Entrepreneurial Finance- Fin 131;
Fall 2016; Dr. Yazdipour; Midterm Exam
INSTRUCTIONS- READ and FOLLOW ALL INSTRUCTIONS VERY CAREFULLY OR YOU MAY END UP WITH NO GRADE AT ALL!
1. This exam is AN INDIVIVUAL WORK. It means only you are expected to work on it- alone- and then submit as instructed in below. Your answers, ALL PLACED IN NO MORE THAN TWO (2) FILES – ONE WORD FILE AND ONE EXCEL FILE (where you use Excel for quantitative question(s)) – must be submitted by 11:59 pm on Sunday, the 9th. No other document format beside Word (.doc or .docx) and Excel will be accepted; this means no PDF files either. When answering the exam questions in either Word or Excel, provide all your responses in the same order as the questions. That is, first answer Question 1, then go to Question 2, then Question 3, etc.
1. The way you submit your exam files is just like submitting the WAs- that is uploading your response file via the exam link given to you. No emailed response will be accepted or graded.
1.
Do NOT remove
the headers that contain space for your Last and First names; just fill in your name right now in the spaces provided so that your name appears on every single page of the exam once you finish and submit your files. ALSO, enter your full name on the first sheet of your Excel.
1. Before turning in your exam, make sure you have answered ALL that was asked from you; NO follow-up additions or modifications are possible after you have submitted your exam.
1. Warnings: Submit ALL your exam responses/files (a maximum of two files, one Word and one Excel file) at the same time. This means, you can NOT submit one file (either Word or Excel) first and then come back a few minutes later and upload another file. The system and I allow you to attach two files BUT you MUST submit your two files at once. Once two files are attached and you can see them, do NOT forget to click Submit at the bottom of the page where you submit. So be careful.
1. Your qualitative answers should be objective- have source(s) of reference (our textbook, assigned readings, etc.). If you depend on sources from the Internet on my exams, you may not even pass the test; exception is when a question specifically asks you to utilize the Internet resources. The first thing that I look for in your responses is to see whether or not you have read AND fully understood the assigned readings in our textbook/readings/notes as listed in the syllabus. That would be the minimum. You may build upon the assigned materials/readings, but referencing the book/readings and building upon the text and any other assigned in the class is a must. Do not quote improperly from any sources- just give references so that your source can be verified. Regarding your textbook, just give the page number and possibly the paragraph. You should show your works for all quantitative questions- unless you properly set up Excel spreadsheets where I can actually see all the formulas used and trace all the calculations done.
1. As stated in the syllabus and repeated in here, all exams- including this one- are individual efforts and will be treated as such. This simply means ALL the existing Academic Honesty Policies at CSUF will be in full force- as always. I especially will be looking very very carefully at student responses to make sure exams are done individually- as they are supposed to be.
1. As questions regarding the exam bring up even more questions, and this may confuse some students, I have decided to give this test to you “as is”. This means you need to trust the questions and the info; and answer the exam questions accordingly. If there are any general typos, mistakes, etc, I can always check for them later on, and if valid, give due credit to all accordingly. With those in mind, I wish you the very best in answering the following questions. Maximum points for each question are given in parentheses at the end of each question.
1. Finally, NO QUESTIONS on Bb or emails WILL BE ANSWERED ONCE THE EXAM IS MADE AVAILABLE TO YOU AS SCHEDULED.
Do NOT forget to first enter your name in BOTH your Excel and Word files as instructed in above.
QUESTION 1: Evaluating a Business/Investment Opportunity
.
Earlier in the semester we studied a subject called “Opportunity Recognition”; as fully discussed in the assigned chapter 5, starting on page 21, of your textbook. In the Entrepreneurial Finance lingo such a topic is also referred to as Due Diligence, Screening Opportunities, or simply Evaluation. (Note: Evaluation is different from Valuation where we assign a Value or Price to a given project using different Valuation Methods that you also have studied in this class.) In this question, your task is as follows.
