Entrepreneurial Finance Test #3 Concept
A potential investor is seeking to invest $500,000 in our venture, which currently has 1,000,000 million shares held by us founders. We expect our venture to produce half a million dollars in income per year for the next five years. We know that a similar venture produced $1,000,000 in income and 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
A
A potential investor is seeking to invest $500,000 in our venture, which currently has 1,000,000 million shares held by us founders. We expect our venture to produce half a million dollars in income per year for the next five years. We know that a similar venture produced $1,000,000 in income and sold shares to the public for $10,000,000. What is the post-money valuation? a. $658,354 b. $499,954 c. $408,377 d. $249,977
A
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
A
All of the scenarios in a multiple scenario analysis must have exit cash flows in the same year.
F
An S corporation provides unlimited liability for its shareholders.
F
Financial bootstrapping maximizes the need for financial capital.
F
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.
F
In a corporate legal entity, the personal assets of the owners are separate from the business' assets, but the personal liabilities of the owners are not.
F
Limited liability companies (LLCs) are owned by shareholders with limited liability and its earnings are taxed at the corporate rate.
F
Limited liability in the corporate business structure means creditors can seize only some of the corporation's assets.
F
Nondisclosure agreements prohibit the creator of an idea or other form of intellectual property from sharing it with others once it has been presented the first time.
F
The capitalization rate is the sum of the discount rate and the growth rate of the cash flow in the terminal value period.
F
The equity capital sources for a proprietorship are partners, families, and friends.
F
The highest marginal income tax rate for taxable personal income is 45 percent.
F
The internal rate of return is the simple (non-compounded) interest rate that equates the present value of the cash inflows received with the initial investment.
F
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.
F
The value of the venture's equity is equal to the value the financing contributed in the first venture capital round.
F
The venture capital valuation method estimates the venture's value by projecting both intermediate and terminal/exit flows to investors.
F
Which of the following business organizational forms provides the owners with limited investor liability and passes its income before taxes through to the owners? a. partnership b. subchapter S (or S) corporation c. regular or (C ) corporation d. limited liability company (LLC) e. both a and b f. both b and d
F
A direct application of the earnings-per-share ratio to venture earnings is known as the direct comparison valuation method.
F
Following is a partial 2007 personal income tax schedule for a single filer: Taxable Income Beginning Amount $1 $7,826 $31,851 Ending Amount $7,825 $31,850 $77,100 Bracket Amount $7,825 $24,025 $45,250 Marginal Tax Rate 0.10 0.15 0.25 The average tax rate for a single filer with taxable income of $77,100 would be: a. 14.7% b. 16.7% b. 20.0% c. 20.4% d. 25.0%
A
In which form of business organization are the owners not offered the protection of limited liability? a. proprietorship b. limited partnership c. corporation d. subchapter S corporation e. limited liability corporation
A
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
A
Which form of business organization is characterized by having the shortest start-up time and lowest legal costs? a. proprietorship b. limited partnership c. corporation d. subchapter S corporation e. limited liability corporation
A
Which of the following are intellectual property rights granted for inventions that are useful, novel, and non-obvious? a. patents b. trademarks c. legal disclaimers d. copyrights e. trade secrets
A
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
B
A potential investor is seeking to invest $500,000 in our venture, which currently has 1,000,000 million shares held by us founders. We expect our venture to produce half a million dollars in income per year for the next five years. We know that a similar venture produced $1,000,000 in income and sold shares to the public for $10,000,000. 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%
B
A potential investor is seeking to invest $500,000 in our venture, which currently has 1,000,000 million shares held by us founders. We expect our venture to produce half a million dollars in income per year for the next five years. We know that a similar venture produced $1,000,000 in income and sold shares to the public for $10,000,000. 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
B
Based on 2007 tax schedules, the first dollar of personal taxable income is taxed at which of the following marginal tax rates: a. 05.0% b. 10.0% c. 15.0% d. 20.0% e. 25.0%
B
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
B
Following is a partial 2007 personal income tax schedule for a single filer: Taxable Income Beginning Amount $1 $7,826 $31,851 Ending Amount $7,825 $31,850 $77,100 Bracket Amount $7,825 $24,025 $45,250 Marginal Tax Rate 0.10 0.15 0.25 The dollar amount of income taxes paid by a single filer who has taxable income of $7,825 would be: a. $150 b. $785 c. $3,603.75 d. $4,388.75 e. $10385
