Deck 10: Valuing Early Stage Ventures

Question 1

The explicit forecast period is the two- to ten-year period in which the venture's financial statements are explicitly forecast.

Answer 1

True

Question 2

Finding the present value of the horizon value produces the venture's reversion value.

Answer 2

True

Question 3

The capitalization (cap)rate is the spread between the discount rate and the growth rate of cash flow in the terminal value period.

Answer 3

True

Question 4

The stepping-stone year is the first year before the explicit forecast period.

Question 5

A post-money valuation differs from a pre-money valuation by the cost of financial capital.

Question 6

A venture's reversion value is the present value of ongoing expenses.

Question 7

While accounting for the past is all well and good, an investor seeks to quantify and value the future.

Question 8

The wider the capitalization (cap)rate (i.e., the discount rate minus the growth rate in the terminal period), the higher the terminal value.

Question 9

Pre-money valuation is the present value of a venture prior to a new money investment.

Question 10

Equity valuation cash flow is defined as net income before taxes available to venture equity investors.

Question 11

The reversion value is the future value of the terminal value.

Question 12

The present value of a venture is the value today of all future cash flows discounted at the investor's required rate of return.

Question 13

Sweat equity is an individual's work-related, nonfinancially compensated contribution to the enhancement of a venture's value.

Question 14

The terminal value is the value of the venture at the beginning of the explicit forecast period.

Question 15

As used in this textbook, the terminal value is the same as the horizon value.

Question 16

The valuation approach involving discounting present value cash flows for risk and delay is called discounted cash flow (DCF).

Question 17

The stepping-stone year is the second year after the explicit forecast period when valuing a venture.

Question 18

The terminal or horizon value is the value of a venture at the end of its explicit forecast period.

Question 19

The reversion value of a venture is the present value of the venture's terminal value.

Question 20

Post-money valuation is the pre-money valuation of a venture plus all monies previously contributed by the venture's founders.

Question 21

The valuation method involving the projection of maximum dividends involves explicitly forecasted dividends to provide surplus cash which is positive.

Question 22

The valuation method involving the extraction of pseudo dividends treats changes in surplus cash as possible free cash flows to equity.

Question 23

Required cash is the amount of cash required to operate a venture through its day-to-day business.

Question 24

Applying the maximum dividend and pseudo dividend approaches to valuation results in different valuation estimates.

Question 25

A pseudo dividend involves excess cash that does not need to be invested in a venture's assets or operations, and may be invested elsewhere for a period of time.

Question 26

An individual's work-related, nonfinancially compensated contribution to the enhancement of a venture's value is referred to as:

A)money equity
B)sweat equity
C)goodwill
D)intangible work

Question 27

The value today of all future cash flows discounted to the present at the investor's required rate of return is called the:

A)horizon value
B)present value
C)terminal value
D)reversion value

Question 28

Surplus cash is the amount of cash required to pay scheduled dividends for the next quarter.

Question 29

Net operating working capital is current assets other than surplus cash less interest-bearing long-term liabilities.

Question 30

What is the present value of the venture's expected future cash flows called?

A)going-concern value
B)net present value
C)terminal value
D)reversion value

Question 31

Most discounted cash flow valuations involve using cash flows from a(n):

A)historical period, an explicit forecast period, and a terminal value
B)historical period and a terminal value
C)historical period and an explicit forecast period
D)explicit forecast period and a terminal value

Question 32

The valuation method calculating pseudo dividends involves zero explicitly forecasted dividends and an adjustment to working capital to strip surplus cash.

Question 33

The value of the venture at the end of the explicit forecast period is called the:

A)going-concern value
B)net present value
C)terminal value
D)reversion value

Question 34

Surplus cash is the cash remaining after required cash, all operating expenses, reinvestments, and dividend payouts are made.

Question 35

When projecting maximum dividends, changes in surplus cash will be paid out as dividends.

Question 36

The pseudo dividend approach to valuation treats equity infusions and withdrawals in a "just-in-time" fashion.

Question 37

A venture's going-concern value is the:

A)net present value of the current and expected future cash flows
B)future value of the expected cash flows
C)net future value of the current and expected cash flows
D)present value of the expected future cash flows

Question 38

Surplus cash is the cash remaining after required cash, all operating expenses, and reinvestments are made.

Question 39

The pseudo dividend approach to valuation treats surplus cash either as stripped out while not in use or as employed outside the venture and stored in a zero NPV investment.

Question 40

The equity valuation method is the process of projecting and then discounting the relevant cash flows available to providers of debt capital.

Question 41

To calculate a terminal value, one divides the next period's cash flow by the spread between the __________ discount rate and __________ growth rate.

A)variable; constant
B)constant; variable
C)constant; constant
D)variable; variable

Question 42

Which of the following equity valuation methods records surplus cash on the balance sheet but assumes that the surplus cash is paid out over time for valuation purposes?

A)the projection of maximum dividends
B)the calibration of pseudo dividends
C)sustainable growth dividend retention
D)return on equity method

Question 43

The purpose of the stepping-stone year is to:

A)assure that there is sufficient required cash
B)assure that future dividends are constant
C)assure that investment flows are consistent with terminal growth rates
D)allow for a final year of higher-than-sustainable growth

Question 44

Which of the following is not a component of the equity valuation cash flow calculation?

