kim226

Direct equity real estate investing has all of the following advantages over indirect real estate investing EXCEPT:

A) lower information costs.

B) tax deductible expenses.

C) the ability to manage geographic diversification.

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Direct equity real estate investing has the following advantages: many expenses are tax deductible, the ability to use more leverage than other investments, having more control, and the ability to diversify geographically. Higher information costs are a disadvantage to direct real estate investing.

kim226

With respect to buyers of venture capital, which group represents the first group to invest in the company after the initial entrepreneurs and their friends and family?

A) Angel investors.

B) Venture capitalists.

C) Strategic partners.

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Buyers of venture capital include angel investors who are usually accredited investors and the first outside investors after the family and friends of the company founders. Venture capitalists come in later after identifying companies with potential but need financial and strategic support. Further, large companies are usually in the same industry as the issuer and are also called strategic partners.

kim226

With respect to the terms “formative-stage companies” and “expansion-stage companies”, which are considered issuers of venture capital?

A) Formative-stage companies only.

B) Both formative-stage companies and expansion-stage companies.

C) Neither formative-stage companies nor expansion-stage companies.

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Issuers of venture capital include formative-stage companies that are either new or young and expansion-stage companies that need funds to expand their revenues or prepare for an IPO.

kim226

With respect to the seed and start-up point in the early stage of venture capital, which of the two represents a point where the company has already started generating revenue?

A) Not at the seed point, but revenue has begun at the start-up point.

B) Not at the start-up point, but revenue has begun at the seed point.

C) In neither the seed nor start-up point.

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The stages through which private companies pass are the early-stage, later-stage, and exit stages. The early stage consists of i) seed: the small amount of money provided by the entrepreneur to get the idea off the ground, ii) start-up: usually a pre-revenue stage that brings the entrepreneur’s idea to commercialization, iii) first stage: additional funds if the idea is sound but start-up funds have run out. The later-stage occurs after revenue has started.

kim226

With respect to venture capital (VC) funds and buyout funds, measuring returns accurately is:

A) equally difficult with VC funds as it is with buyout funds.

B) more difficult with VC funds than with buyout funds.

C) less difficult with VC funds than with buyout funds.

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The difference is a natural consequence of the buyout funds purchasing entities in later stages of development.

kim226

In contrast to venture capital funds, buyout funds usually have:

A) less frequent losses and less upside potential.

B) more frequent losses and more upside potential.

C) less frequent losses and more upside potential.

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These differences are the natural consequence of the buyout funds purchasing entities in later stages of development or even established companies where the risks are lower.

kim226

In contrast to venture capital funds, buyout funds usually have a:

A) lower level of leverage and earlier and steadier cash flows.

B) higher level of leverage and later and more erratic cash flows.

C) higher level of leverage and earlier and steadier cash flows.

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Buyout funds are usually investing in later-stage companies where the risks are lower. The cash flows are steadier and the investors can use more leverage.

kim226

The convertibilty feature in convertible preferred stock is important because it means that preferred stockholders:

A) can block a possible buyout.

B) can convert their claims to equal those of later investors in the company.

C) can benefit from a buyout favorable to common stockholders.

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Any buyout of the company that is favorable to shareholders will lead to the conversion of the preferred stock.

kim226

Compared to common stockholders, investors who use convertible preferred stock to make venture capital investments will receive the promised dividend:

A) before common stockholders receive a dividend but not if there is a liquidation.

B) only if common stockholders receive a dividend or a disbursement through liquidation.

C) before common stockholders receive a dividend or a disbursement through liquidation.

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Preferred stockholders must be paid a specified amount, say twice the initial investment, before common stockholders can receive cash in the form of dividends or distributions through liquidation.

kim226

Frank Campbell, CFA, has a client who wants to make a venture capital investment. Campbell is considering recommending convertible preferred. This would least likely be appropriate if the client wishes to:

A) have a priority of claims over subsequent investors in the company.

B) receive dividends.

C) benefit in the case of a buyout of the company.

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Typically, investors in subsequent rounds after preferred stock issuance will have senior claims to preferred stock. Both remaining choices are reasons to invest using convertible preferred stock.