BUSMHR 2500 Chapter 12

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? Multiple choice question. 25% 50% 75% 40%

25%

_____ is a meticulous test of the short-term liquidity of a venture since it eliminates inventory, which is the least liquid current asset. Multiple choice question. Average collection period Inventory turnover Debt to equity ratio Acid test ratio

Acid test ratio

_____ 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. Multiple choice question. Angel investors Nonaccredited investors Business angels Venture capitalists

Angel investors

Identify the entities that act as sources of funding for early-stage financing of a startup. (Check all that apply.) Multiple select question. Angel investors Family Banks Nonfinancial companies

Angel investors Family

_____ indicates the average number of days required to convert accounts receivable into cash. Multiple choice question. Average collection period Acid test ratio Inventory turnover Debt to equity ratio

Average collection period

Why do ventures avoid an initial public offering (IPO)? (Check all that apply.) Multiple select question. Because of the reduced liquidity for a publicly traded company Because of the lack of focus on making short-term profits for a publicly traded company 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

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

Identify a true statement about the informal risk-capital market. Multiple choice question. The informal investment market contains the lowest pool of risk capital in the United States. Business angels in the informal risk-capital market grant the funds needed in all stages of financing, especially in the start-up. The size and number of informal risk-capital market investors have reduced dramatically. Firms funded from the informal risk-capital market are unable to raise second- and third-round financing from the public-equity market.

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

Identify the formula for calculating inventory turnover.

Costs of goods sold / Inventory

Identify the formula for calculating the acid test ratio. Multiple choice question. CostofgoodssoldInventoryCostofgoodssoldInventory Currentassets−InventoryCurrentliabilitiesCurrentassets-InventoryCurrentliabilities AccountsreceivableAveragedailysalesAccountsreceivableAveragedailysales CurrentassetsCurrentliabilities

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. Multiple choice question. Debt to equity ratio Current ratio Debt ratio Acid test ratio

Current ratio

_____ evaluates a firm's capital structure. Multiple choice question. Current ratio Acid test ratio Debt ratio Debt to equity ratio

Debt to equity ratio

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.) Multiple select question. Inventory Dividend-paying capacity Earnings Book value Total liquid assets

Dividend-paying capacity Earnings Book value

Which of the following are primary advantages of going public for a venture? (Check all that apply.) Multiple select question. Enhanced ability to borrow Reduced risk of liability Lesser pressure to maintain growth pattern Ability to obtain equity capital

Enhanced ability to borrow Ability to obtain equity capital

The information in _____ on the business, management, and company assets is similar to that in Form S-1 of the registration statement. Multiple choice question. Form 8-Q Form 8-K Form 10-K Form 10-Q

Form 10-K

Match the forms that a company is required to file after going public (in the left column) with their uses (in the right column). Instructions Form 10-K Form 10-Q Form 8-K Used to file annual reports Used to file specific transaction or event reports Used to file quarterly reports

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

Which of the following are the disadvantages of going public for an entrepreneur? (Check all that apply.) Multiple select question. Increased expenses Lack of liquidity and valuation Reduced ability to obtain equity capital for the entrepreneur's company Significant loss of control over decision making in the entrepreneur's company Increased responsibilities to public stockholders

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

_____ assesses the efficiency of a venture in managing and selling its inventory. Multiple choice question. Acid test ratio Debt ratio Average collection period Inventory turnover

Inventory turnover

Identify the factors that an entrepreneur should consider when valuing a venture. (Check all that apply.) Multiple select question. Venture capitalists' initial reaction to the venture Market price of equity of companies engaged in the same or similar lines of business Book value (net value) of the stock of the company Media coverage received by the venture and other ventures in the same industry

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

Which of the following are traditional areas of concentration of venture capitalists in the United States? (Check all that apply.) Multiple select question. New York Los Angeles Miami Houston

New York Los Angeles

Match the general valuation approaches (in the left column) with their definitions (in the right column). Instructions Present value of future cash flow Replacement value The value of the cash flow of the business for the time value of money and the business and economic risks The indicated worth of the assets of a company The cost of replacing all assets of a company

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 Replacement value - The cost of replacing all assets of a company Book value - The indicated worth of the assets of a company

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

Reason: This is true. Crowdfunding brings together different individuals who contribute money to projects and firms they want to support. Crowdfunding is rapidly growing market that is transforming how people behave with their money and business raise capital.

