Deck 10: Valuing Early-Stage Ventures

Question 1

The explicit forecast period is the two to ten year period in which the venture's financial statements are explicitly forecast.

Answer 1

True

Question 2

The terminal or horizon value is the value of a venture at the end of its explicit forecast period.

Answer 2

True

Question 3

A venture's reversion value is the present value of ongoing expenses.

Answer 3

False

Question 4

Surplus cash is the cash remaining after required cash,all operating expenses,reinvestments,and dividends payouts are made.
T 17.Required cash is the amount of cash required to operate a venture through its day-to-day business.

Question 5

The maximum dividend valuation method involves explicitly forecasted dividends to provide surplus cash which is positive.

Question 6

The capitalization or "cap" rate is the spread between the discount rate and the growth rate of cash flow in the terminal value period.

Question 7

The "stepping stone" year is the second year after the explicit forecast period when valuing a venture.

Question 8

Finding the present value of the horizon value produces the venture's reversion value.

Question 9

The valuation approach involving discounting present value cash flows for risk and delay is called discounted cash flow (DCF).

Question 10

As used in this textbook,the "terminal" value is the same as the "horizon" value.

Question 11

Surplus cash is the cash remaining after required cash,all operating expenses,and reinvestments are made.

Question 12

The reversion value of a venture is the present value of the venture's terminal value.

Question 13

The easiest way to value a venture is to discount the projected maximum dividend/issue stream.

Question 14

Pre-money valuation is the present value of a venture prior to a new money investment.

Question 15

The stepping stone year is the first year before the explicit forecast period.

Question 16

Post-money valuation is the pre-money valuation of a venture plus all monies previously contributed by the venture's founders.

Question 17

The "reversion value" is the future value of the terminal value.

Question 18

The pseudo dividend method treats surplus cash as a free cash flow to equity.

Question 19

Surplus cash is the amount of cash required to pay scheduled dividends for next quarter.

Question 20

The "terminal" value is the value of the venture at the beginning of the explicit forecast period.

Question 21

The present value of the venture's expected future cash flows is called?

A)going-concern value
B)present value
C)terminal value
D)reversion value
E)net present value

Question 22

The present value of the terminal value is called?

A)going-concern value
B)present value
C)terminal value
D)reversion value
E)net present value

Question 23

The pseudo dividend method treats equity infusions and withdrawals in a "just in time" fashion.

Question 24

A "post-money" valuation differs from a "pre-money" valuation by the cost of financial capital.

Question 25

The present value of a set of future flows plus the current undiscounted flow is called?

A)going-concern value
B)present value
C)terminal value
D)reversion value
E)net present value

Question 26

The wider the capitalization or "cap" rate (i.e.,the discount rate minus the growth rate in the terminal period),the higher the terminal value.

Question 27

Equity valuation cash flow = Net income plus

A)Depreciation and amortization expense minus the change in net operating working capital plus capital expenditures plus net debt issues
B)Depreciation and amortization expense plus the change in net operating working capital plus minus capital expenditures plus net debt issues
C)Depreciation and amortization expense minus the change in net operating working capital plus capital expenditures minus net debt issues
D)Depreciation and amortization expense minus the change in net operating working capital plus minus capital expenditures plus net debt issues

Question 28

Applying the "maximum dividend method" (MDM)and the "pseudo dividend method" (PDM)result in different valuation estimates.

Question 29

A pseudo dividend involves excess cash that does not need to be invested in a venture's assets or operations,and may be invested elsewhere for a period of time.

Question 30

"Net operating working capital" is current assets other than surplus cash less non-interest-bearing current liabilities.

Question 31

Your firm has been in business for two years.In its first year,the firm ended with $227,000 of current assets,long-term assets of $143,000,$70,000 in surplus cash,current liabilities of $52,000,and long-term assets of $68,000.At the end of the second year,current assets were $279,000,long-term assets of $195,000,surplus cash of $90,000,current liabilities of $62,000,and long-term assets of $78,000.What is your firm's change in net operating working capital?

A)$22,000
B)$62,000
C)$42,000
D)$244,000
E)$32,000

Question 32

The calculation of equity valuation cash flows nets the cash impact of all other balance sheet and income accounts to focus on the ______ account as the repository of any remaining cash flow.

A)cash
B)debt
C)equity
D)non-interest-bearing liabilities
E)net income

Question 33

The "maximum dividend method" assumes that all surplus cash will be paid out as dividends.

Question 34

The pseudo dividend method treats surplus cash either as stripped out while not in use or as employed outside the venture and stored in a zero NPV investment.

Question 35

"Equity valuation cash flow" is defined as: net sales + depreciation and amortization expense - change in net operating working capital (excluding surplus cash)- capital expenditures + net debt issues.

Question 36

The "pseudo dividend method" (PDM)is a valuation method involving zero explicitly forecasted dividends and an adjustment to working capital to strip surplus cash.

Question 37

The equity valuation method involving explicitly forecasted dividends to provide surplus cash of zero is called?

A)maximum dividend method
B)pseudo dividend method
C)sustainable growth method
D)dividend payout method

Question 38

The value of the venture at the end of the explicit forecast period is called the horizon value,or what?

