Deck 15: Harvesting the Business Venture Investment

Question 1

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.

Answer 1

True

Question 2

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.

Answer 2

True

Question 3

The relative value method estimates a firm's value by examining how comparable firms are valued based on value-related multiples.

Answer 3

True

Question 4

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.

Question 5

Restructuring is the process of exiting the privately held business venture to unlock the owners' investment value.

Question 6

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.

Question 7

When harvesting a venture, the methodical distribution of assets directly to the owners is known as a systematic liquidation.

Question 8

Unicorns are low-expected-growth companies with valuations in excess of $1 trillion.

Question 9

Two discounted cash flow (DCF)methods are the enterprise method and the debt funds method.

Question 10

One method of harvesting a successful venture is through systematic distribution of assets directly to lenders.

Question 11

In a typical venture's life cycle, the rapid-growth stage involves managing ongoing operations, maintaining and adding value, and obtaining seasoned financing.

Question 12

Valuation methods that estimate a firm's worth using value-related multiples of comparable firms are sometimes known as relative value methods.

Question 13

In a typical venture's life cycle, the examining of exit opportunities often occurs during the rapid-growth stage.

Question 14

When an industry is in decline, a systematic liquidation is typically the most attractive harvest strategy.

Question 15

In determining a harvest value, nonmonetary items such as culture, managerial succession, and employee retention are not factored in.

Question 16

One method of harvesting a venture is through systematic distribution of assets directly to the owners.

Question 17

When harvesting a venture, the two-step public equity registration and sale is known as an outright sale.

Question 18

The process of exiting the privately held business venture to unlock the owners' investment value is known as harvesting.

Question 19

When harvesting a venture, the outright purchase of the going concern by managers, employees, or external buyers is known as going public.

Question 20

An initial public offering (IPO)is the only method used by entrepreneurs when exiting a venture.

Question 21

An outright sale occurs when an entrepreneur sells the venture to family members, managers, employees, or outside buyers.

Question 22

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.

Question 23

Most companies choose best efforts agreements in order to minimize the inherent risks of going public.

Question 24

A direct listing is a private company's initial public offering sold exclusively to institutional investors.

Question 25

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.

Question 26

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

Question 27

Ventures that are high-expected-growth companies with valuations in excess of $1 billion are called:

A)giraffes
B)unicorns
C)elephants
D)giants

Question 28

The sale of used shares of common stock is a secondary market offering.

Question 29

A leveraged buyout (LBO)takes place when the purchase price of a firm is financed largely with debt financial capital.

Question 30

A lockup provision prohibits insiders from selling their existing shares for a specified period of time.

Question 31

IPO underpricing results in a direct loss to the venture's owners.

Question 32

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.

Question 33

The sale of new shares of common stock is a secondary offering.

Question 34

While not a direct loss to a venture, underpricing can represent a significant opportunity cost to the venture's owners.

Question 35

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

Question 36

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

Question 37

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

Question 38

A management buyout (MBO)is a special type of leveraged buyout (LBO).

Question 39

A leveraged buyout (LBO)is a special type of management buyout (MBO).

Question 40

ESOP stands for "employee stock ownership plan."

Question 41

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

Question 42

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

Question 43

IPO stand for:

A)"investment pricing organization"
B)"initial public offering"
C)"institutional pricing overhead"
D)"immediate pricing opportunity"

Question 44

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

Question 45

The sale of new securities is known as a(n):

A)primary offering
B)secondary offering
C)initial public offering
D)shelf offering

Question 46

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

Question 47

The sale of used shares is known as a(n):

A)primary offering
B)secondary offering
C)initial public offering
D)shelf offering

Question 48

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

Question 49

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

Question 50

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

Question 51

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
C)best efforts agreement
D)lockup provision

Question 52

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

Question 53

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

Question 54

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

Question 55

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

Question 56

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

Question 57

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
D)a venture with a high debt ratio

Question 58

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

Question 59

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

Question 60

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

Question 61

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

Question 62

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

Question 63

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%

Question 64

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

Question 65

Which of the following is not a type of trading order?

A)market order
B)limit order
C)stop order
D)repurchase order

Question 66

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%

Question 67

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%

Question 68

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

Question 69

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

Question 70

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:

A)put order
B)market order
C)limit order
D)stop order

Question 71

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

Question 72

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%

Question 73

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

Question 74

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