Entrepreneurial Finance (Unit 2)

38. Determine a firm's financial policy multiplier based on the following information: sustainable growth rate = 20%; net profit margin = 10%; and asset turnover = 2.0 times. a. 1.00 b. 1.25 c. 1.50 d. 2.00

a. 1.00

40. A venture's common equity account increased by $100,000 the past year and ended the year at $500,000. What was its sustainable sales growth rate? a. 15% b. 30% c. 20% d. 25%

d. 25%

[Venture Present Values] The HoldUp Corporation is about to begin producing and selling its prototype product. Annual cash flows for the next five years are forecasted as: Year 1 through 5 Cash Flows: Y1=-$100, Y2=$0, Y3=$0, Y4=$100, Y5=$600 Cash flows will grow at a constant rate of 4% beginning after Year 5. Investors require a 18% return. What is the Discounted Cash Flow Value Today? a. $2,177.36 b. $2,430.90 c. $2,730.48 d. $3,088.87

A. $2,177.36

63. Base our calculation on the premise that the new equity in not included in the forecasted cash flow, but will allow the company additional growth. The current company valuation is Four-Million Dollars. How much ownership should we offer an investor, who wants to invest Twelve-Million Dollars? a. 75% b. 50% c. 25% d. 20% e. 12.5%

A. 75%

65. Base our calculation on the premise that the new equity in not included in the forecasted cash flow, but will allow the company additional growth. The current company valuation is Four-Million Dollars. How much ownership should we offer an investor, who wants to invest Four-Million Dollars? a. 75% b. 50% c. 25% d. 20% e. 12.5%

B. 50%

59. [Venture Present Values] The HoldUp Corporation is about to begin producing and selling its prototype product. Annual cash flows for the next five years are forecasted as: Year 1 through 5 Cash Flows: Y1=-$100, Y2=$0, Y3=$0, Y4=$100, Y5=$600 Cash flows will grow at a constant rate of 4% beginning after Year 5. Investors require a 16% return. What is the Discounted Cash Flow Value Today? a. $2,177.36 b. $2,430.90 c. $2,730.48 d. $3,088.87

C. $2,730.48

64. Base our calculation on the premise that the new equity in not included in the forecasted cash flow, but will allow the company additional growth. The current company valuation is Three-Million Dollars. How much ownership should we offer an investor, who wants to invest One-Million Dollars? a. 75% b. 50% c. 25% d. 20% e. 12.5%

C. 25%

60. [Venture Present Values] The HoldUp Corporation is about to begin producing and selling its prototype product. Annual cash flows for the next five years are forecasted as: Year 1 through 5 Cash Flows: Y1=-$100, Y2=$0, Y3=$0, Y4=$100, Y5=$600 Cash flows will grow at a constant rate of 4% beginning after Year 5. Investors require a 15% return. What is the Discounted Cash Flow Value Today? a. $2,177.36 b. $2,430.90 c. $2,730.48 d. $3,088.87

D. $3,088.87

62. Base our calculation on the premise that the new equity in not included in the forecasted cash flow, but will allow the company additional growth.The current company valuation is Four-Million Dollars. How much ownership should we offer an investor, who wants to invest One-Million Dollars? a. 75% b. 50% c. 25% d. 20% e. 12.5%

D. 20%

66. Base our calculation on the premise that the new equity in not included in the forecasted cash flow, but will allow the company additional growth.The current company valuation is Seven-Million Dollars. How much ownership should we offer an investor, who wants to invest One-Million Dollars? a. 75% b. 50% c. 25% d. 20% e. 12.5%

E. 12.5%

37. Determine a venture's sustainable growth rate based on the following information: sales = $1,000,000; net income = $100,000; common equity at the beginning of the year = $500,000; and retention rate = 50%. a. 10% b. 15% c. 20% d. 25%

a. 10%

5. Calculate the inventory-to-sale conversion period based on the following information: average inventories = $120,000; average receivables = $90,000; average payables = $40,000; cost of goods sold = $182,500; and net sales = $365,000. a. 240 days b. 180 days c. 90 days d. 60 days

a. 240 days

Seed financing is generally associated with which of the following life cycle stages? a. development stage b. startup stage c. survival stage d. rapid-growth stage

a. development stage

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

a. five-year government bonds

22. Investor liability is unlimited under which of the following types of business organizational forms? a. proprietorship b. limited liability company (LLC) c. C corporation d. S corporation

a. proprietorship

24. 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

a. seasoned financing

42. The increase in accounts payables and accruals that occur with a sales increase is called: a. spontaneously generated funds b. additional funds needed c. addition in retained earnings d. financial capital needed

a. spontaneously generated funds

55. Present Value of a company with constant growth: The first cash flow, year 1, equals Two-Hundred Thousand Dollars. Investors require a 22% return and cash flows are expected to grow at 2% forever. What will the company be worth today? a. $1,500,000 b. $1,000,000 c. $500,000 d. $250,000

