Entrepreneurship chapter 12

Identify the formula for calculating the acid test ratio.

(CA-Inventory)/CL

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

25%

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

Acid Test Ratio

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

Angel investors

Identify the formula for calculating inventory turnover.

COGS/Inventory

Match the types of early-stage financing for startups (in the left column) with their features (in the right column).

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 formula used for calculating the debt ratio.

TL/TA

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

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

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

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

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

The entrepreneur should release public disclosures through formal press releases.

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

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

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

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

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

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

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

equity pool

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

lead to potential loss of control

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

liquidation value

The average collection period helps an entrepreneur assess the _____.

liquidity of accounts receivable

Full and fair disclosure refers to the _____.

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

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

net profit margin

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

Crowdfunding

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

Average collection period

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

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

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

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

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

Business angels

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

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

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

Current Ratio

_____ evaluates a firm's capital structure.

Debt to equity ratio

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

Enhanced ability to borrow AND Ability to obtain equity capital

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

False

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

False

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

False

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

Family AND Angel Investors

___ ___refer to control mechanisms to test the financial strength of a new venture.

Financial Ratios

Match the forms that a company is required to file after going public (in the left column) with their uses (in the right column)

Form 10-K -Used to file annual reports Form 10-Q - Used to file quarterly reports Form 8k - Used to file specific transactions or event reports

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

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

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

Inventory turnover

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

LA NY

Match the general valuation approaches (in the left column) with their definitions (in the right column).

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

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

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

Identify a true statement about financial ratios of ventures.

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

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

True

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

True

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]

VCinvestment×VCinvestmentmultipledesired/Company'sprojectedprofitsinyear5×Price−earningsmultipleofcomparablecompany

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

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

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

ability of the venture in generating a return to the stockholders

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

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

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

deal structure

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

debt ratio

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

enterprise capital market

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

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

Debt to equity ratio provides a measure of _____.

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

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

small-business investment companies

Unlike traditional companies, Internet companies often have _____.

their real value in the form of their human capital