Chapter 9: Valuing Early-Stage Ventures

CHAPTER 9
VALUING EARLY-STAGE VENTURES
TrueFalse Questions
F. 1. The valuation approach involving discounting present value cash flows for
ris and delay is called discounted cash flow !"CF#.
F. $. The stepping stone year is the first year %efore the e&plicit forecast period.
T. '. The e&plicit forecast period is the two to ten year period in which the
venture(s financial state)ents are e&plicitly forecast.
F. *. The )a&i)u) dividend valuation )ethod involves e&plicitly forecasted
dividends to provide surplus cash which is positive.
T. +. The easiest way to value a venture is to discount the pro,ected )a&i)u)
dividend-issue strea).
T. .. The pseudo dividend valuation )ethod i)plies /ero e&plicitly forecasted
dividends and an ad,ust)ent to woring capital to strip any surplus cash.
T. 0. The pseudo dividend )ethod treats surplus cash as a free cash flow to
e1uity.
F. 2. 3 venture(s reversion value is the present value of ongoing e&penses.
T. 9. The pseudo dividend )ethod treats e1uity infusions and withdrawals in a
4,ust in ti)e5 fashion.
T. 16. The pseudo dividend )ethod treats surplus cash either as stripped out
while not in use or as e)ployed outside the venture and stored in a /ero 78V
invest)ent.
T. 11. The ter)inal or hori/on value is the value of a venture at the end of its
e&plicit forecast period.
F. 1$. The 4stepping stone5 year is the second year after the e&plicit forecast
period when valuing a venture.

T. 1'. Surplus cash is the cash re)aining after re1uired cash9 all operating
e&penses9 and reinvest)ents are )ade.
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Chapter 9: Valuing Early-Stage Ventures
T. 1*. The capitali/ation or 4cap5 rate is the spread %etween the discount rate and
the growth rate of cash flow in the ter)inal value period.
F. 1+. The 4reversion value5 is the future value of the ter)inal value.
T. 1.. 8re-)oney valuation is the present value of a venture prior to a new
)oney invest)ent.
F. 10. 8ost-)oney valuation is the pre-)oney valuation of a venture plus all
)onies previously contri%uted %y the venture(s founders.
T. 12. 47et operating woring capital5 is current assets other than surplus cash
less non-interest-%earing current lia%ilities.
F. 19. 4E1uity valuation cash flow5 is defined as: net sales : depreciation and
a)orti/ation e&pense ; change in net operating woring capital !e&cluding
surplus cash# ; capital e&penditures : net de%t issues.
T. $6. The 4pseudo dividend )ethod5 !8"<# is a valuation )ethod involving
/ero e&plicitly forecasted dividends and an ad,ust)ent to woring capital to
strip surplus cash.
F. $1. The 4ter)inal5 value is the value of the venture at the %eginning of the
e&plicit forecast period.
T. $$. 3s used in this te&t%oo9 the 4ter)inal5 value is the sa)e as the 4hori/on5
value.
T. $'. Finding the present value of the hori/on value produces the venture(s
reversion value.
F. $*. 3 4post-)oney5 valuation differs fro) a 4pre-)oney5 valuation %y the
cost of financial capital.
F. $+. 3pplying the 4)a&i)u) dividend )ethod5 !<"<# and the 4pseudo
dividend )ethod5!8"<# result in different valuation esti)ates.
ulti!le-C"oi#e Questions
a. 1. The present value of the venture(s e&pected future cash flows is called=
a. going-concern value
%. present value
c. ter)inal value
d. reversion value
e. net present value
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Chapter 9: Valuing Early-Stage Ventures
%. $. The value today of all future cash flows discounted to the present at the
investor(s re1uired rate of return is called=
a. going-concern value
%. present value
c. ter)inal value
d. reversion value
e. net present value
c. '. The value of the venture at the end of the e&plicit forecast period is called
the hori/on value9 or what=
a. going-concern value
%. present value
c. ter)inal value
d. reversion value
e. net present value
d. *. The present value of the ter)inal value is called=
a. going-concern value
%. present value
c. ter)inal value
d. reversion value
e. net present value
e. +. The present value of a set of future flows plus the current undiscounted
flow is called=
a. going-concern value
%. present value
c. ter)inal value
d. reversion value
e. net present value
c. .. The calculation of e1uity valuation cash flows nets the cash i)pact of all
other %alance sheet and inco)e accounts to focus on the >>>>>> account as the
repository of any re)aining cash flow.
