Question

18. Statement 1: For venture capital investment in the early stages of analysis, emphasis is placed on the discounted cash flow approach to valuation. Statement 2: For buyout investments, income-based approaches are used frequently as a primary method of valuation. Statement 3: If a comparable group of companies exist, multiples of revenues or earnings are used frequently to derive a value for venture capital investments. Which statement is the least valid? A. Statement 1 B. Statement 2 C. Statement 3 19. Replication Strategy 1: A long position in high yield corporate bonds and a short position in US Treasury securities with a similar duration. Replication Strategy 2: A long position in convertible bonds and a short position in the equity if the firm issuing the convertible bond. Which of the following hedge fund strategies can be replicated by Replication Strategy 1 and 2? A. Fixed-income arbitrage for both strategies. B. Fixed -income arbitrage for Replication Strategy 1 and convertible arbitrage for Replication Strategy 2. C. Convertible arbitrage for 1 and fixed-income arbitrage for 2.

Answer 1

Q 18)

Answer:-

Statement 1 is incorrect as the DCF method is less frequently used for venture capital investments as the cash flow are uncertain

Statement 2 is correct as the DCF method which as an income based approach is primary method of valuation used for Buyout transactions

Statement 3 is correct as if comparable companies exists then the multiple of earnings and revenues can be used to value for exit in case of venture capital investments.

Hence statement 1 is least valid. Hence option A is correct

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