Name:
Class:
Date:
chapter 10
Indicate whether the statement is true or false.
1. Surplus cash is the amount of cash required to pay scheduled dividends for the next quarter.
a. True
b. False
2. The valuation method involving the extraction of pseudo dividends treats changes in surplus cash as possible free cash
flows to equity.
a. True
b. False
3. The stepping-stone year is the first year before the explicit forecast period.
a. True
b. False
4. The valuation approach involving discounting present value cash flows for risk and delay is called discounted cash flow
(DCF).
a. True
b. False
5. Pre-money valuation is the present value of a venture prior to a new money investment.
a. True
b. False
6. The terminal or horizon value is the value of a venture at the end of its explicit forecast period.
a. True
b. False
7. The valuation method involving the projection of maximum dividends involves explicitly forecasted dividends to
provide surplus cash which is positive.
a. True
b. False
8. The stepping-stone year is the second year after the explicit forecast period when valuing a venture.
a. True
b. False
9. The wider the capitalization (cap) rate (i.e., the discount rate minus the growth rate in the terminal period), the higher
the terminal value.
a. True
b. False
10. The equity valuation method is the process of projecting and then discounting the relevant cash flows available to
providers of debt capital.
Name:
Class:
Date:
chapter 10
b. False
11. The capitalization (cap) rate is the spread between the discount rate and the growth rate of cash flow in the terminal
value period.
a. True
b. False
12. Post-money valuation is the pre-money valuation of a venture plus all monies previously contributed by the venture’s
founders.
a. True
b. False
13. Applying the maximum dividend and pseudo dividend approaches to valuation results in different valuation estimates.
a. True
b. False
14. As used in this textbook, the terminal value is the same as the horizon value.
a. True
b. False
15. The pseudo dividend approach to valuation treats equity infusions and withdrawals in a “just-in-time” fashion.
a. True
b. False
16. The valuation method calculating pseudo dividends involves zero explicitly forecasted dividends and an adjustment to
working capital to strip surplus cash.
a. True
b. False
17. When projecting maximum dividends, changes in surplus cash will be paid out as dividends.
a. True
b. False
18. The terminal value is the value of the venture at the beginning of the explicit forecast period.
a. True
b. False
19. Surplus cash is the cash remaining after required cash, all operating expenses, and reinvestments are made.
a. True
b. False
20. Sweat equity is an individual’s work-related, nonfinancially compensated contribution to the enhancement of a
venture’s value.
a. True
Name:
Class:
Date:
chapter 10
b. False
21. Required cash is the amount of cash required to operate a venture through its day-to-day business.
a. True
b. False
22. The pseudo dividend approach to valuation treats surplus cash either as stripped out while not in use or as employed
outside the venture and stored in a zero NPV investment.
a. True
b. False
23. A venture’s reversion value is the present value of ongoing expenses.
a. True
b. False
24. The explicit forecast period is the two- to ten-year period in which the venture’s financial statements are explicitly
forecast.
a. True
b. False
25. Finding the present value of the horizon value produces the venture’s reversion value.
a. True
b. False
26. A post-money valuation differs from a pre-money valuation by the cost of financial capital.
a. True
b. False
27. The present value of a venture is the value today of all future cash flows discounted at the investor’s required rate of
return.
a. True
b. False
28. A pseudo dividend involves excess cash that does not need to be invested in a venture’s assets or operations, and may
be invested elsewhere for a period of time.
a. True
b. False
29. Net operating working capital is current assets other than surplus cash less interest-bearing long-term liabilities.
a. True
b. False
30. While accounting for the past is all well and good, an investor seeks to quantify and value the future.
a. True
Name:
Class:
Date:
chapter 10
b. False
31. The reversion value of a venture is the present value of the venture’s terminal value.
a. True
b. False
32. The reversion value is the future value of the terminal value.
a. True
b. False
33. Equity valuation cash flow is defined as net income before taxes available to venture equity investors.
a. True
b. False
34. Surplus cash is the cash remaining after required cash, all operating expenses, reinvestments, and dividend payouts are
made.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
35. To calculate a terminal value, one divides the next period’s cash flow by the spread between the __________ discount
rate and __________ growth rate.
a. variable; constant
b. constant; variable
c. constant; constant
d. variable; variable
36. What is the present value of the venture’s expected future cash flows called?
a. going-concern value
b. net present value
c. terminal value
d. reversion value
37. In equation form, the equity valuation cash flow is defined as:
a. Net Income + Depreciation and Amortization Expense – Change in Net Operating Working Capital + Capital
Expenditures + Net Debt Issues
b. Net Income + Depreciation and Amortization Expense + Change in Net Operating Working Capital + Capital
Expenditures + Net Debt Issues
c. Net Income + Depreciation and Amortization Expense – Change in Net Operating Working Capital + Capital
Expenditures – Net Debt Issues
d. Net Income + Depreciation and Amortization Expense – Change in Net Operating Working Capital – Capital
Expenditures + Net Debt Issues
38. When estimating the terminal value of a cash flow perpetuity, which of the following is not a component?
Name:
Class:
Date:
chapter 10
a. the next period’s cash flow
b. a constant discount rate
c. a constant growth rate
d. the payback period
39. The value today of all future cash flows discounted to the present at the investor’s required rate of return is called the:
a. horizon value
b. present value
c. terminal value
d. reversion value
40. The valuation approach involving pseudo dividends suggests:
a. actual dividends expected to be paid
b. dividends that reflect cash not involved in venture operations
c. projecting dividends that exhaust any surplus cash
d. using a net operating working capital adjustment to foster valuation
41. Which of the following is not a component of the equity valuation cash flow?
a. net operating profit after taxes
b. change in net operating working capital (without surplus cash)
c. capital expenditures
d. net debt issues
42. “Just-in-time” capital injections by equity investors is a reference to:
a. sustainable growth
b. the present value of the terminal value
c. equity investors providing money only when needed
d. dividend payout
43. Estimate a venture’s constant growth rate (g) based on the following information: terminal value = $400,000; current
year’s net income = $20,000; next year’s expected cash flow = $25,000; and required rate of return = 20%.
