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Chapter 14—Enterpreneurial Finance and Venture Capital
 

Chapter 14—Enterpreneurial Finance and Venture Capital

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    Chapter 14—Enterpreneurial Finance and Venture Capital Chapter 14—Enterpreneurial Finance and Venture Capital Document Transcript

    • Chapter 14—Enterpreneurial Finance and Venture Capital MULTIPLE CHOICE 1. Entrepreneurial growth companies a. usually consume more cash than they generate. b. usually have tangible assets as a large part of their values. c. usually have low risk for investors. d. usually compensate employees with large salaries. ANS: A DIF: E REF: 14.2 Venture Capital Financing in the United States 2. Formal business entities with full-time professionals who seek out and fund promising ventures are a. angel capitalists b. institutional venture capital funds c. vulture funds d. business incubators ANS: B DIF: E REF: 14.2 Venture Capital Financing in the United States 3. With few exceptions over time, ________________________________ have generally provided more total funding to entrepreneurial companies each year. a. angel capitalists b. institutional venture capital funds c. vulture funds d. government sponsored enterprises ANS: A DIF: E REF: 14.2 Venture Capital Financing in the United States 4. Which of the following institutional venture capital fund categories controls the dominate share of in- dustry resources? a. small business investment companies b. financial venture capital funds c. corporate venture capital funds d. venture capital limited partnerships ANS: D DIF: E REF: 14.2 Venture Capital Financing in the United States 5. A rapidly growing source of new money for institutional venture capital funds is a. bank loans b. pension funds c. individuals d. government grants ANS: B DIF: E REF: 14.2 Venture Capital Financing in the United States 6. Pensions are well-suited to the institutional venture capital fund area of investing because a. pension fund managers are able to take more risk like venture capital fund managers. b. pension fund managers are able to hold investments with longer time horizons like venture
    • fund managers c. pension fund managers do not face investor scrutiny like other fund managers. d. pension fund managers need high risk/high return investments to boost fund returns as the baby boom generation reaches retirement. ANS: B DIF: E REF: 14.2 Venture Capital Financing in the United States 7. A growing firm seeks $30 million to develop and market its promising new technology. An institu- tional venture capital fund steps in with an $8 million initial investment. This is an example of a. low base financing b. staged financing c. scaled financing d. intermitent financing ANS: B DIF: E REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms 8. Venture capitalists use staged financing a. to limit other investors’ returns. b. to increase the venture capitalist’s ownership stake. c. to reduce the venture capitalist’s risk exposure. d. to increase the probability the portfolio company succeeds. ANS: C DIF: E REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms 9. If a venture capital investment contract provides for the protection of the venture capital group’s own- ership stake if the firm sells new equity under duress, then the contract has a(n) a. demand registration rights provision b. stock option plan c. ownwership rights agreement d. ratchet provision ANS: D DIF: E REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms 10. The investment contract provision that gives the venture capital fund the right to compel the firm to file with the SEC for a public offering is a a. repurchase rights provision b. participation rights provision c. demand registration rights provision d. ownership rights agreement ANS: C DIF: E REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms 11. A provision in the venture capital fund’s investment contract that limits the firm’s ability to sell assets without prior investor approval is an example of a. a ratchet provision b. a negative covenant c. a positive covenant d. a participation rights provision ANS: B DIF: E REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms
    • 12. Venture capital funding is usually not straight equity initially, but rather a. senior debt b. staged loan agreements c. convertible debt or preferred stock d. stock options ANS: C DIF: E REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms 13. Convertible securites are attractive to venture capital investors because a. they allow for the venture capitalist to exercise control without majority ownership of the firm’s equity. b. they provide seniority for the venture capitalist relative to the entrepreneur. c. they allow the venture capitalist in the upside of firm success. d. all of the above. ANS: D DIF: M REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms 14. Venture capital funded firms often use stock options in their compensation plans a. to hide compensation costs from investors. b. to attract and retain talented employees with lower cash outlays. c. to transfer risk to the venture capital investors. d. to enhance the future venture capital fund returns. ANS: B DIF: M REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms 15. Why is the cancellation option a key aspect of staged financing? a. It allows the entrepreneur the opportunity to exit the contract. b. It allows the venture capital fund to extract excessive returns. c. It allows the venture capital fund to invest at lower expected returns because risks are re- duced. d. It provides either party a “no fault” exit from the investment contract. ANS: C DIF: M REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms 16. Which of the following will make it more likely the entrepreneur receives funding on more attractive terms? a. the firm is a true start-up, at first stage financing b. the entrepreneur is new to the venture capital market c. the firm has a promising product/technology close to launch d. there are many alternative investments available to the venture capital investor ANS: C DIF: M REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms NARRBEGIN: IGBB It’s Gonna Be Big (IGBB) It’s Gonna Be Big (IGBB) is seeking venture capital investment of $8 million. The founder and the venture capital fund agree the firm is worth $15 million today, and the venture capital investor asserts it requires a 35% (compounded annually) expected return. IGBB and the venture capital investor fore- see an IPO in four years, at which time IGBB is expected to be valued at $90 million.
