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Small Business Finance Final Exam > Chapter 9-13 > Flashcards

Chapter 9-13 Flashcards

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1
Q

What are the stages in the professional venture investing cycle from inception to funding?

A
  1. Determine fund objectives/policies
  2. Organize new fund
  3. Solicit investments in new funds
  4. Obtain commitments for series of capital calls
  5. Conduct due diligence and actively invest
  6. Arrange harvest or liquidation
  7. Distribute cash and securities proceeds
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2
Q

First stage in professional venture investing cycle?

A
  1. Determine fund objectives/policies
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3
Q

Second stage in professional venture investing cycle?

A
  1. Organize new fund
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4
Q

Third stage in professional venture investing cycle?

A
  1. Solicit investments in new funds
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5
Q

Fourth stage in professional venture investing cycle?

A
  1. Obtain commitments for series of capital calls
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6
Q

Fifth stage in professional venture investing cycle?

A
  1. Conduct due diligence and actively invest
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7
Q

Sixth stage in professional venture investing cycle?

A
  1. Arrange harvest or liquidation
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8
Q

Seventh stage in professional venture investing cycle?

A
  1. Distribute cash and securities proceeds
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9
Q
  1. Venture Capital firms tend to specialize in publicly identified niches because of the potential for value-added investing by venture capitalists. Which is not one of these niches?
    a. industry type
    b. venture stage
    c. size of investment
    d. management style
    e. geographic area
A

D

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10
Q
  1. All of the following are typically part of a venture fund’s typical compensation and incentive structure except:
    a. some percent annual fee on invested capital
    b. a percent share of any profits to the managing general partner
    c. carried interest
    d. salary for the general partners
A

D

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11
Q
  1. When evaluating the prospects of a new venture, venture capital firms consider which of the following?
    a. characteristics of the proposal
    b. characteristics of the entrepreneur/team
    c. nature of the proposed industry
    d. both b and c
    e. all of the above
A

E

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12
Q
  1. When screening prospective new ventures, venture capital firms consider their own funds’ requirements. Which of the following is not one of the venture firm’s requirements relating to its own funds?
    a. investor control
    b. rate of return
    c. size of investment
    d. probable stock listing exchange for the mature venture
    e. financial provisions for investors
A

D

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13
Q
  1. All of the following are typical issues addressed in a term sheet except?
    a. valuation
    b. board structure
    c. registration rights
    d. management fees
    e. employment contracts
A

D

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14
Q
  1. Term sheets are usually drafted by:
    a. the mangers of the venture seeking VC funding
    b. the VC fund seeking to fund the venture
    c. management and founders
    d. it is usually done by an third party, in order to ensure the fair treatment of both parties
A

B

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15
Q
  1. In a syndicate of venture investors, the investor who is responsible for governing the process of due diligence is:
    a. the primary investor
    b. the lead investor
    c. a small group of secondary investors
    d. the investor in charge of issuing SLORs for the syndicate
    e. it is a democratic process that is shared by all investors in the group
A

B

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16
Q

Who are the major suppliers of venture capital by type and size of commitment?

A
  1. Pension funds 42%
  2. Finance and Insurance 25%
  3. Endowments and Foundations 21%
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17
Q

What is a VCs time allocation…

A

20% solicitation and selection of new ventures
5% negotiations
70% monitoring and adding value
5% implementing an exit strategy

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18
Q

The present value of the venture’s expected future cash flows is called?

	a. going-concern value
	b. present value
	c. terminal value
	d. reversion value
	e. net present value
A

A

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19
Q

The value today of all future cash flows discounted to the present at the investor’s required rate of return is called?

	a. going-concern value
	b. present value
	c. terminal value
	d. reversion value
	e. net present value
A

B

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20
Q

The value of the venture at the end of the explicit forecast period is called the horizon value, or what?

	a. going-concern value
	b. present value
	c. terminal value
	d. reversion value
	e. net present value
A

