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CHAPTER 14
SECURITY STRUCTURES AND DETERMINING ENTERPRISE VALUES
True–False Questions
F. 1. Preferred stock is the equity claim senior to common stock providing
preference on dividends but not liquidation proceeds.
dividends must be paid before any common stock dividend is paid.
share into a specified number of common shares at any time after the
expiration date.
T. 4. If a share of preferred stock has a $10 par value, and the stock has a 2:1
conversion ratio, then the conversion price would be $5.
use of debt, the venture and its investors can benefit by committing to an
internal reorganization as opposed to bankruptcy reorganization.
determined price.
F. 7. Options generally have no effect on the value of a venture capital
investment.
change over time as specified in the security agreement.
expiration date
T. 10. A European-Style Option may only be exercised on a specific date.
F. 11. A warrant is a call option issued by a company granting the holder the
right to buy common stock at a specific price at a specific time.
has a market price $8 is “in the money.”
it’s said to be “at the money”.
Chapter 14: Security Structures and Determining Enterprise Values
F. 14. As the underlying stock price increases in value, a put option to sell it
becomes more valuable.
option.
preserve their ownership share.
F. 17. Convertible debt is debt that converts into preferred stock.
T. 20. An option not currently worth exercising is said to be an out of the money
option.
F. 21. Owning a put option on a stock is the same as selling a call option on that
same stock.
tax or before-tax weighted cost of capital as long as the rate is applied to the
appropriate enterprise cash flows.
venture needs to issue to achieve a target capital structure (D/V).
venture’s financing, typically equity plus all of the debt.
T. 25. The enterprise value includes the value of the debt, equity, and warrant
pieces of a venture.
convertible or straight debt.
by a future financing round.
Note: The following TF questions relate to Learning Supplements 14A and 14B:
Chapter 14: Security Structures and Determining Enterprise Values
shield from paying interest back into the flows and discounts at a before-tax
weighted average cost of capital.
except that one applies a dilution factor to the option value to arrive at a
warrant value.
F. 3. The unadjusted Black and Scholes model is a model for determining the
value of a warrant to buy a new share.
F. 5. The Black and Scholes model requires the inflation rate as an input.
Multiple-Choice Questions
a. common Stock
b. preferred stock
c. convertible preferred stock
d. convertible debt
e. American-style option
purchasing sufficient shares to keep their percentage share of the firm is called:
a. stock option
b. stock warrant
c. preemptive right
d. participating stock
e. paid-in–kind preferred stock
that they will share in the payment of any dividends to common stockholders?
a. paid in kind preferred stock
b. cumulative preferred stock
c. participating preferred stock
d. convertible preferred stock
e. non-cumulative preferred stock
into common stock?
Chapter 14: Security Structures and Determining Enterprise Values
a. paid in kind preferred stock
b. cumulative preferred stock
c. participating preferred stock
d. convertible preferred stock
e. non-cumulative preferred stock
be satisfied in cash or by issuing additional par amounts of the preferred
security?
a. paid in kind preferred stock
b. cumulative preferred stock
c. participating preferred stock
d. convertible preferred stock
e. non-cumulative preferred stock
dividends must be paid prior to any common dividend?
a. paid in kind preferred stock
b. cumulative preferred stock
c. participating preferred stock
d. convertible preferred stock
e. non-cumulative preferred stock
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
rounds is known as a:
a. down round
b. recessive round
c. reset round
d. a and c
a. common stock
b. preferred stock
Chapter 14: Security Structures and Determining Enterprise Values
c. a and b
d. none of the above
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. call option
b. put option
c. warrant
d. LBO
called:
a. a forward contract
b. an American-style put option
c. an American-style call option
d. a European-style call option
e. a European style put option
date is called:
a. a forward contract
b. an American-style put option
c. an American-style call option
d. a European-style call option
e. a European style put option
a. forward contract
b. lookback option
c. American-style option
d. European-style option
e. Bermuda-style option
a. forward contract
b. lookback option
c. American-Style option
d. European-Style option
e. Bermuda-Style option
Chapter 14: Security Structures and Determining Enterprise Values
a. forward contract
b. lookback option
c. American-Style option
d. European-Style option
e. Bermuda-Style option
money?
a. The option to sell at $11, the stock is worth $12.
b. The option to buy at $13, the stock is worth $12.
c. The option to buy at $12, the stock is worth $12.
d. The option to sell at $13, the stock is worth $12.
e. The option to buy at $11, the stock is worth $12.
money?
a. The option to sell at $11, the stock is worth $12.
b. The option to buy at $13, the stock is worth $12.
c. The option to buy at $12, the stock is worth $12.
d. The option to sell at $13, the stock is worth $12.
e. The option to buy at $11, the stock is worth $12.
money?
a. The option to sell at $11, the stock is worth $12.
b. The option to buy at $13, the stock is worth $12.
c. The option to buy at $12, the stock is worth $12.
d. The option to sell at $13, the stock is worth $12.
e. The option to buy at $11, the stock is worth $12.
money?
a. The option to sell at $11, the stock is worth $12.
b. The option to buy at $13, the stock is worth $12.
c. The option to buy at $12, the stock is worth $12.
d. The option to sell at $13, the stock is worth $12.
e. The option to buy at $11, the stock is worth $12.
money?
a. The option to sell at $11, the stock is worth $12.
b. The option to buy at $13, the stock is worth $12.
c. The option to sell at $12, the stock is worth $12.
Chapter 14: Security Structures and Determining Enterprise Values
d. The option to sell at $13, the stock is worth $12.
e. The option to buy at $11, the stock is worth $12
a. common stock
b. preferred stock
c. convertible debt
d. none of the above
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. 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. debt allowing for conversion into equity (common stock or
convertible preferred stock)
b. convertible at a price set by a future financing round
c. issued to allow for a delayed valuation estimate
d. seasoned firms are the primary issuers of convertible notes
Note: The following MC questions relate to Learning Supplement 14B:
a. stocks
b. bonds
c. options
d. futures contracts
a. earnings per share
b. stock price
Chapter 14: Security Structures and Determining Enterprise Values
c. risk free rate
d. volatility
a. the number of shares issued
b. the next time that a venture capitalist will invest money
c. the normal distribution cumulative density function
d. the number of times that the venture will have to raise money