Question 1

Estimate a venture's equity valuation cash flow based on the following information: net income = $6,372; depreciation = $4,600; change in net operating working capital = $2,415; capital expenditures = $6,900; and new debt issues = $1,000.

Accepted Answer

The answer of Estimate a venture's equity valuation cash flow...

Question 2

The PDM equity valuation method is an abbreviation for:

Accepted Answer

The PDM equity valuation method stands for pseudo dividend method.

Question 3

The MDM equity valuation method is an abbreviation for:

Accepted Answer

The MDM equity valuation method stands for the "maximum dividend method," which is a technique used to evaluate the value of equity based on the maximum dividends that can be expected from an investment.

Question 4

What is the difference between pre-money valuation and post-money valuation?

Accepted Answer

Pre-money valuation is the value of a company before new investment, while post-money valuation includes the new investment. The difference is the amount of money injected by new investors.

Question 5

When estimating the terminal value of a cash flow perpetuity, which one of the following is not a component?

Accepted Answer

The payback period is not a component in estimating the terminal value of a cash flow perpetuity. Terminal value is typically calculated using the next period's cash flow, a constant discount rate, and a constant growth rate.

Question 6

"Just in time" capital injections by equity investors is a reference to

Accepted Answer

"Just in time" capital injections refer to equity investors providing money only when needed, as opposed to providing a lump sum upfront. This approach allows for more efficient use of capital and can help companies avoid unnecessary dilution of ownership. It is not directly related to sustainable growth, present value of terminal value, or dividend payout.

Question 7

The maximum dividend method is

Accepted Answer

The maximum dividend method focuses on distributing all available cash as dividends, which can make financial statements appear to understate the firm's cash position due to the high dividend payouts.

Question 8

Estimate a venture's terminal value based on the following information: current year's net income = $20,000; next year's expected cash flow = $26,000; constant future growth rate = 7%; and venture investors' required rate of return = 20%.

Accepted Answer

The answer of Estimate a venture's terminal value based on...

Question 9

The pseudo dividend method is

Accepted Answer

The answer of The pseudo dividend method is
...

Question 10

When estimating the terminal value of a venture using an equity valuation method, a perpetuity growth equation is often applied that uses the capitalization rate for discounting purposes. This "cap" rate is measured as the:

Accepted Answer

The capitalization rate in the perpetuity growth model is calculated as the equity discount rate minus the perpetuity growth rate. This reflects the expected return on equity adjusted for the growth rate of the cash flows.

Question 11

Most discounted cash flow valuations involve using cash flows from an:

Accepted Answer

The answer of Most discounted cash flow valuations involve using...

Question 12

"Required cash" is?

Accepted Answer

Required cash refers to the cash needed to cover a venture's day-to-day operations, ensuring that the business can continue to function smoothly.

Question 13

Estimate a venture's required rate of return based on the following information: terminal value = $400,000; current year's net income = $20,000; next year's expected cash flow = $25,000; and a constant growth rate = 7%.

Accepted Answer

The answer of Estimate a venture's required rate of return...

Question 14

Which one of the following components is not a component of the equity valuation cash flow?

Accepted Answer

The answer of Which one of the following components is...

Question 15

The purpose of the stepping stone year is?

Accepted Answer

The answer of The purpose of the stepping stone year...

Question 16

The equity valuation method involving zero explicitly forecasted dividends and an adjustment to working capital to strip surplus cash is called?

Accepted Answer

The pseudo dividend method involves adjusting working capital to remove surplus cash and does not explicitly forecast dividends, making it suitable for valuing companies that do not pay dividends.

Question 17

A venture's going-concern value is the:

Accepted Answer

The going-concern value of a venture is the present value of the expected future cash flows, reflecting the value of the business as an ongoing entity.

Question 18

The equity valuation method involving explicitly forecasted dividends to provide surplus cash of zero is called?

Accepted Answer

The maximum dividend method involves explicitly forecasted dividends to provide surplus cash of zero.

Question 19

To calculate a terminal value, one divides the next period's cash flow by the:

Accepted Answer

The terminal value is calculated using the Gordon Growth Model, which divides the next period's cash flow by the constant discount rate minus the constant growth rate.

Question 20

Which one of the following equity valuation methods records surplus cash on the balance sheet but assumes that the surplus cash is paid out over time for valuation purposes?

Accepted Answer

The pseudo dividend method records surplus cash on the balance sheet but assumes that the surplus cash is paid out over time for valuation purposes.

Quiz 10: Valuing Early-Stage Ventures