C

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21
Q

The present value of the terminal value is called?

	a. going-concern value
	b. present value
	c. terminal value
	d. reversion value
	e. net present value
A

D

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22
Q

The present value of a set of future flows plus the current undiscounted flow is called?

	a. going-concern value
	b. present value
	c. terminal value
	d. reversion value
	e. net present value
A

E

23
Q
  1. The calculation of equity valuation cash flows nets the cash impact of all other balance sheet and income accounts to focus on the ______ account as the repository of any remaining cash flow.
    a. cash
    b. debt
    c. equity
    d. non-interest-bearing liabilities
    e. net income
A

C

24
Q

Equity valuation cash flow = Net income plus

a. Depreciation and amortization expense minus the change in net operating working capital plus capital expenditures plus net debt issues
b. Depreciation and amortization expense plus the change in net operating working capital plus minus capital expenditures plus net debt issues
c. Depreciation and amortization expense minus the change in net operating working capital plus capital expenditures minus net debt issues
d. Depreciation and amortization expense minus the change in net operating working capital plus minus capital expenditures plus net debt issues
e. Depreciation and amortization expense minus the change in net operating working capital plus capital expenditures plus net debt issues

A

D

25
Q

The equity valuation method involving explicitly forecasted dividends to provide surplus cash of zero is called?

	a. maximum dividend method
	b. pseudo dividend method
	c. sustainable growth method
	d. dividend payout method
A

A

26
Q

The equity valuation method involving zero explicitly forecasted dividends and an adjustment to working capital to strip surplus cash is called?

	a. maximum dividend method
	b. pseudo dividend method
	c. sustainable growth method
	d. dividend payout method
A

B

27
Q

“Just in time” capital injections by equity investors is a reference to

a. sustainable growth
b. the present value of the terminal value
c. equity investors’ providing money only when needed
d. dividend payout

A

C

28
Q

The maximum dividend method is

a. the cleanest for valuing assets, but creates problems valuing surplus cash
b. the cleanest for valuation purposes but its dividend-laden financial statements can dramatically understate the firm’s cash position
c. the cleanest for cash planning, but creates problems valuing the venture by discounting the dividends
d. calculated by directly discounting the cash flow statement’s projected dividend flow to investors, but ignores risks associated with periodic gluts of surplus cash

A

B

29
Q

The pseudo dividend method is

a. the cleanest for valuing assets, but creates problems valuing surplus cash
b. the cleanest for valuation purposes but its dividend-laden financial statements can dramatically understate the firm’s cash position
c. the cleanest for cash planning, but creates problems valuing the venture by discounting the dividends
d. calculated by directly discounting the cash flow statement’s projected dividend flow to investors, but ignores risks associated with periodic gluts of surplus cash

A

C

30
Q

“Required cash” is?

a. the cash needed to pay interest expense
b. a valuation method for early stage ventures
c. cash needed to cover a venture’s day-to-day operations
d. cash available to pay as a dividend

A

C

31
Q

Most discounted cash flow valuations involve using cash flows from an:

a. historical period, an explicit forecast period, and a terminal value
b. historical period and a terminal value
c. historical period and an explicit forecast period
d. explicit forecast period and a terminal valu

A

D

32
Q
  1. Which one of the following equity valuation methods records surplus cash on the balance sheet but assumes that the surplus cash is paid out over time for valuation purposes?
    a. maximum dividend method
    b. pseudo dividend method
    c. sustainable growth method
    d. return on equity method
A

B

33
Q
  1. When estimating the terminal value of a venture using an equity valuation method, a perpetuity growth equation is often applied that uses the capitalization rate for discounting purposes. This “cap” rate is measured as the:
    a. equity discount rate minus the perpetuity growth rate
    b. equity discount rate plus the perpetuity growth rate
    c. risk-free rate plus the perpetuity growth rate
    d. risk-free rate minus the perpetuity growth rate
A

