ENTR Finance Final UIowa
The beginning of professional venture capitalists occurred when?
1946, post ww2
All of the following are common loan restrictions... (except)
Common loan restrictions: Maintenance of accurate records and financial statements, limits on total debt, restrictions on dividends or other payments to owners/investors, restrictions on additional capital expenditures, restrictions on sale of fixed assets, performance standards on financial ratios & current tax and insurance payments
Stages of a Venture
Development Startup Survival Rapid Growth Early Maturity
The beginning of professional venture capitalists is considered to begin with the establishment of what organization?
Formation of American Research & Development Organization (ARD)
Start-up financing
Funding used for completion of product development and fund initial marketing efforts it is the money that is required to start a new business, whether for office space, permits, licenses, inventory, product development and manufacturing, marketing or any other expense. "seed money" (In startup stage)
What is the largest source of venture capitalists funds in 2009?
Funds of Funds (33%) (Pension funds and corporations)
Know the important issues in place with the establishment of investment fund. Which of these options is not important?
IMPORTANT: fees & expenses, taxation, trading limitations, shareholder control
* What increases a firm's need for additional cash?
If investments in assets are not financed by profits from business operations plus spontaneous financing from suppliers, employees and the gov
Sales growth rate based on retention of profits is called...
Sustainable sales growth rate
Venture capitalists funds tend to identify with publicly identified missions because it adds value. Which is not one of those niches?
The three common identifying characteristics are industry stage and size of investment & geographic area.
Venture Capital firms tend to specialize in publicly identified niches because of the potential for value-added investing by venture capitalists. Which is not one of these niches?
Management style
** Find sustainable growth rate
(Given: $500k projected net income; 2 million equity at end of the year, $125,000 dividends) 1-(dividends/net income) = business retention rate (Net income/equity) = ROE (Retention rate * ROE) = sustainable growth rate 1- (125,000/500,000) = .75 (500,000/2,000,000) = (.25 * .75) = .1875 = 18.75%
*** Calculation Question: If venture investors invest 1 million now, will receive 25% of exit value and expect 20% compounded rate of return. What is the approximate exit value at the end of 5 years?
(compounded rate after 5 years/.25)= 9953280
By an act of Congress, SBA was created in what year?
1953 -for the purpose of fostering the initiation and growth of small businesses
Rapid-growth Stage
4th stage. create and build value, obtain additional financing, examine exit opportunities Stage of expansion- At this stage you might feel there is almost a routine-like feel to running your business. Staff is in place to handle the areas that you no longer have the time to manage (nor should you be managing), and your business has now firmly established its presence within the industry. Here you might start to think about capitalizing on this certain level of stability by broadening your horizons with expanded offerings and entry into new geographies. [[Businesses in this stage often see rapid growth in both revenue and cash flow as the blueprint has now been established, but be warned about getting too comfortable. In business, if you are not moving forward you are moving backwards, and without a constant, almost nervous itch or desire to expand, complacency can set in, and you might get caught off guard.]] Look at your resources, be realistic about the effort and cost and potential returns, and always keep an expert eye on how expansion might impact the current quality of service you provide your existing customers.
Early-maturity Stage
5th stage. manage ongoing operations, maintain and add value, obtain seasoned financing Having navigated the expansion stage of the business lifecycle successfully, your company should now be seeing stable profits year-on-year. While some companies continue to grow the top line at a decent pace, others struggle to enjoy those same high growth rates. It could be said that entrepreneurs here are faced with two choices: push for further expansion, or exit the business. If you decide to expand further, you will need to ask yourself the same questions you did at the expansion stage: Can the business sustain further growth? Are there enough opportunities out there for expansion? Is your business financially stable enough to cover an unsuccessful attempt at expansion? Many at this stage also look to move on through a sale. This could be a partial or full sale, and of course depending on the company type (for example, public or private), the negotiation may be a whole new journey in itself.
* Balance sheet insolvency occurs when a company has... (*lists off conditions*)
A cumulative amount of losses that offset the infusion of equity capital, the venture's total equity account can become negative, not uncommon during early stages of venture Balance sheet insolvency occurs when a company's total liabilities are greater than its assets - a situation that can be determined by taking a 'balance sheet test.' Along with a cash flow test, it provides a clear picture of the company's financial status, and helps directors to avoid accusations of insolvent trading. An accurate balance sheet test will include contingent and prospective liabilities, such as deferred payments or potential litigation decisions against the company, so that a precise assessment can be made.
Collateral (The 5 C's of Credit Analysis)
Collateral can help a borrower secure loans. It gives the lender the assurance that if the borrower defaults on the loan, the lender can repossess the collateral. Car loans, for instance, are secured by cars, and mortgages are secured by homes. Collateral-backed loans, sometimes referred to as secured loans, are generally considered to be less risky for lenders to issue. As a result, loans that are secured by some form of collateral are commonly offered with lower interest rates and better terms compared to other unsecured forms of financing.