Given the above background and by applying what you have especially learned from the assigned topic/chapter as stated in above,
Evaluate
an apparently fast-emerging new business opportunity in the FinTech industry that is called Kensho https://www.kensho.com .
To learn about Kensho, take a look at the attached three-article file as a starter and do more search on the Net to better educate yourself about the said company, its competitors, and other related info that you may need to answer this question.
In answering this question feel free to use any model, guide, or framework that is offered in the mentioned book chapter; mainly chapters 5 of your textbook. As part of your response and after your comprehensive evaluation of the said venture,
also
answer the following question: Is Kensho a good business opportunity (investment) for a Venture Capital or a Private Equity Firm? Explain why yes, or why no. Be well organized, systematic and clear.
(50 points for this question)
Note: Points will be taken off for responses that lack organization, clarity, and rigor. So be clear
and
organized in your response to this and any other question. (Being organized means you categorize the key elements of your response so that the reader, in this case I, can better follow your chain of thoughts and writing.)
Maximum pages allowed for this question: 2-3, double-spaced, size 12.
QUESTION 2
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As you have learned in this class, risk plays a central role in decisions related to financing, growth, and exit strategies. However, risk consideration also plays a key role in decisions related to resource procurement and resource utilization especially by startup entrepreneurs. (Examples of resources include machinery and equipment and similar capital assets.) Given this brief background on the issue, what have you learned, if anything, in this class that can help you as an entrepreneur to minimize your risk exposures that come about as a result of your efforts in obtaining and utilizing the needed resources for your venture? In other words, are there specific risk-minimizing business strategies that you can use in your attempts to obtain and utilize the needed resources like machinery or expensive tools for your startup venture? Explain your answers in the needed details and make sure you also explain how risk is lowered as a result of your suggested strategies.
(Points given: 50)
Be clear
and
organized in your response to this and any other question. (Being organized means you categorize the key elements of your response so that the reader, in this case I, can better follow your chain of thoughts and writing.)
Maximum pages allowed for this question: 2, double-spaced, size 12.
QUESTION 3
.
Use the Free Cash Flow method of valuation and the following information, to calculate the value for a venture with the following characteristics. Expected revenue at year zero (or beginning of year 1): $4.0 million; growth rate in revenue for the first seven years: 25%; and for years 8-on: 10%; Annual profit margin or EBIAT/Sales for all years=22%; Annual asset intensity ratio or (FA+WC)/Sales for all years = 32%; discount rate in years 1-7: 35%, and in years 8-on: 20%.
Use Excel for this problem and not Word. Also make sure you set up your formulas correctly so that I could trace your work; in which case you should not be concerned about showing your work any further than what you do in your Excel file.
(Grade: 50 points)
QUESTION 4
.
You are given the following information:
1. Baseline (last year or year 1) sales: $12.00 million
1. Sales growth rate for years 1-7: 45%
1. Sales growth rate for years 8-10: 25%
1. Sales growth rate for years 11-on: 8%
1. Profit margin for years 1-10: 35%
1. Profit margin for years 11-on: 18%
1. Discount rate or cost of capital: 30% during years 1-10; and 12% for years 11-on.
Answer the following questions:
1. What is the value of this company using the Fundamental Method of valuation?
1. For $3.0 million investment, what portion of the company should be given up?
1. Assume you are a financial consultant to the entrepreneur, and this entrepreneur has asked you to advise her regarding the $3.0 million financing. How will you go about advising your client? Outline your thought process in this regard.
(50 points)
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End of Exam and
REMINDERS:
1. Do NOT forget entering you Name in the Header of your Word file so each page has your full name; (I need to see your full name on each page of the exam book for grading purposes).
2. Do NOT forget entering you Full Name on top of each worksheet/page of your Excel file; (I need to see your full name on worksheet/page of the Excel file for grading purposes).
3. Before you submit make sure you have followed ALL the submission instructions, including type and number of file that are stated on the first page of this exam.
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midterm.fall-2016.docx
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