Deck 14: Security Structures and Determining Enterprise Values

Question 1

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.

Answer 1

True

Question 2

Convertible debt is debt that converts into preferred stock.

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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

Question 5

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 6

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

Question 7

Common stock represents the least senior claim on a venture's assets.

Question 8

A warrant is a type of call option.

Question 9

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

Question 10

A European-style option may only be exercised on a specific date.

Question 11

Convertible notes are debt allowing for conversion into stock at a price set by a future financing round.

Question 12

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

Question 13

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 14

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

Question 15

Convertible debt is debt with the option to exchange it into nonconvertible or straight debt.

Question 16

A call option is the obligation to purchase a specific asset at a predetermined price.

Question 17

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

Question 18

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 19

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

Question 20

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

Question 21

Which of the following can be structured to assure shareholders 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

Question 22

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

Question 23

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

Question 24

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

Question 25

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

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

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

Question 28

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

Question 29

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)a stock option
B)a stock warrant
C)preemptive rights
D)participating stock

Question 30

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

Question 31

Registration rights embedded in a venture's securities grant certain classes of shareholders the right, under certain circumstances, to have their securities registered with the SEC.

Question 32

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 33

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 34

Piggyback registration rights allow holders of convertible securities to "vote as if converted."

Question 35

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 36

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

A)common stock
B)preferred stock
C)convertible preferred stock
D)convertible debt

Question 37

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

Question 38

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

Question 39

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 40

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

Question 41

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

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

Question 42

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)convertible notes

Question 43

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

Question 44

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

A)reset round
B)recessive round
C)angel round
D)anticipation round

Question 45

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

A)American-style put option
B)American-style call option
C)European-style call option
D)European-style put option

Question 46

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

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

Question 47

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

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

Question 48

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

Question 49

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

A)Net Sales ÷ Net Income
B)Operating Profit ÷ Gross Sales
C)Earnings Before Interest and Taxes)× (1 - Enterprise Tax Rate)
D)Net Income × Enterprise Tax Rate

Question 50

Which of the following is not a typical characteristic of convertible notes?

A)debt allowing for conversion into equity (common stock or convertible preferred stock)
B)convertible at a price set by a future financing round
C)issued to allow for a delayed valuation estimate
D)seasoned firms are the primary issuers of convertible notes

Question 51

When consistent assumptions are used, estimated equity values under the enterprise and equity methods should be:

A)the same for the two methods
B)higher for the equity method
C)higher for the enterprise method
D)different for the two methods

Question 52

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

A)Asian-style option
B)American-style option
C)European-style option
D)Bermuda-style option

Question 53

Which of the following is not a component of a preferred stock's security structure?

A)the right to participate in any dividends paid to common stock shareholders
B)the 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 holder to convert preferred stock into debt securities

Question 54

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

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

Question 55

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

A)Asian-style option
B)American-style option
C)European-style option
D)Bermuda-style option

Question 56

Which of the following is not a type of option?

A)call option
B)put option
C)warrant
D)leveraged buyout

Question 57

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

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

Question 58

Convertible debt can have all of the following characteristics except :

A)bankruptcy rights
B)regular dividend payments
C)a structure to provide senior interest in specific assets
D)a tax shield due to interest expense

Question 59

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

A)Asian-style option
B)American-style option
C)European-style option
D)Bermuda-style option

Question 60

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

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

Question 61

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 62

N(h) in the Black and Scholes model involves the use of the:]

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

Question 63

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

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