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Entrepreneurial Finance > Chapter 7 - Exam 2 > Flashcards

Chapter 7 - Exam 2 Flashcards

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1
Q

The accounting emphasis on accrued revenue and expenses and depreciation is the same emphasis as that of finance managers.

A

False

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2
Q

Traditional accounting does not focus on the implicit cost of equity that is the required capital gains to complement dividends. However, evaluation methods exist to determine this value by financial managers.

A

True

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3
Q

Formal historical accounting procedures include explicit records of debt (interest and principal) and dividend capital costs.

A

True

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4
Q

Public financial markets are markets for the creation, sale and trade of illiquid securities having less standardized negotiated features.

A

False

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5
Q

A venture’s “riskiness” in terms of poor performance or failure is usually very high during the maturity stage of its life cycle.

A

False

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6
Q

A venture’s “riskiness” in terms of poor performance or failure is usually high to moderate during the rapid-growth stage of its life cycle.

A

True

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7
Q

First-round financing during a venture’s survival stage comes primarily from venture capitalists and investment banks.

A

True

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8
Q

Startup financing usually comes from entrepreneurs, business angels, and investment bankers.

A

False

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9
Q

Commercial banks provide liquidity-stage financing for ventures in the rapid-growth stage of their life cycles.

A

True

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10
Q

A venture’s “riskiness” in terms of the likelihood of poor performance or failure decreases as it moves from its development stage through to its rapid-growth stage.

A

True

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11
Q

A nominal interest rate is an observed or stated interest rate.

A

True

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12
Q

The “real interest rate” (RR) is the interest one would face in the absence of inflation, risk, illiquidity, and any other factors determining the appropriate interest rate.

A

True

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13
Q

The risk-free interest rate is the interest rate on debt that is virtually free of inflation risk

A

False

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14
Q

Inflation premium is the rising prices not offset by increasing quality of goods being purchased.

A

False

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15
Q

“Default-risk” is the risk that a borrower will not pay the interest and/or the principal on a loan.

A

True

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16
Q

The “prime rate” is the interest rate charged by banks to their highest default risk business customers.

A

False

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17
Q

Bond ratings reflect the inflation risk of a firm’s bonds.

A

False

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18
Q

The relationship between real interest rates and time to maturity when default risk is constant is called the term structure of interest rates.

A

False

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19
Q

The graph of the term structure of interest rates, which plots interest rates to time to maturity is called the yield curve.

A

True

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20
Q

Liquidity premiums reflect the risk associated with firms that possess few liquid assets.

A

False

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21
Q

Subordinated debt is secured by a venture’s assets, while senior debt has an inferior claim to a venture’s assets.

A

False

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22
Q

Early-stage ventures tend to have large amounts of senior debt relative to more mature ventures.

A

False

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23
Q

Investment risk is the chance or probability of financial loss on one’s venture investment, and can be assumed by debt, equity, and founding investors.

A

True

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24
Q

A venture with a higher expected return relative to other ventures will necessarily have a higher standard deviation or returns.

A

False

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25
Q

Historically, large-company stocks have averaged higher long-term returns than small-company stocks.

A

False

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26
Q

The coefficient of variation measures the standard deviation of a venture’s return relative to its expected return.

A

True

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27
Q

Closely held corporations are those companies whose stock is traded over-the-counter.

A

False

28
Q

Typically, the stocks of closely held corporations aren’t publicly traded.

A

True

29
Q

Organized exchanges have physical locations where trading takes place, while the over-the-counter market is comprised of a network of brokers and dealers that interact electronically.

A

True

30
Q

Market cap is determined by multiplying a firm’s current stock price by the number of shares outstanding.

A

True

31
Q

The excess average return of long-term government bonds over common stock is called the market risk premium.

A

False

32
Q

The weighted average cost of capital is simply the blended, or weighted cost of raising equity and debt capital.

A

True

33
Q

Venture capital holding period returns (all stages) for the 10-year period ending in 2012 were about the same as the returns on the S&P 500 stocks.

A

True

34
Q

Which one of the following markets involve liquid securities with standardized contract features such as stocks and bonds?

	a. private financial market
	b. derivatives market
	c. commodities market
	d. real estate market
	e. public financial market
A

e.

35
Q

Which of the following markets involve direct two-party negotiations over illiquid, non-standardized contracts such as bank loans and direct placement of debt?

	a. primary market
	b. secondary market
	c. options market
	d. private financial market
	e. public financial market
A

d.

36
Q

Which of the following is an example of rent on financial capital?

	a. interest on debt
	b. dividends on stock
	c. collateral on equity
	d. a and b
	e. a, b, and c
A

d.

37
Q

Which of the following describes the observed or stated interest rate?

	a. real rate
	b. nominal rate
	c. risk-free rate
	d. prime rate
	e. inflation rate
A

b.

38
Q

Which of the following describes the interest rate in addition to the inflation rate expected on a risk-free loan?

	a. real rate
	b. nominal rate
	c. risk-free rate
	d. prime rate
	e. inflation rate
A

a.

39
Q

Which of the following describes the interest rate on debt that is virtually free of default risk?

	a. real rate
	b. nominal rate
	c. risk-free rate
	d. prime rate
	e. inflation rate
A

c.

40
Q

Which of the following describes the interest rate charged by banks to their highest quality customers?

	a. real rate
	b. nominal rate
	c. risk-free rate
	d. prime rate
	e. inflation rate
A

d.

