Test 2 - Questions

What is the issue price per share? a. $0.1939 b. $0.1203 c. $0.3168 d. $0.1584

$0.1584

. 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 a constant growth rate = 7%. a. 6% b. 7% c. 8% d. 9% e. 10%

9%

The two "just-in-time" capital methods are: a. DDA and VCSC b. DDA and PDM c. VSCS and MDM d. MDM and PDM

MDM and PDM

A venture fund calls upon its investors to deliver their investment funds. This is known as: a. due diligence b. deal flow c. a capital call d. carried interest e. a SLOR

a capital call

An "expected value" is: a. a simple average of a set of scenarios or possible outcomes b. a weighted average of a set of scenarios or possible outcomes c. the highest scenario value or outcome d. the lowest scenario value or outcome

a weighted average of a set of scenarios or possible outcomes

Which of the following financing rounds dilutes the ownership founders? a. first-round b. second-round c. incentive ownership round d. a and b e. a, b, and c

a, b, and c

When evaluating the prospects of a new venture, venture capital firms consider which of the following? a. characteristics of the proposal b. characteristics of the entrepreneur/team c. nature of the proposed industry d. both b and c e. all of the above

all of the above

The calculation of equity valuation cash flows nets the cash impact of all other balance sheet and income accounts to focus on the ______ account as the repository of any remaining cash flow. a. cash b. debt c. equity d. non-interest-bearing liabilities e. net income

equity

When estimating the terminal value of a venture using an equity valuation method, a perpetuity growth equation is often applied that uses the capitalization rate for discounting purposes. This "cap" rate is measured as the: a. equity discount rate minus the perpetuity growth rate b. equity discount rate plus the perpetuity growth rate c. risk-free rate plus the perpetuity growth rate d. risk-free rate minus the perpetuity growth rate

equity discount rate minus the perpetuity growth rate

"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

equity investors' providing money only when needed

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

pre-money valuation

The value today of all future cash flows discounted to the present at the investor's required rate of return is called? a. going-concern value b. present value c. terminal value d. reversion value e. net present value

present value

A venture's going-concern value is the: a. present value of the expected future cash flows b. net present value of the current and expected future cash flows c. future value of the expected cash flows d. net future value of the current and expected cash flows

present value of the expected future cash flows

A P/E multiple refers to: a. price/expectations multiple b. price/earnings multiple c. profit/EBIT multiple d. profit/earnings multiple e. price/EBITDA multiple

price/earnings multiple

What is the percent ownership of our venture that must be sold in order to provide the venture investor's target return? a. 33.33% b. 75.94% c. 12.76% d. 15.00%

75.94%

. 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 $20.00 per shares; 100,000 shares outstanding; and net income of $50,000. a. $1.0 million b. $1.4 million c. $1.6 million d. $2.0 million

$1.6 million

Determine the market value of a "comparable" firm based on the following information: value of target firm = $4,000,000; net income of target firm = $200,000; and net income of "comparable" firm = $500,000. a. $4 million b. $7.5 million c. $10 million d. $12.5 million e. $15 million

$10 million

What is the pre-money valuation? a. $120,300 b. $316,800 c. $158,400 d. $193,900

$158,400

Estimate a venture's terminal value based on the following information: current year's net sales = $500,000; next year's expected cash flow = $16,000; constant future growth rate = 10%; and venture investors' required rate of return = 20%. a. $156,846 b. $285,714 c. $200,000 d. $150,000 e. $160,000

$160,000

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, 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. $648,000 b. $900,000 c. $2,028,000 d. $166,000

$166,000

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. $156,846 b. $285,714 c. $200,000 d. $150,000 e. $428,571

$200,000

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, current assets were $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. $244,000 e. $32,000

$22,000

Estimate the value of a privately-held firm based on the following information: stock price of a comparable firm = $20.00; net income of a comparable firm = $20,000; number of shares outstanding for the comparable firm = 10,000; and earnings per share for the target firm = $3.00. a. $10.00 b. $20.00 c. $30.00 d. $40.00 e. $50.00

