations
c. projecting dividends that exhaust any surplus cash
d. using a net operating working capital adjustment to foster valuation
Q:
The value today of all future cash flows discounted to the present at the investor's required rate of return is called the:
a. horizon value
b. present value
c. terminal value
d. reversion value
Q:
When estimating the terminal value of a cash flow perpetuity, which of the following is not a component?
a. the next period's cash flow
b. a constant discount rate
c. a constant growth rate
d. the payback period