Chapter 10: Venture Capital Valuation Methods

CHAPTER 10
VENTURE CAPITAL VALUATION METHODS
TrueFalse Questios
F. 1. The venture capital valuation method estimates the ventures value by
projecting both intermediate and terminale!it "lo#s to investors.
T. $. Venture investors returns depend on the ventures ability to generate cash
"lo#s or to "ind an ac%uirer "or the venture.
F. &. The value o" the ventures e%uity is e%ual to the value the "inancing
contributed in the "irst venture capital round.
F. '. ( direct application o" the earnings)per)share ratio to venture earnings is
*no#n as the direct comparison valuation method.
T. +. The venture capital valuation method #hich capitali,es earnings using a cap
rate implied by a comparable ratio is *no#n as direct capitali,ation.
T. -. Failure to account "or any additional rounds o" "inancing and its
accompanying dilution in order to meet projected earnings #ill result in the
investors not receiving an ade%uate number o" shares to ensure the re%uired
percent o#nership at the time o" e!it.
T. .. (lmost #ithout e!ception/ pro"essional venture investors demand that some
e%uity or de"erred e%uity compensation be structured into any valuation.
F. 0. 1" a venture issues debt prior to the e!it period/ the initial e%uity investors
#ill still receive "irst claims on the ventures net #orth at e!it time.
F. 2. The utopia discount process allo#s the venture investors to value their
investment using only the business plans e!plicit "orecasts/ discounting it at a
ban* loan interest "actor.
F. 10. The internal rate o" return is the simple 3non)compounded4 interest rate
that e%uates the present value o" the cash in"lo#s received #ith the initial
investment.
T. 11. The venture capital 3VC4 method estimates the ventures value using only
terminale!it "lo#s to investors.
T. 1$. 5ost)money valuation o" a venture is the pre)money valuation plus money
injected by ne# investors.
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Chapter 10: Venture Capital Valuation Methods
T. 1&. 6taged "inancing is "inancing provided in se%uences o" rounds rather than
all at one time.
F. 1'. The capitali,ation rate is the sum o" the discount rate and the gro#th rate
o" the cash "lo# in the terminal value period.
T. 1+. The internal rate o" return 31774 is the compound rate o" return that
e%uates the present value o" the cash in"lo#s received #ith the initial
investment.
T. 1-. The discount rate that one applies in a multiple scenario valuation #ill
usually be lo#er than the discount rate that #ould be applied to the business
plan cash "lo#s.
F. 1.. (ll o" the scenarios in a multiple scenario analysis must have e!it cash
"lo#s in the same year.
T. 10. The discount rate applied in an 8!pected 5V approach should be the same
rate across scenarios.
For t!e Leari" Su##le$ets%
T. 12. The Venture Capital 6hortCut 3VC6C4 method is a post)money version o"
the 9elayed 9ividend (ppro!imation 399(4.
F. $0. The V6C6 and 99( methods are :just)in)time; capital methods #hich do
not assess capital charges "or idle cash.
T. $1. ( price)earnings ratio is related to the level and gro#th o" earnings.
T. $$. For the typical business plan having current and early cash out"lo#s and
later)stage cash in"lo#s/ the VC6C and 99( methods #ill typically give lo#er
valuations than the M9M and 59M.
T. $&. The V6C6 is li*e a post)money version o" the 99(.
F. $'. For the typical business plan having current and early cash out"lo#s and
later)stage cash in"lo#s/ the V6C6 #ill give a higher valuation than the 99(.
T. $+. The 99( and VC6C methods give the same valuation.
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Chapter 10: Venture Capital Valuation Methods
Multi#le&C!oi'e Questios
d. 1. The return to venture investors directly depends on #hich o" the "ollo#ing<
a. ventures ability to generate cash "lo#s
b. ability to convince an ac%uirer to buy the "irm
c. the amount o" its short)term liabilities
d. both a and b
e. all o" the above
b. $. To obtain the percent o#nership to be sold in order to e!pect to provide the
venture investors target return/ one must consider the:
a. cash investment today and the cash return at e!it multiplied by the
venture investors target return/ then divide todays cash investment by
the ventures =5V
b. cash investment today and the cash return at e!it discounted by the
venture investors target return/ then divide todays cash investment by
the ventures =5V
c. cash investment today and the cash return at e!it multiplied by the
venture investors target return/ then divide todays cash investment by
the ventures =5V
d. cash investment today and the cash return at e!it discounted by the
venture investors target return/ then multiply todays cash investment
by the ventures =5V
a. &. The value o" the e!isting venture #ithout the proceeds "rom the potential
ne# e%uity issue is *no#n as<
a. pre)money valuation
b. post money valuation
c. staged "inancing
d. the capitali,ation rate
b. '. The value o" the e!isting venture plus the proceeds "rom the potential ne#
e%uity issue is *no#n as<
a. pre)money valuation
b. post money valuation
c. staged "inancing
d. the capitali,ation rate
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Chapter 10: Venture Capital Valuation Methods
c. +. Financing provided in se%uences o" rounds rather than all at one time is
*no#n as<
a. pre)money valuation
b. post money valuation
c. staged "inancing
d. the capitali,ation rate
Use the following information for the next six (6 through 11) problems.
