Question 1

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

Accepted Answer

The capitalization rate is the discount rate minus the growth rate of cash flow in the terminal value period.

Question 2

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

Accepted Answer

The "terminal" value is the value of the venture at the END of the explicit forecast period, not the beginning.

Question 3

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

Accepted Answer

The reversion value is not necessarily the same as the terminal value. While both represent future values, the reversion value specifically refers to a value that a property is expected to reach after a period of decline or stabilization, while the terminal value is the estimated value at the end of a specific time horizon.

Question 4

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

Accepted Answer

Pre-money valuation is the value of a company before any new investment is made. It does not take into account any additional funds that may be invested. Therefore, it is the present value of the company before any new money is added.

Question 5

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

Accepted Answer

A venture's reversion value is the present value of future cash flows, not ongoing expenses.

Question 6

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

Accepted Answer

This statement is true. The present value of the horizon value, which is the expected future cash flow of a venture at the end of its forecasted period, is used to calculate the venture's reversion value, which is the projected value of the venture at the end of the investment period.

Question 7

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

Accepted Answer

The reversion value of a venture is indeed the present value of the venture's terminal value, making option A correct.

Question 8

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

Accepted Answer

The pseudo dividend method involves treating surplus cash as if it were a dividend, thus considering it as a free cash flow to equity, which can be distributed to shareholders.

Question 9

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

Accepted Answer

The answer of The valuation approach involving discounting present value...

Question 10

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

Accepted Answer

The stepping-stone year is typically the last historical year or the most recent year before the explicit forecast period begins, serving as a bridge between historical data and forecast projections.

Question 11

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

Accepted Answer

Surplus cash refers to the amount of cash that remains after all necessary expenses and reinvestments have been made.

Question 12

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

Accepted Answer

The terminal value and horizon value are used interchangeably in this textbook.

Question 13

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

Accepted Answer

The explicit forecast period is typically two to ten years, during which the venture's financial statements are explicitly forecasted.

Question 14

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

Accepted Answer

Surplus cash refers to the excess cash a company has after meeting its operational and capital expenditure needs, not specifically the amount required for scheduled dividends.

Question 15

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.

Accepted Answer

The answer of Surplus cash is the cash remaining after...

Question 16

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

Accepted Answer

The easiest way to value a venture is to discount the projected maximum dividend/issue stream because this method takes into account the time value of money and the risk associated with the venture.

Question 17

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

Accepted Answer

Post-money valuation is the valuation of a company after new funds have been invested, so it includes the pre-money valuation plus the new investment amount. It does not include any contributions previously made by the founders.

Question 18

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

Accepted Answer

The maximum dividend valuation method involves forecasting dividends, but it does not necessarily imply that surplus cash is always positive. It focuses on the present value of expected future dividends.

Question 19

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

Accepted Answer

The terminal value is the estimated value of a venture beyond the explicit forecast period, and it can be calculated using various methods like perpetuity growth, exit multiple, etc.

Question 20

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

Accepted Answer

The stepping-stone year is typically the first year following the explicit forecast period when valuing a venture, used to transition from the forecast to the terminal value calculation.

Quiz 10: Valuing Early-Stage Ventures