Business Life Cycle Stages
Development Start-up Survival Rapid-growth Early-maturity
During which life cycle stage is a venture most accurate with its forecasts?
Early Maturity Stage
In an outright sale, who can it be sold to?
Family members, managers, employees, or outside buyers.
Why is bank debt not a realistic source of financing for startups?
Large portion of startup assets are intangible and provide no collateral, receivables either don't yet exist or collection history is inadequate, not economically plausible for bank to use management involvement in a defaulting new venture & risk characteristics are not a good match to demand deposits or other bank liabilities A) a large portion of the assets are intangible and provide no collateral B) payables either don't yet exist or its history is inadequate C) the start-up's dependence on a small number of irreplaceable peopleis not a good match to demand deposits or other bank liabilities D) receivables collection track record is incomplete E) in the event of a default, it is now plausible for the bank to install a management team to help right the operations Answer (all letters true except)- B
In a syndicate of venture investors, the investor who is responsible for governing the process of due diligence is...
Lead Investor
Capital (The 5 C's of Credit Analysis)
Lenders also consider any capital the borrower puts toward a potential investment. A large contribution by the borrower decreases the chance of default. Borrowers who have a down payment to put on a home, for example, typically find it easier to get a mortgage. Down payments indicate the borrower's level of seriousness, which can make lenders more comfortable in extending credit. Down payment size can also affect the rates and terms of a borrower's loan. Generally speaking, larger down payments result in better rates and terms.
All of the following are common loan restrictions except?
Limits on total equity
Operating Cycle
Meausres the average time it takes to purchase raw materials, assemble a product, book the sale and collect on it. purchase, produce, and sell the products, plus time needed to collect receivables if the sales are on credit Cash > Materials/WIP-work in progress > Finsihed Goods > Receivables/ Cash & Credit Sales)
*New York Stock Exchange (NYSE) participates in? What type of offering?
NYSE- world's largest securities exchange Participates in Post IPO trading. Secondary offering in secondary market.
Return on Equity (ROE)
Net Income/Total Equity = (net income for period) / (total assests - total liabilities)
Pre-money evaluation vs post-money evaluation
Pre-money: present value of a venture prior to a new money investment Post-money: pre-money valuation of a venture plus money injected by new investors.
When a venture is in financial distress but believes it has a turnaround opportunity, which of the following won't apply?
Private Liquidation
Conditions (The 5 C's of Credit Analysis)
The conditions of the loan, such as its interest rate and amount of principal, influence the lender's desire to finance the borrower. Conditions can refer to how a borrower intends to use the money. Let's say a borrower applies for a car loan or a home improvement loan. A lender may be more likely to approve those loans because of their specific purpose, rather than a signature loan, which could be used for anything. Additionally, lenders may consider conditions that are outside of the borrower's control, such as the state of the economy, industry trends or pending legislative changes.
Going Concern Value
The worth of a business, including real estate, goodwill, and earning capacity. value of a business that is expected to continue operating into the future the total value of the real estate plus the business operation. a value that assumes the company will remain in business indefinitely and continue to be profitable. This differs from the value that would be realized if its assets were liquidated because an ongoing operation has the ability to continue to earn profit, which contributes to its value. (goodwill- consists of intangible assets, such as company brand names, trademarks, patents and customer loyalty.) Typically the going-concern value will be greater than the liquidation value.
Purchase-to-Payment Conversion Period
[represents current outstanding payables- how much a company owes its current vendors for inventory and goods purchases and when the company will have to pay off its vendors] (Avg payables + Avg accrued liabilities) / (COGS / 365) If averages are not available use formula - (yearend payables + yearend accrrued liabilities) / (COGS/365) days-76.8
Inventory-to-Sale Conversion Period
[represents the current inventory level and how long it will take the company to sell this inventory.] = (Avg. Inventories) / (COGS/365) or =(yearend inventories) days-112.9
Sale-to-Cash Conversion Period
[represents the current sales and the amount of time it takes to collect the cash from these sales.] = (Avg. receivables) / (Net sales/365) or = (yearend receivables) Days-57.1
Cash Conversion Cycle (CCC)
[the length of time funds are tied up in working capital, or the length of time between paying for working capital and collecting cash from the sale of the working capital] = (inventory-to-sale conversion period) + (sale-to-cash conversion period) - (purchase-to-payment conversion period) (should be close to zero) Days- 93.2
Stepping stone year
first year after the explicit forcast period
Seed Financing
investor invests capital in a startup company in exchange for an equity stake in the company from- family and friends funding, angel funding, crowdfunding the initial capital used when starting a business, often coming from the founders' personal assets, friends or family, for covering initial operating expenses and attracting venture capitalists. This type of funding is often obtained in exchange for an equity stake in the enterprise, although with less formal contractual overhead than standard equity financing. (in development stage)
* Professional venture investing involves setting up as a...
new firm defining a fund's objectives and policies Professional venture investing usually involves setting up a venture capital firm as a: (c-partnership) a. proprietorship b. corporation c. partnership d. S corporation
When evaluating the prospects of a new venture, venture capital firms consider the characteristics of the entrepreneur and its team. Which of the following is not part of the review of the entrepreneur/team?
the VC firms' ability to cash out
Discounted Cash Flow (DCF)
valuation approach involving discounting future cash flows for risk and delay.