a. cash
%. de%t
c. e1uity
d. non-interest-%earing lia%ilities
e. net inco)e
d. 0. E1uity valuation cash flow ? 7et inco)e plus
a. "epreciation and a)orti/ation e&pense )inus the change in net
woring capital plus capital e&penditures plus net de%t issues
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Chapter 9: Valuing Early-Stage Ventures
%. "epreciation and a)orti/ation e&pense plus the change in net
woring capital plus )inus capital e&penditures plus net de%t issues
c. "epreciation and a)orti/ation e&pense )inus the change in net
woring capital plus capital e&penditures )inus net de%t issues
d. "epreciation and a)orti/ation e&pense )inus the change in net
woring capital plus )inus capital e&penditures plus net de%t issues
e. "epreciation and a)orti/ation e&pense )inus the change in net
woring capital plus capital e&penditures plus net de%t issues
a. 2. @n a wildly successful first year in %usiness9 your fir) has operating inco)e
of A92996669 net inco)e of A.'096669 current assets of A96696669 current
lia%ilities of A.+996669 net capital e&penditures were A.9696669 and
depreciation was A*.69666. Bhat is your e1uity valuation cash flow=
a. A.*29666
%. A9669666
c. A$96$29666
d. A1..9666
e. 7ot enough infor)ation is provided
a. 9. Cour fir) has %een in %usiness for two years. @n its first year9 the fir)
ended with A$$09666 of current assets9 long-ter) assets of A1*'96669 A069666
in surplus cash9 current lia%ilities of A+$96669 and long-ter) assets of A.29666.
3t the end of the second year9 current assets were A$0996669 long-ter) assets
of A19+96669 surplus cash of A9696669 current lia%ilities of A.$96669 and long-
ter) assets of A029666. Bhat is your fir)(s change in net woring capital=
a. A$$9666
%. A.$9666
c. A*$9666
d. A$**9666
e. A'$9666
a. 16. The e1uity valuation )ethod involving e&plicitly forecasted dividends to
provide surplus cash of /ero is called=
a. )a&i)u) dividend )ethod
%. pseudo dividend )ethod
c. sustaina%le growth )ethod
d. dividend payout )ethod
%. 11. The e1uity valuation )ethod involving /ero e&plicitly forecasted dividends
and an ad,ust)ent to woring capital to strip surplus cash is called=
a. )a&i)u) dividend )ethod
%. pseudo dividend )ethod
c. sustaina%le growth )ethod
d. dividend payout )ethod
.$
Chapter 9: Valuing Early-Stage Ventures
c. 1$. 4Dust in ti)e5 capital in,ections %y e1uity investors is a reference to
a. sustaina%le growth
%. the present value of the ter)inal value
c. e1uity investors( providing )oney only when needed
d. dividend payout
%. 1'. The )a&i)u) dividend )ethod is
a. the cleanest for valuing assets9 %ut creates pro%le)s valuing surplus
cash
%. the cleanest for valuation purposes %ut its dividend-laden financial
state)ents can dra)atically understate the fir)(s cash position
c. the cleanest for cash planning9 %ut creates pro%le)s valuing the
venture %y discounting the dividends
d. calculated %y directly discounting the cash flow state)ent(s
pro,ected dividend flow to investors9 %ut ignores riss associated with
periodic gluts of surplus cash
c. 1*. The pseudo dividend )ethod is
a. the cleanest for valuing assets9 %ut creates pro%le)s valuing surplus
cash
%. the cleanest for valuation purposes %ut its dividend-laden financial
state)ents can dra)atically understate the fir)(s cash position
c. the cleanest for cash planning9 %ut creates pro%le)s valuing the
venture %y discounting the dividends
d. calculated %y directly discounting the cash flow state)ent(s
pro,ected dividend flow to investors9 %ut ignores riss associated with
periodic gluts of surplus cash
c. 1+. 4Ee1uired cash5 is=
a. the cash needed to pay interest e&pense
%. a valuation )ethod for early stage ventures
c. cash needed to cover a venture(s day-to-day operations
d. cash availa%le to pay as a dividend
d. 1.. <ost discounted cash flow valuations involve using cash flows fro) an:
a. historical period9 an e&plicit forecast period9 and a ter)inal value
%. historical period and a ter)inal value
c. historical period and an e&plicit forecast period
d. e&plicit forecast period and a ter)inal value
%. 10. Bhich one of the following e1uity valuation )ethods records surplus cash
on the %alance sheet %ut assu)es that the surplus cash is paid out over ti)e for
valuation purposes=
a. )a&i)u) dividend )ethod
%. pseudo dividend )ethod
.'
