A venture capitalist firm wants to invest $1.5 million in your NYDeli dot.com venture that you started six months ago. You do not expect to make a profit until year four when your net income is expected to be $3 million. The common stock of BioSystems, a “comparable” firm, currently trades in the over-the-counter market at $30 per share. BioSystems’ net income for the most recent year was $300,000 and the firm has 150,000 shares of common stock outstanding. A. Apply the VC method to determine the value of the NYDeli at the end of four years. B. If VCs want a 40% compound annual rate of return on similar investments, what is the present value of your NYDeli venture? C. What percentage of ownership of the NYDeli dot.com venture will you have to give up to the VC firm for its $1.5 million investment?
> Describe what it means for two events to be independent.
> H & K Electronic Warehouse sells a 12-pack of AAA batteries, and this is a very popular item. Demand for this is normally distributed, with an average of 50 packs per day and a standard deviation of 16. The average delivery time is five days, with a stan
> For SKU A3510 at the Hardware Warehouse, the order quantity has been set at 150 units each time an order is placed. The daily demand is normally distributed, with a mean of 12 units and a standard deviation of 4. It always takes exactly five days for an
> The Hardware Warehouse is evaluating the safety stock policy for all its items, as identified by the SKU code. For SKU M4389, the company always orders 80 units each time an order is placed. The daily demand is constant, at 5 units per day; the lead time
> Quality Suppliers, Inc., has decided to extend its shipping option. (Refer to Problem 6-43 for details.) Now, Quality Suppliers is offering to ship the amount ordered in five equal shipments, one each week. It will take five weeks for this entire order t
> Dillard Travey receives 5,000 tripods annually from Quality Suppliers to meet his annual demand. Dillard runs a large photographic outlet, and the tripods are used primarily with 35-mm cameras. The ordering cost is $15 per order, and the carrying cost is
> Thaarugo, Inc., produces a GPS device that is becoming popular in parts of Scandinavia. When Thaarugo produces one of these, a printed circuit board (PCB) is used, and it is populated with several electronic components. Thaarugo determines that it needs
> Ralph Janaro simply does not have time to analyze all of the items in his company’s inventory. As a young manager, he has more important things to do. The following is a table of six items in inventory along with the unit cost and the d
> Linda Lechner has just been severely chastised for her inventory policy. (See Problem 6-39.) Sue Surrowski, her boss, believes that the service level should be either 95% or 98%. Compute the safety stock levels for a 95% and a 98% service level. Linda kn
> North Manufacturing has a demand for 1,000 pumps each year. The cost of a pump is $50. It costs North Manufacturing $40 to place an order, and the carrying cost is 25% of the unit cost. If pumps are ordered in quantities of 200, North Manufacturing can g
> Lisa Surowsky was asked to help in determining the best ordering policy for a new product. Currently, the demand for the new product has been projected to be about 1,000 units annually. To get a handle on the carrying and ordering costs, Lisa prepared a
> Why is the probability of the intersection of two events subtracted in the sum of the probability of two events?
> Northern Distributors is a wholesale organization that supplies retail stores with lawn care and household products. One building is used to store Never fail lawn mowers. The building is 25 feet wide by 40 feet sdeep by 8 feet high. Anna Oldham, manager
> Douglas Boats is a supplier of boating equipment for the states of Oregon and Washington. It sells 5,000 White Marine WM-4 diesel engines every year. These engines are shipped to Douglas in a shipping container of 100 cubic feet, and Douglas Boats keeps
> After analyzing the costs of various options for obtaining brackets, Ross White (see Problems 6-27 through 6-29) recognizes that although he knows that the lead time is 2 days and the demand per day averages 10 units, the demand during the lead time ofte
> Upon hearing that Ross White (see Problems 6-27 and 6-28) is considering producing the brackets inhouse, the vendor has notified Ross that the purchase price would drop from $15 per bracket to $14.50 per bracket if Ross would purchase the brackets in lot
> Ross White (see Problem 6-27) wants to reconsider his decision of buying the brackets and is considering making the brackets in-house. He has determined that setup cost would be $25 in machinist time and lost production time and that 50 brackets could be
> Ross White’s machine shop uses 2,500 brackets during the course of a year, and this usage is relatively constant throughout the year. These brackets are purchased from a supplier 100 miles away for $15 each, and the lead time is 2 days. The holding cost
> In Problem 6-20, you helped Lila Battle determine the optimal order quantity for number 6 screws. She had estimated that the ordering cost was $10 per order. At this time, though, she believes that this estimate was too low. Although she does not know th
> Lila’s brother believes that she places too many orders for screws per year. He believes that an order should be placed only twice per year. If Lila follows her brother’s policy, how much more would this cost every year over the ordering policy that she
> Lila Battle has determined that the annual demand for number 6 screws is 100,000 screws. Lila, who works in her brother’s hardware store, is in charge of purchasing. She estimates that it costs $10 every time an order is placed. This cost includes her wa
> Refer to the DJIA data in Problem 5-41. Problem 5-41: The following table provides the Dow Jones Industrial Average (DJIA) opening index value on the first working day of 1994–2013. Develop a trend line and use it to predict the openi
> Should people who will be using the results of a new quantitative model become involved in the technical aspects of the problem-solving procedure?
