Question

All the following are part of characteristics of Venture Capital (VC) except :

VC is a financial intermediary

VC only invests in private companies;

             c.     VC invests to fund the external growth of companies.

                d.     VC’s primary goal is to maximize its financial return by investments through a sale or an initial public offering (IPO)

               e. VC takes an active role in monitoring and helping the companies in its portfolio

According to the textbook by Metrick and Yasuda (2011), the term ‘Mezzanine’ refers to two distinct meanings within the private equity market:

A. A form of late (often very late) stage of investment and subordinated debt with some equity participation.

B. growth and equity

C. income and expenditure

D. Demand and supply

According to the Exhibit no. 1-8 (chapter 1), in 2009 Silicon Valley had what percent of all the venture capital investment made nationwide:

29.9%

B. 38.8%

48.8%

50.8%

Indicate whether the following statement is True, False, or Uncertain: If both EBV and Owl have the same GVM, then the value multiple of Owl will be lower than the value multiple of EBV. (See Appendices 2.A and 2.C for more information on EBV and Owl.)

True

False

C. Uncertain

D. None of the above

5. In capital-asset-pricing-model (CAPM): the standard model is r_i= R_i = R_f + ? (R_m – R_f)

Where r_i stands for:

A. cost of interest for asset ‘I’

B. cost of capital for asset ‘I’

C. both

D. None

6. In capital-asset-pricing-model (CAPM): the standard model is r_i= R_i = R_f + ?(R_m – R_f)

Where R_i   stands for:

Expected feedback of asset ‘i’

Expected loop of asset ‘i’

C. Expected return of asset ‘i’

7. In capital-asset-pricing-model (CAPM): the standard model is r_i= R_i = R_f + ?(R_m – R_f)

Where (R_m – R_f)    stands for:

Dollar premium

Pound premium

C. Market premium

D. No premium

8. In capital-asset-pricing-model (CAPM): the standard model is r_i= R_i = R_f + ?(R_m – R_f)

Where Beta (?)    stands for:

Asset value

B. market risk

C. Both

d. neither

                       

9.   Internal Rate of Return is the interest rate at which:

A. NET PRESENT VALUE of all future cash flows of an investment project is zero

B. Profit is maximized

C. Neither

D. all of the above

10. Net Present Value is a discounted value of :

A. Past cash flows

B. No cash flows

C. Future cash flows

D. all of the above.

11. Venture Capitalist and Angel investors are synonymous:

A. True

B. False

C. Both

D. Neither

12. “Value multiples” best refers to which of the following statement?

A. “ For every penny I spend how much I owe?”

B. “ For every dollar I gave you, how much did I get back?”

C. Both

D. neither

13. Definition of Gross Value Multiple (GVM) is:

A. Total distribution – investment capital

B. Total distribution x interest rate

C. Total distribution / investment capital

D. None of the above.

14. Recall ‘the banana bird example’ from chapter 4, and in the light of that example, which risk can be mitigated by adopting a diversification strategy in investment portfolio?

A. Idiosyncratic risk

B. Systematic risk

C. Neither

D. all of the above.

15. Recall ‘the banana bird example’ from chapter 4, the banana birds seem to choose their islands randomly. From islanders’ standpoint the risk of their banana harvest being eaten out by birds will be known as:

A. Systematic risk

B. Idiosyncratic risk

C. Both.

D. None.

16. Evaluate the statement (True, False, Uncertain or None): Early stage venture capital should earn a higher expected return than later-stage venture capital, because early stage ventures have a higher failure rate than later stage ventures:

A. True

B. False

C. Uncertain

D. None of the above.

17. If relevant market beta for a software company is 1.25, risk free rate is 4 percent and a market risk premium is 7 percent, then using the CAMP formula calculate the cost of capital

A. 12.75 percent

B. 11.25 percent

C. 9.25 PERCENT

D. 8.50 percent

18. Number of General partners of a Venture Capital firm is typically:

A. 4 PERSONS

B. 3 PERSONS

C. 10 PERSONS

D. 12 persons

19. Local Partners of VENTURE CAPITAL firms are mostly:

A. individuals from households

B. Individuals from institutions such as pension funds, university endowments, and large corporations

C. all of the above;

d. None of the above.

20. If you increase the discount rate, the NPV of estimated cash flows of an investment project will:

A. Increase

B. decrease

C. Both

D. Neither

Short Essay Questions (please use the space provided below)

21. Suppose that a $200M VC fund has a management fee of 2.5 percent per year for the first five years, with a reduction of 0.25 percent (25 basis points) in each year thereafter. All fees are paid on committed capital, and the fund has a ten-year life. What are the lifetime fees and investment capital for this fund? Show your work.

22. (This is a little bit tricky.) Suppose that a $1000M VC fund has fees of 2.0 percent per year in all years, with these fees paid on committed capital in the first five years and on net invested capital for years 6 through 10. You can assume the fund is fully invested by the beginning of year 6, and then realizes 20 percent of its investment capital in each of the following five years. What are the lifetime fees and investment capital for this fund? (Make assumptions for any information that you think is still missing from the problem.). Show your work.

23. If you have invested $1 million and expected to receive cash flows in next five years per following schedule: $500,000 in year 1 and 2 each, $750,000 in year 3, 4, and 4 and relevant discount rate is 10%, what will be the NPV of the project? Send me your excel worksheet via email.

24. Consider the data presented in the question no. 23 and calculate the IRR of the project. Send me your excel worksheet via email.

Answer 1

	Answer 1		e
	Answer 2		b
	Answer 3		d
	Answer 4		c
	Answer 5		b
	Answer 6		c
	Answer 7		c
	Answer 8		b
	Answer 9		a
	Answer 10		c
	Answer 11		b
	Answer 12		b
	Answer 13		c
	Answer 14		a
	Answer 15		a
	Answer 16		c
	Answer 17		a
	Answer 18		c
	Answer 19		c
	Answer 20		b

Answer 23
Year	cash flow	PVF@10%	PV
0	-1000000	1	-1000000
1	500000	0.909	454545.455
2	500000	0.826	413223.140
3	250000	0.751	187828.700
4	250000	0.683	170753.364
5	250000	0.621	155230.331
		NPV	381580.990

Answer 24
Year	cash flow	PVF@20%	PV	PVF@30%	Pv
0	-1000000	1	-1000000	1	-1000000
1	500000	0.833333	416666.6667	0.769231	384615.4
2	500000	0.694444	347222.2222	0.591716	295858
3	250000	0.578704	144675.9259	0.455166	113791.5
4	250000	0.482253	120563.2716	0.350128	87531.95
5	250000	0.401878	100469.393	0.269329	67332.27
		NPV	129597.4794		-50870.9
	IRR =	20 +( 129597/180468.4)*10		27.18117