Question 1

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 2

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

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Question 3

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

Accepted Answer

"Just in time" capital injections mean that equity investors provide money to the company only when it is needed, rather than a large lump sum upfront. This allows for more efficient use of capital and can support sustainable growth. The present value of the terminal value and dividend payout are not related to this concept.

Question 4

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 5

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 estimating the terminal value of a cash flow perpetuity. The components are the next period's cash flow, a constant discount rate, and a constant growth rate.

Question 6

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

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Question 7

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

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Question 8

A venture's going-concern value is the:

Accepted Answer

Going-concern value refers to the value of a business as a continuing operation with ongoing positive cash flows. Therefore, the present value of the expected future cash flows is the most relevant measure of going-concern value. Options B, C, and D are not accurate representations of going-concern value.

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 records surplus cash on the balance sheet but assumes that the surplus cash is paid out over time for valuation purposes. This method is commonly used for companies that have a large amount of excess cash on their balance sheets. The other methods listed do not take into account the surplus cash on the balance sheet.

Question 10

The maximum dividend method is

Accepted Answer

The maximum dividend method is considered the cleanest for valuation purposes. However, since it heavily relies on dividend payments, the financial statements can understate the firm's cash position. Therefore, choice B is the correct answer.

Question 11

The purpose of the stepping stone year is?

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Question 12

The equity valuation method involving zero explicitly forecasted dividends and an adjustment to working capital to strip surplus cash is called?

Accepted Answer

The equity valuation method that involves zero explicitly forecasted dividends and an adjustment to working capital to strip surplus cash is called the pseudo dividend method. It is used when a company does not pay dividends or has irregular dividend payments, and it adjusts the valuation by removing any excess cash that is not required for operations. The other answer choices (maximum dividend method, sustainable growth method, and dividend payout method) do not involve this adjustment to working capital.

Question 13

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

Accepted Answer

The pre-money valuation refers to the value of a company prior to receiving new investment, while the post-money valuation refers to the value of the company after new investment has been added. The difference between the two is the amount of money injected by new investors, making option B the correct choice. The other options are not directly related to the difference between pre-money and post-money valuation.

Question 14

The MDM equity valuation method is an abbreviation for:

Accepted Answer

MDM stands for Maximum Dividend Method, which is a valuation method that estimates the value of a company by forecasting its future dividends and discounting them back to their present value using the required rate of return.

Question 15

The pseudo dividend method is

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...

Question 16

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%.

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Question 17

The PDM equity valuation method is an abbreviation for:

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Question 18

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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Question 19

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 20

"Required cash" is?

Accepted Answer

Required cash refers to the amount of cash a venture requires on a day-to-day basis to cover its operational expenses such as salaries, rent, supplies, etc. This is different from the cash available to pay dividends or interest expenses, and it is not a valuation method for early-stage ventures.

Quiz 10: Valuing Early-Stage Ventures