Question

QUESTION 29 A venture capitalist may work backwards to value an early stage venture. She starts with the objective of earning 10x on the capital investment. It then becomes necessary to find out how the company will achieve a valuation at IPO consistent with returning 10x to the VC. The factors that must be taken into a account include the size of the market and the ability of the founders to control a significant part of this market while maintaining high gross margins O True False QUESTION 30 Use the following data about a fixed coupon corporate bond to answer the following question The yield to maturity of the bond is greater than 12% 11/14/2016 settlement 11/14/2026 maturity 10% rate 98 price redemption frequency basis QUESTION 29 A venture capitalist may work backwards to value an early stage venture. She starts with the objective of earning 10x on the capital investment. It then becomes necessary to find out how the company will achieve a valuation at IPO consistent with returning 10x to the VC. The factors that must be taken into a account include the size of the market and the ability of the founders to control a significant part of this market while maintaining high gross margins True O False QUESTION 30 Use the following data about a fixed coupon corporate bond to answer the following question. The yield to maturity of the bond is greater than 12% settlement 11/14/2016 maturity 11/14/2026 1096 rate 98 price redemption 100 frequency basis True False

Answer 1

(30) Settlement Date: 11/14/2016 and Maturity Date: 11/14/2026

Tenure = 11/14/2026 - 11/14/2016 = 10 years or 20 half-years

Rate = 10 % (coupon), Coupon Payment Frequency = 2, Redemption Price (Face vAlue) = $ 100 and Current Price = 98 (% of Face Value) = 0.98 x 100 = $ 98

Let the yield to maturity be 2r

Semi-Annual Coupon = 0.5 x 0.1 x 100 = $ 5

Therefore, 98 = 5 x (1/r) x [1-{1/(1+r)^(20)}] + 100 / (1+r)^(20)

Using EXCEL's Goal Seek Function/ a financial calculator/ hit and trial method to solve the above equation, we get:

r = 0.51627 or 5.1627 %

Yield to Maturity = 5.1627 x 2 = 10.3254% ~ 10.33 %

As is observable, the yield to maturity is not more than 12%. Hence, the given statement is false.