Deck 10: Venture Capital Valuation Methods

Question 1

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

Answer 1

True

Question 2

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.

Answer 2

True

Question 3

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.

Answer 3

True

Question 4

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 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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 17

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 18

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

Question 19

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

Question 20

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 21

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 22

A potential investor is seeking to invest $500,000 in a venture,which currently has 1,000,000 million shares held by its founders,and is targeting a 50% return five years from now.The venture is expected to produce half a million dollars in income per year at year5.It is known that a similar venture recently produced $1,000,000 in income and sold shares to the public for $10,000,000.
What is the pre-money valuation?

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

Question 23

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

Question 24

A potential investor is seeking to invest $500,000 in a venture,which currently has 1,000,000 million shares held by its founders,and is targeting a 50% return five years from now.The venture is expected to produce half a million dollars in income per year at year5.It is known that a similar venture recently produced $1,000,000 in income and sold shares to the public for $10,000,000.
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 25

A potential investor is seeking to invest $500,000 in a venture,which currently has 1,000,000 million shares held by its founders,and is targeting a 50% return five years from now.The venture is expected to produce half a million dollars in income per year at year5.It is known that a similar venture recently produced $1,000,000 in income and sold shares to the public for $10,000,000.
What is the percent ownership of our venture that must be sold in order to provide the venture investor's target return?

A)33.33%
B)75.94%
C)12.76%
D)15.00%

Question 26

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 ofits short-term liabilities
D)both a and b
E)all of the above

Question 27

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

Question 28

A potential investor is seeking to invest $500,000 in a venture,which currently has 1,000,000 million shares held by its founders,and is targeting a 50% return five years from now.The venture is expected to produce half a million dollars in income per year at year5.It is known that a similar venture recently produced $1,000,000 in income and sold shares to the public for $10,000,000.
What is the issue price per share?

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

Question 29

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 30

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

Question 31

A potential investor is seeking to invest $500,000 in a venture,which currently has 1,000,000 million shares held by its founders,and is targeting a 50% return five years from now.The venture is expected to produce half a million dollars in income per year at year5.It is known that a similar venture recently produced $1,000,000 in income and sold shares to the public for $10,000,000.
What is the number of shares that must be issued to the new investor in order for the investor to earn his target return?

A)3,156,276
B)1,578,138
C)4,156,276
D)2,578,138

Question 32

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

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

Question 33

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

Question 34

A potential investor is seeking to invest $500,000 in a venture,which currently has 1,000,000 million shares held by its founders,and is targeting a 50% return five years from now.The venture is expected to produce half a million dollars in income per year at year5.It is known that a similar venture recently produced $1,000,000 in income and sold shares to the public for $10,000,000.
What is the post-money valuation?

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

Question 35

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 36

The DDA and VCSC methods give the same valuation.

Question 37

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

Question 38

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

Question 39

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 40

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,thendivide 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,thendivide 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,thenmultiply today's cash investment by the venture's NPV

Question 41

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 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

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 44

During the exit period,which of the following will have last crack at the venture's wealth?

A)banks giving loans to the venture
B)convertible debt holders of the venture
C)initial equity investors of the venture
D)participating preferred equity holders

Question 45

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 46

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 47

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 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

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 50

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 51

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 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

Question 53

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 54

Which of the following is not a variation of the venture capital valuation method?

A)venture capital method
B)expected present value
C)utopian discount process
D)none of the above