Archive for February 2019

Over the past 90 or so years, the variability (standard deviation) of average annual rates of return in the U.S. have been lowest for which of the following securities?

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Over the past 90 or so years, the variability (standard deviation) of average annual rates of return in the U.S. have been lowest for which of the following securities?


a. Five-year government bonds

b. Twenty-year corporate bonds

c. Large-company stocks

d. Small-company stocks


Answer: Five-year government bonds

Calculate the after-tax WACC based on the following information: nominal interest rate on debt = 12%; cost of common equity = 25%; common equity = $700,000; interest-bearing debt = $300,000; and a tax rate = 25%.

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Calculate the after-tax WACC based on the following information: nominal interest rate on debt = 12%; cost of common equity = 25%; common equity = $700,000; interest-bearing debt = $300,000; and a tax rate = 25%.


a. 15%

b. 16.4%

c. 20.2%

d. 22.8%

e. 30%


Answer: 20.2%

Calculate the after-tax WACC based on the following information: nominal interest rate on debt = 16%; cost of common equity = 30%; equity to value = 60%; debt to value = 40%; and a tax rate = 25%.

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Calculate the after-tax WACC based on the following information: nominal interest rate on debt = 16%; cost of common equity = 30%; equity to value = 60%; debt to value = 40%; and a tax rate = 25%.


a. 10%

b. 16%

c. 19.8%

d. 22.8%

e. 30%


Answer: 22.8%

Calculate the weighted average cost of capital (WACC) based on the following information: the equity multiplier is 1.66; the interest rate on debt is 13%; the required return to equity holders is 22%; and the tax rate is 35%.

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Calculate the weighted average cost of capital (WACC) based on the following information: the equity multiplier is 1.66; the interest rate on debt is 13%; the required return to equity holders is 22%; and the tax rate is 35%.


a. 11.5%

b. 13.9%

c. 15.0%

d. 16.6%


Answer: 16.6%

Calculate the weighted average cost of capital (WACC) based on the following information: the capital structure weights are 50% debt and 50% equity; the interest rate on debt is 10%; the required return to equity holders is 20%; and the tax rate is 30%.

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Calculate the weighted average cost of capital (WACC) based on the following information: the capital structure weights are 50% debt and 50% equity; the interest rate on debt is 10%; the required return to equity holders is 20%; and the tax rate is 30%.


a. 7%

b. 10%

c. 13.5%

d. 17.5%

e. 20%


Answer: 13.5%

The "risk-free" interest rate is the sum of:

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The "risk-free" interest rate is the sum of:


a. a real rate of interest and an inflation premium

b. a real rate of interest and a default risk premium

c. an inflation premium and a default risk premium

d. a default risk premium and a liquidity premium

e. a liquidity premium and a maturity premium


Answer: a real rate of interest and an inflation premium

Your venture has net income of $600, taxable income of $1,000, operating profit of $1,200, total financial capital including both debt and equity of $9,000, a tax rate of 40%, and a WACC of 10%. What is your venture's EVA?

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Your venture has net income of $600, taxable income of $1,000, operating profit of $1,200, total financial capital including both debt and equity of $9,000, a tax rate of 40%, and a WACC of 10%. What is your venture's EVA?


a. $400,000

b. $200,000

c. $ 0

d. ($180,000)

e. ($300,000)


Answer: ($180,000)

A venture has raised $4,000 of debt and $6,000 of equity to finance its firm. Its cost of borrowing is 6%, its tax rate is 40%, and its cost of equity capital is 8%. What is the venture's weighted average cost of capital?

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A venture has raised $4,000 of debt and $6,000 of equity to finance its firm. Its cost of borrowing is 6%, its tax rate is 40%, and its cost of equity capital is 8%. What is the venture's weighted average cost of capital?


a. 8.0%

b. 7.2%

c. 7.0%

d. 6.2%

e. 6.0%


Answer: 6.2%

Suppose the real risk free rate of interest is 4%, maturity risk premium is 2%, inflation premium is 6%, the default risk on similar debt is 3%, and the liquidity premium is 2%. What is the nominal interest rate on this venture's debt capital?

