Q&A Hero

Q: Investor liability in a proprietorship or corporation is unlimited. a. True b. False

Q: Investor liability in a limited liability company (LLC) is limited to the owners' investments. a. True b. False

Q: Title II of the JOBS Act of 2012 eliminates the general solicitation and advertising restriction for Regulation D 506 offerings. a. True b. False

Q: The trading of securities is regulated under the Securities and Exchange Act of 1964. a. True b. False

Q: Accredited investors are specifically protected by the Securities Act of 1933 from investing in unregistered securities issues. a. True b. False

Q: The Securities Act of 1933 is the main body of federal law governing the creation and sale of securities in the United States. a. True b. False

Q: Rule 503 of Regulation D states that a Form D should be filed with the SEC within six months after the first sale of securities. a. True b. False

Q: Title III of the JOBS Act of 2012 establishes a small offering registration exemption and calls for SEC rules relating to the sales of securities to an Internet "crowd" (securities crowdfunding).a. Trueb. False

Q: True-False Questions for Appendix BThe definition of an "accredited investor," initially defined in the Securities Act of 1933, was expanded in Rule 501 of Regulation D.a. Trueb. False

Q: The JOBS Act of 2012 created several important changes in Rule 506 of Regulation D and the expanded version of a Regulation A-like offering.a. Trueb. False

Q: Regulation A, while technically considered an exemption from registration, is a public offering rather than a private placement. a. True b. False

Q: An early-stage venture that is not an investment company and has written compensation agreements can structure compensation-related securities issues so they are exempt from SEC registration requirements. a. True b. False

Q: The Investment Advisers Act of 1940 provides a definition of an investment company. a. True b. False

Q: In SEC v. Ralston Purina (1953), the U.S. Supreme Court took an important step toward defining a public offering for the purposes of Section 4(2) of the Securities Act of 1933. a. True b. False

Q: The Investment Company Act of 1940 defines investment companies and excludes them from using some of the registration exemptions originating in the 1933 Act. a. True b. False

Q: The Securities Exchange Act of 1934 provides for the regulation of securities exchanges and over-the-counter markets. a. True b. False

Q: Multiple-Choice Questions for Appendix AYour venture has net income of $600, taxable income of $1,000, operating profit of $1,200, total financial capital (including both debt and equity) of $9,000, a tax rate of 40%, and a WACC of 10%. What is your venture's EVA?a. $400,000b. $200,000c. $20,000d. $180,000

Q: Which of the following describes the interest rate charged by banks to their highest-quality customers?a. real rateb. nominal ratec. risk-free rated. prime rate

Q: Which of the following is not a component in determining the cost of debt? a. inflation premium b. default risk premium c. maturity premium d. interest rate premium

Q: Which of the following describes the interest rate on debt that is virtually free of default risk? a. real rate b. nominal rate c. risk-free rate d. inflation rate

Q: A venture has raised $4,000 of debt and $6,000 of equity to finance its firm. Its cost of borrowing is 6%, its tax rate is 40%, and its cost of equity capital is 8%. What is the venture's weighted average cost of capital? a. 7.2% b. 7.0% c. 6.2% d. 6.0%

Q: The added interest rate charged due to the inherent increased risk in long-term debt is called a(n): a. inflation premium b. default risk premium c. liquidity premium d. maturity premium

Q: The difference between average annual returns on common stocks and returns on long-term government bonds is called a: a. default risk premium b. maturity premium c. risk-free premium d. market risk premium

Q: Multiple-Choice Questions for Appendix AEstimate a firm's NOPAT based on the following information: net sales = $2,000,000; EBIT = $600,000; net income = $20,000; and effective tax rate = 30%.a. $600,000b. $420,000c. $150,000d. $70,000

Q: Which of the following venture life cycle stages would involve seasoned financing rather than venture financing?a. development stageb. startup stagec. rapid-growth staged. early-maturity stage

Q: Suppose the real risk-free rate of interest is 4%, the maturity risk premium is 2%, the inflation premium is 6%, the default risk on similar debt is 3%, and the liquidity premium is 2%. What is the nominal interest rate on this venture's debt capital? a. 14% b. 15% c. 16% d. 17%