B
Following is a partial 2007 personal income tax schedule for a single filer: Taxable Income Beginning Amount $1 $7,826 $31,851 Ending Amount $7,825 $31,850 $77,100 Bracket Amount $7,825 $24,025 $45,250 Marginal Tax Rate 0.10 0.15 0.25 The average tax rate for a single filer with taxable income of $31,850 would be: a. 10.0% b. 13.8% c. 15.0% d. 16.7% e. 20.0%
B
In a general partnership, legal action that treats all partners equally as a group is called: a. joint and several liability b. joint liability c. limited liability d. accrued liability e. general liability
B
Intellectual property rights to "writings" in written and electronically-stored forms are protected by: a. Patents b. copyrights c. trade secrets d. trademarks
B
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
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
B
Which of the following are intellectual property rights that allow firms to differentiate their products and services through the use of unique marks which allow consumers to easily identify the source and quality of the products and services? a. patents b. trademarks c. legal disclaimers d. copyrights e. trade secrets
B
Which of the following forms of protecting intellectual property currently has a protection limit of 20 years? a. copyrights b. patents c. trade secrets d. trademarks
B
Which of the following is not a right or a duty of general partners? a. participation in profits and losses b. some liability for partnership obligations c. veto right on new partners d. eventual return of capital e. access to partnership books
B
A potential investor is seeking to invest $500,000 in our venture, which currently has 1,000,000 million shares held by us founders. We expect our venture to produce half a million dollars in income per year for the next five years. We know that a similar venture produced $1,000,000 in income and sold shares to the public for $10,000,000. What is the pre-money valuation? a. $120,300 b. $316,800 c. $158,400 d. $193,900
C
Based on 2007 tax schedules, the first dollar of corporate income is taxed at which of the following marginal tax rates: a. 05.0% b. 10.0% c. 15.0% d. 20.0% e. 25.0%
C
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
C
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
C
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
C
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
C
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
C
Intellectual property can be protected by all of the following except: a. patents b. trademarks c. legal disclaimers d. copyrights e. trade secrets
C
Patents are intellectual property rights granted for inventions that are: a. not useful, novel, and non-obvious b. not useful, not novel, and obvious c. useful, novel, and non-obvious d. useful, not novel, and obvious
C
Patents that cover most inventions pertaining to new products, services, and processes, are referred to as: a. design patents b. plant patents c. utility patents d. electrical patents e. mechanical patents
C
The Subchapter S (or S) corporation business form requires that there be less than which of the following number of owners? a. 2 b. 30 c. 75 d. 500
C
The rules and procedures established to govern the corporation are called the a. corporate charter b. articles of incorporation c. corporate bylaws d. confidentiality disclosure agreements e. partnership agreements
C
Which form of business organization typically offers the easiest transfer of ownership? a. proprietorship b. limited partnership c. corporation d. subchapter S corporation e. general partnership
C
Which of the following forms of protecting intellectual property had its protection limit increased from 17 to 20 years? a. copyrights b. trademarks c. patents d. trade secrets
C
Which of the following is not a "kind" of patent? a. Utility b. Design c. Mark d. Plant e. Business method
C
A potential investor is seeking to invest $500,000 in our venture, which currently has 1,000,000 million shares held by us founders. We expect our venture to produce half a million dollars in income per year for the next five years. We know that a similar venture produced $1,000,000 in income and sold shares to the public for $10,000,000. What is the issue price per share? a. $0.1939 b. $0.1203 c. $0.3168 d. $0.1584
D
Based on 2007 tax schedules, the highest marginal tax rate on personal taxable income is: a. 25.0% b. 28.0% c. 33.0% d. 35.0% e. 40.0%
D
Following is a partial 2007 personal income tax schedule for a single filer: Taxable Income Beginning Amount $1 $7,826 $31,851 Ending Amount $7,825 $31,850 $77,100 Bracket Amount $7,825 $24,025 $45,250 Marginal Tax Rate 0.10 0.15 0.25 The cumulative dollar amount of income taxes paid by a single filer who has taxable income of $31,850 would be: a. $150 b. $785 c. $3,603.75 d. $4,388.75 e. $10385
D
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
D
In which form of business organization is the taxation effects characterized by the income flowing to shareholders taxed at personal tax rates? a. proprietorship b. limited partnership c. corporation d. subchapter S corporation e. general partnership
D
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%
D
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
D