** Find sustainable growth rate
(Given: $200k beginning of period; $300k end of period) Know what it grew based off of beginning 300k-200k=100k (100,000/200,000) 50 % =growth/beginning value Sustainable growth rate- (SGR) is the maximum rate of growth that a firm can sustain without having to expand financial leverage or look for outside financing. For a firm operating above its SGR, sustaining growth can be difficult in the long term due to strained financial resources or overextended financial leverage, in which case the firm should borrow funds to facilitate prolonged growth. Meanwhile, firms that fail to attain their SGR are at risk of stagnation. A company's SGR is the product of its return on equity (ROE) and the percentage of its profits that is plowed back into the firm. SGR is calculated as: ROE x (1 - dividend-payout ratio), which is equal to the product of ROE and the retention ratio. or (net income/equity) x (1-dividend payout) (dividend payout ratio= dividends paid/net income for period) If, for example, a company has a ROE of 15% and a payout ratio of 75%, its SGR is calculated by taking 0.15 and multiplying it by (1 - 0.75), giving the company a SGR of 0.0375. This means that the company can safely grow at a rate of 3.75% using its own revenue and remain self-sustaining. If the company wants to accelerate its growth past this threshold to, say, 4%, it should seek outside funding.
** Find return on assets (percentage)
(Given: 20% sustainable growth rate; total assets $500k; beginning of year equity $200k; dividend payout 60%) Growth rate in $= (Growth rate * Beginning equity), Total income= (Growth rate in $/1-dividend payout), ROA= (Total income/total assets) (.2*200,000)= $40,000 (growth rate in $), (($40,000/(1-.6))= $100,000 (total income), ($100,000/500,000)= .5, 50% ROA
** Find sustainable growth rate
(Given: common equity increase (100,000) and end of period value(500,000)) Calculate beginning value= 500k - 100k = 400,000 100,000/400,000= 25%
** Forecasting sales growth rate
(Given: 2 probability 80% growth in sales; 3 probability 60% growth in sales; 4 probability 40% growth in sales; 1 probability 10% decrease in sales) (0.2x0.8) + (0.3x0.6) + (0.4x0.4) + (0.1x-0.1) = 49% average percent
After a new fund is organized, fund managers do what?
Solicit investments in new fund and obtain commitments
What is the definition of SLOR?
Standard Letter of Rejection, or used as a verb to indicate the sending of such a letter.
Life cycle stage generally associated with 2nd lowest forecasting in sales accuracy?
Start-up Financing
Who usually drafts a term sheet?
Venture Capitalists
Average receivables that are outstanding
(Given: net sales, sales to cash conversion period, purchase to payment conversion period and COGS) = ^ Days from sales to cash conversion period / 365 x net credit sales = accounts receivable = accounts receivable / net credit sales x 365 = days (for payables- same formula except use purchase to payment conversion period instead)
Net Present Value (NPV)
-the present value of an investment's expected cash inflows minus the costs of acquiring the investment. -Used to analyze an investment decision and give company management a clear way to tell if the investment will add value to the company. Typically, if an investment has a positive net present value, it will add value to the company and benefit company shareholders. -Net present value calculations can be used for either acquisitions (as shown in the example above) or future capital projects. For example, if a company decides to open a new product line, they can use NPV to find out if the projected future cash inflows cover the future costs of starting and running the project. If the project has a positive NPV, it adds value to the company and therefore should be considered. Formula- NPV= (total cash inflows from investment) - (cash outflows or cost of investment)
Development Stage
1st stage. screen business ideas, prepare business plan, obtain seed financing This is the very beginning of the business lifecycle, before your startup is even officially in existence. You've got your business idea and you are ready to take the plunge. But first you must assess just how viable your startup is likely to be. At this stage, you should garner advice and opinion as to the potential of your business idea from as many sources as possible Ultimately the success of your business will come down to many factors- including your own abilities, the readiness of the market you wish to enter and, of course, the financial foundation in place (how are you going to finance your launch?). It's where you take a step back and consider the feasibility of your business idea, and also ask yourself if you have what it takes to make it a success.
Start-up Stage
2nd stage. choose organizational form, prepare initial financial statements, obtain first round financing Once you have thoroughly canvassed and tested your business idea and are satisfied that it is ready to go, it's time to make it official and launch your startup. Many believe this is the riskiest stage of the entire lifecycle. In fact, it is believed that mistakes made at this stage impact the company years down the line, and are the primary reason why 25% of startups do not reach their fifth birthday. Adaptability is key here, and much of your time in this stage will be spent tweaking your products or services based on the initial feedback of your first customers.