Q: The additional premium added to the real interest rate by lenders to compensate them for a debt instrument which cannot be converted to cash quickly at its existing value is called a(n): a. inflation premium b. default risk premium c. liquidity premium d. maturity premium

Q: Venture capital holding period returns (all stages) for the 10-year period ending in 2018 were approximately: a. 25% b. 18% c. 13% d. 8%

Q: Which of the following types of "premiums" would not be associated with corporate bonds? a. investment risk premium b. default risk premium c. liquidity premium d. maturity premium

Q: A venture's riskiness in terms of possible poor performance or failure would be considered to be very high in which of the following life cycle stages? a. startup stage b. survival stage c. rapid-growth stage d. early-maturity stage

Q: The cost of equity for a firm is 20%. If the real interest rate is 5%, the inflation premium is 3%, and the market risk premium is 2%, what is the investment risk premium for the firm? a. 10% b. 12% c. 13% d. 15%

Q: The additional interest rate premium required to compensate the lender for the probability that a borrower will not be able to repay interest and principal on a loan is known as a(n): a. inflation premium b. default risk premium c. liquidity premium d. maturity premium

Q: Which of the following "premiums" is not typically included in the rate on U.S. Treasury securities? a. liquidity premium b. default risk premium c. market risk premium d. inflation premium

Q: What has been the approximate long-run (90 or so years) average annual rate of return on publicly traded small-company stocks? a. 10% b. 17% c. 25% d. 30%

Q: Venture investors generally use which of the following target rate ranges to discount the projected cash flows of ventures in the development stage of their life cycles: a. 12%15% b. 20%30% c. 25%35% d. 40%60%

Q: Over the long run (90 or so years), the average annual rates of return in the United States have been highest for which of the following securities? a. five-year government bonds b. twenty-year corporate bonds c. large-company stocks d. small-company stocks

Q: Which of the following describes the observed or stated interest rate? a. real rate b. nominal rate c. risk-free rate d. prime rate

Q: Multiple-Choice Questions for Appendix AEstimate a firm's economic value added (EVA) based on the following information: NOPAT = $400,000; amount of financial capital used = $1,600,000; and WACC = 19%.a. $26,000b. $36,000c. $96,000d. $54,000

Q: Calculate the after-tax WACC based on the following information: nominal interest rate on debt = 12%; cost of common equity = 25%; common equity = $700,000; interest-bearing debt = $300,000; and tax rate = 25%.a. 15.0%b. 16.4%c. 20.2%d. 22.8%

Q: Which of the following types of financing would be associated with the highest target compound rate of return on venture equity capital? a. public and seasoned financing b. second-round and mezzanine financing c. first-round financing d. seed financing

Q: Which of the following describes the interest rate in addition to the inflation rate expected on a risk-free loan? a. real rate b. nominal rate c. risk-free rate d. prime rate

Q: Which of the following components is not used when estimating the cost of risky debt capital? a. real interest rate b. inflation premium c. default risk premium d. market risk premium

Q: Over the long run (90 or so years), the variability (standard deviation) of average annual rates of return in the United States have been lowest for which of the following securities? a. five-year government bonds b. twenty-year corporate bonds c. large-company stocks d. small-company stocks

Q: The word "risk" developed from the early Italian word "risicare" and means: a. "don't care" b. "take a chance" c. "to dare" d. "to gamble"

Q: Which of the following markets involve liquid securities with standardized contract features such as stocks and bonds? a. private financial market b. commodities market c. real estate market d. public financial market

Q: Calculate the weighted average cost of capital (WACC) based on the following information: the capital structure weights are 50% debt and 50% equity; the interest rate on debt is 10%; the required return to equity holders is 20%; and the tax rate is 30%. a. 7.0% b. 10.0% c. 13.5% d. 17.5%

Q: Use the SML model to calculate the cost of equity for a firm based on the following information: the firm's beta is 1.5; the risk-free rate is 5%; and the market risk premium is 2%. a. 8.0% b. 9.5% c. 10.0% d. 12.0%