( potential investor is see*ing to invest >+00/000 in our venture/ #hich
currently has 1/000/000 million shares held by us "ounders. ?e e!pect our
venture to produce hal" a million dollars in income per year "or the ne!t "ive
years. ?e *no# that a similar venture produced >1/000/000 in income and
sold shares to the public "or >10/000/000.
b. -. ?hat is the percent o#nership o" our venture that must be sold in order to
provide the venture investors target return<
a. &&.&&@
b. .+.2'@
c. 1$..-@
d. 1+.00@
a. .. ?hat is the number o" shares that must be issued to the ne# investor in
order "or the investor to earn his target return<
a. &/1+-/$.-
b. 1/+.0/1&0
c. '/1+-/$.-
d. $/+.0/1&0
d. 0. ?hat is the issue price per share<
a. >0.12&2
b. >0.1$0&
c. >0.&1-0
d. >0.1+0'
c. 2. ?hat is the pre)money valuation<
a. >1$0/&00
b. >&1-/000
c. >1+0/'00
d. >12&/200
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Chapter 10: Venture Capital Valuation Methods
a. 10. ?hat is the post)money valuation<
a. >-+0/&+'
b. >'22/2+'
c. >'00/&..
d. >$'2/2..
b. 11. ?hat is the value o" the venture in year "ive using direct capitali,ation<
a. >+00/000
b. >+/000/000
c. >1/000/000
d. >100/000
d. 1$. For early stage ventures/ #hich o" the "ollo#ing is a strong reason "or
having an e%uity component in employee compensation<
a. the e!pected de"erred and ta!)pre"erred compensation allo#s the
venture to pay a lo#er current compensation to employees
b. as a #ay to motivate employees to strive "or the same goal o" high
e%uity value
c. because any dividends received as part o" the e%uity compensation
reduces ta!able income
d. both a and b
e. all o" the above
c. 1&. 9uring the e!it period/ #hich o" the "ollo#ing #ill have last crac* at the
ventures #ealth<
a. ban*s giving loans to the venture
b. convertible debt holders o" the venture
c. initial e%uity investors o" the venture
d. participating pre"erred e%uity holders
d. 1'. 6uppose your ventures e!pected mean cash "lo#s are >30+/0004 initially/
"ollo#ed by e!pected mean cash "lo#s at the end o" the "irst/ second/ and third
years o" >'0/000/ >'0/000/ and >&+/000. ?hat is the internal rate o" return<
a. 1&.2@
b. 1'..@
c. 1-.$@
d. 1..$@
e. 12.$@
b. 1+. ( 58 multiple re"ers to:
a. pricee!pectations multiple
b. priceearnings multiple
c. pro"it8A1T multiple
d. pro"itearnings multiple
e. price8A1T9( multiple
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Chapter 10: Venture Capital Valuation Methods
c. 1-. 8stimate the value o" a privately)held "irm based on the "ollo#ing
in"ormation: stoc* price o" a comparable "irm B >$0.00C net income o" a
comparable "irm B >$0/000C number o" shares outstanding "or the comparable
"irm B 10/000C and earnings per share "or the target "irm B >&.00.
a. >10.00
b. >$0.00
c. >&0.00
d. >'0.00
e. >+0.00
b. 1.. 8stimate the value o" a privately)held "irm based on the "ollo#ing
in"ormation: total mar*et value 3or capitali,ation value4 o" a comparable "irm
B >$00/000C net income o" a comparable "irm B >'0/000C number o" shares
outstanding "or the comparable "irm B $0/000C net income "or the target "irm B
>1+/000C and number o" shares outstanding "or the target "irm B 10/000.
a. >+.00
b. >..+0
c. >10.00
d. >1$.+0
e. >1+.00
c. 10. 9etermine the mar*et value o" a :comparable; "irm based on the
"ollo#ing in"ormation: value o" target "irm B >'/000/000C net income o" target
"irm B >$00/000C and net income o" :comparable; "irm B >+00/000.
a. >' million
b. >..+ million
c. >10 million
d. >1$.+ million
e. >1+ million
a. 12. 9etermine the net income o" a :comparable; "irm based on the "ollo#ing
in"ormation: value o" target "irm B >'/000/000C net income o" target "irm B
>$00/000C stoc* price o" :comparable; "irm B >&0.00C and &00/000 shares o"
stoc* outstanding "or the comparable "irm.
a. >'+0/000
b. >+00/000
c. >++0/000
d. >-00/000
e. >.00/000
c. $0. 9etermine the "uture value o" a target venture #hich has net income
e!pected to be >'0/000 at the end o" "our years "rom no#. ( comparable "irm
currently has a stoc* price o" >$0.00 per sharesC 100/000 shares outstandingC
and net income o" >+0/000.
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Chapter 10: Venture Capital Valuation Methods
a. >1.0 million
b. >1.' million
c. >1.- million
d. >$.0 million
For t!e Leari" Su##le$ets%
d. $1. The t#o :just)in)time; capital methods are:
a. 99( and VC6C
b. 99( and 59M
c. V6C6 and M9M
d. M9M and 59M
a. $$. ?hen a "irm has gro#th that only meets/ rather than e!ceeds/ the cost o"
capital/ #e #ould e!pect its price)earnings multiple to be appro!imately e%ual
to:
a. the reciprocal o" its re%uired return on e%uity
b. its earnings per share
c. its boo*)to)mar*et ratio
d. its debt)to)value ratio
b. $&. For the typical venture investing project/ the valuation #ill be highest
under:
a. 99(
b. 59M and M9M
c. VC6C
d. initial boo* value o" e%uity
.&