Venture capital holding period returns (all stages) for the 10-year period ending in 2014, were approximately:
finance
Description
Paper Title: Entrepreneurial Finance
Time Allowed: Two Hours
This Final Test has three parts: A, B & C
Part A: Multiple Type Questions (10 x 1 =
10 marks)
Part B: Answer all of the four questions
(15 marks each)
Part C: Choose any two of the following
three questions (15 marks each question)
SPECIAL INSTRUCTIONS
1. You should follow the instructions.
Plagiarism and Duplication are considered seriously. Make sure that your
responses are within the word limit.
2. Show the multiple-choice answers in
the box provided
THIS FINAL TEST PAPER MUST BE
submitted online
Part A: Multiple Type Questions (10 x 1 = 10 marks)
Provide your responses in the box
given below:
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1.
Calculate the weighted average cost of capital (WACC) based on the
following information: the capital
structure weights are 50% debt and 50% equity; the interest rate on debt is
10%; the required return to equity holders is 20%; and the tax rate is 30%.
a. 7%
b. 10%
c. 13.5%
d. 17.5%
e. 20%
2. Venture capital holding
period returns (all stages) for the 10-year period ending in 2014, were
approximately:
a.
20%
b.
15%
c.
10%
d. 5%
3.
If a venture has a return on assets (ROA) = 10%, an equity multiplier
based on beginning equity = 3.5 times, and a retention rate = 50%, the
sustainable growth rate would be:
a. 10%
b. 17.5%
c. 35%
d. 40%
e. 20.5%
4.
When
long-term financial planning efforts set cash as a percentage of sales or as a
fixed dollar amount for planning purposes, the projected cash flow statement is
said to be a ________ forecasting statement.
a. dynamic
b. passive
c. conservative
d. checking
5. 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%.
a. $156,846
b.
$285,714
c.
$200,000
d.
$150,000
e.
$428,571
6.
An
individual’s work-related, non-financially compensated, contribution to the
enhancement of a venture’s value is referred to as:
a.
money equity
b.
sweat equity
c.
goodwill
d.
intangible work
7. Determine the future value of a
target venture which has net income expected to be $40,000 at the end of four
years from now. A comparable firm
currently has a stock price of $20.00 per shares; 100,000 shares outstanding;
and net income of $50,000.
a. $1.0 million
b. $1.4 million
c. $1.6 million
d.
$2.0 million
8.
Personal credit cards have proven to be a source of financing for
start-up firms for all of the following reasons except?
a.
credit card debt is not based on the firm’s ability to repay, but rather the individual
card holder’s ability to repay
b. teaser rates afford initial low cost
borrowing
c. balance transfer at below-prime rates
d. credit card debt can create problems if the
firm doesn’t generate cash flows to cover credit card payments once low
introductory rates expire
9.
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?
a. 10.5%
b. 20.1%
c. 24.9%
d. 28.8%
e. 32.5%
10.
Ventures
that reach their survival stage of their life cycles and seek first-round
financing are typically organized as:
a. proprietorships or partnerships
b. LLCs or corporations
c. corporations
d. partnerships or LLCs
e. proprietorships or corporations
Part
B: Answer all of the four questions given below (15 marks each)
Questions 1.
The Mega One Software Corporation was organized to
develop software products that would provide Internet-based firms with
information about their customers. As a
result of initial success, the venture’s premier product allows firms with
subscriber bases to predict customer profiles, retention, and satisfaction.
Arlene received an undergraduate
degree in computer sciences and information systems from a major northeastern
university four years ago. The Omega
Subscriber Software Product was developed, test marketed with the help of two
of her classmates; Mega One Software Corporation was up and running within one
year. Venture capital was obtained to
start up operations; a second round of venture financing helped Mega One to
move through its survival stage. Product
success in the marketplace has allowed the venture to achieve such rapid sales
growth that it now is able to get bank loans and issue long-term debt.
The interest rate on the bank loan
is 10 percent. For long-term debt, the
real interest rate is estimated to be 3 percent; the inflation premium is 4
percent; and Mega One’s default/liquidity risk premium over government bonds is
estimated to be 7 percent. The cost of
common equity was estimated using the risk-free long-term government bond rate
and a stock investment risk premium of 13 percent.
Arlene has now reached the point of
being able to consider whether Mega One is adding economic value in terms of
its net operating profit after taxes (NOPAT) and its weighted average cost of
capital (WACC). Following are the
financial statements for 2016.
Mega One
Software Corporation