> Using the DJIA data in Problem 5-41 and exponential smoothing with trend adjustment, forecast the opening DJIA value for 2014. Use
> The following table provides the Dow Jones Industrial Average (DJIA) opening index value on the first working day of 1994–2013. Develop a trend line and use it to predict the opening DJIA index value for years 2014, 2015, and 2016. Find
> In the past, Judy Holmes’s tire dealership sold an average of 1,000 radials each year. In the past 2 years, 200 and 250, respectively, were sold in fall, 350 and 300 in winter, 150 and 165 in spring, and 300 and 285 in summer. With a major expansion plan
> Management of Davis’s Department Store has used time-series extrapolation to forecast retail sales for the next four quarters. The sales estimates are $100,000, $120,000, $140,000, and $160,000 for the respective quarters before adjusting for seasonality
> The unemployment rates in the United States during a 10-year period are given in the following table. Use exponential smoothing to find the best forecast for next year. Use smoothing constants of 0.2, 0.4, 0.6, and 0.8. Which one had the lowest MAD?
> Trevor Harty, an avid mountain biker, always wanted to start a business selling top-of-the-line mountain bikes and other outdoor supplies. A little over 6 years ago, he and a silent partner opened a store called Hale and Harty Trail Bikes and Supplies. G
> Using the data in Problem 5-35, develop a multiple regression model to predict sales (with both trend and seasonal components), using dummy variables to incorporate the seasonal factor into the model. Use this model to predict sales for each quarter of t
> A major source of revenue in Texas is a state sales tax on certain types of goods and services. Data are compiled, and the state comptroller uses them to project future revenues for the state budget. One particular category of goods is classified as Reta
> Resolve Problem 5-33 with
> Consulting income at Kate Walsh Associates for the period February–July has been as follows: Use exponential smoothing to forecast August’s income. Assume that the initial forecast for February is $65,000. The smooth
> Why do you think many quantitative analysts don’t like to participate in the implementation process? What could be done to change this attitude?
> Sales of vacuum cleaners over the past 13 months were as follows: (a) Using a moving average with three periods, predict the demand for vacuum cleaners for next February. (b) Using a three-period weighted moving average with weights 3, 2, and 1, predict
> How would the forecast for week 25 of the previous problem change if the initial forecast was 40 instead of 50? How would the forecast for week 25 change if the forecast for week 1 was assumed to be 60?
> Emergency calls to Winter Park, Florida’s 911 system for the past 24 weeks are as follows: (a) Compute the exponentially smoothed forecast of calls for each week. Assume an initial forecast of 50 calls in the first week, and use WE
> Passenger miles flown on Northeast Airlines, a commuter firm serving the Boston hub, are as follows for the past 12 weeks: (a) Assuming an initial forecast for week 1 of 17,000 miles, use exponential smoothing to compute miles for weeks 2 through 12. U
> Sales of industrial vacuum cleaners at R. Lowenthal Supply Co. over the past 13 months are as follows: (a) Using a moving average with three periods, determine the demand for vacuum cleaners for next February. (b) Using a weighted moving average with t
> Would you use exponential smoothing with a smoothing constant of 0.3, a 3-year moving average, or a trend line to predict the sales of Cool-Man air conditioners? Refer to Problems 5-22, 5-25, and 5-26. Problem 5-22: Sales of Cool-Man air conditioners ha
> Using the trend projection method, develop a forecasting model for the sales of Cool-Man air conditioners (see Problem 5-22). Problem 5-22: Sales of Cool-Man air conditioners have grown steadily during the past 5 years: The sales manager had predicted
> What effect did the smoothing constant have on the forecast for Cool-Man air conditioners? (See Problems 5-22 and 5-23.) Which smoothing constant gives the more accurate forecast? Problem 5-22: Sales of Cool-Man air conditioners have grown steadily duri
> Using smoothing constants of 0.6 and 0.9, develop forecasts for the sales of Cool-Man air conditioners (see Problem 5-22). Problem 5-22: Sales of Cool-Man air conditioners have grown steadily during the past 5 years: The sales manager had predicted, b
> A college student has just completed her junior year. The following table summarizes her grade-point average (GPA) for each of the past nine quarters: (a) Forecast the student’s GPA for the fall semester of her senior year by using a
> Ron Garcia felt good about his first week as a management trainee at Mexicana Wire Winding, Inc. He had not yet developed any technical knowledge about the manufacturing process, but he had toured the entire facility, located in the suburbs of Mexico Cit
> Southwestern University (SWU), a large state college in Stephenville, Texas, 30 miles southwest of the Dallas/Fort Worth metroplex, enrolls close to 20,000 students. The school is the dominant force in the small city, with more students during fall and s
> Assume a venture has a perpetuity enterprise value cash flow of $800,000. Cash flows are expected to continue to grow at 8 percent annually and the venture’s WACC is 15 percent. A. Calculate the venture’s enterprise value. B. If the venture has $2,000,0
> Given a WACC of 15 percent, a target debt-to-value of .5, a tax rate of 28 percent and a cost of debt of 10 percent, what is the implied cost of equity?