Survival Stage
3rd stage. monitor financial performance, project cash needs, obtain first round financing Stage of growth- Cash flow should start to improve as recurring revenues help to cover ongoing expenses, and you should be looking forward to seeing your profits improve slowly and steadily.
** Understand typical venture funds and compensation structure. *list and pick which one isn't*
All of the following are typically part of a venture fund's typical compensation and incentive structure except: (d- salary...) a. some percent annual fee on invested capital b. a percent share of any profits to the managing general partner c. carried interest d. salary for the general partners Venture funds have two principal parties: general partners (GPs) and limited partners (LPs). -LPs are the fund's financial backers. These are the people whose capital is being invested. LPs can range from university endowments to pension funds to wealthy individuals. -GPs are the fund's day-to-day managers. These are the people who make startup investments. They can be thought of as the middlemen that connect LPs' capital to the founders who need funding for their startups. Funds typically last for ten years. The first portion of that decade -- typically 2-4 years -- is an active investing period where funds make new investments. The mission of a venture fund is to invest in startups, have those investments appreciate over time, and have those startups exit within the fund's ten-year lifetime. (An exit would be an acquisition or an IPO.) [[Like many hedge funds, a typical VC fund has a "2 and 20" fee structure. This means 2% of the fund is charged as a management fee each year, and the fund's GPs and employees split 20% of the profits they generate. The profit-sharing portion is usually referred to as "carried interest" or "carry."]] *VCs have 3 principal jobs: picking startups to invest in, helping startups after investing, and raising capital for investing.
When evaluating new prospects for a new venture, venture capitalists consider characteristics of the entrepreneur and their team. Which of the following is not part of the review of the entrepreneur and team?
All part of the review of the entrepreneur and team: 1 Ability to evaluate risk, 2 articulate regarding the venture, 3 background/experience, 4 capable of sustained effort, 5 managerial capabilities, 6 management commitment, 7 references & 8 stake in firm
When evaluating new prospects for a new venture, venture capitalists firms consider their own fund requirements. Which of the following is not a requirement related to their own firm?
All requirements: 1 Cash out potential, 2 equity share, 3 familiarity with technology, 4 product & market, 5 financial provisions for investors, 6 geographic location, 7 investor control, 8 investor group, 9 rate of return, 10 size of investment & 11 stage of development
Capacity (The 5 C's of Credit Analysis)
Capacity measures a borrower's ability to repay a loan by comparing income against recurring debts and assessing the borrower's debt-to-income (DTI) ratio. Lenders calculate DTI by adding together a borrower's total monthly debt payments and dividing that by the borrower's gross monthly income. The lower an applicant's DTI the better their chances of qualifying for a new loan. Every lender is different, but many lenders prefer for an applicant's DTI to fall around 35% or less before approving an application for new financing. It is worth noting that sometimes lenders are prohibited from issuing loans to consumers with higher DTIs as well. In addition to examining income, lenders look at the length of time an applicant has been at his job and job stability.
What is the definition of carried interest?
Carried interest is the portion of profits paid to the professional venture capitalist as incentive compensation. A share of any profits that the general partners of private equity and hedge funds receive as compensation, regardless of whether they contributed any initial funds. This method of compensation seeks to motivate the general partner (fund manager) to work toward improving the fund's performance. The term "carried interest" refers to: (d- the portion...) a. interest not currently paid but which must be paid in the future by a professional venture capitalist b. interest transported directly to a bank c. interest owed on a loan in default d. the portion of profits paid to the professional venture capitalist as incentive compensation
What is the definition of cross default provision, acceleration provision, loan default, insolvency & foreclosure?