Q: Multiple-Choice Questions for Appendix AFind a venture's economic value added (EVA) based on the following information: EBIT = $200,000; financial capital used = $500,000; WACC = 20%; and effective tax rate = 30%.a. $20,000b. $30,000c. $40,000d. $50,000

Q: The risk-free interest rate is the sum of: a. a real rate of interest and an inflation premium b. a real rate of interest and a default risk premium c. an inflation premium and a default risk premium d. a liquidity premium and a maturity premium

Q: The coefficient of variation measures the standard deviation of a venture's return relative to its expected return.a. Trueb. False

Q: The relationship between real interest rates and time to maturity when default risk is constant is called the term structure of interest rates. a. True b. False

Q: The risk-free interest rate is the interest rate on debt that is virtually free of inflation risk. a. True b. False

Q: Market cap is determined by multiplying a firm's current stock price by the number of shares outstanding. a. True b. False

Q: A venture with a higher expected return relative to other ventures will necessarily have a higher standard deviation or returns. a. True b. False

Q: EVA equals net operating profit after taxes minus after-tax dollar cost of financial capital used. a. True b. False

Q: Over the long run (90 or so years) in the United States, average annual rates of return have been higher for small-company stocks relative to large-company stocks. a. True b. False

Q: Historically, large-company stocks have averaged higher long-term returns than small-company stocks. a. True b. False

Q: Early-stage ventures tend to have large amounts of senior debt relative to more mature ventures. a. True b. False

Q: Inflation premium is the rising prices not offset by increasing quality of goods being purchased. a. True b. False

Q: A nominal interest rate is an observed or stated interest rate. a. True b. False

Q: First-round financing during a venture's survival stage comes primarily from venture capitalists and investment banks. a. True b. False

Q: Bond ratings reflect the inflation risk of a firm's bonds. a. True b. False

Q: A venture's riskiness in terms of poor performance or failure is usually high to moderate during the rapid-growth stage of its life cycle. a. True b. False

Q: The weighted average cost of capital is simply the blended, or weighted, cost of raising equity and debt capital. a. True b. False

Q: Typically, the stocks of closely held corporations aren't publicly traded. a. True b. False

Q: The prime rate is the interest rate charged by banks to their highest default-risk business customers. a. True b. False

Q: The accounting emphasis on accrued revenue and expenses and depreciation is the same emphasis as that of finance managers. a. True b. False

Q: Components used to calculate the after-tax WACC do not include an equity rate. a. True b. False

Q: Closely held corporations are those companies whose stock is traded over the counter. a. True b. False

Q: The excess average return of long-term government bonds over common stock is called the market risk premium. a. True b. False

Q: Late- and expansion-stage U.S. venture capital for most holding periods have lower returns than early-stage U.S. venture capital. a. True b. False

Q: The graph of the term structure of interest rates, which plots interest rates to time to maturity, is called the yield curve. a. True b. False

Q: Organized exchanges have physical locations where trading takes place, while the over-the-counter market is comprised of a network of brokers and dealers that interact electronically. a. True b. False

Q: Default risk is the risk that a borrower will not pay the interest and/or the principal on a loan. a. True b. False

Q: Subordinated debt is secured by a venture's assets, while senior debt has an inferior claim to a venture's assets. a. True b. False

Q: The real interest rate (RR) is the interest one would face in the absence of inflation, risk, illiquidity, and any other factors determining the appropriate interest rate. a. True b. False

Q: Venture capital holding period returns (multistages) for the 20-year period ending in 2018 were more than three times the returns on the Dow Jones Industrial Average Index. a. True b. False

Q: Closely held corporations are corporations whose stock is publicly traded. a. True b. False

Q: Commercial banks provide liquidity-stage financing for ventures in the rapid-growth stage of their life cycles. a. True b. False

Q: Investment risk is the chance or probability of financial loss on one's venture investment, and can be assumed by debt, equity, and founding investors. a. True b. False