> Calculate the after-tax WACC for a firm with a 25 percent tax rate, a 10 percent cost of debt, a 30 percent cost of equity and a target debt-to-value of .30. Explain how investing to provide the WACC returns keeps the debt and equity investors happy.
> Suppose you are considering a venture conducting a current financing round involving an issue of 100,000 new shares at $3. The existing number of shares outstanding is 200,000. What are the related pre-money and post-money valuations?
> First- and second-round required returns of 55% and 40% (instead of the original 50% and 25%). Interpret your results as they relate to the founders’ ownership and the feasibility of the financing.
> If the new offering price was $.80 for 1,500 shares. Assume other things remain the same.
> A venture investor wants to estimate the value of a venture. The venture is not expected to produce any free cash flows until the end of year 6 when the cash flow is estimated at $2,000,000 and is expected to grow at a 7 percent annual rate per year int
> Calculate the discount rate consistent with a cap rate of 12% and a growth rate of 6%. Show how your answer would change if the cap rate dropped to 10 percent while the growth rate declined to 5 percent.
> Describe how the enterprise valuation cash flow is determined. That is, identify the components included in determining the enterprise valuation cash flow.
> What is the enterprise (entity) method of valuation and how does it differ from the equity methods?
> What are the “factors” that influence the values of American-style options?
> How do (a) American-style options, (b) European-style options, and (c) Bermudan-style options differ?
> What is common stock or common equity? What is the purpose of preemptive rights?
> Why is credit card financing attractive to entrepreneurs? What are the risks?
> Why are new ventures at a disadvantage in receiving debt financing?
> What are the five C’s of Credit Analysis?
> What is a direct public offering?
> What is venture leasing? How does it differ from traditional leasing?
> Describe how a firm’s net working capital (NWC) is measured and how the NWC-to-total- assets ratio is calculated. What does this ratio measure?
> What is meant by the terms business crowdsourcing and crowdfunding?
> What are factoring and receivables lending?
> What is a debt guarantee and how does the SBA back a small business loan?
> What types of advisory services are available from the SBA?
> What is a Small Business Investment Company (SBIC)?
> What is the Small Business Administration (SBA), when was it organized, and what was its purpose?
> What is meant by the terms (a) capital call (b) deal flow (c) venture investing due diligence?
> What are the components or stages in the professional venture investing cycle after funds have been raised until closure?
> What are the components or stages in the professional venture investing cycle from inception to funding?
> What has happened to professional venture investing since the mid-1990s?
> How is the current ratio calculated and what does it measure? How does the quick ratio differ from the current ratio?
> Describe the development of professional venture investing in the 1960s, 1970s, and early 1980s.
> What was the early role of the Small Business Administration (SBA) in fostering venture investing?
> Is the compensation paid to venture capitalists (e.g. 2% management fee and 20% carried interest) reasonable? What are a fund’s investors buying with this compensation?
> Why should entrepreneurs care what pressures venture capitalists face in carrying out their professional money management (intermediation) function?
> What is meant by the terms (a) lead investor (b) SLOR (c) term sheet?
> What is a professional venture capitalist? How does this occupation differ from that of an angel investor?
> What are the common ways to estimate a terminal value for a venture?
> How would one expect P/E ratios to vary with a venture’s risk and growth opportunities?
> How is multiplying a projected earnings by a P/E ratio similar to discounting a perpetuity of earnings starting at that level?
> What is staged financing? Describe how the capitalization (cap) rate is calculated.
> What are the meanings of the terms “cash build” and “cash burn”? How do we calculate net cash burn rates?
> What is meant by pre-money valuation? What is post-money valuation?
> How does a present value venture valuation pie differ from a future value valuation pie?
> Describe the process for estimating the percentage of equity ownership that must be given up by the founder when a new equity investment is needed.
> Describe the basic venture capital (VC) method for estimating a venture’s value.
> What is the difference between discounting expected cash flows from multiple scenarios at a constant rate and averaging the scenarios’ PVs calculated with that single discount rate?
> What is meant by the utopia discount process? Describe how expected present value is calculated.
> What is meant by “finding the value of a venture’s assets is the same as finding the value of a venture’s debt plus equity”?
> Describe the equity valuation method.
> Explain the difference between pre-money valuation and post-money valuation.
> What is a venture’s reversion value?
> What are the three types of comparisons that can be made when conducting ratio analyses?
> Define the terms (a) explicit forecast period (b) terminal or horizon value as they relate to a venture’s discounted cash flow valuation.
> Describe what is meant by the statement “If you’re not using estimates, it’s not a valuation.”
