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

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

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

A manufacturing company would seek mezzanine financing in which of the following scenarios?

A) A company already producing and selling a product, seeking an initial expansion of operations.

B) A company ready for a major marketing campaign.

C) A company preparing for an initial public offering.

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All of the above scenarios are different stages of later-stage financing. A company ready for a major marketing campaign or a physical plant expansion is seeking third-stage financing. An initial expansion of operations describes second-stage financing. The capital provided to prepare for an initial public offering is at the mezzanine stage.

Kingpin804

A venture capitalist would typically do all of the following EXCEPT:

A) provide business expertise and confidentiality.

B) force the entrepreneur to carefully consider the viability of the project through the development of a business plan.

C) manage the company after it has gone public.

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Venture capitalists also provide risk capital.

Kingpin804

Which of the following is least likely a way in which venture capitalists create value?

A) Understanding the outside capital markets and helping start-ups acquire capital in the public debt and equity markets.

B) Are often able to identify undervalued investments due to specialization in the venture capitalist's area of expertise.

C) Provide contacts to accountants, lawyers, and investment bankers.

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Start-ups generally are not ready for the public equity markets (hence the venture capitalist) and are certainly not ready for the public debt markets. Venture capitalists provide value by not only providing money, but also contacts, guidance, advice, insight, etc.

Kingpin804

A property has a gross potential rental income of $740,000. Operating expenses, excluding insurance and property taxes, amount to 30% of gross rents. Insurance and property taxes total $16,800. If the market capitalization rate is 22%, the value of this property is closest to:

A) $1,727,000.

B) $2,431,000.

C) $2,278,000.

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Appraised Price = NOI / CAP = [(0.7 × 740,000) − 16,800] / 0.22 = 2,278,182

Kingpin804

John Williams wants to purchase an apartment complex. The complex consists of 75 units each renting for $700 per month. The estimated vacancy and collection loss rate is 7%. The insurance for the building is $40,000 annually and taxes are $22,000 annually. Utilities are $18,000 and the maintenance expense is $29,000.
Assume a market cap rate of 11%. Recent sales of nearby apartment complexes have resulted in the following information.

Characteristics	Units	Slope Coefficient in $ per Unit
Proximity to downtown	Miles	-350,000
Proximity to public transportation	Blocks	-500
Building size	Units	+75,000

Williams' proposed apartment complex is 4 miles away from downtown and 6 blocks away from the nearest public transportation. What is the net operating income (NOI) for Williams' proposed apartment complex?

A) $498,900.

B) $476,900.

C) $436,153.

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NOI = (75)(700)(12)(0.93) – $40,000 − $22,000 − $18,000 − $29,000 = $476,900.

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Using the sales comparison approach, the value of the apartment complex is:

A) $4,222,000.

B) $4,060,000.

C) $3,894,500.

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Value = (-350,000)(4) + (-500)(6) + (75,000)(75) = 4,222,000

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Using the income approach, the value of Williams' apartment complex is:

A) $4,335,455.

B) $4,525,455.

C) $5,727,273.

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Appraisal price = NOI / market cap rate = $476,900 / 0.11 = $4,335,454.55

Kingpin804

An investor with a large real estate portfolio must estimate the value of his holdings at year-end. Given the following data for an apartment building in the portfolio, estimate the appraised value using the income approach:

NOI	$165,000
Marginal tax rate	28%
Market cap rate	9%

A) $1,833,333.

B) $1,576,667.

C) $1,320,000.

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Appraisal price = NOI / Market cap rate = $165,000 / 0.09 = $1,833,333. Remember that all calculations for the income approach are made pre-tax.

Kingpin804

A real estate agent contacts an investor regarding a property that has recently come on the market. The real estate agent can provide reliable information regarding the property’s net operating income, as well as the prevailing market cap rate, based on recent comparable sales. The investor can best estimate the market value of the property, with the information supplied by the real estate agent, using the:

A) discounted cash flow model.

B) sales comparison approach.

C) income approach.

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The sales comparison approach uses recent transactions to estimate a benchmark value. The discounted cash flow model is used as a check on investment valuation. The income approach uses a property’s NOI, divided by the market cap rate, to estimate market value.