    • NARREND 17. What share of IGBB’s equity is necessary for the venture capital investor to achieve its required re- turn? a. 45% b. 40% c. 35% d. 30% ANS: D DIF: M REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms NAR: IGBB 18. If the venture capital investor pushes for a 40% per year expected return, what share of IGBB’s equity will it receive in exchange for its $8 million investment? a. 34% b. 39% c. 30% d. 26% ANS: A DIF: M REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms NAR: IGBB 19. Suppose the venture capital investor’s share of the equity in IGBB is 25%, and that in four years at the IPO the firm is valued at $120 million. What annual (compounded) return did the venture capital in- vestor earn? a. 46% b. 39% c. 30% d. 26% ANS: B DIF: M REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms NAR: IGBB NARRBEGIN: Pickswinners Pickswinners Venture Fund Pickswinners Venture Fund invested $10 million five years ago in Robotronics Co. The fund received 6 million shares of convertible preferred stock, each of which can be converted into three shares of common stock. Robotronic is now set to complete an IPO, and its shares are being priced at $40 each. Pickswinners will convert its preferred stock to common at the IPO, and will sell its shares along with Robotronic. The investment banking firm handling the IPO will charge an 8% underwriting fee. NARREND 20. If Pickswinners’ common stock position represents 40% of Robotronics equity, how many shares are being offered in the IPO? a. 15,000,000 b. 18,000,000 c. 25,200,000 d. 45,000,000 ANS: D DIF: E REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms NAR: Pickswinners
    • 21. What proceeds does Pickswinners expect to receive? a. $662,400,000 b. $220,800,000 c. $720,000,000 d. $552,000,000 ANS: A DIF: M REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms NAR: Pickswinners 22. What is the annual (compounded) return on Pickswinners’ investment? a. 13% b. 31% c. 131% d. 231% ANS: C DIF: M REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms NAR: Pickswinners 23. Palooka Products negotiates a venture capital investment contract, receiving $5 million today, with the expectation that the firm will seek an IPO in five years with an expected value of $50 million. If the venture capital investor requires a 40% expected return, what share of Palooka Products’ equity does it accept in exchange for its $5 million investment? a. 54% b. 38% c. 26% d. 14% ANS: A DIF: M REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms 24. China has one of the fastest growing and potentially largest economies in the world, yet there is very little or no private equity investment. Why? a. There are not enough attractive investment opportunities yet. b. Basic contracting and property rights issues cannot be legally supported or enforced at this time. c. Stock market growth provides more than enough funding. d. None of the above. ANS: B DIF: M REF: 14.1 International VC 25. Which country shows a great potential for future private equity investment? a. Canada b. China c. India d. Japan ANS: C DIF: E REF: 14.4 International VC 26. The financing provided for equity investments in rapidly growing private companies is called a. venture capital b. junk bonds c. initial public offerings
    • d. none of the above ANS: A DIF: E REF: 14.2 Venture Capital Financing in the United States 27. Which of the following is not considered a type of an institutional venture capital fund? a. small business investment companies b. financial venture capital funds c. corporate venture capital funds d. all of the above are types of institutional venture capital funds ANS: D DIF: E REF: 14.2 Venture Capital Financing in the United States 28. Which of the following is a type of covenant in a private equity investment contract? a. ownership right agreements b. ratchet provisions c. stock option plans d. all of the above ANS: D DIF: E REF: 14.2 Venture Capital Financing in the United States 29. Among the possible exit strategies employed by venture capitalists, which of the following describes the redemption option? a. exit through an initial public offering b. exit through a sale of the company directly to another company c. exit through selling the company back to the founders d. none of the above ANS: C DIF: M REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms 30. A wealthy individual who makes private equity investments on an