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Indicate whether the statement is true or false.
1. For the typical business plan having current and early cash outflows and later-stage cash inflows, the VSCS will give a
higher valuation than the DDA.
a. True
b. False
2. The DDA and VCSC methods give the same valuation.
a. True
b. False
3. The alternative to a utopian venture valuation approach is a mean venture valuation approach which considers that two
or more outcomes could occur.
a. True
b. False
4. Failure to account for any additional rounds of financing and its accompanying dilution in order to meet projected
earnings will result in the investor not receiving an adequate number of shares to ensure the required percent ownership at
the time of exit.
a. True
b. False
5. The utopian venture valuation approach uses probability-weighted outcomes that are summed to get an expected
present value for the venture.
a. True
b. False
6. Venture investors’ returns depend on the venture’s ability to generate cash flows or to find an acquirer for the venture.
a. True
b. False
7. The market value of a venture’s equity is equal to the market value of the venture’s total assets minus its total liabilities.
a. True
b. False
8. The value of the venture’s equity is equal to the value the financing contributed in the first venture capital round.
a. True
b. False
9. The internal rate of return (IRR) is the compound rate of return that equates the present value of the cash inflows
received with the initial investment.
a. True
b. False
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10. A price-earnings ratio is related to the level and growth of earnings.
a. True
b. False
11. Staged financing is financing provided in sequences of rounds rather than all at one time.
a. True
b. False
12. If a venture issues debt prior to the exit period, the initial equity investors will still receive first claims on the venture’s
net worth at exit time.
a. True
b. False
13. The return on book equity equals the sustainable growth rate when all earnings are paid out in the form of dividends.
a. True
b. False
14. Post-money valuation of a venture is the pre-money valuation plus money injected by new investors.
a. True
b. False
15. Multiplying a venture’s earnings by a price-earnings ratio represents a form of direct comparison valuation.
a. True
b. False
16. The venture capital shortcut (VCSC) method is a post-money version of the delayed dividend approximation (DDA).
a. True
b. False
17. A direct application of the earnings-per-share ratio to venture earnings is known as the direct comparison valuation
method.
a. True
b. False
18. The basic venture capital method estimates a venture’s value using intermediate and terminal/exit flows to founders.
a. True
b. False
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19. Almost without exception, professional venture investors demand that some equity or deferred equity compensation be
structured into any valuation.
a. True
b. False
20. The internal rate of return is the simple (noncompounded) interest rate that equates the present value of the cash
inflows received with the initial investment.
a. True
b. False
21. The expected present value method incorporates the present values of different scenarios, as well as their probabilities,
into the valuation process.
a. True
b. False
22. The discount rate applied in an expected PV approach should be the same rate across scenarios.
a. True
b. False
23. For most early-stage ventures, there are no strong motives for having an equity component in employee compensation.
a. True
b. False
24. The basic venture capital method estimates a venture’s value using only terminal/exit flows to all of the venture’s
owners.
a. True
b. False
25. For the typical business plan having current and early cash outflows and later-stage cash inflows, the VCSC and DDA
methods will typically give lower valuations than the MDM and PDM.
a. True
b. False
26. The venture capital valuation method which capitalizes earnings using a cap rate implied by a comparable ratio is
known as direct capitalization.
a. True
b. False
27. All of the scenarios in a multiple scenario analysis must have exit cash flows in the same year.
a. True
b. False
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28. In staged financing, the expected effect of future dilution is borne by both founders and the investors currently seeking
to invest.
a. True
b. False
29. The capitalization rate is the sum of the discount rate and the growth rate of the cash flow in the terminal value period.
a. True
b. False
30. The VSCS and DDA methods are “just-in–time” capital methods which do not assess capital charges for idle cash.
a. True
b. False
31. The discount rate that one applies in a multiple scenario valuation will usually be lower than the discount rate that
would be applied to the business plan cash flows.