A)net income
B)depreciation and amortization expense
C)change in net operating working capital (without surplus cash)
D)net equity repurchases

Question 45

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

A)the size of the capitalization rate
B)the amount of money injected by new investors
C)the terminal value
D)the amount of money previously contributed by founders

Question 46

Estimate a venture's terminal value based on the following information: current year's net sales = $500,000; next year's expected cash flow = $16,000; constant future growth rate = 10%; and venture investors' required rate of return = 20%.

A)$285,714
B)$200,000
C)$150,000
D)$160,000

Question 47

The equity valuation method involving zero explicitly forecasted dividends and an adjustment to working capital to strip surplus cash involves:

A)maximum dividends
B)pseudo dividends
C)sustainable growth dividend retention
D)actual dividend payments

Question 48

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

A)cash
B)net income
C)equity
D)non-interest-bearing liabilities

Question 49

Required cash is:

A)the cash needed to pay interest expense
B)a valuation method for early-stage ventures
C)the cash needed to cover a venture's day-to-day operations
D)the cash available to pay as a dividend

Question 50

The valuation approach involving pseudo dividends suggests:

A)actual dividends expected to be paid
B)dividends that reflect cash not involved in venture operations
C)projecting dividends that exhaust any surplus cash
D)using a net operating working capital adjustment to foster valuation

Question 51

Which of the following is not a component of the equity valuation cash flow?

A)net operating profit after taxes
B)change in net operating working capital (without surplus cash)
C)capital expenditures
D)net debt issues

Question 52

The equity valuation method involving explicitly forecasted dividends to provide surplus cash of zero involves:

A)maximum dividends
B)pseudo dividends
C)sustainable growth dividend retention
D)actual dividend payments

Question 53

The present value of the terminal value is called the:

A)going-concern value
B)horizon value
C)terminal value
D)reversion value

Question 54

The valuation approach involving maximum dividends suggests:

A)actual dividends expected to be paid
B)dividends that reflect cash not involved in venture operations
C)projecting dividends that exhaust any surplus cash
D)using a net operating working capital adjustment to foster valuation

Question 55

"Just-in-time" capital injections by equity investors is a reference to:

A)sustainable growth
B)the present value of the terminal value
C)equity investors providing money only when needed
D)dividend payout

Question 56

When estimating the terminal value of a cash flow perpetuity, which of the following is not a component?

A)the next period's cash flow
B)a constant discount rate
C)a constant growth rate
D)the payback period

Question 57

What is the present value of the terminal value called?

A)horizon value
B)net present value
C)reversion value
D)entity value

Question 58

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

A)equity discount; minus
B)equity discount; plus
C)risk-free; plus
D)risk-free; minus

Question 59

What is the present value of a set of future flows plus the current undiscounted flow called?

A)reversion value
B)horizon value
C)terminal value
D)net present value

Question 60

In equation form, the equity valuation cash flow is defined as:

A)Net Income + Depreciation and Amortization Expense - Change in Net Operating Working Capital + Capital Expenditures + Net Debt Issues
B)Net Income + Depreciation and Amortization Expense + Change in Net Operating Working Capital + Capital Expenditures + Net Debt Issues
C)Net Income + Depreciation and Amortization Expense - Change in Net Operating Working Capital + Capital Expenditures - Net Debt Issues
D)Net Income + Depreciation and Amortization Expense - Change in Net Operating Working Capital - Capital Expenditures + Net Debt Issues

Question 61

Estimate a venture's constant growth rate (g)based on the following information: terminal value = $400,000; current year's net income = $20,000; next year's expected cash flow = $25,000; and required rate of return = 20%.

A)4.00%
B)13.25%
C)7.75%
D)15.50%

Question 62

In a wildly successful first year in business that started and ended with no required cash, your firm has operating income of $989,000, net income of $637,000, current assets of $900,000, and current liabilities of $659,000. Net capital expenditures were $690,000, and depreciation was $460,000. The firm has never financed itself with debt. What is your equity valuation cash flow?

A)$48,000
B)$166,000
C)$218,000
D)$466,000

Question 63

Estimate a venture's cash flow expected next year based on the following information: current year's net sales = $400,000; terminal value = $500,000; constant future growth rate = 10%; and venture investors' required rate of return = 20%.

A)$80,000
B)$40,000
C)$50,000
D)$60,000

Question 64

Your firm has been in business for two years. In its first year, the firm ended with $227,000 of current assets, long-term assets of $143,000, $70,000 in surplus cash, current liabilities of $52,000, and long-term assets of $68,000. At the end of the second year, the firm had current assets of $279,000, long-term assets of $195,000, surplus cash of $90,000, current liabilities of $62,000, and long-term assets of $78,000. What is your firm's change in net operating working capital?

A)$22,000
B)$62,000
C)$42,000
D)$32,000

Question 65

Estimate a venture's terminal value based on the following information: current year's net income = $20,000; next year's expected cash flow = $26,000; constant future growth rate = 7%; and venture investors' required rate of return = 20%.

A)$356,846
B)$285,714
C)$200,000
D)$150,000

Question 66

Estimate a venture's equity valuation cash flow based on the following information: net income = $6,372; depreciation = $4,600; change in net operating working capital = $2,415; capital expenditures = $6,900; and new debt issues = $1,000.

A)$6,787
B)$5,487
C)$4,487
D)$3,787

Question 67

Estimate a venture's required rate of return based on the following information: terminal value = $400,000; current year's net income = $20,000; next year's expected cash flow = $25,000; and constant growth rate = 7%.

A)7.50%
B)9.00%
C)10.75%
D)13.25%