Cross default provision: provides that defaulting on one loan places all loans in default a provision in a bond indenture or loan agreement that puts a borrower in default if the borrower defaults on another obligation. For instance, a cross-default clause in a loan agreement may say that a person automatically defaults on his car loan if he defaults on his mortgage. The cross-default provision exists to protect the interest of lenders, who desire to have equal rights to a borrower's assets in case of default on one of the loan contracts. Acceleration provision: provides that all future interest and principal obligations on a loan become immediately due when default occurs. a contract provision that allows a lender to require a borrower to repay all of an outstanding loan if certain requirements are not met. An acceleration clause outlines the reasons that the lender can demand loan repayment and the repayment required. An acceleration clause allows the lender to require payment before the standard terms of the loan expire. Acceleration clauses are typically contingent on on-time payments. Most common in mortgage loans. Loan default: occurs when there is a failure to meet interest or principal payments when due on a loan. failure to pay interest or principal on a loan or security when due. Default occurs when a debtor is unable to meet the legal obligation of debt repayment, and it also refers to cases in which one party fails to perform on a futures contract as required by an exchange. Insolvency: when a venture has a negative book equity or net worth position and/or when its cash flow is insufficient to meet current debt payment obligations when an individual or organization can no longer meet its financial obligations with its lender or lenders as debts become due. Before an insolvent company or person gets involved in insolvency proceedings, it will likely be involved in informal arrangements with creditors, such as making alternative payment arrangements. Insolvency can arise from poor cash management, a reduction in cash inflow forecasts or from an increase in expenses. Foreclosure: legal process used by creditors to try to collect amounts owed on loans in default Insolvency is a state of financial distress in which someone is unable to pay their bills. It can lead to insolvency proceedings, in which legal action will be taken against the insolvent entity, and assets may be liquidated to pay off outstanding debts. (The Internal Revenue Service (IRS) states when a person/company is insolvent but bankruptcy is an actual court order. Can be insolvent with out being bankrupt)
EBITDA
Earnings before interest, taxes, depreciation, and amortization -a measure of a company's financial performance and is used as an alternative to earnings or net income in some circumstances. -essentially net income (or earnings) with interest, taxes, depreciation and amortization added back. EBITDA can be used to analyze and compare profitability among companies and industries -EBITDA is often used in valuation ratios and can be compared to enterprise value and revenue. EBITDA ($) = Operating Profit + Depreciation Expense + Amortization Expense or EBITDA ($) = Net Income + Interest +Taxes + Depreciation + Amortization
What are reasons why people use personal credit cards for startup firms?
Ease of obtaining credit card debt, potential low cost when rolling balance across various cards & personal guarantees required on regular bank loans. All reasons for personal credit card except... (d.) a. credit card debt is not based on the firm's ability to repay, but ratherthe individual card holder's ability to repay b. teaser rates afford initial low cost borrowing c. balance transfer at below-prime rates d. credit card debt can create problems if the firm doesn't generate cash flows to cover credit card payments once low introductory rates expire
** Reversion Value
Estimated value of an asset when it is sold at the end of the investment holding period. (present value of the terminal value )
What is the definition of financial distress, balance sheet insolvency, bankruptcy & liquidation?
Financial distress: when cash flow is insufficient to meet current debt obligations a condition in which a company cannot meet, or has difficulty paying off, its financial obligations to its creditors, typically due to high fixed costs, illiquid assets, or revenues sensitive to economic downturns. A company under financial distress can incur costs related to the situation, such as more expensive financing, opportunity costs of projects, and less productive employees. Employees of a distressed firm usually have lower morale and higher stress caused by the increased chance of bankruptcy, which could force them out of their jobs. Balance sheet insolvency: exits when total debt exceeds total assets a situation where the value of a company's liabilities exceeds the value of its assets. LOOKS ONLY AT THE FIRM'S BALANCE SHEET, deeming a company "insolvent on the books" when its net worth appears negative. This is also known as technical insolvency. Actual insolvency is also known as cash-flow insolvency and occurs when a company is unable to make promised payments to vendors or lenders. When a firm appears to be insolvent on the books, it is likely the debt holders will force a response. The company may attempt to restructure the business to alleviate its debt obligations, or be placed in bankruptcy by the debt holders. Bankruptcy: occurs when a petition for bankruptcy is filed with a federal bankruptcy court & bankruptcy judge Bankruptcy is a legal term for when a person or business cannot repay their outstanding debts. The bankruptcy process begins with a petition filed by the debtor, which is most common, or on behalf of creditors, which is less common. All of the debtor's assets are measured and evaluated, and the assets may be used to repay a portion of outstanding debt. Bankruptcy offers an individual or business a chance to start fresh by forgiving debts that simply cannot be paid, while offering creditors a chance to obtain some measure of repayment based on the individual's or business's assets available for liquidation. Liquidation: process of bringing a business to an end and distributing its assets to claimants. It is an event that usually occurs when a company is insolvent, meaning it cannot pay its obligations when they come due. As company operations end, the remaining assets are used to pay creditors and shareholders, based on the priority of their claims.
What is the definition and conditions of a company that'd be a candidate of a leveraged buyout?
Leveraged buyout: purchase price of a firm is financed largely with debt finance capital and assets it is the acquisition of another company using a significant amount of borrowed money to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans, along with the assets of the acquiring company. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital. In a leveraged buyout (LBO), there is usually a ratio of 90% debt to 10% equity. Because of this high debt/equity ratio, the bonds issued in the buyout are usually are not investment grade and are referred to as junk bonds. LBOs are conducted for three main reasons. The first is to take a public company private; the second is to spin-off a portion of an existing business by selling it; and the third is to transfer private property, as is the case with a change in small business ownership. However, it is usually a requirement that the acquired company or entity, in each scenario, is profitable and growing. Conditions of a leveraged buyout: firms with relatively stable operating income and an ability to protect market share, stable and adequate operating cash flows are essential to meeting current interest commitments, as well as being able to pay off debt principal in a timely manner.