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

Reason: This is true. Frequently, it is best to designate one person in the company to be the information officer, ensuring that the press, public, and security analysts are dealt with in a friendly, efficient manner. There is nothing worse than a company not responding in a timely manner to information requests.

Match the types of early-stage financing for startups (in the left column) with their features (in the right column). Instructions Drag and drop application. Seed capital Startup capital It is generally a relatively small amount of capital required for proof of concept and market feasibility studies. It is used for developing and selling some initial products of a venture to determine if commercial sales are feasible.

Seed capital - It is generally a relatively small amount of capital required for proof of concept and market feasibility studies. Startup capital - It is used for developing and selling some initial products of a venture to determine if commercial sales are feasible.

Identify the true statements about small-business investment companies (SBIC firms). (Check all that apply.) Multiple select question. The Small Business Investment Act of 1958 led to the formation of SBIC firms. SBIC firms are primarily managed by federal agencies. The Jump Start Our Business Act of 2010 led to the formation of SBIC firms. SBIC firms were the beginning of the formal venture capital industry.

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.

Identify the factors that need to be considered when deciding the timing of a company going public. (Check all that apply.) Multiple select question. The amount of the company's earnings The performance of companies that went public ten years ago The finances that the company requires for fulfilling its needs The size of the company The number of venture capitalists that the company has approached

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

Identify a true statement about current ratios used by entrepreneurs for valuation. Multiple choice question. The entrepreneur need not compare this ratio with any industry standards It provides a measure of risk to creditors by considering the funds invested by creditors (debt) and investors. It is a measure of risk because debt consists of a fixed commitment in the form of interest and principal repayments. The current liabilities must be covered from cash or its equivalent.

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. Multiple choice question. The entrepreneur should avoid the use of underwriters for aftermarket support. The entrepreneur should restrict their appearances before societies of security analysts. The entrepreneur should attempt to reduce their meetings with analysts and brokers. The entrepreneur should release public disclosures through formal press releases.

The entrepreneur should release public disclosures through formal press releases.

Identify a true statement about financial ratios of ventures. Multiple choice question. There is a single set of financial ratios that should be used for valuation of ventures. They should be used with caution since they are only one control measure for interpreting the financial success of a venture. There are standard definitions available for all ratios. They do not provide the entrepreneur with any sense of where problems exist in the pro forma statements.

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

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? Multiple choice question. WIN Systech Inc. should value the startup based on the number of users they have and the data generated. WIN Systech Inc. should compare the startup with other companies that existed more than 25 years ago. WIN Systech Inc. should base its analysis solely on the value of the startup's tangible assets such as land. WIN Systech Inc. should value the startup solely on the basis of its current revenue.

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

In the context of investment in ventures by venture capitalists, the return on investment measures the _____. Multiple choice question. efficiency of a venture in selling its inventory ability of a venture to translate sales into profits ability of a venture to manage its total investment in assets short-term solvency of a venture or its ability to meet its short-term debts

ability of a venture to manage its total investment in assets

In the process of locating venture capitalists, an entrepreneur should _____. Multiple choice question. approach only those venture capitalists who may have an interest in their investment opportunity avoid being introduced to a venture capitalist through sources such as bankers, accountants, lawyers, or professors send e-mails to all venture-capital firms irrespective of their area of interest for investment avoid differentiating venture capitalists geographically or by industry

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

In the process of locating venture capitalists, an entrepreneur should _____. Multiple choice question. approach only those venture capitalists who may have an interest in their investment opportunity send e-mails to all venture-capital firms irrespective of their area of interest for investment avoid differentiating venture capitalists geographically or by industry avoid being introduced to a venture capitalist through sources such as bankers, accountants, lawyers, or professors

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. Multiple choice question. Financial Industry Regulatory Authority blue-sky laws red herring laws Regulation FD

