Chapter 14: Harvesting the Business Venture Investment

CHAPTER 14
HARVESTING THE BUSINESS VENTURE INVESTMENT
TrueFalse Questions
T. 1. The process of exiting the privately held usiness venture to unloc! the
o"ners# investment value is !no"n as harvesting.
T. $. %hen harvesting a venture& the methodical distriution of assets directly to
the o"ners is !no"n as a systematic li'uidation.
(. ). %hen harvesting a venture& the outright purchase of the going concern y
managers& employees& or external uyers is !no"n as going pulic.
(. 4. %hen harvesting a venture& the t"o*step pulic e'uity registration and sale
is !no"n as an outright sale.
T. +. %hen an initial usiness plan is prepared& attention must e paid to the
investors# and founders# desire for eventual li'uidity y providing a harvest for
the venture investors.
T. ,. -n advantage of an exit strategy that pays out the venture#s investment
value over several years can ma!e it more difficult for entrepreneurs to start a
ne" venture ecause ade'uate capital has not een released from the existing
venture.
(. .. %hen an industry is in decline& systematic li'uidation is typically the most
attractive harvest strategy.
(. /. The harvesting process "here the purchase price of a firm is financed
largely "ith det capital is !no"n as management uyout 01B23.
(. 4. - special type of harvesting process "here the firm#s top management
continues to run the firm and has a sustantial e'uity position in the
reorgani5ed firm is !no"n as a leveraged uyout.
(. 16. In determining a harvest value& non*monetary items such as culture&
managerial succession& and employee retention are not factored in.
T. 11. -n oligatory disclaimer disavo"ing any intent to act as an offer to sell& or
solicit an offer to uy securities is !no"n as a red herring.
T. 1$. Harvesting is the process of exiting the privately held usiness venture to
unloc! the o"ners# investment value.
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Chapter 14: Harvesting the Business Venture Investment
T. 1). 2ne method of harvesting a venture is through systematic distriution of
assets directly to the o"ners.
(. 14. 2ther than "hen the venture is operating in a declining industry& it is
difficult to thin! of cases "here the disadvantages of li'uidation out"eigh the
advantages.
T. 1+. - leveraged uyout 07B23 ta!es place "hen the purchase price of a firm
is financed largely "ith det financial capital.
T. 1,. 8xit values for many mature ventures are usually determined y 013
discounted cash flo" 09C(3 methods or 0$3 relative valuation models ased on
some form of multiples analysis.
(. 1.. The t"o discounted cash flo" 09C(3 methods covered in this text are the
enterprise method and the det funds method.
T. 1/. :ltimately for harvesting purposes& "e need to decide on the venture#s
value at exit and ho" that exit value pie "ill e divided up among investors.
(. 14. -n ;initial pulic offering< is the only method used y entrepreneurs "hen
exiting a venture.
(. $6. The outright sale of a venture is the same thing as going pulic.
T. $1. - management uyout 01B23 is a special type of leveraged uyout
07B23.
(. $$. - leveraged uyout 07B23 is a special type of management uyout
01B23.
T. $). 8=2> stands for ;employee stoc! o"nership plan.<
(. $4. The sale of ne" shares of common stoc! is a secondary offering.
T. $+. The sale of used shares of common stoc! is a secondary mar!et offering.
Multile!C"oi#e Questions
c. 1. %hich of the follo"ing is not a "ay to harvest a venture?
a. systematic li'uidation
. outright sale
c. chapter 11 an!ruptcy
d. going pulic
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Chapter 14: Harvesting the Business Venture Investment
d. $. %hen registering e'uity and selling it via an I>2 of ne" shares follo"ed y
a secondary offering of existing shares& this venture harvesting process is
!no"n as?
a. systematic li'uidation
. outright sale
c. chapter 11 an!ruptcy
d. going pulic
. ). The ac'uisition of the venture y family memers& managers& or outside
uyers is a venture harvesting process !no"n as?
a. systematic li'uidation
. outright sale
c. chapter 11 an!ruptcy
d. going pulic
a. 4. The distriution of the venture#s cash flo"s directly to the o"ners is a
venture harvesting process !no"n as?