b. $1,000,000

58. [Venture Present Values] The HoldUp Corporation is about to begin producing and selling its prototype product. Annual cash flows for the next five years are forecasted as: Year 1 through 5 Cash Flows: Y1=-$100, Y2=$0, Y3=$0, Y4=$100, Y5=$600 Cash flows will grow at a constant rate of 4% beginning after Year 5. Investors require a 17% return. What is the Discounted Cash Flow Value Today? a. $2,177.36 b. $2,430.90 c. $2,730.48 d. $3,088.87

b. $2,430.90

53. 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 required rate of return = 20%. a. 4.00% b. 13.25% c. 7.75% d. 15.50%

b. 13.25%

34. If a venture has a return on assets (ROA) of 10%, an equity multiplier based on beginning equity of 4.0 times, and a dividend payout ratio of 60%, the sustainable growth rate would be: a. 10% b. 16% c. 20% d. 24%

b. 16%

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

b. 17%

35. If a venture has a return on assets (ROA) of 10%, an equity multiplier based on beginning equity of 3.5 times, and a retention rate of 50%, the sustainable growth rate would be: a. 10.0% b. 17.5% c. 20.0% d. 35.0%

b. 17.5%

28. 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 0.20 probability of an 80% growth in sales, a 0.30 probability of a 60% growth in sales, a 0.40 probability of a 40% growth in sales, and a 0.10 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%

b. 49%

6. Calculate the sale-to-cash conversion period based on the following information: average inventories = $120,000; average receivables = $90,000; average payables = $40,000; cost of goods sold = $182,500; and net sales = $365,000. a. 180 days b. 90 days c. 60 days d. 45 days

b. 90 days

21. Ventures that reach the survival stage of their life cycles and seek first-round financing are typically organized as: a. proprietorships or partnerships b. LLCs or corporations c. corporations or proprietorships d. partnerships or LLCs

b. LLCs or corporations

27. 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

b. a weighted average of a set of scenarios or possible outcomes

44. When projecting financial statements, one would first __________, and then proceed to __________. a. project the balance sheet; forecast sales b. forecast sales; project the income statement c. forecast sales; project the balance sheet d. forecast sales; project the statement of cash flows

b. forecast sales; project the income statement

50. 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. $356,846 b. $285,714 c. $200,000 d. $150,000

c. $200,000

51. 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. $80,000 b. $40,000 c. $50,000 d. $60,000

c. $50,000

54. Present Value of a company with constant growth: The first cash flow, year 1, equals One-Hundred Thousand Dollars. Investors require a 22% return and cash flows are expected to grow at 2% forever. What will the company be worth today? a. $1,500,000 b. $1,000,000 c. $500,000 d. $250,000

c. $500,000

56. Present Value of a company with constant growth: The first cash flow, year 1, equals One-Hundred Thousand Dollars. Investors require a 27% return and cash flows are expected to grow at 7% forever. What will the company be worth today? a. $1,500,000 b. $1,000,000 c. $500,000 d. $250,000

c. $500,000

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

c. 13.5%

39. Determine a firm's return on assets percentage based on the following information: sustainable growth rate = 20%; total assets = $500,000; beginning-of-year common equity = $200,000; and dividend payout percentage = 60%. a. 10.0% b. 22.5% c. 20.0% d. 17.5%

c. 20.0%

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

c. 20.2%

13. Venture investors generally use which of the following target rate ranges to discount the projected cash flows of ventures in the startup stage of their life cycles: a. 20%-30% b. 25%-35% c. 30%-50% d. 40%-60%

c. 30%-50%

31. If beginning-of-period common equity is $200,000 and end-of-period common equity is $300,000, the sustainable growth rate is: a. 33% b. 40% c. 50% d. 67%

c. 50%

36. If a venture has a return on assets (ROA) of 12%, an equity multiplier based on beginning equity of 3.0 times, and a sustainable growth rate of 18%, the retention rate would be: a. 60% b. 30% c. 50% d. 40%

c. 50%

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

c. 6.2%

45. To calculate a terminal value, one divides the next period's cash flow by the spread between the __________ discount rate and __________ growth rate. a. variable; constant b. constant; variable c. constant; constant d. variable; variable

c. constant; constant

26. Public or seasoned financing is generally associated with which of the following life cycle stages? a. startup stage b. survival stage c. early-maturity stage d. development stage

c. early-maturity stage

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

c. equity

29. 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

c. net income

3. Which of the following measures the average time from purchase of materials and labor to actual cash payment? a. sale-to-cash conversion period b. inventory-to-sale conversion period c. purchase-to-payment conversion period d. cash conversion cycle

