Deck 14: Security Structures and Determining Enterprise Values

Question 1

An option is a right to buy or sell additional shares of stock.

Answer 1

True

Question 2

A preemptive right is a right for existing owners to buy sufficient shares to preserve their ownership share.

Answer 2

True

Question 3

As the underlying stock price increases in value, a put option to sell it becomes more valuable.

Answer 3

False

Question 4

An option not currently worth exercising is said to be an out of the money option.

Question 5

A European-Style Option may only be exercised on a specific date.

Question 6

For American and Bermudan embedded options, the exercise price can change over time as specified in the security agreement.

Question 7

For preferred noncumulative stock, all previously unpaid preferred dividends must be paid before any common stock dividend is paid.

Question 8

Convertible preferred stockholders have the right to convert a preferred share into a specified number of common shares at any time after the expiration date.

Question 9

If a share of preferred stock has a $10 par value, and the stock has a 2:1 conversion ratio, then the conversion price would be $5.

Question 10

Options generally have no effect on the value of a venture capital investment.

Question 11

By issuing preferred stock, and thus forfeiting bankruptcy rights from the use of debt, the venture and its investors can benefit by committing to an internal reorganization as opposed to bankruptcy reorganization.

Question 12

If a call option can be bought for $12 and the stock's market value is $12, it's said to be "at the money".

Question 13

Convertible debt is debt that converts into preferred stock.

Question 14

An American-style option is an option that can be exercised only at the expiration date

Question 15

The value of a warrant can be directly derived from the value of a call option.

Question 16

Preferred stock is the equity claim senior to common stock providing preference on dividends but not liquidation proceeds.

Question 17

A warrant is a call option issued by a company granting the holder the right to buy common stock at a specific price at a specific time.

Question 18

A warrant is a type of call option.

Question 19

An option granting the right to sell a stock at $10 when that stock currently has a market price $8 is "in the money."

Question 20

A call option is the obligation to purchase a specific asset at a pre-determined price.

Question 21

The concept of an enterprise value is that it is the combined value of all of venture's financing, typically equity plus all of the debt.

Question 22

Entity valuation allows us to answer the question of how much debt a venture needs to issue to achieve a target capital structure D/V).

Question 23

The Black and Scholes model requires an exercise price as an input.

Question 24

Which of the following provides the option to transform preferred stock into common stock?

A) paid in kind preferred stock
B) cumulative preferred stock
C) participating preferred stock
D) convertible preferred stock
E) non-cumulative preferred stock

Question 25

Which of the following stock can be structured to assure the shareholder that they will share in the payment of any dividends to common stockholders?

A) paid in kind preferred stock
B) cumulative preferred stock
C) participating preferred stock
D) convertible preferred stock
E) non-cumulative preferred stock

Question 26

Warrant valuation as presented in this text) is similar to option valuation except that one applies a dilution factor to the option value to arrive at a warrant value.

Question 27

Which of the following requires that all previously unpaid preferred dividends must be paid prior to any common dividend?

A) paid in kind preferred stock
B) cumulative preferred stock
C) participating preferred stock
D) convertible preferred stock
E) non-cumulative preferred stock

Question 28

Which of the following have the least senior claim on a venture's asset?

A) common Stock
B) preferred stock
C) convertible preferred stock
D) convertible debt
E) American-style option

Question 29

The Black and Scholes model requires the inflation rate as an input.

Question 30

The right for existing owners to maintain their ownership share by purchasing sufficient shares to keep their percentage share of the firm is called:

A) stock option
B) stock warrant
C) preemptive right
D) participating stock
E) paid-in-kind preferred stock

Question 31

The enterprise method of valuation can be executed with either an after-tax or before-tax weighted cost of capital as long as the rate is applied to the appropriate enterprise cash flows.

Question 32

An alternative approach to the Enterprise Valuation method adds the tax shield from paying interest back into the flows and discounts at a before-tax weighted average cost of capital.

Question 33

Convertible debt is debt with the option to exchange it into non-convertible or straight debt.

Question 34

Which of the following offers the option where the dividend obligation can be satisfied in cash or by issuing additional par amounts of the preferred security?

A) paid in kind preferred stock
B) cumulative preferred stock
C) participating preferred stock
D) convertible preferred stock
E) non-cumulative preferred stock

Question 35

Which of the following is never a component of a preferred stock's security structure?