Wealthy individuals who invest in early stage ventures in exchange for the excitement of launching a business and a share in any financial rewards are known as: a. creditors b. white knights c. corporate raiders d. business angels e. stakeholders
D
Which form of business organization is characterized as having unlimited life? a. proprietorship b. limited partnership c. limited liability corporation d. subchapter S corporation e. general partnership
D
Which of the following are intellectual property rights to writings in written and electronically stored forms? a. patents b. trademarks c. legal disclaimers d. copyrights e. trade secrets
D
Based on 2007 tax schedules, the highest marginal tax rate on corporate taxable income is: a. 25.0% b. 28.0% c. 35.0% d. 38.0% e. 39.0%
E
Following is a partial 2007 personal income tax schedule for a single filer: Taxable Income Beginning Amount $1 $7,826 $31,851 Ending Amount $7,825 $31,850 $77,100 Bracket Amount $7,825 $24,025 $45,250 Marginal Tax Rate 0.10 0.15 0.25 The maximum dollar amount of income taxes in the $31,851-$77,100 "bracket" paid by a single filer with taxable income of $77,100 would be: a. $150 b. $785 c. $3,603.75 d. $4,388.75 e. $11,312.50
E
Which of the following are intellectual property rights in the form of inventions and information such as formulas, processes, and customer lists that are not generally known to others and which convey economic advantage to the holders? a. patents b. trademarks c. legal disclaimers d. copyrights e. trade secrets
E
Which of the following are not sources of seed and start-up financing? a. family and friends b. the entrepreneur's physical and financial assets c. business angels d. venture capitalists e. stock and bond markets
E
"Certification marks" are intellectual property rights in the form of inventions and information (e.g., formulas, processes, customer lists, etc.) not generally known to others.
F
"Certification marks" cover memberships in groups (e.g., a sorority or a labor union).
F
"Design patents" cover most inventions pertaining to new products, services, and processes.
F
"Patents" are intellectual property rights granted for inventions that are useful, novel, and obvious.
F
A "color mark" is considered to be one four types of "marks" used to try to protect intellectual property.
F
"Business method" is one kind of patent.
T
"Business method" patents protect a specific way of doing business and the underlying computer codes, programs, and technology.
T
"Collective marks" cover memberships in groups (e.g., a sorority or a labor union).
T
"Trademarks" are intellectual property rights that allow firms to differentiate their products and services through the use of unique marks.
T
. The income received by a proprietorship is taxed at personal tax rates.
T
A limited partnership limits certain partners' liabilities to pay the venture's obligations to the amount each paid for their partnership interests.
T
Almost without exception, professional venture investors demand that some equity or deferred equity compensation be structured into any valuation.
T
An employment contract is an agreement between an employer and employee about the terms and conditions of employment including the employee's agreement to keep confidential information secret and to assign ideas and inventions to the employer.
T
Based on 2007 tax laws, the highest possible marginal tax rate is higher for corporations than for individuals.
T
Failure to account for any additional rounds of financing and its accompanying dilution in order to meet projected earnings will result in the investor's not receiving an adequate number of shares to ensure the required percent ownership at the time of exit.
T
Most trademarks take the form of names, words, or graphic designs
T
Partnerships are treated with pass-through taxation. This means that profits and losses of the business pass directly through to investors on the basis specified in the partnership agreement.
T
Post-money valuation of a venture is the pre-money valuation plus money injected by new investors.
T
Professional corporations (PCs) and service corporations (SCs) are corporate structures that "states" provide for professionals such as physicians, dentists, lawyers, and accountants.
T
Staged financing is financing provided in sequences of rounds rather than all at one time.
T
The articles of incorporation are the basic legal declarations contained in the corporate charter.
T
The difference between a limited partnership and a general partnership is that the limited partnership has partners who actively manage the day-to-day operations but also has passive investors.
T
The discount rate applied in an Expected PV approach should be the same rate across scenarios.
T
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.
T
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.
T
The marginal tax rate for the first dollar of taxable income is higher for corporations than for individuals.
T
The number of owners in a Subchapter S corporation must be fewer that 75.
T
The venture capital (VC) method estimates the venture's value using only terminal/exit flows to investors.
T
The venture capital valuation method which capitalizes earnings using a cap rate implied by a comparable ratio is known as direct capitalization.
T
There are four kinds of patents.
T
There are four types of "marks" that can be used to try to protect intellectual property.
T
Venture investors returns depend on the venture's ability to generate cash flows or to find an acquirer for the venture.
T