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Suppose the real risk free rate of interest is 4%, maturity risk premium is 2%, inflation premium is 6%, the default risk on similar debt is 3%, and the liquidity premium is 2%. What is the nominal interest rate on this venture's debt capital?


a. 13%

b. 14%

c. 15%

d. 16%

e. 17%


Answer: 17%

The additional premium added to the real interest rate by lenders to compensate them for a debt instrument which cannot be converted to cash quickly at its existing value is called?

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The additional premium added to the real interest rate by lenders to compensate them for a debt instrument which cannot be converted to cash quickly at its existing value is called?


a. inflation premium

b. default risk premium

c. liquidity premium

d. maturity premium

e. investment risk premium


Answer: liquidity premium

The additional interest rate premium required to compensate the lender for the probability that a borrower will not be able to repay interest and principal on a loan is known as?

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The additional interest rate premium required to compensate the lender for the probability that a borrower will not be able to repay interest and principal on a loan is known as?


a. inflation premium

b. default risk premium

c. liquidity premium

d. maturity premium

e. investment risk premium


Answer: default risk premium

Which of the following markets involve direct two-party negotiations over illiquid, non-standardized contracts such as bank loans and direct placement of debt?

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Which of the following markets involve direct two-party negotiations over illiquid, non-standardized contracts such as bank loans and direct placement of debt?



a. primary market

b. secondary market

c. options market

d. private financial market

e. public financial market


Answer: private financial market

Rule 502 of Regulation D deals with:

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Rule 502 of Regulation D deals with:


a. integration

f. information

g. solicitation

h. resale

i. a and b above

e. a, b, c, and d above


Answer: a, b, c, and d above

Which of the following are requirements of natural persons to be accredited investors under Regulation D Rule 501?

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Which of the following are requirements of natural persons to be accredited investors under Regulation D Rule 501?


a. net worth greater than $5 million

b. total assets greater than $1 million

c. individual (single) annual income greater than $200,000

d. stock market portfolio greater than $2 million

e. all of the above


Answer: individual (single) annual income greater than $200,000

Rule 501 of Regulation D expands the categories of accredited investors. Which is not one of the categories?

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Rule 501 of Regulation D expands the categories of accredited investors. Which is not one of the categories?


a. any organization formed for the specific purpose of acquiring securities with assets in excess of $5 million

b. any director or executive officer of the issuer of securities being sold

c. any individual whose net worth exceeds $1 million

d. any partnership

e. any trust with total assets greater the $5 million


Answer: any partnership

The JOBS Act of 2012 provides for which of the following:

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The JOBS Act of 2012 provides for which of the following:


a. establishes a new business classification called "Emerging Growth Company"

b. lifts restrictions on general solicitation and advertising for Reg D 506 accredited investor offerings

c. establishes a small offering registration exemption and calls for SEC rules relating to the sales of securities to an Internet "crowd" (securities crowdfunding)

d. a and b above

e. a, b, and c


Answer: a, b, and c

Under Regulation A, which one of the following is not true?

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Under Regulation A, which one of the following is not true?


a. issuers are allowed to test the waters prior to preparing the offering circular

b. after filing a SEC statement, the issuer can communicate with perspective investors orally, in writing, by advertising in newspapers, radio, television, or via the mail to determine investor interest

c. issuers can take commitments or funds

d. there is a formal delay of 20 calendar days before sales are made

e. if the interest level is insufficient, the issuer can drop Regulation A filing


Answer: issuers can take commitments or funds

Of the following, which is not true about Regulation A?

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Of the following, which is not true about Regulation A?


a. it is shorter and simpler than the full registration

b. it does not have limitations on the number or sophistication of offerees.

c. it is a public offering rather than a private placement

d. it can generally be freely sold

e. it requires no offering statement be filed with the SEC


Answer: it requires no offering statement be filed with the SEC

Which one of the following is not a characteristic of Regulation A?