A) the right to participate in any dividends paid to common stock shareholders
B) payment of dividends in the form of additional shares of preferred stock
C) the option for the holder to convert preferred stock into common stock
D) the option for the venture to call outstanding preferred stock
E) none of the above; all of these may be included in the structure ofpreferred stock

Question 36

The unadjusted Black and Scholes model is a model for determining the value of a warrant to buy a new share.

Question 37

Owning a put option on a stock is the same as selling a call option on that same stock.

Question 38

The enterprise value includes the value of the debt, equity, and warrant pieces of a venture.

Question 39

Convertible notes are debt allowing for conversion into stock at a price set by a future financing round.Note: The following TF questions relate to Learning Supplements 14A and 14B:

Question 40

The Black and Scholes model requires the stock price as an input.

Question 41

Which of the following are components of common equity?

A) common stock
B) preferred stock
C) a and b
D) none of the above

Question 42

Which of the following is not a type of option?

A) call option
B) put option
C) warrant
D) LBO

Question 43

in the Black and Scholes model involves the use of

A) the number of shares issued
B) the next time that a venture capitalist will invest money
C) the normal distribution cumulative density function
D) the number of times that the venture will have to raise money

Question 44

Generally speaking, warrants are call options that allow the holder to purchase what type of security at a specific price?

A) common stock
B) preferred stock
C) convertible debt
D) none of the above

Question 45

To calculate the enterprise valuation cash flow, one begins with which of the following items from the income statement?

A) net sales
B) operating profit
C) earnings before interest and taxes) × 1 - enterprise tax rate)
D) net income
E) net income times the enterprise tax rate

Question 46

Which of the following is not an input to the Black and Scholes model?

A) earnings per share
B) stock price
C) risk free rate
D) volatility

Question 47

Which of the following is an example of a call option which is out of the money?

A) The option to sell at $11, the stock is worth $12.
B) The option to buy at $13, the stock is worth $12.
C) The option to buy at $12, the stock is worth $12.
D) The option to sell at $13, the stock is worth $12.
E) The option to buy at $11, the stock is worth $12.

Question 48

The right to buy a specified asset at a specified price on a specified date is called:

A) a forward contract
B) an American-style put option
C) an American-style call option
D) a European-style call option
E) a European style put option

Question 49

An option that can be exercised only at its expiration date is called a:

A) forward contract
B) lookback option
C) American-Style option
D) European-Style option
E) Bermuda-Style option

Question 50

An option that can be exercised at any time until its expiration is called a:

A) forward contract
B) lookback option
C) American-style option
D) European-style option
E) Bermuda-style option

Question 51

An option that can be exercised only at a specific set of dates is called a:

A) forward contract
B) lookback option
C) American-Style option
D) European-Style option
E) Bermuda-Style option

Question 52

Which of the following is an example of a put option which is out of the money?

A) The option to sell at $11, the stock is worth $12.
B) The option to buy at $13, the stock is worth $12.
C) The option to buy at $12, the stock is worth $12.
D) The option to sell at $13, the stock is worth $12.
E) The option to buy at $11, the stock is worth $12.

Question 53

A round of financing where shares sell for a lower price than previous rounds is known as a:

A) down round
B) recessive round
C) reset round
D) a and c

Question 54

Which of the following is an example of a put option which is in the money?

A) The option to sell at $11, the stock is worth $12.
B) The option to buy at $13, the stock is worth $12.
C) The option to buy at $12, the stock is worth $12.
D) The option to sell at $13, the stock is worth $12.
E) The option to buy at $11, the stock is worth $12.

Question 55

Which of the following is an example of a put option which is at the money?

A) The option to sell at $11, the stock is worth $12.
B) The option to buy at $13, the stock is worth $12.
C) The option to sell at $12, the stock is worth $12.
D) The option to sell at $13, the stock is worth $12.
E) The option to buy at $11, the stock is worth $12

Question 56

The right to sell a specified asset at a specified price up until a specified date is called:

A) a forward contract
B) an American-style put option
C) an American-style call option
D) a European-style call option
E) a European style put option

Question 57

The Black and Scholes model is intended to be used to value

A) stocks
B) bonds
C) options
D) futures contracts

Question 58

Which of the following is an example of a call option which is in the money?

A) The option to sell at $11, the stock is worth $12.
B) The option to buy at $13, the stock is worth $12.
C) The option to buy at $12, the stock is worth $12.
D) The option to sell at $13, the stock is worth $12.
E) The option to buy at $11, the stock is worth $12.

Question 59

Convertible debt has all of the following except:

A) bankruptcy rights
B) regular dividend payments
C) it can be structured to provide senior interest in specific assets
D) a tax shield due to interest expense
E) a security interest in the firms' assets