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Indicate whether the statement is true or false.
1. If a call option can be bought for $12 and the stock’s market value is $12, it’s said to be “at the money.”
a. True
b. False
2. An option not currently worth exercising is said to be “out of the money.”
a. True
b. False
3. 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.
a. True
b. False
4. A preemptive right is a right for existing owners to buy sufficient shares to preserve their ownership share.
a. True
b. False
5. Registration rights embedded in a venture’s securities grant certain classes of shareholders the right, under certain
circumstances, to have their securities registered with the SEC.
a. True
b. False
6. A call option is the obligation to purchase a specific asset at a predetermined price.
a. True
b. False
7. The enterprise value includes the value of the debt, equity, and warrant pieces of a venture.
a. True
b. False
8. An option granting the right to sell a stock at $10 when that stock currently has a market price of $8 is “in the money.”
a. True
b. False
9. Entity valuation allows us to answer the question of how much debt a venture needs to issue to achieve a target capital
structure (D/V).
a. True
b. False
10. Convertible notes are debt allowing for conversion into stock at a price set by a future financing round.
a. True
b. False
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11. Preferred stock is the equity claim senior to common stock and providing preference on dividends but not liquidation
proceeds.
a. True
b. False
12. The value of a warrant can be directly derived from the value of a call option.
a. True
b. False
13. For American and Bermudan embedded options, the exercise price can change over time as specified in the security
agreement.
a. True
b. False
14. The enterprise method of valuation can be executed with either an after-tax or before-tax weighted average cost of
capital as long as the rate is applied to the appropriate enterprise cash flows.
a. True
b. False
15. An American-style option is an option that can be exercised only at the expiration date.
a. True
b. False
16. By issuing preferred stock, and thus forfeiting bankruptcy rights from the use of debt, the venture and its investors can
benefit by committing to an internal reorganization as opposed to bankruptcy reorganization.
a. True
b. False
17. Convertible debt is debt that converts into preferred stock.
a. True
b. False
18. The Black and Scholes model requires the inflation rate as an input.
a. True
b. False
19. For preferred noncumulative stock, all previously unpaid preferred dividends must be paid before any common stock
dividend is paid.
a. True
b. False
20. Piggyback registration rights allow holders of convertible securities to “vote as if converted.”
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a. True
b. False
21. As the underlying stock price increases in value, a put option to sell it becomes more valuable.
a. True
b. False
22. 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.
a. True
b. False
23. Convertible preferred stockholders have the right to convert a preferred share into a specified number of common
shares at any time after the expiration date.
a. True
b. False
24. An option is a right to buy or sell additional shares of stock.
a. True
b. False
25. Convertible debt is debt with the option to exchange it into nonconvertible or straight debt.
a. True
b. False
26. A warrant is a type of call option.
a. True
b. False
27. The Black and Scholes model requires an exercise price as an input.
a. True
b. False
28. The Black and Scholes model requires the stock price as an input.
a. True
b. False
29. An alternative approach to the enterprise valuation method adds the tax shield from paying interest back into the flows
and discounts at a before-tax weighted average cost of capital.
a. True
b. False
30. A European-style option may only be exercised on a specific date.
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a. True
b. False
31. Owning a put option on a stock is the same as selling a call option on that same stock.
a. True
b. False
32. Options generally have no effect on the value of a venture capital investment.
a. True
b. False
33. The concept of an enterprise value is that it is the combined value of all of venture’s financing, typically equity plus all
of the debt.
a. True
b. False
34. Warrant valuation (as presented in this text) is similar to option valuation except that one applies a dilution factor to
the option value to arrive at a warrant value.
a. True
b. False
35. Common stock represents the least senior claim on a venture’s assets.
a. True
b. False
36. The unadjusted Black and Scholes model is a model for determining the value of a warrant to buy a new share.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
The following Multiple-Choice Questions relate to Learning Supplement 14B
37. Which of the following is not an input to the Black and Scholes model?
a. earnings per share
b. stock price
c. risk-free rate
d. volatility
38. The right to buy a specified asset at a specified price on a specified date is called a(n):
a. forward contract
b. American-style put option
c. American-style call option
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d. European-style call option
39. The right to sell a specified asset at a specified price up until a specified date is called a(n):
a. American-style put option
b. American-style call option
c. European-style call option
d. European-style put option
40. Generally speaking, warrants are call options that allow the holder to purchase what type of security at a specific
price?
