Question 1

The concept of an enterprise value is that it is the combined value of all of venture's financing, typically equity plus all of the debt.

Accepted Answer

Enterprise value includes both equity and debt financing, as it represents the total value of a company's operations.

Question 2

Entity valuation allows us to answer the question of how much debt a venture needs to issue to achieve a target capital structure D/V).

Accepted Answer

Entity valuation helps us determine the total value of a business or venture, which includes both equity and debt. By estimating the value of the equity, we can determine the amount of debt needed to achieve a target capital structure (D/V ratio). Therefore, the statement is true.

Question 3

The Black and Scholes model requires an exercise price as an input.

Accepted Answer

The Black-Scholes model does require the input of an exercise price (also known as a strike price) for calculating the theoretical value of an option.

Question 4

Which of the following provides the option to transform preferred stock into common stock?
A) paid in kind preferred stock
B) cumulative preferred stock
C) participating preferred stock
D) convertible preferred stock
E) non-cumulative preferred stock

Accepted Answer

Convertible preferred stock includes a feature that allows holders to convert their preferred shares into a predetermined number of common shares.

Question 5

Which of the following stock can be structured to assure the shareholder that they will share in the payment of any dividends to common stockholders?
A) paid in kind preferred stock
B) cumulative preferred stock
C) participating preferred stock
D) convertible preferred stock
E) non-cumulative preferred stock

Accepted Answer

Participating preferred stock allows shareholders to receive dividends beyond the fixed rate, sharing in additional dividends paid to common stockholders.

Question 6

Warrant valuation as presented in this text) is similar to option valuation except that one applies a dilution factor to the option value to arrive at a warrant value.

Accepted Answer

The statement correctly describes the process of warrant valuation, which involves applying a dilution factor to the option value.

Question 7

Which of the following requires that all previously unpaid preferred dividends must be paid prior to any common dividend?
A) paid in kind preferred stock
B) cumulative preferred stock
C) participating preferred stock
D) convertible preferred stock
E) non-cumulative preferred stock

Accepted Answer

Cumulative preferred stock requires that all previously unpaid preferred dividends must be paid prior to any common dividend.

Question 8

Which of the following have the least senior claim on a venture's asset?
A) common Stock
B) preferred stock
C) convertible preferred stock
D) convertible debt
E) American-style option

Accepted Answer

Common stock has the least senior claim on a venture's assets because it is subordinate to all other classes of securities in the event of liquidation.

Question 9

The Black and Scholes model requires the inflation rate as an input.

Accepted Answer

The Black and Scholes model does not require the inflation rate as an input. It only requires the current stock price, the strike price, the time to expiration, the risk-free interest rate, and the implied volatility of the stock.

Question 10

The right for existing owners to maintain their ownership share by purchasing sufficient shares to keep their percentage share of the firm is called:
A) stock option
B) stock warrant
C) preemptive right
D) participating stock
E) paid-in-kind preferred stock

Accepted Answer

Preemptive right gives existing owners the right to maintain their ownership share by purchasing sufficient shares to keep their percentage share of the firm.

Question 11

The enterprise method of valuation can be executed with either an after-tax or before-tax weighted cost of capital as long as the rate is applied to the appropriate enterprise cash flows.

Accepted Answer

The enterprise method of valuation can use either after-tax or before-tax weighted average cost of capital (WACC) as long as it is consistently applied to the corresponding after-tax or before-tax cash flows.

Question 12

An alternative approach to the Enterprise Valuation method adds the tax shield from paying interest back into the flows and discounts at a before-tax weighted average cost of capital.

Accepted Answer

The alternative approach to Enterprise Valuation, known as the Adjusted Present Value (APV) method, adds the tax shield from interest payments to the cash flows and discounts them at the before-tax weighted average cost of capital.

Question 13

Convertible debt is debt with the option to exchange it into non-convertible or straight debt.

Accepted Answer

Convertible debt gives the holder the option to convert it into a predetermined number of shares of the issuer's common stock, not into nonconvertible or straight debt.

Question 14

Which of the following offers the option where the dividend obligation can be satisfied in cash or by issuing additional par amounts of the preferred security?
A) paid in kind preferred stock
B) cumulative preferred stock
C) participating preferred stock
D) convertible preferred stock
E) non-cumulative preferred stock

Accepted Answer

Paid in kind preferred stock allows the issuer to pay dividends in cash or by issuing additional shares of the preferred stock.

Question 15

Which of the following is never a component of a preferred stock's security structure?
A) the right to participate in any dividends paid to common stock shareholders
B) payment of dividends in the form of additional shares of preferred stock
C) the option for the holder to convert preferred stock into common stock
D) the option for the venture to call outstanding preferred stock
E) none of the above; all of these may be included in the structure ofpreferred stock

Accepted Answer

Preferred stock can include various features such as participating dividends, payment in additional shares, conversion options, and call options, making all the choices possible components of its structure.

Question 16

The unadjusted Black and Scholes model is a model for determining the value of a warrant to buy a new share.

Accepted Answer

The Black-Scholes model is primarily used for pricing European style options, not specifically for determining the value of a warrant to buy a new share.

Question 17

Owning a put option on a stock is the same as selling a call option on that same stock.

Accepted Answer

Owning a put option gives the holder the right to sell the underlying stock at a specified price before the option expires, while selling a call option obligates the seller to sell the stock at a specified price if the option is exercised by the buyer. These are different positions with different rights and obligations.

Question 18

The enterprise value includes the value of the debt, equity, and warrant pieces of a venture.

Accepted Answer

The enterprise value (EV) is calculated as the sum of the market value of equity, debt, minority interest, and preferred shares minus cash and cash equivalents. Therefore, it includes the value of debt, equity, and all other financial instruments of a company.

Question 19

Convertible notes are debt allowing for conversion into stock at a price set by a future financing round.Note: The following TF questions relate to Learning Supplements 14A and 14B:

Accepted Answer

Convertible notes are a form of debt that can be converted into equity at a later date, typically during a future financing round, at a price determined by that round.

Question 20

The Black and Scholes model requires the stock price as an input.

Accepted Answer

The Black and Scholes model does require the current stock price as one of its inputs, along with other variables such as the option's strike price, time to expiration, risk-free interest rate, and implied volatility.

Quiz 14: Security Structures and Determining Enterprise Values

The concept of an enterprise value is that it is the combined value of all of venture's financing, typically equity plus all of the debt.

Entity valuation allows us to answer the question of how much debt a venture needs to issue to achieve a target capital structure D/V).

The Black and Scholes model requires an exercise price as an input.

Which of the following provides the option to transform preferred stock into common stock?

Which of the following stock can be structured to assure the shareholder that they will share in the payment of any dividends to common stockholders?

Warrant valuation as presented in this text) is similar to option valuation except that one applies a dilution factor to the option value to arrive at a warrant value.

Which of the following requires that all previously unpaid preferred dividends must be paid prior to any common dividend?

Which of the following have the least senior claim on a venture's asset?