Deck 11: 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

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

Multiplying a venture's earnings by a price-earnings ratio represents a form of direct comparison valuation.

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

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

Question 9

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

Question 10

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

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

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 13

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 14

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

Question 15

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 16

For most early-stage ventures, there are no strong motives for having an equity component in employee compensation.

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

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

Question 19

The market value of a venture's equity is equal to the market value of the venture's total assets minus its total liabilities.

Question 20

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

Question 21

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 22

The return to venture investors directly depends on the:

A)venture's ability to generate cash flows
B)ability to convince a debtholder to buy the venture
C)amount of the venture's short-term liabilities
D)sum of past retained earnings

Question 23

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 24

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 25

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 26

Which of the following does a P/E multiple refer to?

A)price/expectations multiple
B)price/earnings multiple
C)profit/EBIT multiple
D)profit/earnings multiple

Question 27

To obtain the percent ownership to be sold in order to expect to provide the venture investor's target return, one must consider the cash investment today and the cash return at exit __________ by the venture investor's target return, then __________ today's cash investment by the venture's NPV.

A)multiplied; divide
B)discounted; divide
C)discounted; multiply

Question 28

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 29

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

Question 30

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

Question 31

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

Question 32

The DDA and VCSC methods give the same valuation.]

Question 33

The utopian venture valuation approach uses probability-weighted outcomes that are summed to get an expected present value for the venture.

Question 34

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

Question 35

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 36

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 debtholders of the venture
C)initial equity investors of the venture
D)participating preferred equity holders

Question 37

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

Question 38

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

Question 39

The venture capital shortcut (VCSC) method is a post-money version of the delayed dividend approximation (DDA).

Question 40

Which of the following financing rounds does not dilute the ownership of founders?

A)first round
B)second round
C)incentive ownership round
D)founder's round

Question 41

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 42

A potential investor is willing to provide $500,000 in first-round financing with the expectation of a 50% annual compound rate of return over the next five years. Founders currently hold 1,000,000 million shares of stock. The venture is expected to produce $500,000 in net income in year 5. A similar firm with annual net income of $1,000,000 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 43

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, respectively. What is the internal rate of return?

A)13.9%
B)14.7%
C)16.2%
D)17.2%

Question 44

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 45

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)it is a way to motivate employees to strive for a goal of low equity value
C)any dividends received as part of the equity compensation reduces taxable income
D)it reduces the percentage of ownership held by debtholders

Question 46

A potential investor is willing to provide $500,000 in first-round financing with the expectation of a 50% annual compound rate of return over the next five years. Founders currently hold 1,000,000 million shares of stock. The venture is expected to produce $500,000 in net income in year 5. A similar firm with annual net income of $1,000,000 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 47

A potential investor is willing to provide $500,000 in first-round financing with the expectation of a 50% annual compound rate of return over the next five years. Founders currently hold 1,000,000 million shares of stock. The venture is expected to produce $500,000 in net income in year 5. A similar firm with annual net income of $1,000,000 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 48

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 49

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)actual dividend payments

Question 50

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 per share, 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 51

Determine the net income of a comparable firm based on the following information: value of the target firm = $4,000,000; net income of the target firm = $200,000; stock price of the comparable firm = $30; and number of shares of stock outstanding for the comparable firm = 300,000.

A)$450,000
B)$500,000
C)$550,000
D)$600,000

Question 52

A potential investor is willing to provide $500,000 in first-round financing with the expectation of a 50% annual compound rate of return over the next five years. Founders currently hold 1,000,000 million shares of stock. The venture is expected to produce $500,000 in net income in year 5. A similar firm with annual net income of $1,000,000 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 53

A potential investor is willing to provide $500,000 in first-round financing with the expectation of a 50% annual compound rate of return over the next five years. Founders currently hold 1,000,000 million shares of stock. The venture is expected to produce $500,000 in net income in year 5. A similar firm with annual net income of $1,000,000 sold shares to the public for $10,000,000. What is the value of the venture at the end of year 5 using direct capitalization?

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

Question 54

A potential investor is willing to provide $500,000 in first-round financing with the expectation of a 50% annual compound rate of return over the next five years. Founders currently hold 1,000,000 million shares of stock. The venture is expected to produce $500,000 in net income in year 5. A similar firm with annual net income of $1,000,000 sold shares to the public for $10,000,000. What is the percent ownership of the 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 55

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

A)black-hole scenarios
B)living-dead scenarios
C)black-hole scenarios and living-dead scenarios
D)venture utopia scenarios

Question 56

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 the 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)$7.50
B)$10.00
C)$12.50
D)$15.00

Question 57

Estimate the value of a privately held firm based on the following information: stock price of a comparable firm = $20; 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.

A)$10
B)$20
C)$30
D)$40

Question 58

Which of the following are components of the mean venture valuation approach?

A)th e present value of each outcome is calculated
B)each outcome's present value is multiplied by the probability that the outcome will occur
C)the probability-weighted outcomes are summed to get an expected present value for the venture
D)the future value of each outcome is calculated

Question 59

Determine the market value of a comparable firm based on the following information: value of the target firm = $4,000,000; net income of the target firm = $200,000; and net income of the comparable firm = $500,000.

A)$15 million
B)$7.5 million
C)$10 million
D)$12.5 million