A

34
Q
  1. A venture’s going-concern value is the:
    a. present value of the expected future cash flows
    b. net present value of the current and expected future cash flows
    c. future value of the expected cash flows
    d. net future value of the current and expected cash flows
A

A

35
Q

The purpose of the stepping stone year is?

a. to assure that there is sufficient required cash
b. to assure that future dividends are constant
c. to assure that investment flows are consistent with terminal growth rates
d. to allow for a final year of higher-than-sustainable growth

A

A

36
Q
  1. When estimating the terminal value of a cash flow perpetuity, which one 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
A

D

37
Q
  1. To calculate a terminal value, one divides the next period’s cash flow by the:
    a. constant discount rate plus a constant growth rate
    b. constant discount rate plus a variable growth rate
    c. constant discount rate minus a constant growth rate
    d. constant growth rate minus constant discount rate
    e. constant growth rate plus a variable discount rate
A

C

38
Q
  1. Estimate a venture’s equity valuation cash flow based on the following information: net income = $6,372; depreciation = $4,600; change in net operating working capital = $2,415; capital expenditures = $6,900; and new debt issues = $1,000.
    a. $6,487
    b. $5,487
    c. $4,487
    d. $3,787
    e. $5,787
A

B

39
Q
  1. 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. $156,846
    b. $285,714
    c. $200,000
    d. $150,000
    e. $428,571
A

C

40
Q

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 a constant growth rate = 7%. (Doesn’t add up, memorize)

a. 6%
b. 7%
c. 8%
d. 9%
e. 10%

A

D

41
Q

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 a required rate of return of 20%.

a. 2%
b. 4%
c. 6%
d. 8%
e. 10%

A

B

42
Q
  1. 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
A

D

43
Q
  1. 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
A

B

44
Q

How would one expect P/E ratios to vary with a venture’s risk and growth opportunities?

A

P/E should increase with valuable growth opportunities and decrease with risk, other things being equal.

45
Q

For most early stage ventures, there are at least two strong motives for having an equity component in employee compensation.

A

1)Allows venture to pay lower current compensation

2) Motivates employees

46
Q

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
A

C

47
Q
  1. Which of the following is not a variation of the venture capital valuation method?
    a. venture capital method
    b. expected present value
    c. utopian discount process
    d. none of the above
A

D

48
Q

Which of the following is never a component of a preferred stock’s security structure?
a. the right to participate in any dividends paid to common stock shareholders
b. payment of dividends in the form of additional shares of preferred stock
c. the option for the holder to convert preferred stock into common stock
d. the option for the venture to call outstanding preferred stock
e. none of the above; all of these may be included in the structure of
preferred stock

A

E

49
Q
  1. A round of financing where shares sell for a lower price than previous rounds is known as a:
    a. down round
    b. recessive round
    c. reset round
    d. a and c
A

D

50
Q

Convertible debt has all of the following except:

a. bankruptcy rights
b. regular dividend payments
c. it can be structured to provide senior interest in specific assets
d. a tax shield due to interest expense
e. a security interest in the firms’ assets

A

B

51
Q
  1. Which of the following is not a type of option?
    a. call option
    b. put option
    c. warrant
    d. LBO
A

D

52
Q

Generally speaking, warrants are call options that allow the holder to purchase what type of security at a specific price?

	a. common stock
	b. preferred stock
	c. convertible debt
	d. none of the above
A

A

53
Q

To calculate the enterprise valuation cash flow, one begins with which of the following items from the income statement?

a. net sales
b. operating profit
c. (earnings before interest and taxes) × (1 - enterprise tax rate)
d. net income
e. net income times the enterprise tax rate

A

C

54
Q

When consistent assumptions are used, we

a. get the same value for equity under the enterprise and equity methods of valuation
b. we get a higher value of equity under the equity method of valuation
c. we get a lower value of equity under the equity method of valuation
d. we get equity values that cannot be compared across the equity and enterprise methods of valuation

A

A

Small Business Finance Final Exam (1 decks)

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