CFA Level 1 - Alternative Investments Session 18 - Reading 74 - LOS g

CFA Level 1 - Alternative Investments Session 18 - Reading 74 - LOS g (Notes, Practice Questions, Sample Questions) 1. Venture-capital investing will appeal to investors who: A) are willing to accept a high-risk profile and illiquidity. B) have a short time horizon.C) make investment decisions based on historical risk andreturn data. Explanation — Venture capital investments are characterized by illiquidity and a high-risk profile. Venture capital is along-term investment not suitable for investors with shorttime horizons. There is little historical data available forventure-capital investments, so investors who depend onsuch data to make decisions are not likely to invest in thisarena 2. The di erent stages of venture capital investing are generally grouped according to the: A) rights and responsibilities of the investor.B) liquidity of the investment. C) stage of development of the venture Explanation — The stages of venture capital investment are categorized according to the point the venture is in thebusiness cycle

3. The founders of the ABCD Corporation believe their idea for a new weight-loss pill will be tremendously successful. ABCDCorporation is currently seeking venture capitalists to invest intheir company so they can do further research and hopefullysomeday develop their idea into a marketable product. Thisstage of venture capital investing can best be described as: A) seed-stage. B) first-stage.C) formative-stage Explanation — First-stage financing is used to begin manufacturing and sales of a product. Formative-stagefinancing includes the seed-stage and the early-stage, but istoo broad of a description for this situation. Seed-stage bestdescribes this scenario, because ABCD is seeking financing tosupport product development and market research.Note: there is some overlap between the stages, so read thequestion carefully 4. A manufacturing company would seek mezzanine financing in which of the following scenarios? A) A company already producing and selling a product, seekingan initial expansion of operations.B) A company ready for a major marketing campaign. C) A company preparing for an initial public o ering. Explanation — All of the above scenarios are di erent stages of later-stage financing. A company ready for a major marketingcampaign or a physical plant expansion is seeking third-stagefinancing. An initial expansion of operations describes

second-stage financing. The capital provided to prepare for aninitial public o ering is at the mezzanine stage 5. A venture capitalist would typically do all of the following EXCEPT: A) provide business expertise and confidentiality.B) force the entrepreneur to carefully consider the viability ofthe project through the development of a business plan. C) manage the company after it has gone public Explanation — Venture capitalists also provide risk capital 6. Which of the following is least likely a way in which venture capitalists create value? A) Understanding the outside capital markets and helpingstart-ups acquire capital in the public debt and equitymarkets. B) Are often able to identify undervalued investments due tospecialization in the venture capitalist's area of expertise.C) Provide contacts to accountants, lawyers, and investmentbankers Explanation — Start-ups generally are not ready for the public equity markets (hence the venture capitalist) and are certainlynot ready for the public debt markets. Venture capitalistsprovide value by not only providing money, but also contacts,guidance, advice, insight, etc

7. Which of the following is NOT among the three most important factors in valuing a venture capital investment? A) Timing of exit. B) Liquidity. C) Expected payo at exit. Explanation — Illiquidity is a characteristic common to all venture capital investments, but is di cult to quantify valuingan investment. The timing and amount of the expected payoat exit, adjusted for the probability of failure, are the threemost important factors in the valuation of venture capitalopportunities