What is the definition of operations restructure? What is involved?
Operations Restructure: Involves growing revenues relative to costs and/or cutting costs relative to the venture's revenues Involves improving its operating cash flow to allow it to meet its debt obligations, increase in sales without an equal increase in costs & a reduction in costs with a less-than-proportionate decrease in revenues will also help increase cash flow. it is the act of reorganizing the legal, ownership, operational, or other structures of a company for the purpose of making it more profitable, or better organized for its present needs. Restructuring may also be described as corporate restructuring, debt restructuring and financial restructuring. It generally involves financing debt, selling portions of the company to investors, and reorganizing or reducing operations. The basic nature of restructuring is a zero-sum game. Strategic restructuring reduces financial losses, simultaneously reducing tensions between debt and equity holders to facilitate a prompt resolution of a distressed situation. Steps: Ensure the company has enough liquidity to operate during implementation of a complete restructuring Produce accurate working capital forecasts Provide open and clear lines of communication with creditors who mostly control the company's ability to raise financing Update detailed business plan and considerations
* What is not part of the proposed industry?
Part of the Proposed Industry: Market attractiveness, potential size, technology & threat resistance (business initiatives proposed) The Proposed Industry - Various industries and land use activities have the potential to impact on water quality and mahinga kai unless properly managed. Good knowledge about the issues and ways to mitigate the effects of land use activities and industry on freshwater resources will enhance and protect water quality, species, and their habitats
What is the definition of primary offering, initial public offering & secondary offering?
Primary offering: sale of new securities A primary offering is the first issuance of stock from a private company for public sale. This is the means by which a private company can raise equity capital through financial markets in order to expand its business operations. This can also include debt issuance. A primary offering is a rite of passage for a growing successful company, as it goes from being private to being public and registered with the Securities and Exchange Commission (SEC). Initial public offering: a venture's first offering of SEC-registered securities to the public Secondary offering: sale of used securities Public companies can choose to issue additional shares of stock after a primary offering. These are called secondary offerings. Secondary offerings increase the number of outstanding shares available for trade in the secondary market, thus diluting the value of each share. A secondary offering is the sale of new or closely held shares by a company that has already made an initial public offering (IPO). There are two types of secondary offerings. A non-dilutive secondary offering is a sale of securities in which one or more major stockholders in a company sell all or a large portion of their holdings. The proceeds from this sale are paid to the stockholders that sell their shares. Meanwhile, a dilutive secondary offering involves creating new shares and offering them for public sale.
When a venture is in financial distress, but have turn around opportunity...know the conditions/three ways to resolve financial distress.
Restructuring is a type of corporate action taken when significantly modifying the debt, operations or structure of a company as a means of potentially eliminating financial harm and improving the business. When a company is having trouble making payments on its debt, it will often consolidate and adjust the terms of the debt in a debt restructuring, creating a way to pay off bond holders. In the process of restructuring, the credit obligations are spread out over longer duration with smaller payments. This allows company's ability to meet debt obligations. Also, as part of process, some creditors may agree to exchange debt for some portion of equity. It is based on the principle that restructuring facilities available to companies in a timely and transparent matter goes a long way in ensuring their viability which is sometimes threatened by internal and external factors. This process tries to resolve the difficulties faced by the corporate sector and enables them to become viable again. 1 Operations Restructuring 2 Financial Restructuring 3 Asset Restructuring
Character (The 5 C's of Credit Analysis)
Sometimes called credit history, the first C refers to a borrower's reputation or track record for repaying debts. This information appears on the borrower's credit reports. credit reports contain detailed information about how much an applicant has borrowed in the past and whether they have repaid their loans on time. These reports also contain information on collection accounts and bankruptcies, and they retain most information for seven to 10 years. Information from these reports helps lenders evaluate your credit risk (creditworthiness)
What is the definition of systematic liquidation, outright sales & initial public offering?
Systematic liquidation: venture liquidated by distributing the venture's cash flows to the owners Liquidation in finance and economics is the process of bringing a business to an end and distributing its assets to claimants. It is an event that usually occurs when a company is insolvent, meaning it cannot pay its obligations when they come due. As company operations end, the remaining assets are used to pay creditors and shareholders, based on the priority of their claims. (Chapter 7 of the U.S. Bankruptcy Code governs liquidation proceedings. Solvent companies may also file for Chapter 7, but this is uncommon. Not all bankruptcies involve liquidation; Chapter 11, for example, involves rehabilitating the bankrupt company and restructuring its debts.) Advantages of Systematic liquidation: Entrepreneur maintains control throughout the harvest period, harvesting of the venture can be spread out over several years & time, effort and costs of finding a buyer for the venture can be avoided Disadvantages of Systematic liquidation: liquidation proceeds are treated as ordinary income (rather than capital gains), difficulty for the entrepreneur to maintain focus on a dying venture & the value of the venture may decline more rapidly when competitors respond to the venture's lack of investment *Outright sales: venture sold to others including family members, managers, employees & outside (external) buyers The outright sale of a venture is the same thing as going public. Initial public offering (IPO): a venture's first offering of SEC-registered securities to the public The process of offering shares in a private corporation to the public for the first time is called an initial public offering (IPO). Growing companies that need capital will frequently use IPOs to raise money, while more established firms may use an IPO to allow the owners to exit some or all their ownership by selling shares to the public. An "initial public offering" is the only method used by entrepreneurs when exiting a venture. Steps in process of IPO: 1 An external initial public offering team is formed, comprising underwriters, lawyers, certified public accountants and Securities and Exchange Commission (SEC) experts. 2 Information regarding the company is compiled, including financial performance and expected future operations. This becomes part of the company prospectus, which is circulated for review after it has been prepared. 3 The financial statements are audited, and an opinion is generated. 4 The company files its prospectus and required forms with the SEC and sets a date for the offering.