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Which one of the following is not a characteristic of Regulation A?


a. An offering is limited to $5 million

b. the number offerees or investors is limited to 35

c. the offering is a public offering

d. the securities issued can generally be freely resold


Answer: the number offerees or investors is limited to 35

An offering that raises $2,500,000 over a 12-month period, involving 35 unaccredited investors and 5 accredited investors, might be exempt from registration under:

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An offering that raises $2,500,000 over a 12-month period, involving 35 unaccredited investors and 5 accredited investors, might be exempt from registration under:


a. Section 4(6)

b. Regulation D: Rule 504

c. Regulation D: Rule 505

d. none of the above


Answer: Regulation D: Rule 505

While Section 4(2) does not limit the dollar amount of an offering, the interpretation of the law has stipulated that:

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While Section 4(2) does not limit the dollar amount of an offering, the interpretation of the law has stipulated that:


a. the investors must be sophisticated

b. the number of investors must be limited to 35

c. the funds must be raised within a 12-month period

d. the offering must be extended to the public, and not only investors who have a relationship with the issuer


Answer: the investors must be sophisticated

Rule 504 of Regulation D limits the total number of investors to:

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Rule 504 of Regulation D limits the total number of investors to:


a. 35

b. 100

c. 35 unaccredited investors and any number of accredited investors

d. there is no limit on the number of accredited or unaccredited investors


Answer: there is no limit on the number of accredited or unaccredited investors

In the Ninth Circuit Court of Appeals decision on SEC v. Murphy, all of the following were considerations in determining an offering to be a private placement except:

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In the Ninth Circuit Court of Appeals decision on SEC v. Murphy, all of the following were considerations in determining an offering to be a private placement except:


a. there must be an arm's length relationship between the issuer of the security and the prospective purchaser

b. the number of offerees must be limited

c. the size and the manner of the offering must not indicate widespread solicitation

d. the offerees must be sophisticated

e. some relationship between the offerees and the issuer must be present


Answer: there must be an arm's length relationship between the issuer of the security and the prospective purchaser

Which one of the following is not a requirement for registration of securities with the SEC?

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Which one of the following is not a requirement for registration of securities with the SEC?


a. the name under which the issuer is doing business

b. the name of the state where the issuer is organized

c. the names of all products sold by the issuer

d. the names and addresses of the directors

e. the names of the underwriters


Answer: the names of all products sold by the issuer

Which of the following is not true about registering securities with the SEC?

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Which of the following is not true about registering securities with the SEC?


a. it is a time consuming process

b. it required the disclosure of accounting information

c. it is usually done with the help of an investment bank

d. it is an inexpensive process

e. it provides information to prospective investors


it is an inexpensive process

In securities law, which of the following is (are) true?

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In securities law, which of the following is (are) true?


a. ignorance is no defense

b. security regulators may alter your investment agreement to the benefit of the investors

c. Securities Act of 1933 gives the SEC broad civil procedures to use in enforcement

d. Securities Act of 1933 gives the SEC some criminal procedures to use in enforcement

e. a, b, and c above

f. a, b, c, and d above


Answer: a, b, c, and d above

Efforts to regulate the offerings and sales of securities take place under which of the following securities laws?

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Efforts to regulate the offerings and sales of securities take place under which of the following securities laws?


a. Securities Act of 1933

b. state "blue-sky" laws

c. Securities and Exchange Act of 1934

d. Investment Company Act of 1940

e. Investment Advisers Act of 1940

f. Both a and b

g. Both a and c


Answer: Both a and b

Which of the following is not true regarding the Securities Act of 1933?

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Which of the following is not true regarding the Securities Act of 1933?


a. it was passed in response to abuses thought to have contributed to the financial catastrophes of the Great Depression

b. it covers securities fraud

c. it requires securities to be registered formally with the federal government

d. it set of the nature and authority of the Securities and Exchange Commission

e. it focuses on those who provide investment advice


Answer: it focuses on those who provide investment advice

When long-term financial planning efforts set cash as a percentage of sales or as a fixed dollar amount for planning purposes, the projected cash flow statement is said to be a ________ forecasting statement.

