Question 1

The return on book equity equals the sustainable growth rate when all earnings are paid out in the form of dividends.

Accepted Answer

The return on book equity equals the sustainable growth rate when all earnings are retained and reinvested in the business, not when they are paid out in dividends.

Question 2

The DDA and VCSC methods give the same valuation.

Accepted Answer

The DDA (Dividend Discount Model) and VCSC (Venture Capital Method) methods are both based on estimating the present value of future cash flows. As long as the inputs used for both methods are the same, they should give the same valuation result. Therefore, the statement is true.

Question 3

The return to venture investors directly depends on which of the following?

Accepted Answer

The return to venture investors depends on the venture's ability to generate cash flows and the ability to convince an acquirer to buy the firm, as these factors determine the potential for profit and exit opportunities.

Question 4

What is the post-money valuation?

Accepted Answer

The post-money valuation is calculated by adding the amount of new equity investment to the pre-money valuation. The correct choice is based on the context or data provided, which is not available here, but assuming choice A is correct based on the options given.

Question 5

A price-earnings ratio is related to the level and growth of earnings.

Accepted Answer

A price-earnings ratio (P/E ratio) is calculated by dividing the price of a stock by its earnings per share (EPS). Therefore, it is related to the level and growth of earnings. The higher the P/E ratio, the more investors are willing to pay for each dollar of earnings, indicating higher growth potential. Conversely, a lower P/E ratio may indicate lower growth potential or undervaluation of the stock.

Question 6

The utopian venture valuation approach uses probability-weighted outcomes that are summed to get an expected present value for the venture.Note: The following TF questions relate to Learning Supplements 11A and 11B:

Accepted Answer

The answer of The utopian venture valuation approach uses probability-weighted...

Question 7

The alternative to a "utopian" venture valuation approach is a "mean" venture valuation approach which considers that two or more outcomes could occur.

Accepted Answer

The statement is true. The mean venture valuation approach considers multiple potential outcomes, rather than assuming a single, idealistic outcome.

Question 8

What is the value of the venture in year five using direct capitalization?

Accepted Answer

Direct capitalization involves dividing the net operating income (NOI) by the capitalization rate to determine the value of a property. The value of $5,000,000 suggests a significant NOI and a reasonable cap rate, making it a plausible choice for a venture's value in year five.

Question 9

The VSCS is like a post-money version of the DDA.

Accepted Answer

The VSCS is a post-money valuation, while the DDA is a pre-money valuation. This means that the VSCS takes into account the value of the company's outstanding shares, while the DDA does not.

Question 10

The value of the existing venture plus the proceeds from the potential new equity issue is known as?

Accepted Answer

Post-money valuation is the value of a company after it has raised new equity financing. It is calculated by adding the proceeds from the new equity issue to the value of the existing venture.

Question 11

What is the pre-money valuation?

Accepted Answer

Pre-money valuation is the value of a company before it receives external funding or the latest round of investment. The correct choice is based on the context or calculation provided, which is not included here, but typically involves subtracting the investment amount from the post-money valuation.

Question 12

The Venture Capital ShortCut VCSC) method is a post-money version of the Delayed Dividend Approximation DDA).

Accepted Answer

The Venture Capital Shortcut (VCS) method is a post-money version of the Delayed Dividend Approximation (DDA) method, which means that it takes into account the dilution that occurs when new investors invest in a company.

Question 13

What is the issue price per share?

Accepted Answer

The answer of What is the issue price per share?
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Question 14

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

Accepted Answer

The correct approach is to discount the cash return at exit by the venture investor's target return and then divide today's cash investment by the venture's NPV to determine the percent ownership needed to meet the target return.

Question 15

For the typical business plan having current and early cash outflows and later-stage cash inflows, the VCSC and DDA methods will typically give lower valuations than the MDM and PDM.

Accepted Answer

The VCSC and DDA methods typically give lower valuations because they discount future cash flows more heavily, while the MDM and PDM take a more optimistic view of future cash inflows.

Question 16

Financing provided in sequences of rounds rather than all at one time isknown as?

Accepted Answer

Staged financing refers to providing funding in multiple rounds rather than all at once. Pre-money valuation is the valuation of a company prior to receiving funding, while post-money valuation is the valuation of a company after receiving funding. The capitalization rate is a measure of a company's profitability. Therefore, staged financing is the answer that best fits the given definition.

Question 17

The expected present value method incorporates the present values of different scenarios, as well as their probabilities, into the valuation process.

Accepted Answer

The expected present value method does incorporate the present values of different scenarios and their probabilities into the valuation process.

Question 18

The VSCS and DDA methods are "just-in-time" capital methods which do not assess capital charges for idle cash.

Accepted Answer

The VSCS (Variable Standard Cost System) and DDA (Direct Dollar Allocation) methods are related to cost accounting and allocation, not specifically to "just-in-time" capital methods or the assessment of capital charges for idle cash. These methods are used for different purposes, such as product costing or expense allocation, rather than managing or assessing capital in the context described.

Question 19

For the typical business plan having current and early cash outflows and later-stage cash inflows, the VSCS will give a higher valuation than the DDA.

Accepted Answer

The DCF (Discounted Cash Flow) method typically gives a higher valuation than the VC method (Venture Capital Method) for early-stage companies because DCF considers the long-term potential cash inflows, while the VC method focuses more on near-term risks and the need for high returns on investment.

Question 20

The value of the existing venture without the proceeds from the potential new equity issue is known as?

Accepted Answer

Pre-money valuation refers to the value of the existing venture before any new equity or funding is raised. It does not take into account the potential proceeds from the new equity issue. Post-money valuation, on the other hand, includes the value of the existing venture as well as the proceeds from the new equity issue. Staged financing refers to a process where a venture receives funding in stages, with each stage based on specific milestones or achievements. The capitalization rate refers to the rate at which a company's future expected earnings are discounted to arrive at a present value.

Quiz 11: Venture Capital Valuation Methods