a. systematic li'uidation
. outright sale
c. chapter 11 an!ruptcy
d. going pulic
c. +. %hich of the follo"ing is not an advantage of a systematic li'uidation?
a. maintaining control throughout the harvest period
. harvesting of the investment value can e spread out over a numer
of years
c. the taxation treatment of li'uidation proceeds as ordinary income
d. the time& effort& and costs of finding a uyer for the venture can e
avoided
c. ,. %hich of the follo"ing is not a disadvantage of a systematic li'uidation?
a. the treatment and taxation of li'uidation proceeds as ordinary
income rather than capital gains
. the commitment of the entrepreneur#s resources and focus on a
dying venture rather than on other more lucrative ventures
c. the harvesting of the investment gets spread out over a numer of
years
d. the acceleration of the venture#s rate of decline as other industry
participants respond to the reduction in investment
d. .. %hich of the follo"ing is not a candidate for a leveraged uyout?
a. a venture "ith stale and ade'uate operating cash flo"s
. a venture "ith a high amount of e'uity relative to det
c. a venture "ith the aility to protect mar!et share
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Chapter 14: Harvesting the Business Venture Investment
d. a venture "ith a high det ratio
c. /. =hares registered "ith the =ecurities and 8xchange Commission and state
securities regulators and sold to the pulic are !no"n as?
a. primary offering
. secondary offering
c. initial pulic offering
d. shelf offering
a. 4. The sale of ne" securities is !no"n as?
a. primary offering
. secondary offering
c. initial pulic offering
d. shelf offering
. 16. The sale of used shares is !no"n as?
a. primary offering
. secondary offering
c. initial pulic offering
d. shelf offering
c. 11. In the investment an!ing process& "hich of the follo"ing is a duty of the
investment an!?
a. to e the targeted investors for a firm#s securities
. to provide an!ing services such as chec!ing accounts to firms
c. to find uyers for a firm#s securities
d. oth a and b
e. all of the aove
e. 1$. The difference et"een "hat the investment an! gets from selling
securities to pulic investors and "hat they pay to the issuing firm is !no"n
as?
a. I>2 underpricing
. due diligence
c. firm commitment
d. est efforts
e. under"riting spread
d. 1). - type of agreement "ith an investment an! employing only mar!eting
and distriution efforts "ithout the actual transfer of securities o"nership to
the investment an!ing syndicate is called?
a. I>2 underpricing
. due diligence
c. firm commitment
d. est efforts
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Chapter 14: Harvesting the Business Venture Investment
e. under"riting spread
c. 14. -n agreement "ith an investment an! that involves the purchase and
distriution of ne" securities is !no"n as?
a. I>2 underpricing
. due diligence
c. firm commitment
d. est efforts
e. under"riting spread
. 1+. The investment an!s process of ascertaining& to the extent possile& an
issuing firm#s financial condition and investment intent is !no"n as?
a. I>2 underpricing
. due diligence
c. firm commitment
d. est efforts
e. under"riting spread
a. 1,. %hich of the follo"ing descries "hen a syndicate#s offering price is less
than the mar!et price immediately follo"ing the offering?
a. I>2 underpricing
. due diligence
c. firm commitment
d. est efforts
e. under"riting spread
. 1.. In the aftermar!et trading for the venture#s securities& an order that is to e
executed as soon as possile at the prevailing mar!et price is !no"n as a:
a. put order
. mar!et order
c. limit order
d. stop order
d. 1/. In the aftermar!et trading for the venture#s securities& an order that
converts to a mar!et order once a certain price is achieved is !no"n as a:
a. put order
. mar!et order
c. limit order
d. stop order
c. 14. In the aftermar!et trading for the venture#s securities& an order that can e
executed only at a specified price or etter is !no"n as a:
a. put order
. mar!et order
c. limit order
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Chapter 14: Harvesting the Business Venture Investment
d. stop order

a. $6. - venture can e harvested in "hich of the follo"ing "ays?