$30.00

Determine the net income of a "comparable" firm based on the following information: value of target firm = $4,000,000; net income of target firm = $200,000; stock price of "comparable" firm = $30.00; and 300,000 shares of stock outstanding for the comparable firm. a. $450,000 b. $500,000 c. $550,000 d. $600,000 e. $700,000

$450,000

What is the value of the venture in year five using direct capitalization? a. $500,000 b. $5,000,000 c. $1,000,000 d. $100,000

$5,000,000

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. $6,487 b. $5,487 c. $4,487 d. $3,787 e. $5,787

$5,487

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. $20,000 b. $40,000 c. $50,000 d. $60,000 e. $80,000

$50,000

What is the post-money valuation? a. $658,354 b. $499,954 c. $408,377 d. $249,977

$658,354

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 a 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. $5.00 b. $7.50 c. $10.00 d. $12.50 e. $15.00

$7.50

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. What is the internal rate of return? a. 13.9% b. 14.7% c. 16.2% d. 17.2% e. 19.2%

17.2%

The beginning of professional venture capitalists is considered to have occurred: a. prior to World War II b. 1946 c. 1956 d. 1966 e. after the Vietnam War

1946

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

3,156,276

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 a required rate of return of 20%. a. 2% b. 4% c. 6% d. 8% e. 10%

4%

Lola is in the process of forecasting the sales growth rate for an early-stage venture specializing in the production of durable running shoes. Lola predicts a .2 probability of an 80% growth in sales, a .3 probability of a 60% growth in sales, a .4 probability of a 40% growth in sales, and a .1 probability of a 10% decrease in sales. What is the expected sales growth rate of the venture? a. 47% b. 49% c. 51% d. 53%

49%

The beginning of professional venture capitalists is considered to have begun with the establishment or formation of: a. Small Business Administration b. Small Business Investment Companies c. American Research and Development organization d. Professional Venture Capitalists organization

American Research and Development organization

Equity valuation cash flow = Net income plus a. Depreciation and amortization expense minus the change in net operating working capital plus capital expenditures plus net debt issues b. Depreciation and amortization expense plus the change in net operating working capital plus minus capital expenditures plus net debt issues c. Depreciation and amortization expense minus the change in net operating working capital plus capital expenditures minus net debt issues d. Depreciation and amortization expense minus the change in net operating working capital plus minus capital expenditures plus net debt issues e. Depreciation and amortization expense minus the change in net operating working capital plus capital expenditures plus net debt issues

Depreciation and amortization expense minus the change in net operating working capital plus minus capital expenditures plus net debt issues

Which one of the following components is not a component of the equity valuation cash flow? a. NOPAT b. depreciation and amortization expense c. change in net operating working capital (without surplus cash) d. capital expenditures e. net debt issues

NOPAT

For the typical venture investing project, the valuation will be highest under: a. DDA b. PDM and MDM c. VCSC d. initial book value of equity

PDM and MDM

Which of the following are components of the "mean" venture valuation approach? a. the present value of each outcome is calculated b. each outcome's present value is multiplied by the probability that the outcome will occur c. the probability-weighted outcomes are summed to get an expected present value for the venture d. all of the above are components

all of the above are components

What is the difference between pre-money valuation and post-money valuation? a. size of the capitalization rate b. amount of money injected by new investors c. revision value d. amount of money previously contributed by founders e. amount of money previously contributed by venture investors

amount of money injected by new investors

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. as a way to motivate employees to strive for the same goal of high equity value c. because any dividends received as part of the equity compensation reduces taxable income d. both a and b e. all of the above

both a and b

The return to venture investors directly depends on which of the following? a. venture's ability to generate cash flows b. ability to convince an acquirer to buy the firm c. the amount of its short-term liabilities d. both a and b e. all of the above

both a and b

The utopian approach to valuation ignores which of the following venture scenarios: a. black hole scenarios b. living dead scenarios c. both a and b d. neither a or b

both a and b

To obtain the percent ownership to be sold in order to expect to provide the venture investor's target return, one must consider the: a. cash investment today and the cash return at exit multiplied by the venture investor's target return, then divide today's cash investment by the venture's NPV b. cash investment today and the cash return at exit discounted by the venture investor's target return, then divide today's cash investment by the venture's NPV c. cash investment today and the cash return at exit multiplied by the venture investor's target return, then divide today's cash investment by the venture's NPV d. cash investment today and the cash return at exit discounted by the venture investor's target return, then multiply today's cash investment by the venture's NPV

cash investment today and the cash return at exit discounted by the venture investor's target return, then divide today's cash investment by the venture's NPV

