Q6. In connection with the proposed leveraged buyout, Krager wants to measure The Apple House’s business risk without taking into account its leverage. She must:

A)   determine the asset beta.

B)   calculate the CAPM IRR.

C)   compare historical returns to the target IRR.

Q7. Savannah Walton, a venture-capital analyst for Mixon University’s endowment, is investigating Xavier’s Fine Paper. Management seeks a $12 million investment to fund expansion.

Assuming owners hold 4 million shares and are willing to issue Mixon 5 million shares, Walton should:

A)   do the deal, because the buy-in price is $3.0 million below the estimated value.

B)   do the deal, because the buy-in price is $9.6 million below the estimated value.

C)   not do the deal, because the buy-in price is $2.4 million more than the estimated value.

Q8. A private equity investor makes a $5 million investment in a venture capital firm today. The investor expects to sell the firm in four years. He believes there are three equally possible scenarios at termination:

1.       expected earnings will be $20 million, and the expected P/E will be 10.

2.       expected earnings will be $7 million, and the expected P/E will be 6.

3.       expected earnings will be zero if the firm fails.

The investor believes an IRR of 25% is appropriate. The expected terminal value and the investor’s pre-money valuation, respectively, are closest to (in $ million):

         Expected terminal value             Pre-money valuation

A)         $80.67                                          $33.04

B)         $80.67                                          $28.04

C)         $9.00                                            $3.69

Q9. The private equity firm Purcell & Hyams (P&H) is considering a $17 million investment in Eizak Biotech. Eizak’s owners firmly believe that with P&H’s investment they could develop their “wonder” drug and sell the firm in six years for $120 million. Given the project’s risk, P&H believes a discount rate of 30% is reasonable.
The pre-money valuation (PRE) and P&H’s fractional ownership, respectively, are closest to (in millions):

                     PRE                    Fractional ownership

A)      $24.86                           0.68

B)      $7.86                             0.14

C)      $7.86                             0.68

Q10. A private equity firm makes a $10 million investment in a portfolio company. The founders of a portfolio company currently hold 300,000 shares and the pre-money valuation is $6 million. The number of shares to be held by the private equity firm, and the appropriate share price, respectively, are closest to:

           Number of shares                  Share price

A)      500,000                                 $20.00

B)      500,000                                $32.00

C)      480,000                                $20.83

Q11. The private equity firm Purcell & Hyams (P&H) is considering a $17 million investment in Eizak Biotech, of which $10 million is invested today and $7 million in four years. Eizak’s owners firmly believe that with P&H’s investment they could develop their “wonder” drug and sell the firm in six years for $120 million. Given the project’s risk, P&H believes a discount rate of 50% is appropriate for the first four years, and 30% for the last two years. The fractional ownership for first-round investors would be closest to:

A)   0.79.

B)   0.71.

C)   0.27.

cool

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