ad hoc basis, is called a(n) a. angel capitalist b. small business investment company c. financial venture capital fund d. venture capital limited partnership ANS: A DIF: E REF: 14.2 Venture Capital Financing in the United States 31. John Smith seeks $15 million from a VC fund. John and the VC agree that the company should be ready to go public in 8 years. At that time the company should have a net income of $6.75 million. If comparable firms are expected to be trading at a P/E ratio of 25, what will be the company’s market capitalization at the time of the IPO? a. $375 million b. $168.75 million c. $126.35 million d. $254.75 million ANS: B 25(6.75) = 168.75 million DIF: E REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms
    • 32. John Smith seeks $15 million from a VC fund. John and the VC agree that the company should be ready to go public in 8 years. At that time the company should have a market capitalization of $368.75 million. If the VC requires a 45% return on their investment, what is the VC’s stake at the time of the IPO? a. $368.75 million b. $293.11 million c. $202.65 million d. $15 million ANS: B 15(1.45)^8 = 293.11 DIF: E REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms 33. John Smith seeks $15 million from a VC fund. John and the VC agree that the company should be ready to go public in 8 years. At that time the company should have a market capitalization of $368.75 million. If the VC requires a 45% return on their investment, what is the fraction of the firm that the VC will receive for its $15 million investment? a. 20.51% b. 15% c. 79.49% d. 63.47% ANS: C 15(1.35)^8 = 293.11 293.11/368.75 = .7949 DIF: M REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms NARRBEGIN: Miller Venture Capital Miller Venture Capital Miller Venture Capital made a $5 million investment in Bavarian Sausage Technology (BST) 8 years ago and in return received 1 million shares of convertible preferred stock that can be converted into 2 shares of common stock. After all stock has been converted BST will have 15 million shares outstand- ing. In addition, the company is planning on issuing an additional 3 million shares in an IPO. NARREND 34. Refer to Miller Venture Capital. What fraction of BST’s common stock will Miller own after the IPO? a. 15.24% b. 11.11% c. 45.32% d. 23.56% ANS: B 2/18 = .1111 DIF: E REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms NAR: Miller Venture Capital 35. Refer to Miller Venture Capital. If the value of BST stock is $25 at the end of the first trading day, what is the value of Miller’s investment? a. $50 million b. $25 million c. $30 million d. $5 million
    • ANS: A 2,000,000(25) = 50,000,000 DIF: E REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms NAR: Miller Venture Capital 36. Refer to Miller Venture Capital. If BST’s stock trades at $25 at the end of the first trading day, what is the annual return on Miller’s investment? a. 900.00% b. 24.65% c. 33.35% d. 350.00% ANS: C 2,000,000(25) = 50,000,000 50,000,000 = 5,000,000(1+r)^8 r = .3335 DIF: M REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms NAR: Miller Venture Capital 37. Miller Venture Capital Fund wants to average a 34.375% return on its investments. Of the 15 total in- vestments 5 have failed (i.e a return of -100%), and 7 generated a zero return. Two other projects yielded a return of 80% and 85%, respectively. What has to be the return on the last outstanding in- vestment in order for Miller to reach its investment goal? a. 425% b. 1,250% c. 885% d. 680% ANS: C .34375 = 5(-1) + 7(0) + .80 + .85 + r)/15 r = 8.85 DIF: M REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms 38. Miller Venture Capital Fund wants to average a 50% return on its investments. Of the 15 total invest- ments 5 have failed (i.e a return of -100%), and 7 generated a zero return. What has to be the average return on the three outstanding investment in order for Miller to reach its investment goal? a. 268% b. 417% c. 124% d. 930% ANS: B .50 = (5(-1)+7(0)+3(r))/15 r = 4.1667 DIF: M REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms 39. John Smith seeks $7.5 million from a VC fund. John and the VC agree that the company should be ready to go public in 4 years. At that time the company should have a net income of $3.75 million. If comparable firms are expected to be trading at a P/E ratio of 18, what will be the company’s market capitalization at the time of the IPO?
