Full Test Bank Equity Financing Chapter.10 4th Edition

Chapter 10: Equity Financing

True / False

1. Growth capital refers to equity investments in more mature companies that are looking for capital to expand or restructure operations.
2. In a merger, the company is sold for either cash or share in another company.
3. A capitalization table is commonly used at the time an equity investment is made.
4. Preferences and Covenants are terms negotiated by investors when making an investment.
5. In private equity financing, everything can be renegotiated.
6. Unfortunately, a venture capitalist firm only invests in companies located near them.
7. One of the guides to selecting a venture capitalist is Rule 504.
8. The Securities Act of 1933 states that securities may not be issued unless they are registered or an exemption from registration is available.
9. When preparing a loan proposal, repayment plans provide the background experiences of the key managers.
10. Setting up a checking account at a bank is one the first steps in building a relationship with a lending institution.

Short Answer / Fill in the blank

1. _________ is a broad subcategory of private equity that refers to equity investments made, typically in less mature companies, for the launch, early development, or expansion of a business.
2. ___________ is also known as LBO or buyout.
3. __________ refers to when investors request a board seat in the company.
4. Investors will insist on having ____________ rights should the company go public.
5. ______________ gives all shareholders such rights to sell their stock at an IPO.
6. The most important thing for an entrepreneur to understand about a VC firm is that all interests are focused to __________ the return on investment.
7. _______________ is a guide to selecting a venture capitalist that does not want unseasoned executives.
8. In a loan proposal, the __________ is where you state the amount sought, purpose, and source of repayment.
9. ____________ rate is the rate that banks charge their “best” customers.

Multiple Choice

1. Private Equity does not include:
   1. Angel Investments.
   2. Venture Capital Investments.
   3. An Initial Public Offering.
   4. Mezzanine Funding.
2. The normal order of investment rounds is:
   1. Seed, A Round, Mezzanine, C Round.
   2. A, Seed, B, Seed.
   3. Seed, A, B, C, Mezzanine.
   4. All of the above.
3. Preferred Stock is so-called because it:
   1. Is preferred by an entrepreneur.
   2. Offers certain preferred advantages to investors over founders.
   3. Is preferred by venture capitalists.
   4. Is preferred by investment bankers at an IPO.
4. A convertible loan allows:
   1. An investor to lend to a company and choose to convert the loan to equity at some time in the future.
   2. An entrepreneur to convert a bank loan to equity at his or her option.
   3. An entrepreneur to convert investors’ stock into a loan at some time in the future.
   4. All of the above.
5. Warrants allow:
   1. An entrepreneur to reduce the ownership position of investors.
   2. An investor to purchase additional stock at a defined time in the future and at a defined price.
   3. A company to give free stock to employees.
   4. A company to reduce its insurance cover by offering guarantees to investors.
6. Post-Money Valuation is:
   1. The value of a company immediately after an investment has been made.
   2. The value of a company when it has just met an important milestone.
   3. The value of a company just prior to an investment from a VC firm.
   4. The value of a company when it has secured a bank loan.
7. Due diligence is a term used to describe:
   1. A regular disclosure by a company to its investors.
   2. The examination process used by the US patent office.
   3. The process in which a potential investor and an entrepreneur investigate each other in detail prior to an investment being offered and accepted.
   4. All of the above.
8. Bridge financing refers to:
   1. Short term financing provided by the entrepreneur and his/her family.
   2. A short term round of funding to allow the company to get to an important milestone.
   3. A construction loan for a building extension.
   4. A round of funding to allow a company to jump from a “seed” round directly to a “B” round.

28. The objectives of venture capitalists and entrepreneurs:

a. Are the same.

b. Are frequently at odds.

c. Are brought into sync by common problems.

d. Unfortunately does not match the firm’s objectives.

29. A term sheet is:

a. A non-binding offer from a VC to invest in a company.

b. An offer to invest if the company secures in addition a term loan from a bank.

c. An outline of an investment offer to be negotiated later.

d. A binding offer from a VC to invest in a company.

30. Which of the following is considered a disadvantage of “going public”?

a. Prestige

b. Federal filings requirements

c. Transferability of ownership

d. Access to capital

31. Which of the following is NOT a way private equity firms receive a return on their investment?

a. Merger or Acquisition

b. IPO

c. Growth Capital

d. Recapitalization

32. The expected IRR for a Pre-seed round is:

a. 85-100 percent.

b. 50-80 percent.

c. 1-40 percent.

d. 40-50 percent.

Ans. C Page: 246

33. IRR stands for:

a. Internal rate of return.

b. Initial rate of return.

c. Ideal rate of return.

d. International rate of return.

34. ___________ shows the total amount of the various securities issued by the company

a. Due diligence

b. Cap table

c. Warrants

d. Pro rata

35. A forced buyout term is part of which of the following:

a. Later Rounds.

b. Piggybacking.

c. Management Decisions.

d. Forcing Exit.

36. Which of the following protect an investor from the company not meeting its objectives and from a subsequent round of investment being made at a lower valuation?

a. Registration Rights

b. Antidilution Rights

c. Later Rounds

d. Piggybacking

37. Which of the following is NOT a factor that may influence a venture capital firm’s funding decision?

a. Stage of Fund

b. Cash flow

c. Stage of Development

d. Location of the Venture

38. Which of the following is NOT a guide in selecting a venture capitalist?

a. Keep a lookout

b. Target the search

c. Keep a high profile

d. Shoot for the stars

39. When investigating possible venture partners you should:

a. Find out what their needs are.

b. Find out how much money they have.

c. Meet only once in person.

d. Meet their entire family.

40. Management Team Profiles:

a. Define the products and market.

b. Shows how you will generate the cash to provide payments.

c. Fire more experienced managers to make room for younger staff.

d. Provide the background experiences of the key managers.

41. The Four C’s of lending are:

a. Champions, Cash Flow, Collateral and Contribution.

b. Cash, Character, Consideration, and Collateral.

c. Cash Flow, Collateral, Character, and Contribution.

d. Consistency, Consideration, Cash, and Character.

42. Which of the following is NOT a sector of stage of development?

a. Expansion

b. Acquisitions/buyout

c. Early-stage

d. Decline

43. When preparing a loan, which of the following is NOT part of the seven key elements?

a. Business description

b. Financial projections

c. Repayment plans

d. Building blueprints

44. What calculation is computed by looking at forecasted earnings (profits) and multiplying those earnings by a factor that is relevant to the industry?

a. Strategic Sale

b. Cash Flow Estimates

c. Milestone

d. Profit Margin