Question 1

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

Accepted Answer

Participating preferred stock allows shareholders to receive dividends equal to the normally specified rate plus an additional dividend based on a predetermined condition, ensuring they share in dividends paid to common stockholders.

Question 2

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

Accepted Answer

The Black-Scholes model is primarily used for pricing European style options, not specifically for determining the value of a warrant to buy a new share.

Question 3

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

Accepted Answer

As the underlying stock price increases, the likelihood of the stock dropping below the strike price of the put option decreases, making it less valuable.

Question 4

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

Accepted Answer

The Black and Scholes model does not require the inflation rate as an input. Instead, it requires inputs such as the current stock price, the option's strike price, the time until expiration, and the expected volatility of the stock.

Question 5

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.

Accepted Answer

The enterprise method of valuation focuses on the entire business entity, rather than just the equity, and can use 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 6

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.

Accepted Answer

This statement is true as warrant valuation involves calculating the value of a warrant using the Black-Scholes model similar to option valuation, but with the additional consideration of dilution caused by the issuance of new shares upon exercise of the warrant.

Question 7

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

Accepted Answer

Warrants are similar to call options, and their value can be directly derived from the value of a call option using the same pricing model.

Question 8

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

Accepted Answer

The enterprise value takes into account the combined value of both debt and equity in addition to any outstanding warrants.

Question 9

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

Accepted Answer

Preemptive rights allow existing owners to purchase enough shares to maintain their ownership percentage when new shares are issued. This helps to protect their investment and prevent dilution of ownership. Stock options and warrants are different types of securities that give the holder the right to purchase shares at a certain price, but they do not necessarily guarantee the ability to maintain ownership percentage. Participating stock is a type of equity security that entitles the holder to receive an additional dividend beyond the standard dividend paid to common shareholders, but it does not relate to maintaining ownership percentage.

Question 10

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

Accepted Answer

The Black and Scholes model requires the stock price, among other inputs, to calculate the theoretical price of an option.

Question 11

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.

Accepted Answer

Registration rights are a common provision in venture capital deals and typically give certain classes of shareholders the right to have their securities registered with the SEC under certain conditions. These rights are important for investors because they facilitate liquidity by allowing them to sell their securities to the public if they choose to do so.

Question 12

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.

Accepted Answer

Enterprise value takes into account both equity and debt financing, representing the total value of the company's operations.

Question 13

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.

Accepted Answer

This approach is known as the Adjusted Present Value (APV) method, which adds the benefit of the tax shield to the discounted cash flows. This adjusted cash flow is then discounted at a before-tax weighted average cost of capital.

Question 14

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

Accepted Answer

Piggyback registration rights allow investors to include their shares in a company's public offering, but they do not grant the right to vote as if converted. Voting rights as if converted pertain to the terms of the convertible securities themselves, not to piggyback registration rights.

Question 15

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.

Accepted Answer

The answer of A warrant is a call option issued...

Question 16

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

Accepted Answer

Common stock represents ownership in a company, but it has the least senior claim on a venture's assets. In case of liquidation or bankruptcy, common stockholders are the last to receive any distribution of the company's assets after all other liabilities and debts have been paid off. Preferred stockholders, convertible preferred stockholders, and convertible debt holders all have senior claims on a venture's assets over common stockholders.

Question 17

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

Accepted Answer

The Black and Scholes model requires an exercise price as one of its inputs, along with current stock price, time to expiration, risk-free interest rate, and volatility.

Question 18

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

Accepted Answer

Owning a put option gives the holder the right to sell the underlying stock at a specified price before the option expires, while selling a call option obligates the seller to sell the stock at a specified price if the option is exercised by the buyer. These are different positions with different rights and obligations.

Question 19

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).

Accepted Answer

Entity valuation allows us to determine the value of a company, which can be used to calculate the amount of debt needed to achieve a target capital structure.

Question 20

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

Accepted Answer

Convertible preferred stock provides the option to transform preferred stock into common stock at a predetermined price and time.

Quiz 14: Security Structures and Determining Enterprise Values

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