Deck 11: Venture Capital Valuation Methods

Question 1

The capitalization rate is the sum of the discount rate and the growth rate of the cash flow in the terminal value period.

Answer 1

False

Question 2

The venture capital valuation method estimates the venture's value by projecting both intermediate and terminal/exit flows to investors.

Answer 2

False

Question 3

Staged financing is financing provided in sequences of rounds rather than all at one time.

Answer 3

True

Question 4

The internal rate of return IRR) is the compound rate of return that equates the present value of the cash inflows received with the initial investment.

Question 5

Failure to account for any additional rounds of financing and its accompanying dilution in order to meet projected earnings will result in the investor's not receiving an adequate number of shares to ensure the required percent ownership at the time of exit.

Question 6

If a venture issues debt prior to the exit period, the initial equity investors will still receive first claims on the venture's net worth at exit time.

Question 7

The discount rate applied in an Expected PV approach should be the same rate across scenarios.

Question 8

The discount rate that one applies in a multiple scenario valuation will usually be lower than the discount rate that would be applied to the business plan cash flows.

Question 9

The basic venture capital method estimates a venture's value using only terminal/exit flows to founders.

Question 10

Almost without exception, professional venture investors demand that some equity or deferred equity compensation be structured into any valuation.

Question 11

Venture investors returns depend on the venture's ability to generate cash flows or to find an acquirer for the venture.

Question 12

The utopia discount process allows the venture investors to value their investment using only the business plan's explicit forecasts, discounting it at a bank loan interest factor.

Question 13

A direct application of the earnings-per-share ratio to venture earnings is known as the direct comparison valuation method.

Question 14

The value of the venture's equity is equal to the value the financing contributed in the first venture capital round.

Question 15

Post-money valuation of a venture is the pre-money valuation plus money injected by new investors.

Question 16

The internal rate of return is the simple non-compounded) interest rate that equates the present value of the cash inflows received with the initial investment.

Question 17

In staged financing, the expected effect of future dilution is borne by both founders and the investors currently seeking to invest.

Question 18

The basic venture capital method estimates a venture's value using only terminal/exit flows to all the venture's owners.

Question 19

All of the scenarios in a multiple scenario analysis must have exit cash flows in the same year.

Question 20

The venture capital valuation method which capitalizes earnings using a cap rate implied by a comparable ratio is known as direct capitalization.

Question 21

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

Question 22

The DDA and VCSC methods give the same valuation.

Question 23

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

A) venture's ability to generate cash flows
B) ability to convince an acquirer to buy the firm
C) the amount of its short-term liabilities
D) both a and b
E) all of the above

Question 24

What is the post-money valuation?

A) $658,354
B) $499,954
C) $408,377
D) $249,977

Question 25

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

Question 26

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:

Question 27

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

Question 28

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

A) $500,000
B) $5,000,000
C) $1,000,000
D) $100,000

Question 29

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

Question 30

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

A) pre-money valuation
B) post money valuation
C) staged financing d . the capitalization rate

Question 31

What is the pre-money valuation?

A) $120,300
B) $316,800
C) $158,400
D) $193,900

Question 32

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

Question 33

What is the issue price per share?

A) $0.1939
B) $0.1203
C) $0.3168
D) $0.1584

Question 34

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 discounted by the venture investor's target return, then multiply today's cash investment by the venture's NPV

Question 35

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.

Question 36

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

A) pre-money valuation
B) post money valuation
C) staged financing
D) the capitalization rate

Question 37

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

Question 38

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

Question 39

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.

Question 40

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

A) pre-money valuation
B) post money valuation
C) staged financing
D) the capitalization rate

Question 41

For the typical venture investing project, the valuation will be highest under:

A) DDA
B) PDM and MDM
C) VCSC
D) initial book value of equity

Question 42

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

Question 43

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

Question 44

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

Question 45

The utopian approach to valuation ignores which of the following venture scenarios:

A) black hole scenarios
B) living dead scenarios
C) both a and b
D) neither a or b

Question 46

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

Question 47

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

Question 48

The two "just-in-time" capital methods are:

A) DDA and VCSC
B) DDA and PDM
C) VSCS and MDM
D) MDM and PDM

Question 49

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%

Question 50

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

Question 51

Which of the following financing rounds dilutes the ownership founders?

A) first-round
B) second-round
C) incentive ownership round
D) a and b
E) a, b, and c

Question 52

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