Question 1

Venture investors generally use which one of the following target rates to discount the projected cash flows of ventures in the "development" stage of their life cycles:

Accepted Answer

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Question 2

A venture's "riskiness" in terms of possible poor performance or failure would be considered to be "very high" in which of the following life cycle stages:

Accepted Answer

The startup stage is typically characterized by high levels of uncertainty and risk as the venture is just getting off the ground and has not yet established itself in the market. There may be no proven business model, a lack of financial resources, and a need to develop and refine products and services. All of these factors contribute to the high risk associated with the startup stage.

Question 3

The difference between average annual returns on common stocks and returns on long-term government bonds is called a:

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Question 4

What has been the approximate average annual rate of return on publicly traded small company stocks since the mid-1920s?

Accepted Answer

The approximate average annual rate of return on publicly traded small company stocks since the mid-1920s is around 16%. This is based on historical data and may vary in the future.

Question 5

Which of the following components is not typically included in the rate on short-term U.S.treasuries?

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Question 6

A venture has raised $4,000 of debt and $6,000 of equity to finance its firm.Its cost of borrowing is 6%,its tax rate is 40%,and its cost of equity capital is 8%.What is the venture's weighted average cost of capital?

Accepted Answer

The answer of A venture has raised $4,000 of debt...

Question 7

The added interest rate charged due to the inherent increased risk in long-term debt is called?

Accepted Answer

The added interest rate charged due to the inherent increased risk in long-term debt is called maturity premium. Maturity premium compensates investors for the added risk of holding long-term debt, including the risk of future interest rate changes, inflation, and default.

Question 8

Calculate the weighted average cost of capital (WACC)based on the following information:the capital structure weights are 50% debt and 50% equity;the interest rate on debt is 10%;the required return to equity holders is 20%;and the tax rate is 30%.

Accepted Answer

The WACC can be calculated using the formula:
WACC = (E/V) * Re + (D/V) * Rd * (1 - T)
where:
E = market value of equity
V = total market value of equity and debt
Re = required return on equity
D = market value of debt
Rd = interest rate on debt
T = tax rate

Given:
E/V = 0.5
D/V = 0.5
Re = 20%
Rd = 10%
T = 30%

Using the above formula, we get:
WACC = (0.5 * 0.20) + (0.5 * 0.10 * (1 - 0.30))
WACC = 0.10 + 0.035 = 0.135 or 13.5%

Therefore, the best choice is C, 13.5%.

Question 9

The word "risk" developed from the early Italian word "risicare" and means:

Accepted Answer

The word "risicare" in Italian means "to dare." "Risk" then came to mean taking a chance or daring to do something, rather than the other listed options of not caring or gambling.

Question 10

Corporate bonds might involve which of the following types of "premiums."

Accepted Answer

All of the above premiums can be involved in corporate bonds. Inflation premium compensates for the expected loss of purchasing power due to inflation; default risk premium compensates for the risk of default by the issuer; liquidity premium compensates for the lack of marketability of the bond; and maturity premium compensates for the longer term of the bond.

Question 11

Suppose the real risk free rate of interest is 4%,maturity risk premium is 2%,inflation premium is 6%,the default risk on similar debt is 3%,and the liquidity premium is 2%.What is the nominal interest rate on this venture's debt capital?

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Question 12

Which of the following types of financing would be associated with the highest target compound rate of return?

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Question 13

Your venture has net income of $600,taxable income of $1,000,operating profit of $1,200,total financial capital including both debt and equity of $9,000,a tax rate of 40%,and a WACC of 10%.What is your venture's EVA?

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Question 14

Use the SML model to calculate the cost of equity for a firm based on the following information: the firm's beta is1.5;the risk free rate is 5%;the market risk premium is 2%.

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Question 15

The cost of equity for a firm is 20%.If the real interest rate is 5%,the inflation premium is 3%,and the market risk premium is 2%,what is the investment risk premium for the firm?

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The answer of The cost of equity for a firm...

Question 16

Which one of the following components is not used when estimating the cost of risky debt capital?

Accepted Answer

Market risk premium is not used when estimating the cost of risky debt capital, as it is a component used to calculate the cost of equity capital. The other premiums listed (inflation, default, and liquidity) are all used in estimating the cost of risky debt capital.

Question 17

The "risk-free" interest rate is the sum of:

Accepted Answer

The "risk-free" interest rate is calculated as the sum of the real rate of interest (the rate of return adjusted for inflation) and an inflation premium. This is because the risk-free rate represents the return an investor would expect on an investment with no risk of default. Therefore, the risk-free rate must compensate investors for the erosion of purchasing power due to inflation.

Question 18

Which of the following venture life cycle stages would involve seasoned financing rather than venture financing?

Accepted Answer

Seasoned financing typically occurs in the maturity stage, after a company has successfully grown and established its position in the market. At this stage, the company is seeking financing to fuel expansion or strategic initiatives, and may turn to sources such as private equity, mezzanine investors, or debt offerings rather than traditional venture capital. The other stages listed are typically associated with early-stage venture financing.

Question 19

The additional premium added to the real interest rate by lenders to compensate them for a debt instrument which cannot be converted to cash quickly at its existing value is called?

Accepted Answer

The liquidity premium is the additional premium added to the real interest rate by lenders to compensate them for a debt instrument which cannot be converted to cash quickly at its existing value. In other words, it is a compensation for the risk associated with the lack of liquidity. The other options are not relevant to this concept: 
A) Inflation premium is the additional premium added to the real interest rate to compensate lenders for the loss in purchasing power due to inflation. 
B) Default risk premium is the additional premium added to the real interest rate to compensate lenders for the risk of borrower default. 
D) Maturity premium is the additional premium added to the real interest rate to compensate lenders for the risk of lending over a long period of time. 
E) Investment risk premium is the additional premium added to the real interest rate to compensate lenders for the risk associated with the specific investment.

Question 20

Venture investors generally use which one of the following target rates to discount the projected cash flows of ventures in the "startup" stage of their life cycles:

Accepted Answer