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Indicate whether the statement is true or false.
1. Valuation methods that estimate a firm’s worth using value-related multiples of comparable firms are sometimes known
as relative value methods.
a. True
b. False
2. An initial public offering (IPO) is the only method used by entrepreneurs when exiting a venture.
a. True
b. False
3. In determining a harvest value, nonmonetary items such as culture, managerial succession, and employee retention are
not factored in.
a. True
b. False
4. One method of harvesting a venture is through systematic distribution of assets directly to the owners.
a. True
b. False
5. ESOP stands for “employee stock ownership plan.”
a. True
b. False
6. When harvesting a venture, the two-step public equity registration and sale is known as an outright sale.
a. True
b. False
7. When harvesting a venture, the methodical distribution of assets directly to the owners is known as a systematic
liquidation.
a. True
b. False
8. Exit values for many mature ventures are usually determined by (1) discounted cash flow (DCF) methods or (2) relative
valuation models based on some form of multiples analysis.
a. True
b. False
9. A leveraged buyout (LBO) takes place when the purchase price of a firm is financed largely with debt financial capital.
a. True
b. False
10. A leveraged buyout (LBO) is a special type of management buyout (MBO).
a. True
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11. The sale of new shares of common stock is a secondary offering.
a. True
b. False
12. The sale of used shares of common stock is a secondary market offering.
a. True
b. False
13. Restructuring is the process of exiting the privately held business venture to unlock the owners’ investment value.
a. True
b. False
14. A special type of harvesting process where the firm’s top management continues to run the firm and has a substantial
equity position in the reorganized firm is known as a leveraged buyout.
a. True
b. False
15. The relative value method estimates a firm’s value by examining how comparable firms are valued based on value-
related multiples.
a. True
b. False
16. Most companies choose best efforts agreements in order to minimize the inherent risks of going public.
a. True
b. False
17. In a typical venture’s life cycle, the rapid-growth stage involves managing ongoing operations, maintaining and adding
value, and obtaining seasoned financing.
a. True
b. False
18. A lockup provision prohibits insiders from selling their existing shares for a specified period of time.
a. True
b. False
19. For harvesting purposes, we need to decide on the venture’s value at exit and how that exit value pie will be divided up
among investors.
a. True
b. False
20. An advantage of an exit strategy that pays out the venture’s investment 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.
a. True
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b. False
21. An obligatory disclaimer disavowing any intent to act as an offer to sell, or solicit an offer to buy, securities is known
as a red herring.
a. True
b. False
22. When an initial business plan is prepared, attention should be paid to the investors’ and founders’ desire for eventual
liquidity by anticipating a harvest for the venture investors.
a. True
b. False
23. Other than when the venture is operating in a declining industry, it is difficult to think of cases where the
disadvantages of liquidation outweigh the advantages.
a. True
b. False
24. One method of harvesting a successful venture is through systematic distribution of assets directly to lenders.
a. True
b. False
25. The process of exiting the privately held business venture to unlock the owners’ investment value is known as
harvesting.
a. True
b. False
26. When harvesting a venture, the outright purchase of the going concern by managers, employees, or external buyers is
known as going public.
a. True
b. False
27. Unicorns are low-expected-growth companies with valuations in excess of $1 trillion.
a. True
b. False
28. While not a direct loss to a venture, underpricing can represent a significant opportunity cost to the venture’s owners.
a. True
b. False
29. IPO underpricing results in a direct loss to the venture’s owners.
a. True
b. False
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30. An outright sale occurs when an entrepreneur sells the venture to family members, managers, employees, or outside
buyers.
a. True
b. False
31. A management buyout (MBO) is a special type of leveraged buyout (LBO).
a. True
b. False
32. Two discounted cash flow (DCF) methods are the enterprise method and the debt funds method.
a. True
b. False
33. When an industry is in decline, a systematic liquidation is typically the most attractive harvest strategy.
a. True
b. False
34. In a typical venture’s life cycle, the examining of exit opportunities often occurs during the rapid-growth stage.
a. True
b. False
35. A direct listing is a private company’s initial public offering sold exclusively to institutional investors.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
36. A venture can be harvested in which of the following ways?
a. systematic liquidation, outright sale, and going public
b. outright sale, going public, and acquisition
c. going public and acquisition
d. acquisition and systematic liquidation
37. Based on the following information, estimate the percentage appreciation on stock bought by the founders: founders’
purchase price = $1.00; venture investors’ purchase price = $2.00; current stock price = $10.00; founders’ holding period =
5 years; and venture investors holding period = 3 years.