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When long-term financial planning efforts set cash as a percentage of sales or as a fixed dollar amount for planning purposes, the projected cash flow statement is said to be a ________ forecasting statement.



a. dynamic
b. passive
c. conservative
d. checking


Answer: checking

When projecting financial statements, one would first , and then proceed to :

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When projecting financial statements, one would first , and then proceed to :


a. project of the balance sheet, forecast sales.

b. forecast sales, project the income statement

c. forecast sales, project the balance sheet

d. forecast sales, project the statement of cash flows


Answer: forecast sales, project the income statement

Your firm recorded sales for the most recent year of $10 million generated from an asset base of $7 million, producing a $500,000 net income. Sales are projected to grow at 20%, causing spontaneous liabilities to increase by $200,000. In the most recent year, $200,000 was paid out as dividends, and the current payout ratio will continue in the upcoming years. What is your firm's AFN?

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Your firm recorded sales for the most recent year of $10 million generated from an asset base of $7 million, producing a $500,000 net income. Sales are projected to grow at 20%, causing spontaneous liabilities to increase by $200,000. In the most recent year, $200,000 was paid out as dividends, and the current payout ratio will continue in the upcoming years. What is your firm's AFN?



a. $200,000
b. $600,000
c. $840,000
d. $960,000
e. $1,400,000


Answer: $840,000

The financial funds still needed to finance asset growth after using spontaneously generated funds and any increase in retained earnings is called:

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The financial funds still needed to finance asset growth after using spontaneously generated funds and any increase in retained earnings is called:



a. spontaneously generated funds

b. additional funds needed

c. addition in retained earnings

d. financial capital needed


Answer: additional funds needed

Determine a firm's "return on assets" percentage based on the following information: sustainable growth rate = 20%; total assets $500,000; beginning of year common equity $200,000; and dividend payout percentage = 60%.

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Determine a firm's "return on assets" percentage based on the following information: sustainable growth rate = 20%; total assets $500,000; beginning of year common equity $200,000; and dividend payout percentage = 60%.



a. 10.0%
b. 12.5%
c. 15.0%
d. 17.5%
e. 20.0%


Answer: 20.0%

Determine a venture's sustainable growth rate based on the following information: sales = $1,000,000; net income = $150,000; common equity at the end of last year = $520,000; and the dividend payout percentage = 20%.

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Determine a venture's sustainable growth rate based on the following information: sales = $1,000,000; net income = $150,000; common equity at the end of last year = $520,000; and the dividend payout percentage = 20%.



a. 10%
b. 16%
c. 20%
d. 24%
e. 30%


Answer: 30%

Determine a venture's sustainable growth rate based on the following information: sales = $1,000,000; net income = $100,000; common equity at the beginning of the year = $500,000; and the retention rate = 50%.

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Determine a venture's sustainable growth rate based on the following information: sales = $1,000,000; net income = $100,000; common equity at the beginning of the year = $500,000; and the retention rate = 50%.



a. 10%
b. 15%
c. 20%
d. 25%
e. 30%


Answer: 10%

Use the following information to estimate a venture's sustainable growth rate: Net income = $200,000; Total assets = $1,000,000; equity multiple based on beginning common equity = 2.0 times; and Retention rate = 25%.

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Use the following information to estimate a venture's sustainable growth rate: Net income = $200,000; Total assets = $1,000,000; equity multiple based on beginning common equity = 2.0 times; and Retention rate = 25%.



a. 50%
b. 25%
c. 20%
d. 10%
e. 5%


Answer: 10%

A firm has net income of $320,000 on sales of $3,200,000. Its assets total $2,000,000; the equity at the beginning of the year was $1,600,000 and dividends paid were $80,000. What is the sustainable growth rate?

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A firm has net income of $320,000 on sales of $3,200,000. Its assets total $2,000,000; the equity at the beginning of the year was $1,600,000 and dividends paid were $80,000. What is the sustainable growth rate?



a. 5%
b. 15%
c. 6.25%
d. 4.69%
e. none of the above


Answer: 15%

Internally generated funds which are available for distribution to owners of for reinvestment back into the business to support future growth can be characterized by which of the following?

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Internally generated funds which are available for distribution to owners of for reinvestment back into the business to support future growth can be characterized by which of the following?


a. operating income

b. operating cash flow

c. net income

d. net cash flow

e. pre-tax income


Answer: net income

Lola is in the process of forecasting the sales growth rate for an early-stage venture specializing in the production of durable running shoes. Lola predicts a .2 probability of an 80% growth in sales, a .3 probability of a 60% growth in sales, a .4 probability of a 40% growth in sales, and a .1 probability of a 10% decrease in sales. What is the expected sales growth rate of the venture?