c. purchase-to-payment conversion period

23. The efforts to regulate the trading of securities takes place under which of the following securities laws? a. the Securities Act of 1933 b. state blue-sky laws c. the Securities and Exchange Act of 1934 d. the Investment Company Act of 1940

c. the Securities and Exchange Act of 1934

2. Which of the following is not part of the operating cycle? a. time it takes to produce products b. time it takes to sell products c. time it takes to pay suppliers d. time it takes to collect receivables

c. time it takes to pay suppliers

49. 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. $285,714 b. $200,000 c. $150,000 d. $160,000

d. $160,000

57. Present Value of a company with constant growth: The first cash flow, year 1, equals One-Hundred Thousand Dollars. Investors require a 47% return and cash flows are expected to grow at 7% forever. What will the company be worth today? a. $1,500,000 b. $1,000,000 c. $500,000 d. $250,000

d. $250,000

32. Use the following information to estimate a venture's sustainable growth rate: net income = $200,000; total assets = $1,000,000; equity multiplier based on beginning common equity = 2.0 times; and retention rate = 25%. a. 5% b. 25% c. 20% d. 10%

d. 10%

52. 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 constant growth rate = 7%. a. 7.50% b. 9.00% c. 10.75% d. 13.25%

d. 13.25%

17. Calculate the weighted average cost of capital (WACC) based on the following information: the equity multiplier is 1.66; the interest rate on debt is 13%; the required return to equity holders is 22%; and the tax rate is 35%. a. 11.5% b. 13.9% c. 15.0% d. 16.6%

d. 16.6%

33. A venture's common equity was $50,000 at the end of last year. If the venture's common equity at the end of this year was $60,000, what was its sustainable sales growth rate? a. 25% b. 10% c. 15% d. 20%

d. 20%

20. Calculate the after-tax WACC based on the following information: nominal interest rate on debt = 16%; cost of common equity = 30%; equity to value = 60%; debt to value = 40%; and tax rate = 25%. a. 10.0% b. 16.0% c. 19.8% d. 22.8%

d. 22.8%

7. Based on the following information, determine the venture's inventory-to-sale conversion period: cash conversion cycle = 250 days; sale-to-cash conversion period = 60 days; and purchase-to-payment conversion period = 70 days. a. 70 days b. 140 days c. 240 days d. 260 days

d. 260 days

48. In equation form, the equity valuation cash flow is defined as: a. Net Income + Depreciation and Amortization Expense - Change in Net Operating Working Capital + Capital Expenditures + Net Debt Issues b. Net Income + Depreciation and Amortization Expense + Change in Net Operating Working Capital + Capital Expenditures + Net Debt Issues c. Net Income + Depreciation and Amortization Expense - Change in Net Operating Working Capital + Capital Expenditures - Net Debt Issues d. Net Income + Depreciation and Amortization Expense - Change in Net Operating Working Capital - Capital Expenditures + Net Debt Issues

d. Net Income + Depreciation and Amortization Expense - Change in Net Operating Working Capital - Capital Expenditures + Net Debt Issues

43. Which of the following would increase a firm's need for additional funds? a. an increase in the profit margin b. a decrease in the expected sales growth rate c. a decrease in assets d. an increase in the dividend payout rate

d. an increase in the dividend payout rate

4. Which of the following measures the average time it takes a firm to complete its operating cycle after deducting the days supported by trade credit and delayed payroll financing? a. sale-to-cash conversion period b. inventory-to-sale conversion period c. purchase-to-payment conversion period d. cash conversion cycle

d. cash conversion cycle

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

d. early-maturity stage

41. The financial funds needed to acquire assets necessary to support a firm's sales growth is called: a. spontaneously generated funds b. additional funds needed c. addition in retained earnings d. financial capital needed

d. financial capital needed

9. A major difference exists between a venture's operating cycle and its cash conversion cycle because the conversion cycle includes the time to: a. buy materials b. produce a finished good c. collect sales made on credit d. pay suppliers for purchases on credit

d. pay suppliers for purchases on credit

8. A venture's operating cycle measures the time it takes to: a. purchase raw materials and assemble a product b. assemble a product and book the sale c. assemble a product, book the sale, and collect on the sale d. purchase raw materials, assemble a product, book the sale, and collect on the sale

d. purchase raw materials, assemble a product, book the sale, and collect on the sale

30. Which of the following ratios is not part of the standard return on equity (ROE) model? a. net profit margin b. asset turnover c. equity multiplier d. retention rate

d. retention rate

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

d. seed financing

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

d. small-company stocks

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

d. the payback period

15. Use the SML model to calculate the cost of equity for a firm based on the following information: the firm's beta is 1.5; the risk-free rate is 5%; and the market risk premium is 4%. a. 8.0% b. 9.5% c. 10.0% d. 12.0% e. 13.0%

e. 13.0%