What is the definition of capacity, capital, collateral, conditions & character? (*several questions about these*)
The 5 C's of Credit Analysis: The five Cs of credit is a system used by lenders to gauge the creditworthiness of potential borrowers. The system weighs five characteristics of the borrower and conditions of the loan, attempting to estimate the chance of default and, consequently, the risk of a financial loss for the lender. Lenders may look at a borrower's credit reports, credit scores, income statements and other documents relevant to the borrower's financial situation, and they also consider information about the loan itself. Capacity: to repay, MOST CRITICAL Capital: money you have personally invested in business; indication of external risk if business fails Collateral: additional forms of security or guarantees provided to lender Conditions: focus on the intended purpose of the loan Character: general impression you make on the potential lender or investor
What is the definition of SBA?
The Small Business Administration- an autonomous U.S. government agency established in 1953 to bolster and promote the economy in general by providing assistance to small businesses. One of the largest functions of the SBA is the provision of counseling to aid individuals trying to start and grow businesses. The Small Business Administration offers substantial educational information with a specific focus on assisting small business startup and growth. In addition to educational events offered on the SBA's website, local offices also provide more personalized special events for small business owners. The loan programs offered by the SBA are among the most visible elements the agency provides. The organization does not offer grants or direct loans, with the exception of disaster relief loans, but instead guarantees against default pieces of business loans extended by banks and other official lenders that meet the agency's guidelines. The number one function of these loan programs is to make loans with longer repayment periods available to small businesses.
What is the definition of warrant?
The right to buy equity at a specific price a security that entitles the holder to buy the underlying stock of the issuing company at a fixed price called exercise price until the expiry date. Warrants and options are similar in that the two contractual financial instruments allow the holder special rights to buy securities. Warrants are a derivative that give the right, but not the obligation, to buy or sell a security—most commonly an equity—at a certain price before expiration. The price at which the underlying security can be bought or sold is referred to as the exercise price or strike price. An American warrant can be exercised at any time on or before the expiration date. Warrants are generally issued by the company itself, not a third party, and they are traded over-the-counter more often than on an exchange. Warrants do not pay dividends or come with voting rights. Warrants that give the right to buy a security are known as CALL WARRANTS; those that give the right to sell a security are known as PUT WARRANTS.
What is the definition of two and twenty shops?
Two and twenty shops is the investment management firms having a contract that gives them a 2 percent of assets annual management fee and 20 percent carried interest. Two and twenty is a compensation structure that hedge fund managers typically employ in which part of compensation is performance-based. More specifically, this phrase refers to how hedge fund managers charge a flat 2% of total asset value as a management fee and an additional 20% of any profits earned. The 2% management fee is paid to hedge fund managers regardless of the fund's performance. The 20% profit fee is only paid once the fund achieves a level of performance that exceeds a certain profit threshold, typically around 8%.
** Unlike commercial banks that have received equity financing in return, venture banks return all of the following... (except)
Unlike traditional commercial banks, venture banks typically provide debt to start-ups that have already received equity financing from professional venture capital firms. In return for providing additional debt financing, these venture banks receive in return all of the following except? (d- tax breaks) a. interest payments b. repayment of principal c. implementation of loan restrictions d. tax breaks on the interest e. right to buy equity at a specific price
What is the definition of diligence and deal flow?
Venture investing due diligence: the process of ascertaining the viability of a business plan. a rigorous investigation and evaluation of an investment opportunity before committing funds. The due diligence process is designed to reduce the investors' risk by understanding the issues and challenges embedded in a business proposal. Deal flow: the flow of business plans and term sheets involved in the venture capital investing process the rate at which business proposals and investment pitches are being received by financiers such as investment bankers and venture capitalists. Rather than a rigid quantitative measure, the rate of deal flow is somewhat qualitative and is meant to indicate whether business is good or bad.