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Lola is in the process of forecasting the sales growth rate for an early-stage venture specializing in the production of durable running shoes. Lola predicts a .2 probability of an 80% growth in sales, a .3 probability of a 60% growth in sales, a .4 probability of a 40% growth in sales, and a .1 probability of a 10% decrease in sales. What is the expected sales growth rate of the venture?


a. 47%

b. 49%

c. 51%

d. 53%


Answer: 49%

An "expected value" is:

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An "expected value" is:


a. a simple average of a set of scenarios or possible outcomes

b. a weighted average of a set of scenarios or possible outcomes

c. the highest scenario value or outcome

d. the lowest scenario value or outcome


Answer: a weighted average of a set of scenarios or possible outcomes

A "new" venture usually begins its sales forecast by first:

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A "new" venture usually begins its sales forecast by first:



a. forecasting industry sales and expressing the venture's sales as a percent of industry sales

b. using a "bottom-up" market-driven approach

c. extrapolating past sales

d. working with existing and potential customers


Answer: forecasting industry sales and expressing the venture's sales as a percent of industry sales

Which of the following statements is incorrect?

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Which of the following statements is incorrect?


a. forecasting sales is the first step in creating projected financial
statements

b. financial forecasting tends to be more accurate for mature ventures than for early-stage ventures

c. forecasting is relatively unimportant for early-stage ventures with little historical financial data

d. a and b

e. a and c


Answer: forecasting is relatively unimportant for early-stage ventures with little historical financial data

Which of the following is not a step in forecasting sales for a seasoned firm?

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Which of the following is not a step in forecasting sales for a seasoned firm?


a. forecast future growth rates based on possible scenarios and the probabilities of those scenarios.

b. attempt to corroborate the projected sales growth rates analyzing both industry growth rates and the firm's own past market share.

c. refine the sales forecast by using the sales force as a direct contact with both existing and potential customers.

d. take into consideration the likely impact of major operating changes within the firm on the sales forecast.

e. consider the effects of changes in the firm's debt/equity blend on the sales forecasts.


Answer: consider the effects of changes in the firm's debt/equity blend on the sales forecasts.

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%.

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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. $20,000
b. $40,000
c. $50,000
d. $60,000
e. $80,000


Answer: $50,000

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%.

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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. $156,846
b. $285,714
c. $200,000
d. $150,000
e. $160,000


Answer: $160,000

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 a required rate of return of 20%.

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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 a required rate of return of 20%.



a. 2%
b. 4%
c. 6%
d. 8%
e. 10%


Answer: 4%

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 a constant growth rate = 7%.

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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 a constant growth rate = 7%.



a. 6%
b. 7%
c. 8%
d. 9%
e. 10%


Answer: 9%

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%.

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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. $156,846
b. $285,714
c. $200,000
d. $150,000
e. $428,571


Answer: $200,000

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.

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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. $6,487
b. $5,487
c. $4,487
d. $3,787
e. $5,787


Answer: $5,487

To calculate a terminal value, one divides the next period's cash flow by the:

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To calculate a terminal value, one divides the next period's cash flow by the:



a. constant discount rate plus a constant growth rate
b. constant discount rate plus a variable growth rate
c. constant discount rate minus a constant growth rate
d. constant growth rate minus constant discount rate
e. constant growth rate plus a variable discount rate


Answer: constant discount rate minus a constant growth rate

What is the difference between pre-money valuation and post-money valuation?

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What is the difference between pre-money valuation and post-money valuation?



a. size of the capitalization rate
b. amount of money injected by new investors
c. revision value
d. amount of money previously contributed by founders
e. amount of money previously contributed by venture investors


Answer: amount of money injected by new investors

The purpose of the stepping stone year is?

