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LOS m: Explain and apply methods to account for risk in venture capital.
Q1. A private equity investor expects to realize a return on her venture capital investment in two years and expects to sell the firm for $30 million. She estimates that a discount rate of 30% is reasonable but expects that there is a 20% probability of failure in any given year. The post-money value of her investment today, adjusted for failure, is closest to:
A) $11.20.
B) $14.20.
C) $11.36.
Q2. The founders of a small technology firm are seeking a $3 million venture capital investment from prospective investors. The founders project that their firm could be sold for $25 million in 4 years. The private equity investors deem a discount rate of 25% to be appropriate, but believe there is a 20% chance of failure in any year.
The adjusted pre-money valuation (PRE) of the technology firm is closest to (in millions):
A) $4.19.
B) $7.24.
C) $1.19.
Q3. A private equity investor calculates a discount rate of 40% for valuing a company. The investor, however, believes that there is a 20% chance that the company will fail in any one year. The most appropriate adjusted discount rate the investor should use is:
A) 75.0%.
B) 48.0%.
C) 50.0%.
Q4. The least likely factor affecting venture capital firm valuation is the:
A) private equity firm’s initial investment.
B) bargaining power of the venture capital and private equity firms.
C) probability of failure.
Q5. A private equity investor is considering an investment in a venture capital firm, and is looking to calculate the firm’s terminal value. The investor determines that there is equal likelihood of the following:
1. Expected firm earnings are $2.5 million with a P/E ratio of 8.
2. Expected firm earnings are $3.0 million with a P/E ratio of 10.
The firm’s expected terminal value, and the analysis used by the investor, respectively, is:
Terminal value Analysis
A) $2.75 million Sensitivity
B) $50 million Scenario
C) $25 million Scenario | 
发表于 2009-3-10 13:11
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