41
Q

Which of the following is not a component in determining the cost of debt?

	a. inflation premium
	b. default risk premium
	c. liquidity premium
	d. maturity premium
	e. interest rate premium
A

e.

42
Q

The additional interest rate premium required to compensate the lender for the probability that a borrower will not be able to repay interest and principal on a loan is known as?

	a. inflation premium
	b. default risk premium
	c. liquidity premium
	d. maturity premium
	e. investment risk premium
A

b.

43
Q

The additional premium added to the real interest rate by lenders to compensate them for a debt instrument which cannot be converted to cash quickly at its existing value is called?

	a. inflation premium
	b. default risk premium
	c. liquidity premium
	d. maturity premium
	e. investment risk premium
A

c.

44
Q

The added interest rate charged due to the inherent increased risk in long-term debt is called?

	a. inflation premium
	b. default risk premium
	c. liquidity premium
	d. maturity premium
	e. investment risk premium
A

d.

45
Q

Suppose the real risk free rate of interest is 4%, maturity risk premium is 2%, inflation premium is 6%, the default risk on similar debt is 3%, and the liquidity premium is 2%. What is the nominal interest rate on this venture’s debt capital?

	a. 13%
	b. 14%
	c. 15%
	d. 16%
	e. 17%
A

e.

46
Q

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. 8.0%
	b. 7.2%
	c. 7.0%
	d. 6.2%
	e. 6.0%
A

d.

47
Q

Your venture has net income of $600, taxable income of $1,000, operating profit of $1,200, total financial capital including both debt and equity of $9,000, a tax rate of 40%, and a WACC of 10%. What is your venture’s EVA?

	a. $400,000
	b. $200,000
	c. $          0
	d. ($180,000)
	e. ($300,000)
A

d.

48
Q

The “risk-free” interest rate is the sum of:

a. a real rate of interest and an inflation premium
b. a real rate of interest and a default risk premium
c. an inflation premium and a default risk premium
d. a default risk premium and a liquidity premium
e. a liquidity premium and a maturity premium

A

a.

49
Q

Venture investors generally use which one of the following target rates to discount the projected cash flows of ventures in the “startup” stage of their life cycles:

a. 20%
b. 25%
c. 40%
d. 50%

A

c.

50
Q

Which one of the following components is not used when estimating the cost of risky debt capital?

a. real interest rate
b. inflation premium
c. default risk premium
d. market risk premium
e. liquidity premium

A

d.

51
Q

Which of the following components is not typically included in the rate on short-term U.S. treasuries?

	a. liquidity premium
	b. default risk premium
	c. market risk premium
	d. b and c
	e. a, b, and c
A

e.

52
Q

The word “risk” developed from the early Italian word “risicare” and means:

a. don’t care
b. take a chance
c. to dare
d. to gamble

A

c.

53
Q

The difference between average annual returns on common stocks and returns on long-term government bonds is called a:

a. default risk premium
b. maturity premium
c. risk-free premium
d. liquidity premium
e. market risk premium

A

e.

54
Q

What has been the approximate average annual rate of return on publicly traded small company stocks since the mid-1920s?

a. 10%
b. 16%
c. 25%
d. 30%
e. 40%

A

b.

55
Q

Venture investors generally use which one of the following target rates to discount the projected cash flows of ventures in the “development” stage of their life cycles:

a. 15%
b. 20%
c. 25%
d. 40%
e. 50%

A

e.

56
Q

Corporate bonds might involve which of the following types of “premiums.”

	a. inflation premium
	b. default risk premium
	c. liquidity premium d. maturity premium
	e. all of the above
	f. none of the above
A

e.

57
Q

Which of the following venture life cycle stages would involve seasoned financing rather than venture financing?

	a. Development stage
	b. Startup stage
	c. Survival stage
	d. Rapid-growth stage
	e. Maturity stage
A

e.

58
Q

A venture’s “riskiness” in terms of possible poor performance or failure would be considered to be “very high” in which of the following life cycle stages:

	a. Startup stage
	b. Survival stage
	c. Rapid-growth stage
	d. Maturity stage
A

a.

59
Q

Which of the following types of financing would be associated with the highest target compound rate of return?

	a. public and seasoned financing
	b. second-round and mezzanine financing
	c. first-round financing
	d. startup financing e. seed financing
A

e.

60
Q

The cost of equity for a firm is 20%. If the real interest rate is 5%, the inflation premium is 3%, and the market risk premium is 2%, what is the investment risk premium for the firm?

	a. 10%
	b. 12%
	c. 13%
	d. 15%
A

b.

61
Q

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%; the market risk premium is 2%.

	a. 4.5%
	b. 8.0%
	c. 9.5%
	d. 10.5%
A

b.

62
Q

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%
	b. 10%
	c. 13.5%
	d. 17.5%
	e. 20%
A

c.

63
Q

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%
A

d.

64
Q

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 a tax rate = 25%.

	a. 10%
	b. 16%
	c. 19.8%
	d. 22.8%
	e. 30%
A

d.

65
Q

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 a tax rate = 25%.

	a. 15%
	b. 16.4%
	c. 20.2%
	d. 22.8%
	e. 30%
A

c.

66
Q

Venture capital holding period returns (all stages) for the 20-year period ending in 2012, had a compound average return of approximately:

	a. 35%
	b. 28%
	c. 21%
	d. 14%
 		e. 7%
A

b.

Entrepreneurial Finance (5 decks)

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