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The purpose of the stepping stone year is?



a. to assure that there is sufficient required cash
b. to assure that future dividends are constant
c. to assure that investment flows are consistent with terminal growth rates
d. to allow for a final year of higher-than-sustainable growth


Answer: to assure that there is sufficient required cash

A venture's going-concern value is the:

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A venture's going-concern value is the:



a. present value of the expected future cash flows
b. net present value of the current and expected future cash flows
c. future value of the expected cash flows
d. net future value of the current and expected cash flows


Answer: present value of the expected future cash flows

When estimating the terminal value of a venture using an equity valuation method, a perpetuity growth equation is often applied that uses the capitalization rate for discounting purposes. This "cap" rate is measured as the:

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When estimating the terminal value of a venture using an equity valuation method, a perpetuity growth equation is often applied that uses the capitalization rate for discounting purposes. This "cap" rate is measured as the:



a. equity discount rate minus the perpetuity growth rate
b. equity discount rate plus the perpetuity growth rate
c. risk-free rate plus the perpetuity growth rate
d. risk-free rate minus the perpetuity growth rate


Answer: equity discount rate minus the perpetuity growth rate

Which one 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?

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Which one 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. maximum dividend method
b. pseudo dividend method
c. sustainable growth method
d. return on equity method


Answer: pseudo dividend method

Most discounted cash flow valuations involve using cash flows from an:

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Most discounted cash flow valuations involve using cash flows from an:



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


Answer: explicit forecast period and a terminal value

"Required cash" is?

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"Required cash" is?



a. the cash needed to pay interest expense
b. a valuation method for early stage ventures
c. cash needed to cover a venture's day-to-day operations
d. cash available to pay as a dividend


Answer: cash needed to cover a venture's day-to-day operations

The pseudo dividend method is

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The pseudo dividend method is



a. the cleanest for valuing assets, but creates problems valuing surplus cash
b. the cleanest for valuation purposes but its dividend-laden financial statements can dramatically understate the firm's cash position
c. the cleanest for cash planning, but creates problems valuing the venture by discounting the dividends
d. calculated by directly discounting the cash flow statement's projected dividend flow to investors, but ignores risks associated with periodic gluts of surplus cash


Answer: the cleanest for cash planning, but creates problems valuing the venture by discounting the dividends

The maximum dividend method is

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The maximum dividend method is



a. the cleanest for valuing assets, but creates problems valuing surplus cash
b. the cleanest for valuation purposes but its dividend-laden financial statements can dramatically understate the firm's cash position
c. the cleanest for cash planning, but creates problems valuing the venture by discounting the dividends
d. calculated by directly discounting the cash flow statement's projected dividend flow to investors, but ignores risks associated with periodic gluts of surplus cash


Answer: the cleanest for valuation purposes but its dividend-laden financial statements can dramatically understate the firm's cash position

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, current assets were $279,000, long-term assets of $195,000, surplus cash of $90,000, current liabilities of $62,000, and long-term assets of $78,000. What is your firm's change in net operating working capital?

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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, current assets were $279,000, long-term assets of $195,000, surplus cash of $90,000, 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. $244,000
e. $32,000


Answer: $22,000

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, 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?

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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, 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. $648,000
b. $900,000
c. $2,028,000
d. $166,000


Answer: $166,000

Equity valuation cash flow = Net income plus

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Equity valuation cash flow = Net income plus



a. Depreciation and amortization expense minus the change in net operating working capital plus capital expenditures plus net debt issues
b. Depreciation and amortization expense plus the change in net operating working capital plus minus capital expenditures plus net debt issues
c. Depreciation and amortization expense minus the change in net operating working capital plus capital expenditures minus net debt issues
d. Depreciation and amortization expense minus the change in net operating working capital plus minus capital expenditures plus net debt issues
e. Depreciation and amortization expense minus the change in net operating working capital plus capital expenditures plus net debt issues


Answer: Depreciation and amortization expense minus the change in net operating working capital plus minus capital expenditures plus net debt issues

The calculation of equity valuation cash flows nets the cash impact of all other balance sheet and income accounts to focus on the ______ account as the repository of any remaining cash flow.

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The calculation of equity valuation cash flows nets the cash impact of all other balance sheet and income accounts to focus on the ______ account as the repository of any remaining cash flow.



a. cash
b. debt
c. equity
d. non-interest-bearing liabilities
e. net income


Answer: equity

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:

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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
b. its earnings per share
c. its book-to-market ratio
d. its debt-to-value ratio


Answer: the reciprocal of its required return on equity

Which of the following are components of the "mean" venture valuation approach?