a.. systematic li'uidation& outright sale& going pulic
. outright sale& going pulic& ac'uisition
c. going pulic& ac'uisition
d. ac'uisition& systematic li'uidation
. $1. The letters I>2 stand for:
a. investment pricing organi5ation
. initial pulic offering
c. institutional pricing overhead
d. immediate pricing opportunity
e. $$. The negotiated period around an e'uity securities offering during "hich
insiders are prohiited from selling their existing shares is called:
a. a seasoned offering
. an unseasoned offering
c. underpricing
d. an under"riting spread
e. a loc!up provision
d. $). %hich one of the follo"ing is considered to e a disadvantage of
systematic li'uidation?
a. entrepreneur maintains control throughout the harvest period
. harvesting of the venture can e spread out over several years
c. time& effort& and costs of finding a uyer for the venture can e
avoided
d. li'uidation proceeds are treated as ordinary income 0rather than
capital gains3
e. $4. In an outright sale of a venture& the venture can e sold to:
a. family memers
. managers
c. employees
d. outside 0external3 uyers
e. all of the aove
c. $+. -n initial pulic offering 0I>23 involves:
a. sale of ne" securities to private investors
. sale of used securities to the pulic
c. a venture#s first offering of =8C*registered securities to the pulic
d. all of the aove
e. none of the aove
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Chapter 14: Harvesting the Business Venture Investment
a. $,. The type of agreement "ith an investment an! involving the investment
an!#s under"ritten purchase and resale of securities is called:
a. firm commitment
. est efforts commitment
c. due diligence
d. ma!ing a red herring disclaimer
e. a private placement
. $.. -n order to purchase stoc! that can e executed only at a specified price or
etter is called a:
a. mar!et order
. limit order
c. stop order
d. stoc! order
e. private order
. $/. Based on the follo"ing information& estimate the percentage appreciation
on stoc! ought y the venture investors: founders# purchase price @.+6A
venture investors# purchase price @$.66A current stoc! price @16.66A founders
holding period B + yearsA venture investors holding period B ) years.
a. 166C
. 466C
c. ,66C
d. /66C
d. $4. Based on the follo"ing information& estimate the percentage appreciation
on stoc! ought y the founders: founders# purchase price @1.66A venture
investors# purchase price @$.66A current stoc! price @16.66A founders holding
period B + yearsA venture investors holding period B ) years.
a. 166C
. 466C
c. ,66C
d. 466C
c. )6. -ssume that a venture is expected to have an 8BIT9- of @1&+66&666 at the
end of five years from no". If the venture#s value is expected to e
@1$&666&666& "hat ;valuation multiple< "as eing assumed?
a. 1 time
. 4 times
c. / times
d. 16 times
e. 1$ times
d. )1. - venture is expected to have an exit value of @16&666&666 t"o years from
no". If venture investors invest @$&666&666 no"& and expect a $6C
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Chapter 14: Harvesting the Business Venture Investment
compounded rate of return on their investment& "hat portion of the exit value
"ould they need?
a. 16C
. $6.$C
c. $+C
d. $/./C
e. )$C
c. )$. - venture is expected to have an exit value of @16&666&666 five years from
no". If venture investors invest @1&666&666 no"& and expect a $6C
compounded rate of return on their investment& "hat portion of the exit value
"ould they need?
a. 16.+C
. $6.1C
c. $4.4C
d. $/./C
e. )$.+C
c. )). If venture investors invest @1&666&666 no"& "ill receive +6C of the exit
value& and expect a $6C compounded rate of return on their investment& "hat
"ill e the amount of the exit value at the end of t"o years?
a. @1&666&666
. @1&446&666
c. @$&//6&666
d. @+&666&666
e. @+&.,6&666
e. )). If venture investors invest @1&666&666 no"& "ill receive $+C of the exit
value& and expect a $6C compounded rate of return on their investment& "hat
"ill e the amount of the exit value at the end of five years?
a. @1&666&666
. @$&446&666
c. @4&4/6&666
d. @.&4.6&666
e. @4&4,6&666
4.