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. Multiple choice question. angel investors equity managers nonaccredited investors business angels

business angels

The _____ provides an entrepreneur a way to assess a firm's ability to meet all its obligations (short and long term). Multiple choice question. debt to equity ratio current ratio acid test ratio debt ratio

debt ratio

The private equity market, which is also known as the _____, can be a source of capital for privately held ventures. Multiple choice question. federal capital market regional capital market enterprise capital market seed-capital market

enterprise capital market

The _____ is created from the resources of wealthy individuals or institutions who are limited partners. Multiple choice question. seed capital equity pool angel fund informal capital

equity pool

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

financial ratios

A disadvantage of going public for a venture is that it can _____. Multiple choice question. lead to lesser reporting lead to potential loss of control reduce liquidity and valuation reduce the ability to borrow

lead to potential loss of control

The average collection period helps an entrepreneur assess the _____. Multiple choice question. ability of a firm to meet all its obligations ability of a venture to manage its total investment in assets liquidity of accounts receivable degree of risk to any of the creditors

liquidity of accounts receivable

The first factor and the starting point that an entrepreneur should consider when valuing a venture is the _____. Multiple choice question. nature and history of the business book value of the stock of the company number of direct competitors in the industry number of new employees in the company

nature and history of the business

Full and fair disclosure refers to the _____. Multiple choice question. nature of all material submitted to the Securities Exchange Commission for approval public registration and sale of a company's stock preliminary prospectus of a potential public offering document for distribution to prospective buyers of a public offering

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

A venture going public occurs when the entrepreneur and other equity owners of the venture _____. Multiple choice question. raise a large collateral using personal and venture funds to acquire a major loan from a bank offer and sell some part of the company to the public by registering with the Securities Exchange Commission sell off the total company assets to a third party for raising funds acquire another venture with comparable standards in the same industry

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

A(n) _____ includes materials submitted to the Securities Exchange Commission for approval to sell stock to the public. Multiple choice question. initial public offering registration statement comment letter business plan

registration statement

Small companies with some government funds that invest in other companies are known as _____. Multiple choice question. private venture capital companies corporate venture capital companies state-sponsored seed capital companies small-business investment companies

small-business investment companies

Unlike traditional companies, Internet companies often have _____. Multiple choice question. their real value in the form of their human capital significant tangible assets historical financials their comparables in the history of their industry

their real value in the form of their human capital

Which of the following guidelines should be followed by an entrepreneur when approaching a venture capitalist? (Check all that apply.) Multiple select question. 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. The entrepreneur should avoid approaching the venture capitalist through an intermediary. The entrepreneur should ensure that a lawyer, accountant, and other advisors are present for the first meeting with the venture capitalist.

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.

Identify a guideline that should be followed by an entrepreneur when approaching a venture capitalist. Multiple choice question. The entrepreneur should avoid entering into deals where multiple venture capital firms invest together. The entrepreneur should pitch his or her idea among a lot of venture capitalists simultaneously and in a short period of time. The entrepreneur should take care in selecting the right venture capitalist to approach based on the venture capitalist's area of specialization. The entrepreneur should bring all the members of the management team when meeting the venture capitalist for the first time.

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

Which of the following statements are true about an equity pool? (Check all that apply.) Multiple select question. The investments are only in second- and third-stage deals. The pool is managed by a general partner. The pool is managed in exchange for a percentage of the gain generated on the investment and a fee. The investments are made only for the short term.

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

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

Reason: This is false. Market conditions affect both the initial price that an entrepreneur will receive for the stock and the aftermarket, or the price performance of the stock after its initial sale. Thus, the market conditions need to be considered when deciding if the company is ready to go public.

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.

Reason: This is false. The guidelines established by the Securities Exchange Commission regarding the information that can and cannot be released should be understood not only by the entrepreneur but by everyone else in the company as well.

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

Reason: This is false. The venture capitalist does not necessarily seek control of a company and actually would prefer to have the firm and the entrepreneur at the most risk.

The objective of a venture-capital firm is to _____. Multiple choice question. provide collateral for bank loans to start-up companies invest in well-established companies through the public equity market create long-term capital appreciation through debt and equity investments provide loans to companies through crowdfunding

create long-term capital appreciation through debt and equity investments

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 _____. Multiple choice question. angel funding venture capital financing risk capital financing crowdfunding

crowdfunding

The form of the transaction when money is obtained by a company is referred to as _____. Multiple choice question. comment letter registration statement pricing amendment deal structure

deal structure

The _____ indicates a venture's ability to translate sales into profits. Multiple choice question. return on investment acid test ratio net profit margin debt to equity ratio

net profit margin

Debt to equity ratio provides a measure of _____. Multiple choice question. returns on equity to stockholders risk to creditors by considering the funds invested by creditors (debt) and investors (equity) efficiency of a venture in managing and selling its inventory liquidity of accounts receivable or the ability of a venture to collect from its customers

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