Kingpin804

The founders of the ABCD Corporation believe their idea for a new weight-loss pill will be tremendously successful. ABCD Corporation is currently seeking venture capitalists to invest in their company so they can do further research and hopefully someday develop their idea into a marketable product. This stage of venture capital investing can best be described as:

A) first-stage.

B) seed-stage.

C) formative-stage.

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First-stage financing is used to begin manufacturing and sales of a product. Formative-stage financing includes the seed-stage and the early-stage, but is too broad of a description for this situation. Seed-stage best describes this scenario, because ABCD is seeking financing to support product development and market research.
Note: there is some overlap between the stages, so read the question carefully.

Kingpin804

The different stages of venture capital investing are generally grouped according to the:

A) rights and responsibilities of the investor.

B) stage of development of the venture.

C) liquidity of the investment.

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The stages of venture capital investment are categorized according to the point the venture is in the business cycle.

Kingpin804

Venture-capital investing will appeal to investors who:

A) are willing to accept a high-risk profile and illiquidity.

B) have a short time horizon.

C) make investment decisions based on historical risk and return data.

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Venture capital investments are characterized by illiquidity and a high-risk profile. Venture capital is a long-term investment not suitable for investors with short time horizons. There is little historical data available for venture-capital investments, so investors who depend on such data to make decisions are not likely to invest in this arena.

Kingpin804

Which of the following is NOT among the three most important factors in valuing a venture capital investment?

A) Timing of exit.

B) Liquidity.

C) Expected payoff at exit.

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Illiquidity is a characteristic common to all venture capital investments, but is difficult to quantify valuing an investment. The timing and amount of the expected payoff at exit, adjusted for the probability of failure, are the three most important factors in the valuation of venture capital opportunities.

Kingpin804

Which of the following statements regarding venture capital investing is NOT correct?

A) The success of venture capital projects is dependent upon market entrance and exit strategies.

B) Valuation of venture capital projects is difficult due to the unique qualities of each project.

C) Investors in venture capital projects typically require a short-term investment horizon.

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Valuation of venture capital investments is difficult because of the uniqueness of each project in addition to a lack of historical risk and return data. Venture capital investors generally do not know what other competing projects or ideas may hamper their success. Market entrance and exit strategies are critical to the success of a venture capital project. Venture capital investors know upfront they are investing in an illiquid asset with a long time horizon.

Kingpin804

A portfolio manager is analyzing a $2,000,000 venture capital investment. If the project succeeds until the end of the sixth year, the net present value (NPV) of the project is $6,587,000. The project has a 32.69 percent probability of surviving to the end of the sixth year. The expected NPV of the project is:

A) $807,090.

B) $6,587,000.

C) $2,153,290.

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The project’s expected NPV is a probability-weighted average of the two possible outcomes: $6,587,000 if it is successful or the loss of the initial $2,000,000 investment if it fails. The expected NPV for the project is: (0.3269 × 6,587,000) + (0.6731 × -$2,000,000) = $807,090

Kingpin804

Which of the following statements regarding venture capital theory is CORRECT?

A) The probability of failure for a venture capital project will diminish over time.

B) The net present value of a venture capital project that fails is zero.

C) A venture capital project’s expected NPV is a probability-weighted average of the two possible outcomes: success and failure.

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The net present value of a venture capital project that fails is almost certainly less than zero. The probability of failure may or may not diminish over time, depending on the project. The expected NPV is a probability-weighted average of the two possible outcomes: success or failure.

Kingpin804

An investor is considering investing in a venture capital project that will have a large payoff at exit, which is estimated to occur in four years. The investor realizes that the risk of failure is high, given the following estimated probabilities:

Year	1	2	3	4
Failure Probability	0.30	0.28	0.28	0.25

The probability that the project will survive to the end of the fourth year is:

A) 25.00%.

B) 27.22%.

C) 27.75%.

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The probability is calculated as: (1 − 0.30) × (1 − 0.28) × (1 − 0.28) × (1 − 0.25) = 0.2722 or 27.22%

Kingpin804

Which of the following statements regarding hedge funds is least accurate?

A) Global macro funds make bets on the direction of a market, currency or interest rate.

B) Long/short funds have a net market neutral position.

C) Market-neutral hedge funds may have long and/or short positions.

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Long/short funds, by definition, are not market-neutral and usually maintain a net positive or net negative market exposure.

Kingpin804

Hedge funds are usually classified by the media and hedge fund databases according to their:

A) past performance.

B) legal structure.

C) investment strategy.

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The past performance of a hedge fund and legal structure are typically not criteria used in classifying hedge funds. Hedge funds are usually classified investment strategy, although the system is somewhat subjective and there is substantial overlap between categories.