MGNT 3234 Ch. 12

Leveraged buyouts

Management buying out the present owners

Identify a true statement about angel investor groups.

The individual members of the angel group make the investment either individually or with others interested.

Actions of underwriters to help support the price of stock after the public offering are referred to as _____.

aftermarket support

The _____ provides an entrepreneur a way to assess a firm's ability to meet all its obligations (short and long term).

debt ratio

The process of deal evaluation in the venture-capital process is referred to as

due dilienece

To stabilize the market and prevent the price from going below the initial public offering price, an underwriter will usually _____.

enter bids to buy the stock in the early stages after the initial offering

The first factor and the starting point that an entrepreneur should consider when valuing a venture is the _____.

nature and history of the business

A venture going public occurs when the entrepreneur and other equity owners of the venture _____.

offer and sell some part of the company to the public by registering with the Securities Exchange Commission

The preliminary prospectus of a potential public offering is referred to as _____.

red herring

Which of the following are traditional areas of concentration of venture capitalists in the United States? (Check all that apply.)

New York Los Angeles

_____ refer to markets providing debt and equity to nonsecure financing situations.

Risk-capital markets

Venture-capital markets

Risk-capital markets consisting of formal firms

Public-equity markets

Risk-capital markets consisting of publicly owned stocks of companies

Which of the following criteria does a venture capitalist expect a company to satisfy before committing funding to the company? (Check all that apply.)

The business opportunity must have significant capital appreciation. The product offered by the company must be unique. The company should have a strong management team composed of individuals with solid experience and backgrounds.

replacement value

The cost of replacing all assets of a company

Identify a true statement about current ratios used by entrepreneurs for valuation.

The current liabilities must be covered from cash or its equivalent.

Identify a true statement about the relationship that an entrepreneur should maintain with the financial community after his or her company goes public.

The entrepreneur should release public disclosures through formal press releases.

Form 10-k

Used to file annual reports

Form 10-Q

Used to file quarterly reports

Form 8-K

Used to file specific transaction or event reports

Unlike traditional companies, Internet companies often have _____

their real value in the form of their human capital

A group of firms involved in selling stock to the public is known as _______

underwriting syndicate

Which of the following are primary advantages of going public for a venture? (Check all that apply.)

Ability to obtain equity capital. Enhanced ability to borrow.

_____ are individual investors who act alone without any group affiliation and are known to make the largest number of investments in the private equity market.

Angel investors

Identify the formula for calculating inventory turnover.

Cost of goods sold / Inventory

Identify the formula for calculating the acid test ratio.

Current assets−Inventory / Current liabilities

_____ is frequently used to assess the short-term solvency of a venture or its ability to meet its short-term debts.

Current ratio

_____ evaluates a firm's capital structure.

Debt to equity ratio

Third stage

Extensive expansion for company with rapid sales growth

Equity crowdfunding sites

FundingShip.com provides individuals who fund private entrepreneurial ventures with a percentage share of the ventures.

_____ assesses the efficiency of a venture in managing and selling its inventory.

Inventory turnover

Equity crowdfunding

It lets individuals invest in a private firm for a percentage share of the firm.

Which of the following are the disadvantages of going public for an entrepreneur? (Check all that apply.)

Significant loss of control over decision making in the entrepreneur's company. Increased expenses. Increased responsibilities to public stockholders.

Identify the true statements about small-business investment companies (SBIC firms). (Check all that apply.)

The Small Business Investment Act of 1958 led to the formation of SBIC firms. SBIC firms were the beginning of the formal venture capital industry.

Which of the following should be done when calculating the book value of the stock of a company?

The balance sheet should be adjusted to reflect the higher values of the assets.

Which of the following guidelines should be followed by an entrepreneur when approaching a venture capitalist? (Check all that apply.)

The entrepreneur should avoid selling the project on the basis that other venture capitalists have committed themselves. The entrepreneur should disclose any significant problems or negative situations in the initial meetings with the venture capitalist.

Which of the following should an entrepreneur do to be successful in crowdfunding? (Check all that apply.)

The entrepreneur should structure some rewards that are appropriate for what he or she is trying to get funded. The entrepreneur should include an emotional appeal in the crowdfunding video.

Identify the factors that need to be considered when deciding the timing of a company going public. (Check all that apply.)

The finances that the company requires for fulfilling its needs. The amount of the company's earnings. The size of the company.

Second stage

The venture capitalist seeks a basic understanding of the principal terms of the deal.

Identify a true statement about financial ratios of ventures.

They should be used with caution since they are only one control measure for interpreting the financial success of a venture.

Identify the practices that help entrepreneurs achieve success in crowdfunding. (Check all that apply.)