a. 100%
b. 400%
c. 600%
d. 900%
38. Which of the following is not a candidate for a leveraged buyout?
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
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d. a venture with a high debt ratio
39. A venture is expected to have an exit value of $10,000,000 two years 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. 10.0%
b. 20.2%
c. 25.0%
d. 28.8%
40. Which of the following is not a way to harvest a venture?
a. systematic liquidation
b. outright sale
c. Chapter 11 bankruptcy
d. going public
41. A stock offering by a private firm involving the registration and sale to the public of existing shares, but no new
shares, is called:
a. IPO underpricing
b. due diligence
c. a direct listing
d. a best efforts agreement
42. A type of agreement with an investment bank employing only marketing and distribution efforts without the actual
transfer of securities ownership to the investment banking syndicate is called:
a. IPO underpricing
b. due diligence
c. a firm commitment
d. a best efforts agreement
43. The acquisition of the venture by family members, managers, or outside buyers is a venture harvesting process known
as:
a. a systematic liquidation
b. an outright sale
c. Chapter 11 bankruptcy
d. going public
44. The NYSE participates in:
a. the sale of new securities to private investors
b. primary offerings
c. primary and secondary offerings
d. secondary and liquidation offerings
45. The arrangement where an underwriter has the option of selling additional shares when the issue is heavily
oversubscribed is known as a:
a. green shoe option
b. red herring
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c. best efforts agreement
d. lockup provision
46. The investment bank’s process of ascertaining, to the extent possible, an issuing firm’s financial condition and
investment intent is known as:
a. IPO underpricing
b. due diligence
c. a firm commitment
d. an underwriting spread
47. If venture investors invest $1,000,000 now, will receive 25% of the exit 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. $9,950,000
b. $2,490,000
c. $4,980,000
d. $7,470,000
48. Registering equity and selling it via an IPO of new shares followed by a secondary offering of existing shares is a
venture harvesting process known as:
a. a systematic liquidation
b. an outright sale
c. Chapter 11 bankruptcy
d. going public
49. Based on the following information, estimate the percentage appreciation on stock bought by the venture investors:
founders’ purchase price = $0.50; venture investors’ purchase price = $2.00; current stock price = $10.00; founders’
holding period = 5 years; and venture investors’ holding period = 3 years.
a. 100%
b. 400%
c. 600%
d. 800%
50. Which of the following is not an advantage of a systematic liquidation?
a. maintaining control throughout the harvest period
b. the 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
51. Which of the following describes when a syndicate’s offering price is less than the market price immediately following
the offering?
a. IPO underpricing
b. due diligence
c. a firm commitment
d. best efforts
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52. Shares registered with the Securities and Exchange Commission and state securities regulators and sold to the public
are known as a(n):
a. primary offering
b. secondary offering
c. initial public offering
d. shelf offering
53. A venture is expected to have an exit value of $10,000,000 five years 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%
54. The type of agreement with an investment bank involving the investment bank’s underwritten purchase and resale of
securities is called:
a. a firm commitment
b. a best efforts agreement
c. due diligence
d. a red herring disclaimer
55. In the investment banking process, which of the following is a duty of the investment bank?
a. be the targeted investors for a firm’s securities
b. provide banking services, such as checking accounts, to firms
c. find buyers for a firm’s securities
d. market only founder shares
56. The sale of new securities is known as a(n):
a. primary offering
b. secondary offering
c. initial public offering
d. shelf offering
57. If venture investors invest $1,000,000 now, will receive 50% of the exit 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. $5,760,000
b. $1,440,000
c. $2,880,000
d. $5,000,000
58. The sale of used shares is known as a(n):
a. primary offering
b. secondary offering
c. initial public offering
d. shelf offering
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59. Which of the following is not a disadvantage of a systematic liquidation?
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
60. In an outright sale of a venture, the venture can be sold to:
a. family members and managers
b. managers and employees
c. employees and outside (external) buyers
d. family members, managers, employees, and outside (external) buyers
61. In the aftermarket trading for the venture’s securities, an order that 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
62. IPO stand for:
a. “investment pricing organization”
b. “initial public offering”
c. “institutional pricing overhead”
d. “immediate pricing opportunity”
63. The difference between what the investment bank gets from selling securities to public investors and what they pay to
the issuing firm is known as:
a. IPO underpricing
b. an underwriting spread
c. a firm commitment
d. best efforts
64. Assume that a venture is expected to have an EBITDA of $1,500,000 at the 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. 12 times
b. 4 times
c. 8 times
d. 10 times
65. An initial public offering (IPO) involves a:
a. sale of new securities to private investors
b. sale of used securities to the public
c. venture’s first offering of SEC-registered securities to the public
d. venture’s reoffering of its publicly traded securities
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66. The negotiated period around an equity securities offering during which insiders are prohibited from selling their
existing shares is called a(n):
a. seasoned offering
b. underpricing
c. underwriting spread
d. lockup provision
67. Ventures that are high-expected-growth companies with valuations in excess of $1 billion are called:
a. giraffes
b. unicorns
c. elephants
d. giants
68. Which of the following is the premium that would be applied to venture valuation due to an investor’s majority
ownership of a venture?
a. proxy premium
b. control premium
c. influence premium
d. liquidity premium
69. Which of the following is not a type of trading order?
a. market order
b. limit order
c. stop order
d. repurchase order
70. The distribution of the venture’s cash flows directly to the owners is a venture harvesting process known as:
a. a systematic liquidation
b. an outright sale
c. Chapter 11 bankruptcy
d. going public
71. Which of the following is not a characteristic of a “unicorn” company?
a. high expected growth
b. a valuation in excess of $1 billion
c. a previously successful IPO
d. high expected growth and a valuation in excess of $1 billion
72. An order to purchase stock that can be executed only at a specified price or better is called a:
a. market order
b. limit order
c. stop order
d. private order
73. In the aftermarket trading for the venture’s securities, an order that is to be executed as soon as possible at the
prevailing market price is known as a:
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a. put order
b. market order
c. limit order
d. stop order
74. If venture investors invest $6,750,000 now, will receive 32% of the exit value, and expect a 22% compounded rate of
return on their investment, what is the exit value at the end of seven years?
a. $103,521,949
b. $39,931,321
c. $69,552,505
d. $84,854,057
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Answer Key
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