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CHAPTER 15
HARVESTING THE BUSINESS VENTURE INVESTMENT
True–False Questions
owners’ investment value is known as harvesting.
the owners is known as a systematic liquidation.
managers, employees, or external buyers is known as going public.
is known as an outright sale.
investors’ and founders’ desire for eventual liquidity by anticipating a harvest
for the venture investors.
value over several years can make it more difficult for entrepreneurs to start a
new venture because adequate capital has not been released from the existing
venture.
attractive harvest strategy.
discounted cash flow (DCF) methods or (2) relative valuation models based on
some form of multiples analysis.
managerial succession, and employee retention are not factored in.
unlock the owners’ investment value.
multiples of comparable firms are sometimes known as “relative value
methods.”
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enterprise method and the debt funds method.
assets directly to the owners.
distribution of assets directly to lenders.
difficult to think of cases where the disadvantages of liquidation outweigh the
advantages.
continues to run the firm and has a substantial equity position in the
reorganized firm is known as a leveraged buyout.
is financed largely with debt financial capital.
value at exit and how that exit value pie will be divided up among investors.
exiting a venture.
(LBO).
(MBO).
solicit an offer to buy securities is known as a red herring.
inherent risks of going public.
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significant opportunity cost to the venture’s owners.
for a specified period of time.
ongoing operations, maintaining and adding value, and obtaining seasoned
financing.
occur during the rapid-growth stage.
Multiple-Choice Questions
a. systematic liquidation
b. outright sale
c. chapter 11 bankruptcy
d. going public
a secondary offering of existing shares, this venture harvesting process is
known as:
a. systematic liquidation
b. outright sale
c. chapter 11 bankruptcy
d. going public
buyers is a venture harvesting process known as:
a. systematic liquidation
b. outright sale
c. chapter 11 bankruptcy
d. going public
venture harvesting process known as:
a. systematic liquidation
b. outright sale
c. chapter 11 bankruptcy
d. going public
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a. maintaining control throughout the harvest period
b. harvesting of the investment value can be spread out over a number
of years
c. the taxation treatment of liquidation proceeds as ordinary income
d. the time, effort, and costs of finding a buyer for the venture can be
avoided
a. the treatment and taxation of liquidation proceeds as ordinary
income rather than capital gains
b. the commitment of the entrepreneur’s resources and focus on a
dying venture rather than on other more lucrative ventures
c. the harvesting of the investment gets spread out over a number of
years
d. the acceleration of the venture’s rate of decline as other industry
participants respond to the reduction in investment
a.. systematic liquidation, outright sale, going public
b. outright sale, going public, acquisition
c. going public, acquisition
d. acquisition, systematic liquidation
a. a venture with stable and adequate operating cash flows
b. a venture with a high amount of equity relative to debt
c. a venture with the ability to protect market share
d. a venture with a high debt ratio
valuation due to an investor’s majority ownership of a venture?
a. proxy premium
b. control premium
c. influence premium
d. liquidity premium
e. illiquidity premium
securities regulators and sold to the public are known as:
a. primary offering
b. secondary offering
c. initial public offering
d. shelf offering
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a. family members
b. managers
c. employees
d. outside (external) buyers
e. all of the above
a. primary offering
b. secondary offering
c. initial public offering
d. shelf offering
a. primary offering
b. secondary offering
c. initial public offering
d. shelf offering
a. the sale of new securities to private investors
b. primary offerings
c. secondary offerings
d. b and c
investment bank?
a. to be the targeted investors for a firm’s securities
b. to provide banking services such as checking accounts to firms
c. to find buyers for a firm’s securities
d. both a and b
e. all of the above
on stock bought by the venture investors: founders’ purchase price $.50;
venture investors’ purchase price $2.00; current stock price $10.00; founders
holding period = 5 years; venture investors holding period = 3 years.
a. 100%
b. 400%
c. 600%
d. 800%
on stock bought by the founders: founders’ purchase price $1.00; venture
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investors’ purchase price $2.00; current stock price $10.00; founders holding
period = 5 years; venture investors holding period = 3 years.
a. 100%
b. 400%
c. 600%
d. 900%
end of five years from now. If the venture’s value is expected to be
$12,000,000, what “valuation multiple” was being assumed?
a. 1 time
b. 4 times
c. 8 times
d. 10 times
e. 12 times
from now. If venture investors invest $2,000,000 now, and expect a 20%
compounded rate of return on their investment, what portion of the exit value
would they need?
a. 10%
b. 20.2%
c. 25%
d. 28.8%
e. 32%
from now. If venture investors invest $1,000,000 now, and expect a 20%
compounded rate of return on their investment, what portion of the exit value
would they need?
a. 10.5%
b. 20.1%
c. 24.9%
d. 28.8%
e. 32.5%
value, and expect a 20% compounded rate of return on their investment, what
will be the amount of the exit value at the end of two years?
a. $1,000,000
b. $1,440,000
c. $2,880,000
d. $5,000,000
e. $5,760,000
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value, and expect a 20% compounded rate of return on their investment, what
is the approximate expected exit value at the end of five years?
a. $1,000,000
b. $2,490,000
c. $4,980,000
d. $7,470,000
e. $9,950,000
value, and expect a 22% compounded rate of return on their investment, what
is the exit value at the end of seven years?
a. $27,153,298
b. $39,931,321
c. $69,552,505
d. $84,854,057
e. $103,521,949
securities to public investors and what they pay to the issuing firm is known as:
a. IPO underpricing
b. due diligence
c. firm commitment
d. best efforts
e. underwriting spread
and distribution efforts without the actual transfer of securities ownership to
the investment banking syndicate is called:
a. IPO underpricing
b. due diligence
c. firm commitment
d. best efforts
e. underwriting spread
distribution of new securities is known as:
a. IPO underpricing
b. due diligence
c. firm commitment
d. best efforts
e. underwriting spread
issuing firm’s financial condition and investment intent is known as:
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a. IPO underpricing
b. due diligence
c. firm commitment
d. best efforts
e. underwriting spread
shares when the issue is heavily oversubscribed is known as
a. green shoe
b. red herring
c. best efforts
d. lockup
than the market price immediately following the offering?
a. IPO underpricing
b. due diligence
c. firm commitment
d. best efforts
e. underwriting spread
executed as soon as possible at the prevailing market price is known as a:
a. put order
b. market order
c. limit order
d. stop order
converts to a market order once a certain price is achieved is known as a:
a. put order
b. market order
c. limit order
d. stop order
better is called a:
a. market order
b. limit order
c. stop order
d. stock order
e. private order
a. market order
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b. limit order
c. stop order
d. none of the above
a. investment pricing organization
b. initial public offering
c. institutional pricing overhead
d. immediate pricing opportunity
insiders are prohibited from selling their existing shares is called:
a. a seasoned offering
b. an unseasoned offering
c. underpricing
d. an underwriting spread
e. a lockup provision
a. sale of new securities to private investors
b. sale of used securities to the public
c. a venture’s first offering of SEC-registered securities to the public
d. all of the above
e. none of the above
bank’s underwritten purchase and resale of securities is called:
a. firm commitment
b. best efforts commitment
c. due diligence
d. making a red herring disclaimer
e. a private placement