Reading 48: Private Equity Valuation- LOS c～ Q1-4

investment, following, valuation, describe, investor

LOS c: Contrast and describe the valuation characteristics and issues in venture capital vs. buyout.

Q1. A private equity investor is considering making an investment in a venture capital firm. The investor values the firm at $1.5 million following a $300,000 capital investment by the investor. The venture capital firm’s pre-money (PRE) valuation and the investor’s proportional ownership, respectively, are:

PRE valuation Ownership proportion

A) $1.5 million 25%

B) $1.5 million 20%

C) $1.2 million 20%

Q2. A private equity firm is considering the valuation characteristics of both a venture capital and a buyout investment. Increasing working capital requirements and stable EBITDA growth is most likely associated with:

Increasing working capital Stable EBITDA growth

A) Buyout enture capital

B) Venture capital Buyout

C) Buyout Buyout

Q3. The most appropriate pairing for valuing a buyout and a venture capital investment, respectively, is:

Buyout Venture capital

A) Relative value approach Discounted cash flow

B) Pre-money valuation Relative value approach

C) Discounted cash flow Pre-money valuation

Q4. Analysts Jordan Green and Noelle Lafonte are discussing terminal value estimation in venture capital and buyout investments.

Lafonte states: “Private equity firms often use scenario analysis in both venture capital and buyout investments to estimate terminal value.”

Green adds: “Private equity firms only use the multiple of net income approach in leveraged buyout (LBO), but not in venture capital investments to estimate terminal value.”

With respect to their statements:

A) Lafonte is correct but Green is incorrect.

B) Green is correct but Lafonte is incorrect.

C) Neither Lafonte nor Green is incorrect.