a. True
b. False
32. The utopia discount process allows the venture investors to value their investment using only the business plan’s
explicit forecasts, discounting it at a bank loan interest factor.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
33. A potential investor is willing to provide $500,000 in first-round financing with the expectation of a 50% annual
compound rate of return over the next five years. Founders currently hold 1,000,000 million shares of stock. The venture
is expected to produce $500,000 in net income in year 5. A similar firm with annual net income of $1,000,000 sold shares
to the public for $10,000,000. What is the pre-money valuation?
a. $120,300
b. $316,800
c. $158,400
d. $193,900
34. Estimate the value of a privately held firm based on the following information: total market value (or capitalization
value) of a comparable firm = $200,000; net income of the comparable firm = $40,000; number of shares outstanding for
the comparable firm = 20,000; net income for the target firm = $15,000; and number of shares outstanding for the target
firm = 10,000.
a. $7.50
b. $10.00
c. $12.50
d. $15.00
35. The value of the existing venture without the proceeds from the potential new equity issue is known as:
a. pre-money valuation
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b. post money valuation
c. staged financing
d. the capitalization rate
36. Which of the following financing rounds does not dilute the ownership of founders?
a. first round
b. second round
c. incentive ownership round
d. founder’s round
37. The utopian approach to valuation ignores which of the following venture scenarios?
a. black-hole scenarios
b. living-dead scenarios
c. black-hole scenarios and living-dead scenarios
d. venture utopia scenarios
38. A potential investor is willing to provide $500,000 in first-round financing with the expectation of a 50% annual
compound rate of return over the next five years. Founders currently hold 1,000,000 million shares of stock. The venture
is expected to produce $500,000 in net income in year 5. A similar firm with annual net income of $1,000,000 sold shares
to the public for $10,000,000. What is the issue price per share?
a. $0.1939
b. $0.1203
c. $0.3168
d. $0.1584
39. To obtain the percent ownership to be sold in order to expect to provide the venture investor’s target return, one must
consider the cash investment today and the cash return at exit __________ by the venture investor’s target return, then
__________ today’s cash investment by the venture’s NPV.
a. multiplied; divide
b. discounted; divide
c. multiplied; divide
d. discounted; multiply
40. A potential investor is willing to provide $500,000 in first-round financing with the expectation of a 50% annual
compound rate of return over the next five years. Founders currently hold 1,000,000 million shares of stock. The venture
is expected to produce $500,000 in net income in year 5. A similar firm with annual net income of $1,000,000 sold shares
to the public for $10,000,000. What is the value of the venture at the end of year 5 using direct capitalization?
a. $500,000
b. $5,000,000
c. $1,000,000
d. $100,000
The following Multiple-Choice Questions relate to Learning Supplements 11A and 11B
41. When a firm has growth that only meets, rather than exceeds, the cost of capital, we would expect its price-earnings
multiple to be approximately equal to:
a. the reciprocal of its required return on equity
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b. its earnings per share
c. its book-to-market ratio
d. its debt-to-value ratio
42. Which of the following is not a variation of the venture capital valuation method?
a. venture capital method
b. expected present value
c. utopian discount process
d. actual dividend payments
43. A potential investor is willing to provide $500,000 in first-round financing with the expectation of a 50% annual
compound rate of return over the next five years. Founders currently hold 1,000,000 million shares of stock. The venture
is expected to produce $500,000 in net income in year 5. A similar firm with annual net income of $1,000,000 sold shares
to the public for $10,000,000. What is the post-money valuation?
a. $658,354
b. $499,954
c. $408,377
d. $249,977
44. Determine the future value of a target venture which has net income expected to be $40,000 at the end of four years
from now. A comparable firm currently has a stock price of $20 per share, 100,000 shares outstanding, and net income of
$50,000.
