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CHAPTER 10
VALUING EARLY-STAGE VENTURES
True–False Questions
risk and delay is called discounted cash flow (DCF).
F. 2. The stepping stone year is the first year before the explicit forecast period.
explicit forecast period.
period when valuing a venture.
T. 5. The explicit forecast period is the two to ten year period in which the
venture’s financial statements are explicitly forecast.
dividends to provide surplus cash which is positive.
dividend/issue stream.
T. 8. The pseudo dividend method treats surplus cash as a free cash flow to
equity.
terminal value.
F. 11. The “reversion value” is the future value of the terminal value.
explicit forecast period.
value.
reversion value.
Chapter 10: Valuing Early–Stage Ventures
60
expenses, and reinvestments are made.
expenses, reinvestments, and dividends payouts are made.
T 17. Required cash is the amount of cash required to operate a venture through
its day-to–day business.
next quarter.
the growth rate of cash flow in the terminal value period.
T. 20. Pre-money valuation is the present value of a venture prior to a new
money investment.
monies previously contributed by the venture’s founders.
less non-interest-bearing current liabilities.
F. 23. “Equity valuation cash flow” is defined as: net sales + depreciation and
amortization expense – change in net operating working capital (excluding
surplus cash) – capital expenditures + net debt issues.
zero explicitly forecasted dividends and an adjustment to working capital to
strip surplus cash.
cost of financial capital.
F. 26. Applying the “maximum dividend method” (MDM) and the “pseudo
dividend method” (PDM) result in different valuation estimates.
paid out as dividends.
in a venture’s assets or operations, and may be invested elsewhere for a period
of time.
Chapter 10: Valuing Early–Stage Ventures
61
T. 29. The pseudo dividend method treats equity infusions and withdrawals in a
“just in time” fashion.
while not in use or as employed outside the venture and stored in a zero NPV
investment.
growth rate in the terminal period), the higher the terminal value.
T. 32. Sweat equity is an individual’s work-related, non-financially
compensated, contribution to the enhancement of a venture’s value.
Multiple-Choice Questions
a. going-concern value
b. present value
c. terminal value
d. reversion value
e. net present value
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
the horizon value, or what?
a. going-concern value
b. present value
c. terminal value
d. reversion value
e. net present value
a. going-concern value
b. present value
c. terminal value
d. reversion value
e. net present value
Chapter 10: Valuing Early–Stage Ventures
62
flow is called?
a. going-concern value
b. present value
c. terminal value
d. reversion value
e. net present value
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. 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
required cash, your firm has operating income of $989,000, net income of
$637,000, current assets of $900,000, current liabilities of $659,000, net capital
expenditures were $690,000, and depreciation was $460,000. The firm has
never financed itself with debt. What is your equity valuation cash flow?
a. $648,000
b. $900,000
c. $2,028,000
d. $166,000
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63
ended with $227,000 of current assets, long-term assets of $143,000, $70,000
in surplus cash, current liabilities of $52,000, and long–term assets of $68,000.
At the end of the second year, current assets were $279,000, long–term assets
of $195,000, surplus cash of $90,000, current liabilities of $62,000, and long–
term assets of $78,000. What is your firm’s change in net operating working
capital?
a. $22,000
b. $62,000
c. $42,000
d. $244,000
e. $32,000
provide surplus cash of zero is called?
a. maximum dividend method
b. pseudo dividend method
c. sustainable growth method
d. dividend payout method
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. sustainable growth
b. the present value of the terminal value
c. equity investors’ providing money only when needed
d. dividend payout
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
Chapter 10: Valuing Early–Stage Ventures
64
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. 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. 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 value
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
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. 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
Chapter 10: Valuing Early–Stage Ventures
65
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
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
valuation cash flow?
a. NOPAT
b. depreciation and amortization expense
c. change in net operating working capital (without surplus cash)
d. capital expenditures
e. net debt issues
valuation?
a. size of the capitalization rate
b. amount of money injected by new investors
c. revision value
d. amount of money previously contributed by founders
e. amount of money previously contributed by venture investors
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. minimum dividend method
b. maximum discount method
c. maximum dividend method
d. minimum discount method
e. Montgomery design method
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66
a. pseudo dividend method
b. proximate dividend method
c. pseudo discount method
d. proximate discount method
e. pre-money discount method
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
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
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%.
a. 6%
b. 7%
c. 8%
d. 9%
e. 10%
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%
Chapter 10: Valuing Early–Stage Ventures
67
valuation cash flow calculation?
a. net income
b. depreciation and amortization expense
c. change in net operating working capital (without surplus cash)
d. capital expenditures
e. net equity repurchases
current year’s net sales = $500,000; next year’s expected cash flow = $16,000;
constant future growth rate = 10%; and venture investors’ required rate of
return = 20%.
a. $156,846
b. $285,714
c. $200,000
d. $150,000
e. $160,000
information: current year’s net sales = $400,000; terminal value = $500,000;
constant future growth rate = 10%; and venture investors’ required rate of
return = 20%.
a. $20,000
b. $40,000
c. $50,000
d. $60,000
e. $80,000
to the enhancement of a venture’s value is referred to as:
a. money equity
b. sweat equity
c. goodwill
d. intangible work