Chapter 9: Valuing Early-Stage Ventures
c. sustaina%le growth )ethod
d. return on e1uity )ethod
a. 12. Bhen esti)ating the ter)inal value of a venture using an e1uity valuation
)ethod9 a perpetuity growth e1uation is often applied that uses the
capitali/ation rate for discounting purposes. This 4cap5 rate is )easured as
the:
a. e1uity discount rate )inus the perpetuity growth rate
%. e1uity discount rate plus the perpetuity growth rate
c. ris-free rate plus the perpetuity growth rate
d. ris-free rate )inus the perpetuity growth rate
a. 19. 3 venture(s going-concern value is the:
a. present value of the e&pected future cash flows
%. net present value of the current and e&pected future cash flows
c. future value of the e&pected cash flows
d. net future value of the current and e&pected cash flows
a. $6. The purpose of the stepping stone year is=
a. to assure that there is sufficient re1uired cash
%. to assure that future dividends are constant
c. to assure that invest)ent flows are consistent with ter)inal growth
rates
d. to allow for a final year of higher-than-sustaina%le growth
d. $1. Bhen esti)ating the ter)inal value of a cash flow perpetuity9 which one
of the following is not a co)ponent=
a. the ne&t period(s cash flow
%. a constant discount rate
c. a constant growth rate
d. the pay%ac period
a. $$. Bhich one of the following co)ponents is not a co)ponent of the e1uity
valuation cash flow=
a. 7F83T
%. depreciation and a)orti/ation e&pense
c. change in net operating woring capital !without surplus cash#
d. capital e&penditures
e. net de%t issues
%. $'. Bhat is the difference %etween pre-)oney valuation and post-)oney
valuation=
a. si/e of the capitali/ation rate
%. a)ount of )oney in,ected %y new investors
c. revision value
.*
Chapter 9: Valuing Early-Stage Ventures
d. a)ount of )oney previously contri%uted %y founders
e. a)ount of )oney previously contri%uted %y venture investors
c. $*. To calculate a ter)inal value9 one divides the ne&t period(s cash flow %y
the:
a. constant discount rate plus a constant growth rate
%. constant discount rate plus a varia%le growth rate
c. constant discount rate )inus a constant growth rate
d. constant growth rate )inus constant discount rate
e. constant growth rate plus a varia%le discount rate
c. $+. The <"< e1uity valuation )ethod is an a%%reviation for:
a. )ini)u) dividend )ethod
%. )a&i)u) discount )ethod
c. )a&i)u) dividend )ethod
d. )ini)u) discount )ethod
e. <ontgo)ery design )ethod
a. $.. The 8"< e1uity valuation )ethod is an a%%reviation for:
a. pseudo dividend )ethod
%. pro&i)ate dividend )ethod
c. pseudo discount )ethod
d. pro&i)ate discount )ethod
e. pre-)oney discount )ethod
%. $0. Esti)ate a venture(s e1uity valuation cash flow %ased on the following
infor)ation: net inco)e ? A.9'0$G depreciation ? A*9.66G change in net
operating woring capital ? A$9*1+G capital e&penditures ? A.9966G and new
de%t issues ? A19666.
a. A.9*20
%. A+9*20
c. A*9*20
d. A'9020
e. A+9020
c. $2. Esti)ate a venture(s ter)inal value %ased on the following infor)ation:
current year(s net inco)e ? A$69666G ne&t year(s e&pected cash flow ?
A$.9666G constant future growth rate ? 0HG and venture investors( re1uired rate
of return ? $6H.
a. A1+.92*.
%. A$2+901*
c. A$669666
d. A1+69666
e. A*$29+01
.+
Chapter 9: Valuing Early-Stage Ventures
d. $9. Esti)ate a venture(s re1uired rate of return %ased on the following
infor)ation: ter)inal value ? A*669666G current year(s net inco)e ? A$69666G
ne&t year(s e&pected cash flow ? A$+9666G and a constant growth rate ? 0H.
a. .H
%. 0H
c. 2H
d. 9H
e. 16H
%. '6. Esti)ate a venture(s constant growth rate !g# %ased on the following
infor)ation: ter)inal value ? A*669666G current year(s net inco)e ? A$69666G
ne&t year(s e&pected cash flow ? A$+9666G and a re1uired rate of return of $6H.
a. $H
%. *H
c. .H
d. 2H
e. 16H
e. '1. Bhich one of the following co)ponents is not a co)ponent of the e1uity
valuation cash flow calculation=
a. net inco)e
%. depreciation and a)orti/ation e&pense
c. change in net operating woring capital !without surplus cash#
d. capital e&penditures
e. net e1uity repurchases
e. '$. Esti)ate a venture(s ter)inal value %ased on the following infor)ation:
current year(s net sales ? A+669666G ne&t year(s e&pected cash flow ? A1.9666G
constant future growth rate ? 16HG and venture investors( re1uired rate of
return ? $6H.
a. A1+.92*.
%. A$2+901*
c. A$669666
d. A1+69666
e. A1.69666
c. ''. Esti)ate a venture(s cash flow e&pected ne&t year %ased on the following
infor)ation: current year(s net sales ? A*669666G ter)inal value ? A+669666G
constant future growth rate ? 16HG and venture investors( re1uired rate of
return ? $6H.
a. A$69666
%. A*69666
c. A+69666
d. A.69666
e. A269666
..