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CHAPTER 10
VENTURE CAPITAL VALUATION METHODS
TrueFalse Questions
F.
T.
F.
3. The value of the ventures equity is equal to the value the financing
contributed in the first venture capital round.
F.
T.
5. The venture capital valuation method which capitalizes earnings using a cap
rate implied by a comparable ratio is known as direct capitalization.
T.
T.
F.
8. If a venture issues debt prior to the exit period, the initial equity investors
will still receive first claims on the ventures net worth at exit time.
F.
9. The utopia discount process allows the venture investors to value their
investment using only the business plans explicit forecasts, discounting it at a
bank loan interest factor.
F.
10. The internal rate of return is the simple (non-compounded) interest rate
that equates the present value of the cash inflows received with the initial
investment.
T.
11. The basic venture capital method estimates a ventures value using only
terminal/exit flows to all the ventures owners.
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F.
12. The basic venture capital method estimates a ventures value using only
terminal/exit flows to founders.
T.
T.
F.
15. In staged financing, the expected effect of future dilution is borne by both
founders and the investors currently seeking to invest.
F.
16. The capitalization rate is the sum of the discount rate and the growth
rate of the cash flow in the terminal value period.
T.
17. The internal rate of return (IRR) is the compound rate of return that
equates the present value of the cash inflows received with the initial
investment.
T.
18. The discount rate that one applies in a multiple scenario valuation will
usually be lower than the discount rate that would be applied to the business
plan cash flows.
F.
19. All of the scenarios in a multiple scenario analysis must have exit cash
flows in the same year.
T.
20. The discount rate applied in an Expected PV approach should be the same
rate across scenarios.
T.
21. The expected present value method incorporates the present values of
different scenarios, as well as their probabilities, into the valuation
process.
F.
23. The VSCS and DDA methods are just-in-time capital methods which do
not assess capital charges for idle cash.
T.
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T.
25. For the typical business plan having current and early cash outflows and
later-stage cash inflows, the VCSC and DDA methods will typically give lower
valuations than the MDM and PDM.
T.
F.
27. For the typical business plan having current and early cash outflows and
later-stage cash inflows, the VSCS will give a higher valuation than the DDA.
T.
28. The DDA and VCSC methods give the same valuation.
Multiple-Choice Questions
d.
b.
a.
3. The value of the existing venture without the proceeds from the potential
new equity issue is known as?
a. pre-money valuation
b. post money valuation
c. staged financing
d. the capitalization rate
b.
4. The value of the existing venture plus the proceeds from the potential new
equity issue is known as?
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a.
b.
c.
d.
c.
pre-money valuation
post money valuation
staged financing
the capitalization rate
b.
6. What is the percent ownership of our venture that must be sold in order to
provide the venture investors target return?
a. 33.33%
b. 75.94%
c. 12.76%
d. 15.00%
a.
7. What is the number of shares that must be issued to the new investor in
order for the investor to earn his target return?
a. 3,156,276
b. 1,578,138
c. 4,156,276
d. 2,578,138
d.
c.
c. $158,400
d. $193,900
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a.
b.
11. What is the value of the venture in year five using direct capitalization?
a. $500,000
b. $5,000,000
c. $1,000,000
d. $100,000
d.
12. For early stage ventures, which of the following is a strong reason for
having an equity component in employee compensation?
a. the expected deferred and tax-preferred compensation allows the
venture to pay a lower current compensation to employees
b. as a way to motivate employees to strive for the same goal of high
equity value
c. because any dividends received as part of the equity compensation
reduces taxable income
d. both a and b
e. all of the above
c.
13. During the exit period, which of the following will have last crack at the
ventures wealth?
a. banks giving loans to the venture
b. convertible debt holders of the venture
c. initial equity investors of the venture
d. participating preferred equity holders
d.
14. Suppose your ventures expected mean cash flows are $(85,000) initially,
followed by expected mean cash flows at the end of the first, second, and third
years of $40,000, $40,000, and $35,000. What is the internal rate of return?
a. 13.9%
b. 14.7%
c. 16.2%
d. 17.2%
e. 19.2%
b.
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c.
b.
c.
a.
19. Determine the net income of a comparable firm based on the following
information: value of target firm = $4,000,000; net income of target firm =
$200,000; stock price of comparable firm = $30.00; and 300,000 shares of
stock outstanding for the comparable firm.
a. $450,000
b. $500,000
c. $550,000
d. $600,000
e. $700,000
c.
20. Determine the future value of a target venture which has net income
expected to be $40,000 at the end of four years from now. A comparable firm
currently has a stock price of $20.00 per shares; 100,000 shares outstanding;
and net income of $50,000.
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a.
b.
c.
d.
$1.0 million
$1.4 million
$1.6 million
$2.0 million
e.
21. Which of the following financing rounds dilutes the ownership founders?
a. first-round
b. second-round
c. incentive ownership round
d. a and b
e. a, b, and c
c.
22. The utopian approach to valuation ignores which of the following venture
scenarios:
a. black hole scenarios
b. living dead scenarios
c. both a and b
d. neither a or b
d.
23. 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.
25. When a firm has growth that only meets, rather than exceeds, the cost of
capital, we would expect its price-earnings multiple to be approximately equal
to:
a. the reciprocal of its required return on equity
b. its earnings per share
c. its book-to-market ratio
d. its debt-to-value ratio
b.
26. For the typical venture investing project, the valuation will be highest
under:
a. DDA
b. PDM and MDM
c. VCSC
d. initial book value of equity
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