    • a. $7.5 million b. $67.5 million c. $135 million d. $95.7 million ANS: B 3.75 million (18) = 67.5 million DIF: E REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms 40. John Smith seeks $7.5 million from a VC fund. John and the VC agree that the company should be ready to go public in 4 years. At that time the company should have a market capitalization of $254.35 million. If the VC requires a 54% return on their investment, what is the VC’s stake at the time of the IPO? a. $7.5 million b. $42.18 million c. $254.35 million d. $36.74 million ANS: B 7.5(1.54)^4 = $42.18 DIF: E REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms 41. John Smith seeks $7.5 million from a VC fund. John and the VC agree that the company should be ready to go public in 4 years. At that time the company should have a market capitalization of $146.75 million. If the VC requires a 54% return on their investment, what is the fraction of the firm that the VC will receive for its $7.5 million investment? a. 28.74% b. 71.26% c. 54.00% d. 38.57% ANS: A 7.5(1.54)^4 = 42.18 42.18/146.75 = .2874 DIF: M REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms NARRBEGIN: WIMMP Venture Capital WIMMP Venture Capital “Where Is My Money” Professional Venture Capital (WIMMP) made a $10 million investment in Bavarian Sausage Technology (BST) 5 years ago and in return received 2.5 million shares of convert- ible preferred stock that can be converted into 1.5 shares of common stock. After all stock has been converted BST will have 22.5 million shares outstanding. In addition, the company is planning on is- suing an additional 5 million shares in an IPO. NARREND 42. What fraction of BST’s common stock will WIMMP own after the IPO? a. 16.67% b. 11.11% c. 9.09% d. 13.64% ANS: D
    • 2.5m(1.5) = 3.75M 3.75/27.5 = .1364 DIF: M REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms NAR: WIMMP Venture Capital 43. If the value of BST stock is $21.50 at the end of the first trading day, what is the value of WIMMP’s investment? a. $48.375M b. $80.625M c. $63.425M d. $37.557M ANS: A 2.5M(1.5) = 3.75M 3.75M(21.50) = 80.625M DIF: M REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms NAR: WIMMP Venture Capital 44. If BST’s stock trades at $21.50 at the end of the first trading day, what is the annual return on WIMM- P’s investment? a. 51.81% b. 45.69% c. 35.26% d. 68.21% ANS: A 2.5M(1.5) = 3.75M 3.75M(21.50) = 80.625M 80.625M = 10M(1+r)^5 r = .5181 DIF: M REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms NAR: WIMMP Venture Capital 45. Al Bert seeks $15 million from a VC fund. Al and the VC agree that the company should be ready to go public in 6 years. At that time the company should have a net income of $8.95 million. If compara- ble firms are expected to be trading at a P/E ratio of 18, what will be the company’s market capitaliza- tion at the time of the IPO? a. $213.67 million b. $142.25 million c. $161.10 million d. $123.78 million ANS: C 8.95(18) = 161.10 DIF: E REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms 46. Al Bert seeks $15 million from a VC fund. Al and the VC agree that the company should be ready to go public in 6 years. At that time the company should have a market capitalization of $161.1 million. If the VC requires a 45% return on their investment, what is the VC’s stake at the time of the IPO? a. $139.41 million b. $21.75 million
    • c. $112.67 million d. $156.23 million ANS: A 15(1.45)^6 = 139.41 DIF: E REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms 47. Al Bert seeks $15 million from a VC fund. Al and the VC agree that the company should be ready to go public in 6 years. At that time the company should have a market capitalization of $161.1 million. If the VC requires a 45% return on their investment, what is the fraction of the firm that the VC fund will receive for its $15 million investment? a. 69.32% b. 13.46% c. 56.89% d. 86.54% ANS: D 15(1.45)^6 = 139.41 139.41/161.1 = .8654 DIF: M REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms 48. “ALOTACASH” Venture Capital Fund wants to average a 45% return on its investments. Of the 12 total investments 3 have failed (i.e a return of -100%), and 6 generated a zero return. Two other projects yielded a return of 70% and 83%, respectively. What has to be the return on the last outstand- ing investment in order for “ALOTACASH” to reach its investment goal? a. 852% b. 358% c. 687% d. 152% ANS: C .45 = (3(-1)+6(0)+.70+.83+r)/12 r = 6.87 DIF: M REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms 49. “ALOTACASH” Venture Capital Fund wants to average a 45% return on its investments. Of the 12 total investments 3 have failed (i.e a return of -100%), and 6 generated a zero return. What has to be the average return on the last three outstanding investment in order for “ALOTACASH” to reach its investment goal? a. 280% b. 840% c. 460% d. 625% ANS: A .45 =[3(-1)+6(0)+3(r)]/12 r = 2.8 DIF: M REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms
    • 50. “ALOTACASH” Venture Capital Fund currently has its money tied up in 12 investments. Of those in- vestments 3 are expected to fail (i.e a return of -100%), and 6 are expected to generate a zero return. The three remaining projects are supposed to yield a return of 70%, 83% and 167%, respectively. What is the average return on “ALOTACASH”s investments? a. 12.68% b. -4.57% c. 8.93% d. 1.67% ANS: D [3(-1)+6(0)+.70+.83+1.67]/12 = .0167 DIF: E REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms 51. What is considered the leading cause(s) of the death of young entrepreuneral firms? a. not enough customers b. too many customers c. too much cash d. a and b ANS: D DIF: E REF: 14.1 The Challenges of Financing Entrepreneurial Growth Companies 52. Which of the following is not a difference between entrepreneurial finance and “ordinary” finance? a. entrepreneurial companies generally have faster growth than ordinary companies b. most of the assets of entrepreneurial companies are often intangible assets c. entrepreneurial companies must attract, motivate, compensate, and retain highly skilled technical and entrepreneurial talent with minimal cash flow d. none of the above ANS: D DIF: E REF: 14.1 The Challenges of Financing Entrepreneurial Growth Companies 53. Which of the following is the most likely method of financing for a high technology entreprenuerial firm? a. equity b. mortgage bonds c. debentures d. junk bonds ANS: A DIF: M REF: 14.1 The Challenges of Financing Entrepreneurial Growth Companies 54. Modern venture capital is defined as a. a professionally manged pool of money raised for the sole purpose of making actively managed direct equity investments in rapidly growing private companies. b. a professionally manged pool of money raised for the purpose of making equity invest- ments in slowly growing private companies. c. a professionally manged pool of money raised for the sole purpose of making actively managed direct equity investments charitable ventures. d. none of the above. ANS: A DIF: M REF: 14.2 Venture Capital Financing in the United States
    • 55. The roots of the American venture capital industry can be traced to a. the American Research and Development Company. b. the American Reinvestment and Development Company. c. the Alternative Direct and Reinvestment Company. d. none of the above. ANS: A DIF: M REF: 14.2 Venture Capital Financing in the United States 56. Most of the capital for early venture funds came from a. corporate backers. b. wealthy individuals. c. family trusts. d. all of the above. ANS: D DIF: E REF: 14.2 Venture Capital Financing in the United States 57. Which of the following had a significant impact on the change that the venture capital industry went through in the early 1970’s? a. the lowered top personal tax rate on capital gains from 35% to 28% b. the adoption of the “Prudent Man Rule”in 1979 c. the restructuring of the economy in 1975 d. a and b ANS: D DIF: M REF: 14.2 Venture Capital Financing in the United States 58. During most years, which source has generally provided more total investment in entrepreneurial com- panies? a. institutional venture capital funds b. angel funds c. a and b have provided approximtely equal total investment d. none of the above ANS: B DIF: M REF: 14.2 Venture Capital Financing in the United States 59. Which type of venture capital fund has the ability to borrow from the U.S. Treasury? a. financial venture capital funds b. corporate venture capital funds c. small business investment companies d. venture capital limited partnerships ANS: C DIF: M REF: 14.2 Venture Capital Financing in the United States 60. Which type of venture capital firms dominate the industry? a. small business investment companies b. financial venture capital funds c. corporate venture capital funds d. venture capital limited partnerships ANS: D DIF: E REF: 14.2 Venture Capital Financing in the United States
    • 61. In recent history, the largest portion of venture capital investments have occurred a. in California. b. in New England. c. in the airline industry. d. in start up stage financing. ANS: A DIF: M REF: 14.2 Venture Capital Financing in the United States 62. Venture Fund A focuses on start up technology companies while Venture Fund B focuses on middle- stage technology companies. Which firm would require the highest returns on its investments? a. Venture Fund A b. Venture Fund B c. venture funds require the same return d. it is imposible to say which firm would require the highest return ANS: A DIF: E REF: 14.2 Venture Capital Financing in the United States 63. A study by the National Venture Capital Association found that the sales of venture firms during the 1970 - 2000 period was a. half that of non-venture backed companies. b. equal to that of non-venture