"Required cash" is? a. the cash needed to pay interest expense b. a valuation method for early stage ventures c. cash needed to cover a venture's day-to-day operations d. cash available to pay as a dividend

cash needed to cover a venture's day-to-day operations

Which of the following is not one of the four likely outcomes of the venture firm's screening process? a. seek the lead investor position b. seek a non-lead investor position c. close the capital fund d. refer the venture to more appropriate financial market participants e. issue a standard letter of rejection

close the capital fund

Which of the following is not a step in forecasting sales for a seasoned firm? a. forecast future growth rates based on possible scenarios and the probabilities of those scenarios. b. attempt to corroborate the projected sales growth rates analyzing both industry growth rates and the firm's own past market share. c. refine the sales forecast by using the sales force as a direct contact with both existing and potential customers. d. take into consideration the likely impact of major operating changes within the firm on the sales forecast. e. consider the effects of changes in the firm's debt/equity blend on the sales forecasts.

consider the effects of changes in the firm's debt/equity blend on the sales forecasts.

To calculate a terminal value, one divides the next period's cash flow by the: a. constant discount rate plus a constant growth rate b. constant discount rate plus a variable growth rate c. constant discount rate minus a constant growth rate d. constant growth rate minus constant discount rate e. constant growth rate plus a variable discount rate

constant discount rate minus a constant growth rate

During which life cycle stage is a venture typically most accurate in forecasting sales? a. rapid growth stage b. startup stage c. development stage d. early-maturity stage e. survival stage

early-maturity stage

Public or seasoned financing is generally associated with which one of the following life cycle stages: a. development stage b. startup stage c. survival stage d. rapid-growth stage e. early-maturity stage

early-maturity stage

Most discounted cash flow valuations involve using cash flows from an: 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

explicit forecast period and a terminal value

Which of the following is not part of the financial forecasting process used to project financial statements? a. forecast sales b. forecast tax rates c. project the income statement d. project the balance sheet e project the statement of cash flows

forecast tax rates

A "new" venture usually begins its sales forecast by first: a. forecasting industry sales and expressing the venture's sales as a percent of industry sales b. using a "bottom-up" market-driven approach c. extrapolating past sales d. working with existing and potential customers

forecasting industry sales and expressing the venture's sales as a percent of industry sales

Which of the following statements is incorrect? a. forecasting sales is the first step in creating projected financial statements b. financial forecasting tends to be more accurate for mature ventures than for early-stage ventures c. forecasting is relatively unimportant for early-stage ventures with little historical financial data d. a and b e. a and c

forecasting is relatively unimportant for early-stage ventures with little historical financial data

In a Venture Capital Fund Placement Memorandum, which of the following is not part of the fund overview? a. fund size b. investment focus c. fund management d. portfolio size e. general partners' capital contributions

general partners' capital contributions

The present value of the venture's expected future cash flows is called? a. going-concern value b. present value c. terminal value d. reversion value e. net present value

going-concern value

In a Venture Capital Fund Placement Memorandum, all of the following are part of the executive summary except? a. special limited partners b. general partners' capital contributions c. limitation of liability d. allocation of gains and losses e. imposition of confidentiality

imposition of confidentiality

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 debt holders of the venture c. initial equity investors of the venture d. participating preferred equity holders

initial equity investors of the venture

In a Venture Capital Fund Placement Memorandum, which of the following is not part of the offering summary? a. objective of formation b. declaration of general partner c. management fee d. minimum capital restrictions e. targeted fund size

management fee

All of the following are typical issues addressed in a term sheet except? a. valuation b. board structure c. registration rights d. management fees e. employment contracts