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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. all of the above are components


Answer: all of the above are components

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 $20.00 per shares; 100,000 shares outstanding; and net income of $50,000.

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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 $20.00 per shares; 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


Answer: $1.6 million

Determine the net income of a "comparable" firm based on the following information: value of target firm = $4,000,000; net income of target firm = $200,000; stock price of "comparable" firm = $30.00; and 300,000 shares of stock outstanding for the comparable firm.

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Determine the net income of a "comparable" firm based on the following information: value of target firm = $4,000,000; net income of target firm = $200,000; stock price of "comparable" firm = $30.00; and 300,000 shares of stock outstanding for the comparable firm.



a. $450,000
b. $500,000
c. $550,000
d. $600,000
e. $700,000


Answer: $450,000

Determine the market value of a "comparable" firm based on the following information: value of target firm = $4,000,000; net income of target firm = $200,000; and net income of "comparable" firm = $500,000.

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Determine the market value of a "comparable" firm based on the following information: value of target firm = $4,000,000; net income of target firm = $200,000; and net income of "comparable" firm = $500,000.



a. $4 million
b. $7.5 million
c. $10 million
d. $12.5 million
e. $15 million


Answer: $10 million

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 a 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.

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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 a 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. $5.00
b. $7.50
c. $10.00
d. $12.50
e. $15.00


Answer: $7.50

Estimate the value of a privately-held firm based on the following information: stock price of a comparable firm = $20.00; 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 = $3.00.

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Estimate the value of a privately-held firm based on the following information: stock price of a comparable firm = $20.00; 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 = $3.00.



a. $10.00
b. $20.00
c. $30.00
d. $40.00
e. $50.00


Answer: $30.00

A P/E multiple refers to:

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A P/E multiple refers to:


a. price/expectations multiple
b. price/earnings multiple
c. profit/EBIT multiple
d. profit/earnings multiple
e. price/EBITDA multiple


Answer: price/earnings multiple

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. What is the internal rate of return?

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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. What is the internal rate of return?



a. 13.9%
b. 14.7%
c. 16.2%
d. 17.2%
e. 19.2%


Answer: 17.2%

For early stage ventures, which of the following is a strong reason for having an equity component in employee compensation?

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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. as a way to motivate employees to strive for the same goal of high equity value
c. because any dividends received as part of the equity compensation reduces taxable income
d. both a and b
e. all of the above


Answer: both a and b

To obtain the percent ownership to be sold in order to expect to provide the venture investor's target return, one must consider the:

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To obtain the percent ownership to be sold in order to expect to provide the venture investor's target return, one must consider the:



a. cash investment today and the cash return at exit multiplied by the venture investor's target return, then divide today's cash investment by the venture's NPV
b. cash investment today and the cash return at exit discounted by the venture investor's target return, then divide today's cash investment by the venture's NPV
c. cash investment today and the cash return at exit multiplied by the venture investor's target return, then divide today's cash investment by the venture's NPV
d. cash investment today and the cash return at exit discounted by the venture investor's target return, then multiply today's cash investment by the venture's NPV



Answer: cash investment today and the cash return at exit discounted by the venture investor's target return, then divide today's cash investment by the venture's NPV

Which of the following is not one of the four likely outcomes of the venture firm's screening process?

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Which of the following is not one of the four likely outcomes of the venture firm's screening process?


a. seek the lead investor position

b. seek a non-lead investor position

c. close the capital fund

d. refer the venture to more appropriate financial market participants

e. issue a standard letter of rejection


Answer: close the capital fund

In a syndicate of venture investors, the investor who is responsible for governing the process of due diligence is:

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In a syndicate of venture investors, the investor who is responsible for governing the process of due diligence is:




a. the primary investor

b. the lead investor

c. a small group of secondary investors

d. the investor in charge of issuing SLORs for the syndicate

e. it is a democratic process that is shared by all investors in the group


Answer: the lead investor

Term sheets are usually drafted by:

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Term sheets are usually drafted by:




a. the mangers of the venture seeking VC funding
b. the VC fund seeking to fund the venture
c. management and founders
d. it is usually done by an third party, in order to
ensure the fair treatment of both parties


Answer: the VC fund seeking to fund the venture

If an investment management firm is known to be a "two and twenty shop", this implies that the firm:

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If an investment management firm is known to be a "two and twenty shop", this implies that the firm:


a. receives an annual 2% fee on invested capital, and a 20% carried interest
b. receives an annual 20% fee on invested capital, and a 2% carried interest
c. receives an annual 2% fee on gross operating profits, and a 20% carried interest
d. receives an annual 20% fee on gross operating profits, and a 2% carried interest


Answer: receives an annual 2% fee on invested capital, and a 20% carried interest

The term "carried interest" refers to:

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The term "carried interest" refers to:


a. interest not currently paid but which must be paid in the future by a professional venture capitalist

b. interest transported directly to a bank

c. interest owed on a loan in default

d. the portion of profits paid to the professional venture capitalist as incentive compensation


Answer: the portion of profits paid to the professional venture capitalist as incentive compensation

After determining the next fund's objectives and policies, the "professional venture investing cycle's" next step is:

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After determining the next fund's objectives and policies, the "professional venture investing cycle's" next step is:


a. solicit investments in new fund
b. organize the new fund
c. obtain commitments for a series of capital calls
d. conduct due diligence and actively invest
e. arrange harvest or liquidation


Answer: organize the new fund

After a new professional venture capital fund is organized, the fund managers:

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After a new professional venture capital fund is organized, the fund managers:



a. conduct due diligence and actively invest
b. solicit investments and obtain commitments
c. arrange harvest or liquidation
d. identify prospective venture investments and then solicit investments


Answer: solicit investments and obtain commitments

When screening prospective new ventures, venture capital firms must consider the nature of the proposed industry. Which of the following is not part of the screening of the proposed industry?

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When screening prospective new ventures, venture capital firms must consider the nature of the proposed industry. Which of the following is not part of the screening of the proposed industry?


a. market attractiveness
b. managerial references
c. potential size
d. technology
e. threat resistance


Answer: managerial references

When evaluating the prospects of a new venture, venture capital firms consider the characteristics of the entrepreneur and its team. Which of the following is not part of the review of the entrepreneur/team?

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When evaluating the prospects of a new venture, venture capital firms consider the characteristics of the entrepreneur and its team. Which of the following is not part of the review of the entrepreneur/team?


a. its background and experience
b. its managerial capabilities
c. management's stake in the firm
d. the VC firms' ability to cash out
e. the capability to sustain an effort


Answer: the VC firms' ability to cash out

When screening prospective new ventures, venture capital firms consider their own funds' requirements. Which of the following is not one of the venture firm's requirements relating to its own funds?

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When screening prospective new ventures, venture capital firms consider their own funds' requirements. Which of the following is not one of the venture firm's requirements relating to its own funds?


a. investor control
b. rate of return
c. size of investment
d. probable stock listing exchange for the mature venture
e. financial provisions for investors


Answer: probable stock listing exchange for the mature venture

As venture firms attract money from investors, it is placed in a fund. Important issues that must be put in place with the establishment of the fund include all of the following except:

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As venture firms attract money from investors, it is placed in a fund. Important issues that must be put in place with the establishment of the fund include all of the following except:


a. determine the general partners
b. establishing a fee structure
c. a profit sharing arrangement
d. establish its governance
e. the management team assigned to each borrower


Answer: the management team assigned to each borrower

Venture Capital firms tend to specialize in publicly identified niches because of the potential for value-added investing by venture capitalists. Which is not one of these niches?

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Venture Capital firms tend to specialize in publicly identified niches because of the potential for value-added investing by venture capitalists. Which is not one of these niches?



a. industry type
b. venture stage
c. size of investment
d. management style
e. geographic area


Answer: management style

The beginning of professional venture capitalists is considered to have begun with the establishment or formation of:

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The beginning of professional venture capitalists is considered to have begun with the establishment or formation of:


a. Small Business Administration
b. Small Business Investment Companies
c. American Research and Development organization
d. Professional Venture Capitalists organization


Answer: American Research and Development organization

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