They should create a strong crowdfunding video that clearly explains the idea of their venture. They should determine which crowdfunding site is ideal to raise the capital needed.

In the context of startups, identify the true statements about informal investors, or angels, in the United States. (Check all that apply.)

They usually invest in firms that are within one day's travel. The investment made by informal investors in a firm ranges from $100,000 to $500,000.

Identify the formula used for calculating the debt ratio.

Total liabilities / Total assets

True or false: A company that has gone public should designate an information officer to respond in a timely manner to information requests.

True

True or false: The book value of the stock of a company is usually not a good indicator of its fair market value.

True

Second stage

Working capital for initial growth phase, but no clear profitability or cash inflow yet

In the context of valuation of a venture, return on equity indicates the _____.

ability of the venture in generating a return to the stockholders

The book value of the stock of a company is the _____.

acquisition cost (less accumulated depreciation) minus liabilities

A similarity between lending crowdfunding and equity crowdfunding is that they _____.

allows individuals to raise funds without going to the traditional providers of debt-commercial banks

In the process of locating venture capitalists, an entrepreneur should _____.

approach only those venture capitalists who may have an interest in their investment opportunity

The securities of certain smaller companies going public must be qualified under the _____ of each state in which the securities of the company will be offered.

blue-sky laws

The informal risk-capital market consists usually of a virtually invisible group of wealthy investors, often called _____, who are searching for equity-type investment opportunities in a wide variety of entrepreneurial ventures.

business angels

A letter from the Securities Exchange Commission to a company indicating corrections that are required to be made in the submitted prospectus is known as a(n) _______.

comment letter

The objective of a venture-capital firm is to _____.

create long-term capital appreciation through debt and equity investments

The form of the transaction when money is obtained by a company is referred to as _____.

deal structure

Full and fair disclosure refers to the _____.

nature of all material submitted to the Securities Exchange Commission for approval

The _____ indicates a venture's ability to translate sales into profits.

net profit margin

Lending crowdfunding

It lets borrowers (usually companies) occur debt funds without going to the traditional providers of debt-commercial banks.

Which of the following statements are true about an equity pool? (Check all that apply.)

The pool is managed in exchange for a percentage of the gain generated on the investment and a fee. The pool is managed by a general partner.

Which of the following is true about an angel fund?

The private investors or their designated representatives in an angel fund make the investment decisions.

present value of future cash flow

The value of the cash flow of the business for the time value of money and the business and economic risks

A disadvantage of going public for a venture is that it can _____.

lead to potential loss of control

Although all three risk-capital markets can provide funds for stage-one financing, the _____ is available only for high-potential ventures, when high technology is involved.

public-equity market

A(n) _____ includes materials submitted to the Securities Exchange Commission for approval to sell stock to the public.

registration statement

Debt to equity ratio provides a measure of _____.

risk to creditors by considering the funds invested by creditors (debt) and investors (equity)

_____ is the longest stage in the venture-capital process, involving a duration of one to three months.

Due diligence

Which of the following is most likely a feature of state-sponsored venture capital funds?

Each fund is usually required to invest a certain share of its capital in a particular state.

Seed capital

It is generally a relatively small amount of capital required for proof of concept and market feasibility studies.

Identify a guideline that should be followed by an entrepreneur when approaching a venture capitalist.

The entrepreneur should take care in selecting the right venture capitalist to approach based on the venture capitalist's area of specialization.

The _____ is created from the resources of wealthy individuals or institutions who are limited partners.

equity pool

VGNS Global, a start-up venture, requires $1,000,000 of venture-capital money. The venture is anticipating profits of $2,000,000 by the fifth year. A venture capitalist wants an investment multiple of 6 times. The price-earnings multiple of a similar company is 12. How much of the percent ownership would the company have to give up to obtain the needed funds from the venture capitalist?

25%

Fourth stage

A document detailing the venture capitalist's findings and the terms and conditions of the investment transaction is prepared

Identify the factors that an entrepreneur should consider when valuing a venture. (Check all that apply.)

Book value (net value) of the stock of the company. Market price of equity of companies engaged in the same or similar lines of business.

Identify a true statement about the informal risk-capital market.

Business angels in the informal risk-capital market grant the funds needed in all stages of financing, especially in the start-up.

Which of the following startups fulfill the general criteria that most venture capitalists expect a company to satisfy before committing funding to the venture? (Check all that apply.)

A company that is predicted to grow exponentially in the next few months. A company that has a unique product in a large and growing market.

Going private

A publicly held firm buying out existing stockholders

_____ is a meticulous test of the short-term liquidity of a venture since it eliminates inventory, which is the least liquid current asset.