a. 4.00%
b. 13.25%
c. 7.75%
d. 15.50%
44. Required cash is:
a. the cash needed to pay interest expense
b. a valuation method for early-stage ventures
c. the cash needed to cover a venture’s day-to–day operations
d. the cash available to pay as a dividend
45. Your firm has been in business for two years. In its first year, the firm 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, the firm had current assets of $279,000, long-term assets of $195,000, surplus cash of $90,000,
Name:
Class:
Date:
chapter 10
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. $32,000
46. The value of the venture at the end of the explicit forecast period is called the:
a. going-concern value
b. net present value
c. terminal value
d. reversion value
47. The purpose of the stepping-stone year is to:
a. assure that there is sufficient required cash
b. assure that future dividends are constant
c. assure that investment flows are consistent with terminal growth rates
d. allow for a final year of higher-than-sustainable growth
48. What is the difference between pre-money valuation and post-money valuation?
a. the size of the capitalization rate
b. the amount of money injected by new investors
c. the terminal value
d. the amount of money previously contributed by founders
49. The present value of the terminal value is called the:
a. going-concern value
b. horizon value
c. terminal value
d. reversion value
50. What is the present value of the terminal value called?
a. horizon value
b. net present value
c. reversion value
d. entity value
51. Estimate a venture’s equity valuation cash flow based on the following 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. $6,787
b. $5,487
c. $4,487
d. $3,787
52. A venture’s going-concern value is the:
a. net present value of the current and expected future cash flows
Name:
Class:
Date:
chapter 10
b. future value of the expected cash flows
c. net future value of the current and expected cash flows
d. present value of the expected future cash flows
53. Estimate a venture’s terminal value based on the following information: 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. $285,714
b. $200,000
c. $150,000
d. $160,000
54. The valuation approach involving maximum dividends suggests:
a. actual dividends expected to be paid
b. dividends that reflect cash not involved in venture operations
c. projecting dividends that exhaust any surplus cash
d. using a net operating working capital adjustment to foster valuation
55. Estimate a venture’s required rate of return based on the following information: terminal value = $400,000; current
year’s net income = $20,000; next year’s expected cash flow = $25,000; and constant growth rate = 7%.
a. 7.50%
b. 9.00%
c. 10.75%
d. 13.25%
56. What is the present value of a set of future flows plus the current undiscounted flow called?
a. reversion value
b. horizon value
c. terminal value
d. net present value
57. Most discounted cash flow valuations involve using cash flows from a(n):
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
58. In a wildly successful first year in business that started and ended with no required cash, your firm has operating
income of $989,000, net income of $637,000, current assets of $900,000, and 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. $48,000
b. $166,000
c. $218,000
d. $466,000
Name:
Class:
Date:
chapter 10
59. Estimate a venture’s terminal value based on the following information: 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. $356,846
b. $285,714
c. $200,000
d. $150,000
60. Which of the following equity valuation methods records surplus cash on the balance sheet but assumes that the
surplus cash is paid out over time for valuation purposes?
a. the projection of maximum dividends
b. the calibration of pseudo dividends
c. sustainable growth dividend retention
d. return on equity method
61. Which of the following is not a component of the equity valuation cash flow calculation?
a. net income
b. depreciation and amortization expense
c. change in net operating working capital (without surplus cash)
d. net equity repurchases
62. Estimate a venture’s cash flow expected next year based on the following 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. $80,000
b. $40,000
c. $50,000
d. $60,000
63. The calculation of equity valuation cash flows nets the cash impact of all other balance sheet and income statement
accounts to focus on the __________ account as the repository of any remaining cash flow.
a. cash
b. net income
c. equity
d. non-interest-bearing liabilities
64. When estimating the terminal value of a venture using an equity valuation method, a perpetuity growth equation that
uses the capitalization (cap) rate for discounting purposes is often applied. This cap rate is measured as the __________
rate __________ the perpetuity growth rate.
a. equity discount; minus
b. equity discount; plus
c. risk-free; plus
d. risk-free; minus
65. The equity valuation method involving zero explicitly forecasted dividends and an adjustment to working capital to
strip surplus cash involves:
Name:
Class:
Date:
chapter 10
b. pseudo dividends
c. sustainable growth dividend retention
d. actual dividend payments
66. The equity valuation method involving explicitly forecasted dividends to provide surplus cash of zero involves:
a. maximum dividends
b. pseudo dividends
c. sustainable growth dividend retention
d. actual dividend payments
67. An individual’s work-related, nonfinancially compensated contribution to the enhancement of a venture’s value is
referred to as:
a. money equity
b. sweat equity
c. goodwill
d. intangible work
Name:
Class:
Date:
chapter 10
Answer Key
Name:
Class:
Date:
chapter 10
Name:
Class:
Date:
chapter 10