backed companies. c. twice that of non-venture backed companies. d. three times that of non-venture backed companies. ANS: C DIF: E REF: 14.2 Venture Capital Financing in the United States 64. As a limited partner in a venture capital limited partnership, today you committed to investing $70 mil- lion dollars. What amount must you contribute immediately? a. $70 million b. $80 million c. $90 million d. probably less than $70 million ANS: D DIF: M REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms 65. Venture capital funds typically use stage financing in order to a. ensure that the entrepreneur is displined in goal achievement. b. to minimize risk. c. to retain an option for funding future developmental stages of the firm. d. all of the above. ANS: D DIF: M REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms 66. In order to protect the rights and the investment of the venture capital firm, the entrepreneur is usually subject to a. a covenant spelling out what the entrepreneur must do. b. a covenant spelling out what the entrepreneur cannot do. c. a gentleman’s agreement. d. a and b ANS: D DIF: M
    • REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms 67. Most venture capital firms invest capital in order to purchase a. equity of the entrepreneurial firm. b. debt of the entrepreneurial firm. c. an investment that is convertible into common stock of the entrepreneurial firm. d. none of the above. ANS: C DIF: M REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms 68. You are a venture capitalist that is going to invest $10 million dollars today in a firm that is projected to be worth $100 million four years from today when it is expected to have an initial public offering. If you require a 40% annual retun on investments with this kind of risk, then what portion of the equity of the firm should you own after the investment? a. 10.00% b. 38.42% c. 40.00% d. none of the above ANS: B 10 MM × (1.4)4 = 38,416,000 38,416,000/100,000,000 = 38.42% DIF: M REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms 69. You are a venture capitalist that is going to invest $7 million dollars today in a firm that is projected to be worth $200 million six years from today when it is expected to have an initial public offering. If you require a 35% annual retun on investments with this kind of risk, then what portion of the equity of the firm should you own after the investment? a. 3.50% b. 21.12% c. 35.00% d. none of the above ANS: B 7 MM × (1.35)4 = 42,374,116 42,374,116/200,000,000 = 21.12% DIF: M REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms 70. You are a venture capitalist who is approached by a firm that is willing to sell you 30% of the firms common stock. You believe the firm will be worth $800 million dollars when it IPOs in 5 years. If you require a 50% return on investments with this firm’s risk characteristics, what amount will you have to invest today in order to purchase 30% of the firm’s common shares? a. $240.000 million b. $105.350 million c. $31.605 million d. none of the above ANS: C 800 MM / (1.5)5 = 105,349,794 105,349,794 × .3 = 31,604,938
    • DIF: H REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms 71. You are a venture capitalist who can invest only $10 million dollars in a firm today. The firm is ex- pected to be worth $100 million five years from now when it has its IPO. If you require to be a 50% owner of the firm’s common stock at the time of the IPO, then what is your annualized rate of return on this investment? a. 158.49% b. 100.00% c. 37.97% d. none of the above ANS: C 100 MM × .5 = 50 MM of value will be owned in 5 years ====> 10 MM × (1 + r )5 = 50 MM r = .3797 DIF: H REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms 72. Which type of public market is good for the future of entrepreneurial firms as they mature into poten- tial IPOs? a. a healthy capital market for small stocks b. a healthy capital market for large stocks c. a weak small capital market d. neither as these firms are not publicly traded yet ANS: A DIF: M REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms 73. Which of the following is the most poplular exit strategy that VCs use? a. IPO b. through sale of the portfolio company directly to another company c. by selling the portfolio company back to the entrepreneur d. none of the above ANS: A DIF: E REF: 14.3 The Organization and Operations of U.S. Venture Capital Firms 74. Which European country is noted for having the largest amount of venture capital invested in its firms? a. Germany b. France c. Italy d. Britain ANS: D DIF: E REF: 14.4 International Markets for Venture Capital and Private Equity 75. Which country has been the largest recipient of VC financing as a percentage of GDP? a. China b. Australia c. South Africa d. Israel
    • ANS: D DIF: M REF: 14.4 International Markets for Venture Capital and Private Equity