Question 1

The PDM equity valuation method is an abbreviation for:

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Question 2

A venture's going-concern value is the:

Accepted Answer

The going-concern value is the present value of the expected future cash flows. This value represents the financial benefit that will be derived from the business's ongoing operations over its lifetime. It is an important metric for assessing the long-term viability and value of a business.

Question 3

The purpose of the stepping stone year is?

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Question 4

Estimate a venture's terminal value based on the following information:current year's net income = $20,000;next year's expected cash flow = $26,000;constant future growth rate = 7%;and venture investors' required rate of return = 20%.

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Question 5

"Required cash" is?

Accepted Answer

Required cash refers to the amount of cash needed to cover a venture's day-to-day operations, including expenses like rent, salaries, and supplies. It is a crucial aspect of financial planning for any business, as without the necessary cash flow, the venture may not be able to continue operating. Options A and D refer to specific uses of cash, while option B is a valuation method and not directly related to cash flow.

Question 6

When estimating the terminal value of a venture using an equity valuation method,a perpetuity growth equation is often applied that uses the capitalization rate for discounting purposes.This "cap" rate is measured as the:

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The answer of When estimating the terminal value of a...

Question 7

Which one of the following components is not a component of the equity valuation cash flow calculation?

Accepted Answer

Net equity repurchases are not a component of the equity valuation cash flow calculation as they represent a financing activity rather than an operating activity. The other options - net income, depreciation and amortization expense, change in net operating working capital and capital expenditures - are all components of the equity valuation cash flow calculation.

Question 8

The pseudo dividend method is

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...

Question 9

Which one of the following equity valuation methods records surplus cash on the balance sheet but assumes that the surplus cash is paid out over time for valuation purposes?

Accepted Answer

The pseudo dividend method assumes that surplus cash on the balance sheet is paid out gradually over time, but it still records the full amount of surplus cash on the balance sheet as an asset. This method is used to value a company's equity by estimating the present value of future dividends.

Question 10

Most discounted cash flow valuations involve using cash flows from an:

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Question 11

To calculate a terminal value,one divides the next period's cash flow by the:

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Question 12

Estimate a venture's equity valuation cash flow based on the following information: net income = $6,372;depreciation = $4,600;change in net operating working capital = $2,415;capital expenditures = $6,900;and new debt issues = $1,000.

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Question 13

Estimate a venture's constant growth rate (g)based on the following information:terminal value = $400,000;current year's net income = $20,000;next year's expected cash flow = $25,000;and a required rate of return of 20%.

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Question 14

"Just in time" capital injections by equity investors is a reference to

Accepted Answer

"Just in time" capital injections refer to the practice of equity investors providing money only when needed, which implies a more conservative approach to capital allocation and a focus on efficiency and cost-effectiveness. This can help ensure sustainable growth and reduce the need for dividend payouts. The present value of the terminal value is a financial concept related to the estimation of the future cash flows of an investment, but it is not directly related to the question at hand.

Question 15

Estimate a venture's required rate of return based on the following information:terminal value = $400,000;current year's net income = $20,000;next year's expected cash flow = $25,000;and a constant growth rate = 7%.

Accepted Answer

There are multiple methods to estimate a venture's required rate of return, but one common approach is to use the Gordon Growth Model, which is expressed as:

Required rate of return = (Expected dividend or cash flow / Current price) + Expected growth rate

In this case, we don't have information about the current price, so we can use the terminal value as a proxy. The terminal value represents the expected value of the venture at the end of a certain period, assuming a constant growth rate. We can express it as:

Terminal value = Expected cash flow at the end of the period / (Required rate of return - Constant growth rate)

By rearranging this formula, we can solve for the required rate of return:

Required rate of return = Expected cash flow at the end of the period / Terminal value + Constant growth rate

Substituting the given values, we get:

Required rate of return = $25,000 / $400,000 + 7% = 9%

Therefore, the best choice is D, 9%.

Question 16

What is the difference between pre-money valuation and post-money valuation?

Accepted Answer

Pre-money valuation refers to the valuation of a company prior to any external funding or investment, while post-money valuation refers to the valuation of a company after external funding or investment has been added. The difference between the two is the amount of money injected by new investors (choice B). The other choices (size of the capitalization rate, revision value, amount of money previously contributed by founders, and amount of money previously contributed by venture investors) are not directly related to the difference between pre-money and post-money valuation.

Question 17

Which one of the following components is not a component of the equity valuation cash flow?

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Question 18

When estimating the terminal value of a cash flow perpetuity,which one of the following is not a component?

Accepted Answer

The payback period is not a component of the terminal value calculation. The terminal value is based on perpetuity of cash flows and requires a constant growth rate and a constant discount rate to estimate the present value of all future cash flows. The next period's cash flow is also a component as it is used to estimate the first cash flow in the perpetuity.

Question 19

The maximum dividend method is

Accepted Answer

The maximum dividend method is clean in terms of valuation purposes but can understate the firm's cash position due to its dividend-laden financial statements. This method involves calculating the present value of future dividends and assumes that dividend payments can be sustained indefinitely. However, this assumption may not hold true in all cases, and the method ignores the risks associated with periodic gluts of surplus cash.

Question 20

The MDM equity valuation method is an abbreviation for:

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Quiz 9: Valuing Early-Stage Ventures