Deck 15: Harvesting the Business Venture Investment

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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 5

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

Question 6

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

Question 7

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

Question 8

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.

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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.

Question 17

Ultimately 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 18

The two discounted cash flow DCF) methods covered in this text are the enterprise method and the debt funds method.

Question 19

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 20

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 21

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

Question 22

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 23

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

Question 24

The distribution of the venture's cash flows directly to the owners is a venture harvesting process known as:

A) systematic liquidation
B) outright sale
C) chapter 11 bankruptcy
D) going public

Question 25

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
E) illiquidity premium

Question 26

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 27

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

Question 28

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

Question 29

ESOP stands for "employee stock ownership plan."

Question 30

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

Question 31

Which of the following is not an advantage of a systematic liquidation?

A) maintaining control throughout the harvest period
B) 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 32

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

Question 33

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

Question 34

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

Question 35

A venture can be harvested in which of the following ways?

A). systematic liquidation, outright sale, going public
B) outright sale, going public, acquisition
C) going public, acquisition
D) acquisition, systematic liquidation

Question 36

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

Question 37

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 38

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

Question 39

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

Question 40

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 41

An agreement with an investment bank that involves the purchase and distribution of new securities is known as:

A) IPO underpricing
B) due diligence
C) firm commitment
D) best efforts
E) underwriting spread

Question 42

In an outright sale of a venture, the venture can be sold to:

A) family members
B) managers
C) employees
D) outside external) buyers
E) all of the above

Question 43

Shares registered with the Securities and Exchange Commission and state securities regulators and sold to the public are known as:

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

Question 44

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%
E) 32.5%

Question 45

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; venture investors holding period = 3 years.

A) 100%
B) 400%
C) 600%
D) 900%

Question 46

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) firm commitment
D) best efforts
E) underwriting spread

Question 47

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 48

The arrangement where an underwriter has the option of selling additional shares when the issue is heavily oversubscribed is known as

A) green shoe
B) red herring
C) best efforts
D) lockup

Question 49

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%
B) 20.2%
C) 25%
D) 28.8%
E) 32%

Question 50

The investment banks 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) firm commitment
D) best efforts
E) underwriting spread

Question 51

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) 1 time
B) 4 times
C) 8 times
D) 10 times
E) 12 times

Question 52

The sale of new securities is known as:

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

Question 53

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 54

Based on the following information, estimate the percentage appreciation on stock bought by the venture investors: founders' purchase price $.50; venture investors' purchase price $2.00; current stock price $10.00; founders holding period = 5 years; venture investors holding period = 3 years.

A) 100%
B) 400%
C) 600%
D) 800%

Question 55

The NYSE participates in:

A) the sale of new securities to private investors
B) primary offerings
C) secondary offerings
D) b and c

Question 56

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) $1,000,000
B) $2,490,000
C) $4,980,000
D) $7,470,000
E) $9,950,000

Question 57

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) $1,000,000
B) $1,440,000
C) $2,880,000
D) $5,000,000
E) $5,760,000

Question 58

In the investment banking process, which of the following is a duty of the investment bank?

A) to be the targeted investors for a firm's securities
B) to provide banking services such as checking accounts to firms
C) to find buyers for a firm's securities
D) both a and b
E) all of the above

Question 59

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) firm commitment
D) best efforts
E) underwriting spread

Question 60

The sale of used shares is known as:

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

Question 61

An initial public offering IPO) involves:

A) sale of new securities to private investors
B) sale of used securities to the public
C) a venture's first offering of SEC-registered securities to the public
D) all of the above
E) none of the above

Question 62

The letters IPO stand for:

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

Question 63

The negotiated period around an equity securities offering during which insiders are prohibited from selling their existing shares is called:

A) a seasoned offering
B) an unseasoned offering
C) underpricing
D) an underwriting spread
E) a lockup provision

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) stock order
E) 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) none of the above