Mezzanine Financing
a hybrid of debt and equity financing that gives the lender the right to convert to an equity interest in the company in case of default, generally after venture capital companies and other senior lenders are paid. Mezzanine financing tends to be completed with little due diligence on the part of the lender and little or no collateral on the part of the borrower. It is treated as equity on a company's balance sheet. Mezzanine financing is generally offered to companies that have a track record in their industry, an established reputation and product, a history of profitability and a viable expansion plan for the business Mezzanine financing is a loan to the owner with terms that subordinate the loan both to different levels of senior debt as well as to secured junior debt. But the mezzanine lender typically has a warrant (meaning a legal right fixed in writing) enabling him or her to convert the security into equity at a predetermined price per share if the loan is not paid on time or in full. Many variants exist, of course, the most common being that a portion of the money is paid back as equity. Being unsecured and highly subordinated, mezzanine financing is very expensive, with lenders looking for 20 percent returns and up. Major sources of mezzanine financing include private investors, insurance companies, mutual funds, pension funds, and banks. Typically used to finance the expansion of existing companies.Mezzanine financing is basically debt capital that gives the lender the rights to convert to an ownership or equity interest in the company if the loan is not paid back in time and in full. (in rapid-growth stage)
* Seasoned Financing
a new equity issue by an already publicly traded company.may involve shares sold by existing shareholders (non-dilutive), new shares (dilutive) or both. takes the form of cash flow from business operations, bank loans, and stocks and bonds issued with the assistance of investment bankers or others. (in early-maturity stage)
(DTI) Debt-to-income ratio
a personal finance measure that compares an individual's debt payment to his or her overall income. The debt-to-income ratio is one way lenders, including mortgage lenders, measure an individual's ability to manage monthly payment and repay debts. DTI is calculated by dividing total recurring monthly debt by gross monthly income, and it is expressed as a percentage. total recurring monthly debt / gross monthly income = %
Acquisition
a situation whereby one company purchases most or all of another company's shares in order to take control. An acquisition occurs when a buying company obtains more than 50% ownership in a target company. As part of the exchange, the acquiring company often purchases the target company's stock and other assets, which allows the acquiring company to make decisions regarding the newly acquired assets without the approval of the target company's shareholders.
*Forecasting
first step in long term financial planning; any venture should start with 3-5 years of forecasts for annual levels of sales, profits, investments in property, plant, equipment and working capital; pervades all stages of a venture's life cycle; gets easier as a venture matures process- 1. forecasted sales 2. projected income statement 3.projected balance sheet 4. projected statement of cash flows
COGS
the cost of goods sold; what you pay for what you sell This amount includes the cost of the materials used in creating the good along with the direct labor costs used to produce the good. It excludes indirect expenses such as distribution costs and sales force costs. = beginning inventory + purchases during the period - ending inventory example- cost of labor materials manufacturing overhead
* Present Value (PV)
the current value of future cash flows discounted at the appropriate discount rate the current value of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows. Present value is also referred to as the discounted value. The basis is that receiving $1,000 now is worth more than $1,000 five years from now because if you got the money now, you could invest it and receive an additional return over the five years. Present value = FV / (1 + r)n Where: FV = future value, r = rate of return/discount rate, n = number of periods
First Round Financing
the first time a new company raises money from investors. Include the majority of venture capitalists, commercial banks, and government assistance programs. Primary funds contributed by lenders or outside investors in a firm. First round financing typically occurs when a firm can realize moderate yet steady growth with additional capital after having passed the period of teething troubles
* Terminal value (TV)
the value of the venture at the end of the explicit forecast period represents all future cash flows in an asset valuation model. This allows models to reflect returns that will occur so far in the future that they are nearly impossible to forecast. This method is based on the theory that an asset's value is equal to all future cash flows derived from that asset. These cash flows must be discounted to the present value at a discount rate representing the cost of capital, such as the interest rate. Discounting is necessary because the time value of money creates a discrepancy between the current and future values of a given sum of money. In business valuation, free cash flow or dividends can be forecast for a discrete period of time, but the performance of ongoing concerns become more challenging to estimate as the projections stretch further into the future. Moreover, it is difficult to determine the precise time when a company may cease operations. To overcome these limitations, investors can assume that cash flows will grow at a stable rate forever, starting at some point in the future. This represents the terminal value, and it is [[calculated by dividing the last cash flow forecast by the difference of the discount rate and the stable growth rate.]] To capture the value at the end of the forecasting period, a terminal value is included. Terminal value allows for the inclusion of the value of future cash flows beyond a several year projection period, while satisfactorily mitigating many of the problems of valuing such project cash flows. Formulas- Multiple EBITDA approach: TV= EBITDA(t) x EBITDA(multiple) Where EBITDA(t)- EBITDA at the last year of projected period; EBITDA(multiple)- EBITDA multiplier (x) Perpetuity Growth Approach: TV= (FCFt + 1) / (r-g) Where FCF- Free cash flow ath the last year of projected period; r- Discount rate (Cost of equity or capital); g- expected growth rate (%)