Question 1

Assume that a venture is expected to have an EBITDA of $1,500,000 at the end of five years from now. If the venture's value is expected to be $12,000,000, what valuation multiple was being assumed?

Accepted Answer

To find the valuation multiple, divide the enterprise value ($12,000,000) by the EBITDA ($1,500,000): $12,000,000 ÷ $1,500,000 = 8 times. Therefore, the assumed valuation multiple is 8 times.

Question 2

If venture investors invest $6,750,000 now, will receive 32% of the exit value, and expect a 22% compounded rate of return on their investment, what is the exit value at the end of seven years?

Accepted Answer

The answer of If venture investors invest $6,750,000 now, will...

Question 3

A venture is expected to have an exit value of $10,000,000 two years from now. If venture investors invest $2,000,000 now, and expect a 20% compounded rate of return on their investment, what portion of the exit value would they need?

Accepted Answer

First, we need to calculate the future value of the investment after 2 years with 20% compounded annually:

FV = PV x (1 + r)t
FV = 2,000,000 x (1 + 0.20)2
FV = 2,000,000 x 1.44
FV = 2,880,000

So the investment will have a future value of $2,880,000 after 2 years.

Now we need to calculate the portion of the exit value that the investors need to achieve a 20% rate of return on their investment:

Exit Value = FV / (1 + r)t
Exit Value = 2,880,000 / (1 + 0.20)2
Exit Value = 2,880,000 / 1.44
Exit Value = 2,000,000

Therefore, the investors need to receive $2,000,000 of the exit value to achieve a 20% rate of return on their investment.

Finally, we can calculate the portion of the exit value that represents $2,000,000:

Portion of Exit Value = $2,000,000 / $10,000,000
Portion of Exit Value = 0.2 or 20%

So the answer is (D) 28.8%.

Question 4

An order to purchase stock that can be executed only at a specified price or better is called a:

Accepted Answer

A limit order is an order to buy or sell a stock at a specific price or better. This means that the order can only be executed if the market price reaches or exceeds the specified limit price. This type of order allows investors to have more control over the price at which their trades are executed. Market orders (A) are executed immediately at the best available market price, while stop orders (C) are triggered when the market price reaches a certain level and are used to limit losses or protect profits. Private orders (D) are not a recognized type of stock order.

Question 5

Which of the following is not a type of trading order?

Accepted Answer

Repurchase orders are not a type of trading order. Repurchase (or "repo") transactions involve the sale of securities with a commitment to repurchase them at a later date, but they are not a type of trading order used to buy or sell securities on the open market.

Question 6

Based on the following information, estimate the percentage appreciation on stock bought by the founders: founders' purchase price = $1.00; venture investors' purchase price = $2.00; current stock price = $10.00; founders' holding period = 5 years; and venture investors holding period = 3 years.

Accepted Answer

The percentage appreciation is calculated as [(current price - purchase price) / purchase price] * 100. For the founders, this is [(10 - 1) / 1] * 100 = 900%.

Question 7

Based on the following information, estimate the percentage appreciation on stock bought by the venture investors: founders' purchase price = $0.50; venture investors' purchase price = $2.00; current stock price = $10.00; founders' holding period = 5 years; and venture investors' holding period = 3 years.

Accepted Answer

The venture investors' percentage appreciation is calculated as follows:Percentage appreciation = (Current stock price - Venture investors' purchase price) / Venture investors' purchase price * 100= (10.00 - 2.00) / 2.00 * 100= 400%

Question 8

If venture investors invest $1,000,000 now, will receive 25% of the exit value, and expect a 20% compounded rate of return on their investment, what is the approximate expected exit value at the end of five years?

Accepted Answer

To achieve a 20% compounded rate of return over five years on a $1,000,000 investment, the future value (FV) can be calculated using the formula FV = PV(1 + r)^n, where PV is the present value ($1,000,000), r is the annual interest rate (20% or 0.20), and n is the number of years (5). This gives FV = $1,000,000 * (1 + 0.20)^5 = $2,488,320. Since the investors receive 25% of the exit value, and $2,488,320 represents 25% of the exit value, the total exit value is $2,488,320 / 0.25 = $9,953,280, which is approximately $9,950,000.

Question 9

In the aftermarket trading for the venture's securities, an order that converts to a market order once a certain price is achieved is known as a:

Accepted Answer

A stop order is an order that converts to a market order once a certain price is achieved, and is commonly used to limit losses or lock in profits. The other answer choices do not match this description. A put order is an option contract giving the investor the right to sell a certain amount of an underlying security at a specified price within a specified time frame. A market order is an order to buy or sell a security immediately at the prevailing market price. A limit order is an order to buy or sell a security at a specific price or better.

Question 10

In the aftermarket trading for the venture's securities, an order that is to be executed as soon as possible at the prevailing market price is known as a:

Accepted Answer

A market order is an order to be executed as soon as possible at the prevailing market price. A put order is an option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying asset at a set price within a specified time. A limit order is an order to buy or sell a security at a specific price or better. A stop order is an order to buy or sell a security when the price reaches a certain point, typically used as a type of risk management.

Question 11

The NYSE participates in:

Accepted Answer

The NYSE participates in both primary (sales of new securities to public investors) and secondary (trading of already issued securities) offerings. Therefore, the best choice is C. The NYSE does not participate in liquidation offerings, so D is also incorrect. A is incorrect because the NYSE deals with public investors, not private investors.

Question 12

A venture is expected to have an exit value of $10,000,000 five years from now. If venture investors invest $1,000,000 now, and expect a 20% compounded rate of return on their investment, what portion of the exit value would they need?

Accepted Answer

The future value of the investment after five years is calculated as follows:
FV = $1,000,000 x (1+20%)^5 = $3,204,800

Therefore, the portion of the exit value that the investors need to receive is:
$1,000,000 + $3,204,800 = $4,204,800

To calculate the percentage of the exit value needed, we divide the required amount by the exit value:
$4,204,800/$10,000,000 = 0.42048

So, the investors need 42.048% of the exit value. Rounded to the nearest tenth, this is 24.9%. Therefore, the best choice is C.

Question 13

If venture investors invest $1,000,000 now, will receive 50% of the exit value, and expect a 20% compounded rate of return on their investment, what will be the amount of the exit value at the end of two years?

Accepted Answer

To calculate the exit value, we first need to calculate the total amount of return that the venture investors are expecting. We know they are expecting a 20% compounded rate of return on their $1,000,000 investment over two years, so we can use the formula:

Future Value = Present Value x (1 + Rate of Return)^Time

Future Value = $1,000,000 x (1 + 0.20)^2
Future Value = $1,000,000 x 1.44
Future Value = $1,440,000

This is the total amount that the venture investors will receive at the end of two years. Now we need to calculate what percentage of that amount the investors will receive based on their agreement to receive 50% of the exit value.

Exit Value = Total Amount x Percentage of Investment

Exit Value = $1,440,000 x 0.50
Exit Value = $720,000

So the exit value at the end of two years will be $2,880,000 (50% of the total amount of $1,440,000). Therefore, the correct answer is C.

Question 14

The negotiated period around an equity securities offering during which insiders are prohibited from selling their existing shares is called a(n):

Accepted Answer

The negotiated period around an equity securities offering during which insiders are prohibited from selling their existing shares is called a lockup provision. This is meant to prevent insiders from flooding the market with their shares immediately after the offering, which could depress the price of the stock. The provision typically lasts for 90 to 180 days after the offering.

Quiz 15: Harvesting the Business Venture Investment