a. common stock
b. preferred stock
c. convertible debt
d. convertible notes
41. Which of the following is an example of a put option that is “at the money”?
a. option to sell at $11, stock is worth $12
b. option to buy at $13, stock is worth $12
c. option to sell at $12, stock is worth $12
d. option to buy at $11, stock is worth $12
42. Which of the following is not a typical characteristic of convertible notes?
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
43. Which of the following is an example of a call option that is “out of the money“?
a. option to sell at $11, stock is worth $12
b. option to buy at $13, stock is worth $12
c. option to buy at $12, stock is worth $12
d. option to sell at $13, stock is worth $12
44. The right for existing owners to maintain their ownership share by purchasing sufficient shares to keep their
percentage share of the firm is called:
a. a stock option
b. a stock warrant
c. preemptive rights
d. participating stock
45. Which of the following is not a type of option?
a. call option
b. put option
c. warrant
d. leveraged buyout
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46. When consistent assumptions are used, estimated equity values under the enterprise and equity methods should be:
a. the same for the two methods
b. higher for the equity method
c. higher for the enterprise method
d. different for the two methods
47. Which of the following is not a component of a preferred stock’s security structure?
a. the right to participate in any dividends paid to common stock shareholders
b. the 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 holder to convert preferred stock into debt securities
The following Multiple-Choice Questions relate to Learning Supplement 14B
48. The Black and Scholes model is intended to be used to value:
a. stocks
b. bonds
c. options
d. futures contracts
49. Which of the following provides the option to transform preferred stock into common stock?
a. paid in kind preferred stock
b. cumulative preferred stock
c. participating preferred stock
d. convertible preferred stock
50. An option that can be exercised only at a specific set of dates is called a(n):
a. Asian-style option
b. American-style option
c. European-style option
d. Bermuda-style option
51. A round of financing where shares sell for a lower price than previous rounds is known as a(n):
a. reset round
b. recessive round
c. angel round
d. anticipation round
52. An option that can be exercised only at its expiration date is called a(n):
a. Asian-style option
b. American-style option
c. European-style option
d. Bermuda-style option
53. Which of the following requires that all previously unpaid preferred dividends must be paid prior to any common
dividend?
a. paid in kind preferred stock
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b. cumulative preferred stock
c. participating preferred stock
d. convertible preferred stock
54. Which of the following is an example of a put option that is “in the money”?
a. option to sell at $11, stock is worth $12
b. option to buy at $13, stock is worth $12
c. option to buy at $11, stock is worth $12
d. option to sell at $13, stock is worth $12
55. Which of the following offers the option where the dividend obligation can 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
56. Which of the following is an example of a call option that is “in the money”?
a. option to sell at $11, stock is worth $12
b. option to buy at $13, stock is worth $12
c. option to sell at $13, stock is worth $12
d. option to buy at $11, stock is worth $12
57. An option that can be exercised at any time until its expiration is called a(n):
a. Asian-style option
b. American-style option
c. European-style option
d. Bermuda-style option
58. To calculate the enterprise valuation cash flow, one begins with which of the following items from the income
statement?
a. Net Sales ÷ Net Income
b. Operating Profit ÷ Gross Sales
c. Earnings Before Interest and Taxes) × (1 – Enterprise Tax Rate)
d. Net Income × Enterprise Tax Rate
59. Which of the following is an example of a put option that is “out of the money”?
a. option to sell at $11, stock is worth $12
b. option to buy at $13, stock is worth $12
c. option to buy at $12, stock is worth $12
d. option to sell at $13, stock is worth $12
60. Which of the following can be structured to assure shareholders that they will share in the payment of any dividends to
common stockholders?
a. paid in kind preferred stock
b. cumulative preferred stock
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c. participating preferred stock
d. convertible preferred stock
61. Convertible debt can have all of the following characteristics except:
a. bankruptcy rights
b. regular dividend payments
c. a structure to provide senior interest in specific assets
d. a tax shield due to interest expense
The following Multiple-Choice Questions relate to Learning Supplement 14B
62. N(h) in the Black and Scholes model involves the use of the:
a. number of shares issued
b. next time that a venture capitalist will invest money
c. normal distribution cumulative density function
d. number of times that the venture will have to raise money
63. Which of the following has the least senior claim on a venture’s asset?
a. common stock
b. preferred stock
c. convertible preferred stock
d. convertible debt
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Answer Key
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Name:
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