management fees

Venture Capital firms tend to specialize in publicly identified niches because of the potential for value-added investing by venture capitalists. Which is not one of these niches? a. industry type b. venture stage c. size of investment d. management style e. geographic area

management style

When screening prospective new ventures, venture capital firms must consider the nature of the proposed industry. Which of the following is not part of the screening of the proposed industry? a. market attractiveness b. managerial references c. potential size d. technology e. threat resistance

managerial references

The MDM equity valuation method is an abbreviation for: a. minimum dividend method b. maximum discount method c. maximum dividend method d. minimum discount method e. Montgomery design method

maximum dividend method

The equity valuation method involving explicitly forecasted dividends to provide surplus cash of zero is called? a. maximum dividend method b. pseudo dividend method c. sustainable growth method d. dividend payout method

maximum dividend method

Which one of the following components 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. capital expenditures e. net equity repurchases

net equity repurchases

Internally generated funds which are available for distribution to owners of for reinvestment back into the business to support future growth can be characterized by which of the following? a. operating income b. operating cash flow c. net income d. net cash flow e. pre-tax income

net income

The present value of a set of future flows plus the current undiscounted flow is called? a. going-concern value b. present value c. terminal value d. reversion value e. net present value

net present value

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. none of the above

none of the above

In a Venture Capital Fund Placement Memorandum, all of the following are included in the summary of terms except? a. indemnification b. objective c. liquidation d. valuation e. expenses

objective

After determining the next fund's objectives and policies, the "professional venture investing cycle's" next step is: a. solicit investments in new fund b. organize the new fund c. obtain commitments for a series of capital calls d. conduct due diligence and actively invest e. arrange harvest or liquidation

organize the new fund

Professional venture investing usually involves setting up a venture capital firm as a: a. proprietorship b. corporation c. partnership d. S corporation

partnership

Which of the following was the largest source of venture capital funds in 2009 (as reported in Figure 12.4)? a. pension funds and corporations b. individuals and families c. endowments and foundations d. finance and insurance

pension funds and corporations

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

post money valuation

When screening prospective new ventures, venture capital firms consider their own funds' requirements. Which of the following is not one of the venture firm's requirements relating to its own funds? a. investor control b. rate of return c. size of investment d. probable stock listing exchange for the mature venture e. financial provisions for investors

probable stock listing exchange for the mature venture

The PDM equity valuation method is an abbreviation for: a. pseudo dividend method b. proximate dividend method c. pseudo discount method d. proximate discount method e. pre-money discount method

pseudo dividend method

The equity valuation method involving zero explicitly forecasted dividends and an adjustment to working capital to strip surplus cash is called? a. maximum dividend method b. pseudo dividend method c. sustainable growth method d. dividend payout method

pseudo dividend method

Which one 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. maximum dividend method b. pseudo dividend method c. sustainable growth method d. return on equity method

pseudo dividend method

According to Figure 12.4 (Bloomberg, 2014), which of the following is the largest supplier of venture capital? a. financial and insurance b. public pension funds c. endowments and foundations d. family offices

public pension funds

If an investment management firm is known to be a "two and twenty shop", this implies that the firm: a. receives an annual 2% fee on invested capital, and a 20% carried interest b. receives an annual 20% fee on invested capital, and a 2% carried interest c. receives an annual 2% fee on gross operating profits, and a 20% carried interest d. receives an annual 20% fee on gross operating profits, and a 2% carried interest

receives an annual 2% fee on invested capital, and a 20% carried interest

The present value of the terminal value is called? a. going-concern value b. present value c. terminal value d. reversion value e. net present value

reversion value

All of the following are typically part of a venture fund's typical compensation and incentive structure except: a. some percent annual fee on invested capital b. a percent share of any profits to the managing general partner c. carried interest d. salary for the general partners

salary for the general partners

During which round of financing is a venture typically most accurate in forecasting sales? a. seasoned financing b. mezzanine financing c. first round financing d. startup financing e. seed financing

