Subject: Business / Finance
Page 1 Question 1.1. (TCO E) Which of the following correctly completes this sentence? “The value of
any asset is the ______ of all future cash flows it is expected to provide.” (Points : 5) liquidation value
market value Question 2.2. (TCO A) Which is the correct chronology of events in the life cycle of a business
venture? (Points : 5) prepare initial financial statements, manage ongoing operations, sell or merge
project cash needs, obtain startup financing, go public
obtain additional financing (such as IPO), obtain seasoned financing, choose organizational
project cash needs, examine exit opportunities, obtain seasoned financing Question 3.3. (TCO A) During the development stage of a venture’s life cycle, the primary
source(s) of funds are (Points : 5) entrepreneur’s assets, family or friends’ assets, and commercial banks.
business angles, venture capitalists, and family or friends’ assets.
business operations, entrepreneur’s assets, suppliers and customers, and business angles.
family or friends’ assets and entrepreneur’s assets.
None of the above Question 4.4. (TCO C) EBDAT is equal to which of the following? (Points : 5) Revenues – variable costs – cash fixed costs
Revenues + variable costs + cash fixed costs
Revenues – total costs + ending cash balance
Revenues + variable costs – cash fixed costs
Revenues – variable costs – total fixed costs Question 5.5. (TCO G) Growing ventures seeking loans specifically to acquire fixed assets such as machinery would access this type of funding through which of the following U.S. Government
Small Business Administration programs? (Points : 5)
The 7(a) program
The 504 program
A Community Development Financial Institution (CDFI)
A private SBIC Question 6.6. (TCO F) HausBier Brewery licenses beer-brewing technology that produces 300% of the amount of beer from the same amount of hops as standard processes. This
promising technology is intoxicating to investors who seek to buy the firm’s stock in its first capital-raising campaign. If HausBier Brewery had an enterprise value of $10 million before
investors make a $4 million investment (expecting a 50% return), what will the firm’s post-money
valuation be? (Points : 5)
$14 million Question 7.7. (TCO B) Which of the following best defines a partnership? (Points : 5) A business owned and operated by one person
A voluntary association of two or more persons to carry on a business for profit as coowners
The governing body for corporate activity
An organization in which each owner has limited personal liability
A firm where common stock is sold among investors Question 8.8. (TCO B) Which form of business organization is characterized as having
unlimited life? (Points : 5) Proprietorship
Limited liability corporation
Subchapter S corporation
Page 2 Question 1.1. (TCO H) Describe an initial public offering (IPO). What are the differences
between a primary offering and a secondary offering? (Points : 20) Question 2.2. (TCO F) What are some of the reasons that entrepreneurs may not actually
obtain debt financing, though they might very much need it? (Points : 20) Question 3.3. (TCO F) Healthy Optiplex (HO) has a new neutraceutical process technology patent that it licenses to major manufacturers. The firm is privately
held and there is no public market for its common stock. HO’s 2012 EBIT was $2.2
million. The firm’s year-end 2012 accumulated depreciation balance was $2.4
million; at the end of 2011, the accumulated depreciation balance was $1.8
million. At the end of 2012, Healthy Optiplex had total liabilities of $4.45 million,
which included a $3 million loan balance, and the firm’s total shareholders’ equity
balance was $2.55 million. The CEO has asked you to determine the value of HO’s
equity. Your research reveals that BodyVision is a public company that develops
similar solutions for the same markets. Bodyvision’s current share price is $28 and
the firm has 750,000 shares outstanding. BodyVision also has $9 million in bonds
outstanding, and its current EBITDA is $3.75 million. Make sure to provide all calculations in your answers to each of the following questions:
(a) Calculate BodyVision’s enterprise value and its EBITDA multiple.
(b) Calculate Healthy Optiplex’s EBITDA.
(c) After completing (a) and (b) above, use BodyVision’s EBITDA multiple to
determine Healthy Optiplex’s implied Enterprise Value and its estimated equity
value. (Points : 30) Question 4.4. (TCO B) Use the following current year financial statements for Sambora Engineering to perform ratio analysis.
Sambora Engineering Income Statement
Cost of goods sold
Operating income (EBIT)
Earnings before taxes
Taxes (at 40%)
Sambora Engineering Balance Sheet
Total current assets
Net fixed assets
Total current liabilities
Total liabilities $970,000
2,150,000 Common stock 300,000 Retained earnings 2,700,000 Total shareholders’ equity
Total liabilities and shareholders’ equity 3,000,000
$5,150,000 (a) Calculate the firm’s total-debt-to-assets ratio. Assume that the firm’s prior year-end
total liabilties balance was $2.4 million and the firm’s prior year-end total assets balance was
(b) Calculate the firm’s net working capital.
(c) What is the number of “days in inventory” for Sambora Engineering? Assume that the firm’s
year-end inventory balance for the prior year was $100,000. (d) What is the firm’s return on equity at the end of this year? Assume that the firm’s year-end
shareholders’ equity balance for the prior year was $2,600,000. (Points : 40) Question 5.5. (TCO H) Your management team identifies a security software firm, DigiVault, that has developed a 256-bit data encryption key that is licensed by Fortune 100 companies
and governments to protect sensitive database information from prying eyes. The firm’s
founders are out of money and want to sell their technology. Because you and your team don’t
have enough money to acquire the firm outright on your own, you turn to outside sources of
funding. A venture bank is willing to put up a $3.5 million, five-year loan at 11% per year, which
only has interest payments due during its life; the principal balance will be paid off at the
liquidity event. Your team puts up $750,000 of its own capital. One of your friends from the
MBA program is a venture capitalist, and his firm agrees to invest $3.5 million at an expected
60% annual return for five years, at which time they expect a liquidity event in order to obtain
their money and the return back. Include all your calculations to support each answer in order
to earn full credit. Answers must be completed in sequence.
(a) Assume that in five years, DigiVault will have an expected exit enterprise value of $48
million, based on an EBITDA multiple of 5.0 from similar exit transactions. What does this
indicate the firm’s expected EBITDA will be at that time?
(b) Given the future value calculated in (a), what will be the equity value at that time?
(c) Because the VC firm expects a 60% compound return on its investment, what would be the
dollar value of its portion of the equity value you calculated in (b)?
(d) Based on your answer in (c), what would be the amount of the equity up front that you
would have to give up in order to obtain DigiVault’s original venture capital investment?
(e) What will be the dollar value of the management team’s original $750,000 equity investment
at the time of the liquidity event? (Points : 50) Question 6.6. 27. TCOs D & E) Shearer Sales Consulting (SSC) has 20 million shares of stock outstanding that trade at $50. The risk-free interest rate is 4% and
the market risk premium is 7.6%. This stock has a beta of 2.16. SCC also has $750
million in 11% bonds outstanding and the company has a 34% tax rate. Show all
calculations for each of your answers to earn full credit.
Part 1: a) Calculate the firm’s market capitalization, and then calculate the
enterprise value. b) Use the CAPM formula to determine the firm’s cost of equity,
and c) utilize this information to calculate SCC’s weighted average cost of capital.
Part 2: a) Assume that SCC issues $100 million in bonds to buy back $100 million
in common stock in order to recapitalize the firm. What is Shearer Consulting’s
new WACC? b) Finally, discuss why there is a change in WACC and explain the
impact of the components of capital structure on a company’s cost of capital.
(Points : 50)