Acid test ratio

_____ refers to financing used to buy another company.

Acquisition financing

Identify the entities that act as sources of funding for early-stage financing of a startup. (Check all that apply.)

Angel investors Family

Informal risk-capital markets

Areas of risk-capital markets consisting mainly of individuals

Why do ventures avoid an initial public offering (IPO)? (Check all that apply.)

Because of the potential loss of control that can occur in a publicly traded company. Because of the need for increased reporting for a publicly traded company.

Which of the following are the major factors that are used to determine the value of a company using the factor approach? (Check all that apply.)

Book value Earnings Dividend-paying capacity

Fourth stage

Bridge financing to equip company for public offering

_____ refers to financing that helps rapidly expand a business.

Development financing

Startup capital

It is used for developing and selling some initial products of a venture to determine if commercial sales are feasible.

Which of the following are factors that an entrepreneur should consider when valuing a venture? (Check all that apply.)

The financial data of the venture compared with those of other companies in the industry The dividend-paying capacity of the venture

Identify a true statement about private venture capital firms that emerged during the late 1960s.

The limited partners, who supplied the funding, were usually institutional investors.

First stage

The venture capitalist analyzes the economy of the industry and evaluates whether the company is in the industry specified for investment

True or false: Crowdfunding brings together different individuals who contribute money to projects and firms they want to support.

True

_____ play an active role in granting funds at the development financing stage.

Venture capitalists

The Jump Start Our Business Act (JOBS Act) of 2010 has effectively allowed companies to be more active in their intent to raise money in what is often referred to as _____.

crowdfunding

The valuation approach that gives the lowest value of a business is the _____.

liquidation value

Small companies with some government funds that invest in other companies are known as _____.

small-business investment companies

The information in _____ on the business, management, and company assets is similar to that in Form S-1 of the registration statement.

Form 10-K

______ refer to control mechanisms to test the financial strength of a new venture.

financial ratios

The average collection period helps an entrepreneur assess the _____.

liquidity of accounts receivable

Which of the following is used to determine the share of the company a venture capitalist will want for a given amount of investment? [VC= venture capital, n= number of years]

VC investment × VC investment multiple desired / Company's projected profits in year 5 × Price − earnings multiple of comparable company

A social analytics Internet startup is being analyzed for acquisition by WIN Systech Inc., a well-established Internet company. Which of the following factors should WIN Systech Inc. consider when evaluating the startup?

WIN Systech Inc. should value the startup based on the number of users they have and the data generated.

Investment opportunities in a startup are rejected by informal investors, or angels, when there is _____.

an inadequate risk/return ratio

The ________ evaluates the worth of a company by taking into account its present and future earnings.

earnings approach

The most widely used method of valuing a company is the _____, as it provides the potential investor with the best estimate of the probable return on investment.

earnings approach

Book value

The indicated worth of the assets of a company

True or false: Market conditions need not be considered by an entrepreneur when deciding the timing of his or her company going public.

False

True or false: The guidelines established by the Securities Exchange Commission regarding the information that can and cannot be released should be understood only by an entrepreneur in a company.

False

A legal issue that an entrepreneur faces when going public is the____, the period of time from when the decision to go public is made to 90 days following the date the prospectus becomes effective.

quiet period

Lending crowdfunding sites allow borrowers (usually companies) to _____.

raise funds for items such as short-term inventory

Third stage

It is the longest stage of the process, involving between one to three months.

Which of the following are true about lending crowdfunding sites? (Check all that apply.)

Small loans are provided to local entrepreneurs to fund items such as short-term inventory. Individuals who want to lend money to entrepreneurs can create their own loan portfolios.

The private equity market, which is also known as the _____, can be a source of capital for privately held ventures.

enterprise capital market

Reward-based crowdfunding sites

AuraMusic.com provides individuals who fund musician entrepreneurs with a copy of their new musical album

_____ indicates the average number of days required to convert accounts receivable into cash.

Average collection period

True or false: The venture capitalist necessarily seeks control of a company he or she invests in

False

Lending crowdfunding sites

FundingMany.com provides entrepreneurs with the access to apply for loans from individuals who are willing to fund ventures.

Real estate crowdfunding

It is involved in buying properties, providing mortgages, or funding solar energy projects.

_____ were usually established as limited partnerships during the late 1960s, with the venture capital company acting as the general partner that received a management fee and a percentage of the profits earned on a deal.

Private venture capital firms

True or false: A state-sponsored venture capital fund is typically required to invest a certain percentage of its capital in a particular state.

True

A _____ is the additional information on price and distribution submitted to the Securities Exchange Commission to develop the final prospectus.

pricing amendment