seasoned financing

After a new professional venture capital fund is organized, the fund managers: a. conduct due diligence and actively invest b. solicit investments and obtain commitments c. arrange harvest or liquidation d. identify prospective venture investments and then solicit investments

solicit investments and obtain commitments

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

staged financing

When screening possible investments, a venture capital firm might issue an SLOR which stands for: a. standard letter of rejection b. standing letter of reconciliation c. standard letter of reassessment d. senior letter of reference

standard letter of rejection

Which one of the following life cycle stages would generally be associated with the second lowest sales forecasting accuracy? a. early-maturity b. rapid-growth c. survival d. start-up e. development

start-up

An individual's work-related, non-financially 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

sweat equity

In a Venture Capital Fund Placement Memorandum, which of the following is not a front matter declaration? a. description of limited manner of the offering b. targeted fund size c. imposition of confidentiality d. notice of lack of SEC registration e. declaration of the highly risky nature of investment

targeted fund size

A summary of the investment terms and conditions accompanying an investment is referred to as a: a. term sheet b. business plan c. fund created by professional venture capitalists d. due diligence in venture investing e. capital call

term sheet

The value of the venture at the end of the explicit forecast period is called the horizon value, or what? a. going-concern value b. present value c. terminal value d. reversion value e. net present value

terminal value

When evaluating the prospects of a new venture, venture capital firms consider the characteristics of the entrepreneur and its team. Which of the following is not part of the review of the entrepreneur/team? a. its background and experience b. its managerial capabilities c. management's stake in the firm d. the VC firms' ability to cash out e. the capability to sustain an effort

the VC firms' ability to cash out

Term sheets are usually drafted by: a. the mangers of the venture seeking VC funding b. the VC fund seeking to fund the venture c. management and founders d. it is usually done by an third party, in order to ensure the fair treatment of both parties

the VC fund seeking to fund the venture

The pseudo dividend method is a. the cleanest for valuing assets, but creates problems valuing surplus cash b. the cleanest for valuation purposes but its dividend-laden financial statements can dramatically understate the firm's cash position c. the cleanest for cash planning, but creates problems valuing the venture by discounting the dividends d. calculated by directly discounting the cash flow statement's projected dividend flow to investors, but ignores risks associated with periodic gluts of surplus cash

the cleanest for cash planning, but creates problems valuing the venture by discounting the dividends

The maximum dividend method is a. the cleanest for valuing assets, but creates problems valuing surplus cash b. the cleanest for valuation purposes but its dividend-laden financial statements can dramatically understate the firm's cash position c. the cleanest for cash planning, but creates problems valuing the venture by discounting the dividends d. calculated by directly discounting the cash flow statement's projected dividend flow to investors, but ignores risks associated with periodic gluts of surplus cash

the cleanest for valuation purposes but its dividend-laden financial statements can dramatically understate the firm's cash position

In a syndicate of venture investors, the investor who is responsible for governing the process of due diligence is: a. the primary investor b. the lead investor c. a small group of secondary investors d. the investor in charge of issuing SLORs for the syndicate e. it is a democratic process that is shared by all investors in the group

the lead investor

As venture firms attract money from investors, it is placed in a fund. Important issues that must be put in place with the establishment of the fund include all of the following except: a. determine the general partners b. establishing a fee structure c. a profit sharing arrangement d. establish its governance e. the management team assigned to each borrower

the management team assigned to each borrower

When estimating the terminal value of a cash flow perpetuity, which one 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

the payback period

The term "carried interest" refers to: a. interest not currently paid but which must be paid in the future by a professional venture capitalist b. interest transported directly to a bank c. interest owed on a loan in default d. the portion of profits paid to the professional venture capitalist as incentive compensation

the portion of profits paid to the professional venture capitalist as incentive compensation

When 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 equity b. its earnings per share c. its book-to-market ratio d. its debt-to-value ratio

the reciprocal of its required return on equity

The purpose of the stepping stone year is? a. to assure that there is sufficient required cash b. to assure that future dividends are constant c. to assure that investment flows are consistent with terminal growth rates d. to allow for a final year of higher-than-sustainable growth

to assure that there is sufficient required cash