A)going-concern value
B)present value
C)terminal value
D)reversion value
E)net present value

Question 39

In a wildly successful first year in business that started and ended with no required cash,your firm has operating income of $989,000,net income of $637,000,current assets of $900,000,current liabilities of $659,000,net capital expenditures were $690,000,and depreciation was $460,000.The firm has never financed itself with debt.What is your equity valuation cash flow?

A)$648,000
B)$900,000
C)$2,028,000
D)$166,000

Question 40

The value today of all future cash flows discounted to the present at the investor's required rate of return is called?

A)going-concern value
B)present value
C)terminal value
D)reversion value
E)net present value

Question 41

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.

A)$6,487
B)$5,487
C)$4,487
D)$3,787
E)$5,787

Question 42

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

A)historical period,an explicit forecast period,and a terminal value
B)historical period and a terminal value
C)historical period and an explicit forecast period
D)explicit forecast period and a terminal value

Question 43

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

A)sustainable growth
B)the present value of the terminal value
C)equity investors' providing money only when needed
D)dividend payout

Question 44

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%.

A)2%
B)4%
C)6%
D)8%
E)10%

Question 45

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

A)the next period's cash flow
B)a constant discount rate
C)a constant growth rate
D)the payback period

Question 46

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

A)NOPAT
B)depreciation and amortization expense
C)change in net operating working capital (without surplus cash)
D)capital expenditures
E)net debt issues

Question 47

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

A)constant discount rate plus a constant growth rate
B)constant discount rate plus a variable growth rate
C)constant discount rate minus a constant growth rate
D)constant growth rate minus constant discount rate
E)constant growth rate plus a variable discount rate

Question 48

A venture's going-concern value is the:

A)present value of the expected future cash flows
B)net present value of the current and expected future cash flows
C)future value of the expected cash flows
D)net future value of the current and expected cash flows

Question 49

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?

A)maximum dividend method
B)pseudo dividend method
C)sustainable growth method
D)return on equity method

Question 50

The maximum dividend method is

A)the cleanest for valuing assets,but creates problems valuing surplus cash
B)the cleanest for valuation purposes but its dividend-laden financial statements can dramatically understate the firm's cash position
C)the cleanest for cash planning,but creates problems valuing the venture by discounting the dividends
D)calculated by directly discounting the cash flow statement's projected dividend flow to investors,but ignores risks associated with periodic gluts of surplus cash

Question 51

The purpose of the stepping stone year is?

A)to assure that there is sufficient required cash
B)to assure that future dividends are constant
C)to assure that investment flows are consistent with terminal growth rates
D)to allow for a final year of higher-than-sustainable growth

Question 52

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

A)maximum dividend method
B)pseudo dividend method
C)sustainable growth method
D)dividend payout method

Question 53

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

A)size of the capitalization rate
B)amount of money injected by new investors
C)revision value
D)amount of money previously contributed by founders
E)amount of money previously contributed by venture investors

Question 54

The MDM equity valuation method is an abbreviation for:

A)minimum dividend method
B)maximum discount method
C)maximum dividend method
D)minimum discount method
E)Montgomery design method

Question 55

The pseudo dividend method is

A)the cleanest for valuing assets,but creates problems valuing surplus cash
B)the cleanest for valuation purposes but its dividend-laden financial statements can dramatically understate the firm's cash position
C)the cleanest for cash planning,but creates problems valuing the venture by discounting the dividends
D)calculated by directly discounting the cash flow statement's projected dividend flow to investors,but ignores risks associated with periodic gluts of surplus cash

Question 56

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%.

A)6%
B)7%
C)8%
D)9%
E)10%

Question 57

The PDM equity valuation method is an abbreviation for:

A)pseudo dividend method
B)proximate dividend method
C)pseudo discount method
D)proximate discount method
E)pre-money discount method

Question 58

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:

A)equity discount rate minus the perpetuity growth rate
B)equity discount rate plus the perpetuity growth rate
C)risk-free rate plus the perpetuity growth rate
D)risk-free rate minus the perpetuity growth rate

Question 59

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%.

A)$156,846
B)$285,714
C)$200,000
D)$150,000
E)$428,571

Question 60

"Required cash" is?

A)the cash needed to pay interest expense
B)a valuation method for early stage ventures
C)cash needed to cover a venture's day-to-day operations
D)cash available to pay as a dividend

Question 61

Estimate a venture's terminal value based on the following information:current year's net sales = $500,000; next year's expected cash flow = $16,000; constant future growth rate = 10%; and venture investors' required rate of return = 20%.

A)$156,846
B)$285,714
C)$200,000
D)$150,000
E)$160,000

Question 62

Estimate a venture's cash flow expected next year based on the following information:current year's net sales = $400,000; terminal value = $500,000; constant future growth rate = 10%; and venture investors' required rate of return = 20%.

A)$20,000
B)$40,000
C)$50,000
D)$60,000
E)$80,000

Question 63

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

A)net income
B)depreciation and amortization expense
C)change in net operating working capital (without surplus cash)
D)capital expenditures
E)net equity repurchases