a. $1.0 million
b. $1.4 million
c. $1.6 million
d. $2.0 million
The following Multiple-Choice Questions relate to Learning Supplements 11A and 11B
45. The two “just–in–time” capital methods are:
a. DDA and VCSC
b. DDA and PDM
c. VSCS and MDM
d. MDM and PDM
46. The value of the existing venture plus the proceeds from the potential new equity issue is known as:
a. pre-money valuation
b. post money valuation
c. staged financing
d. the capitalization rate
47. Financing provided in sequences of rounds rather than all at one time is known as:
a. pre-money valuation
b. post money valuation
c. staged financing
d. the capitalization rate
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48. A potential investor is willing to provide $500,000 in first-round financing with the expectation of a 50% annual
compound rate of return over the next five years. Founders currently hold 1,000,000 million shares of stock. The venture
is expected to produce $500,000 in net income in year 5. A similar firm with annual net income of $1,000,000 sold shares
to the public for $10,000,000. What is the number of shares that must be issued to the new investor in order for the
investor to earn his target return?
a. 3,156,276
b. 1,578,138
c. 4,156,276
d. 2,578,138
49. For early-stage ventures, which of the following is a strong reason for having an equity component in employee
compensation?
a. the expected deferred and tax-preferred compensation allows the venture to pay a lower current compensation to
employees
b. it is a way to motivate employees to strive for a goal of low equity value
c. any dividends received as part of the equity compensation reduces taxable income
d. it reduces the percentage of ownership held by debtholders
50. Determine the net income of a comparable firm based on the following information: value of the target firm =
$4,000,000; net income of the target firm = $200,000; stock price of the comparable firm = $30; and number of shares of
stock outstanding for the comparable firm = 300,000.
a. $450,000
b. $500,000
c. $550,000
d. $600,000
51. Suppose your venture’s expected mean cash flows are –$85,000 initially, followed by expected mean cash flows at the
end of the first, second, and third years of $40,000, $40,000, and $35,000, respectively. What is the internal rate of return?
a. 13.9%
b. 14.7%
c. 16.2%
d. 17.2%
52. The return to venture investors directly depends on the:
a. venture’s ability to generate cash flows
b. ability to convince a debtholder to buy the venture
c. amount of the venture’s short-term liabilities
d. sum of past retained earnings
53. Which of the following does a P/E multiple refer to?
a. price/expectations multiple
b. price/earnings multiple
c. profit/EBIT multiple
d. profit/earnings multiple
54. During the exit period, which of the following will have last crack at the venture’s wealth?
a. banks giving loans to the venture
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b. convertible debtholders of the venture
c. initial equity investors of the venture
d. participating preferred equity holders
55. A potential investor is willing to provide $500,000 in first-round financing with the expectation of a 50% annual
compound rate of return over the next five years. Founders currently hold 1,000,000 million shares of stock. The venture
is expected to produce $500,000 in net income in year 5. A similar firm with annual net income of $1,000,000 sold shares
to the public for $10,000,000. What is the percent ownership of the venture that must be sold in order to provide the
venture investor’s target return?
a. 33.33%
b. 75.94%
c. 12.76%
d. 15.00%
56. Which of the following are components of the mean venture valuation approach?
a. the present value of each outcome is calculated
b. each outcome’s present value is multiplied by the probability that the outcome will occur
c. the probability-weighted outcomes are summed to get an expected present value for the venture
d. the future value of each outcome is calculated
The following Multiple-Choice Questions relate to Learning Supplements 11A and 11B
57. For the typical venture investing project, the valuation will be highest under:
a. DDA
b. PDM and MDM
c. VCSC
d. initial book value of equity
58. Determine the market value of a comparable firm based on the following information: value of the target firm =
$4,000,000; net income of the target firm = $200,000; and net income of the comparable firm = $500,000.
a. $15 million
b. $7.5 million
c. $10 million
d. $12.5 million
59. Estimate the value of a privately held firm based on the following information: stock price of a comparable firm =
$20; net income of a comparable firm = $20,000; number of shares outstanding for the comparable firm = 10,000; and
earnings per share for the target firm = $3.
a. $10
b. $20
c. $30
d. $40
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Answer Key
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