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CHAPTER 14
SECURITY STRUCTURES AND DETERMINING ENTERPRISE VALUES
True–False Questions
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.
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.
investment.
change over time as specified in the security agreement.
expiration date
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
becomes more valuable.
option.
preserve their ownership share.
option.
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.
pieces of a venture.
Note: The following TF questions relate to Learning Supplements 14A and 14B:
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.
Chapter 14: Security Structures and Determining Enterprise Values
value of a warrant to buy a new share.
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?
a. paid in kind preferred stock
b. cumulative preferred stock
c. participating preferred stock
d. convertible preferred stock
e. non-cumulative preferred stock
Chapter 14: Security Structures and Determining Enterprise Values
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
c. a and b
d. none of the above
Chapter 14: Security Structures and Determining Enterprise Values
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
a. forward contract
Chapter 14: Security Structures and Determining Enterprise Values
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.
d. The option to sell at $13, the stock is worth $12.
e. The option to buy at $11, the stock is worth $12
Chapter 14: Security Structures and Determining Enterprise Values
purchase what type of security at a specific price?
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
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
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