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Questions and Answers of Finance

Describe the development of professional venture investing in the 1960s, 1970s, and early 1980s.
What has happened to professional venture investing since the mid-1990s?
What are the components or stages in the professional venture investing cycle from inception to funding?
What are the components or stages in the professional venture investing cycle after funds have been raised until closure?
Who are the major suppliers of venture capital by type and size of commitment?
What is meant by the terms (a) Capital call, (b) Deal flow, and (c) Due diligence?
What is meant by the terms,(a) Lead investor, (b) SLOR, and (c) Term sheet?
Why should entrepreneurs care what pressures venture capitalists face in carrying out their professional money management (intermediation) function?
Why do venture capitalists make quick decisions on the infeasibility of some business plans? When a business plan is not quickly determined to be infeasible, what happens next and why?
What should be the goal of the financial projections in a business plan submitted to a venture capitalist?
Is the compensation paid to venture capitalists (e.g., 2 percent management fee and 20 percent carried interest) reasonable?
Why are venture capital funds typically organized as limited partnerships? In particular, why are they private firms instead of public firms?
What can be learned from the SBA’s creation and the Internal Revenue Service’s subsidy of venture investing through SBICs?
Describe the role venture capitalists played in the founding and expansion of Tabula. Comment on possible reasons for the involvement of multiple VC firms.
Suppose you become an intern at a local VC firm and are asked to assist in due diligence on a proposed investment in a telecommunications company. Explain how you would approach such a task and where
Interact Systems, Inc., has developed software tools that help hotel chains solve application integration problems. Interact’s application integration server (AIS) provides a two-way interface
What are the five Cs of credit analysis?
What is meant by venture banks? How do they differ from traditional commercial banks?
Why are new ventures at a disadvantage in receiving debt financing?
Why is credit card financing attractive to entrepreneurs? What are the risks?
Identify and briefly describe four basic SBA credit programs.
Compare the characteristics in terms of loan amounts, lenders, and SBA role in 7(a) loans versus 504 loans.
What is a Small Business Investment Company (SBIC)?
What types of advisory services are available from the SBA?
What is a debt guarantee and how does the SBA back a small business loan?
In which research areas does the SBA provide supplemental programs?
What are some characteristics of a Community Development Financial Institutions (CDFI) loan?
What is factoring? What is receivables lending?
What is venture leasing? How does it differ from traditional leasing?
What is a direct public offering?
From the Headlines—Solix: Describe the alternative financing Solix arranged for the launch of its biofuels production facility. Comment on your impressions of what attracted the investors.
Assume you started a new business last year with $50,000 of your own money, which was used to purchase equipment. Now you are seeking a $25,000 loan to finance the inventory needed to reach this
Assume that the operation of your business resulted in sales of $730,000 last year. Year-end receivables are $100,000. You are considering factoring the receivables to raise cash to help finance your
In 2010, Jennifer (Jen) Liu and Larry Mestas founded Jen and Larry’s Frozen Yogurt Company, which was based on the idea of applying the microbrew or microbatch strategy to the production and sale
What is common stock or common equity? What is the purpose of preemptive rights?
What is preferred stock? What is participating preferred stock, and what is meant by paid in kind (PIK) preferred stock?
What are the basic design features for financial securities used in venture investing?
Why is the conversion feature in convertible preferred important for venture investors?
What is meant by (a) A full ratchet clause and (b) A down (reset) round?
Which is more favorable to the founders, the market price formula (MPF) or the conversion price formula (CPF)?
How does convertible debt differ from convertible preferred stock?
Why are options to buy additional shares of stock used in venture financing? What are warrants?
How do (a) American-style options, (b) European style options, and (c) Bermudan-style options differ?
How are put and call options similar? How are they different?
What are the “factors” that influence the values of American-style options?
Why is price protection an issue when convertibles or warrants are used?
Why is it important that convertible securities also be callable (redeemable)?
Is the sale of an out-of-the-money warrant a future sale of equity at a favorable price?
Describe how the enterprise valuation cash flow is determined. That is, identify the components included in determining the enterprise valuation cash flow.
What is meant by (a) NOPAT and (b) EBIAT? How do they compare with each other?
Why is the weighted average cost of capital (WACC) used as the discount rate in the enterprise method?
How do debt investors get paid in the enterprise method?
Discuss what you would need if you wanted to conduct an enterprise valuation of Azul airlines. Do you see any complex financing arrangements that could present challenges? Discuss the advantages and
A share of a venture’s preferred stock is convertible into 1.5 shares of its common stock. The dividend on the preferred stock is $0.50 per share.A. If the firm’s common stock is currently
The CCC (triple C) Venture has issued convertible preferred stock to its venture investors. Each share of preferred stock is convertible into 0.80 shares of common stock and pays an annual cash
Calculate the conversion price formula (CPF) and market price formula (MPF) prices for an offering involving an existing conversion price of $1, a hypothesized market price of $2, and a new offering
Show how your answers for Problem 3 would change if the new offering price was $0.80 for 1,500 shares. Assume other things remain the same.
Draw the payoff diagram for the following options:A. Call option to buy a venture’s stock at $3.B. Put option to sell a venture’s stock back to the venture at $15.
Draw the payoff for a portfolio of a share of venture equity and a short (sold) call option to buy that share at $5.
Sometimes the combination of a share and a warrant is called a stock unit. What does the payoff diagram look like for such an investment?
Find the enterprise valuation cash flow expected for the current year given the following information:Capital expenditures (CAPEX) = $150,000Depreciation and amortization expenses = $40,000Earnings
Rework Problem 8 assuming that the earnings before interest and taxes are only $320,000 while capital expenditures (CAPEX) are $110,000. Assume the other information remains the same.
Calculate the after-tax WACC for a firm with a 25 percent tax rate, a 10 percent cost of debt, a 30 percent cost of equity, and a target debt to value of 0.30. Explain how investing to provide the
Why is the (1 − tax rate) in the WACC? How do we model the government’s payment of the tax rebate on interest—through a flow or in the rate?
Given a WACC of 15 percent, a target debt to value of 0.50, a tax rate of 28 percent, and a cost of debt of 10 percent, what is the implied cost of equity?
Assume a venture has a perpetuity enterprise value cash flow of $800,000. Cash flows are expected to continue to grow at 8 percent annually and the venture’s WACC is 15 percent.A. Calculate the
A venture has a $500,000 bank loan outstanding, a long-term debt obligation of $900,000, accounts payable of $200,000, and accounts receivable of $350,000.A. If the venture’s equity value is
Why is the market value of currently issued debt subtracted from the enterprise value (in a debt-and-equity-only firm) to arrive at the value of equity? Why are future debt issues ignored in this
The Datametrix Corporation has been in operation for one full year (2010). Financial statements are shown below. Sales are expected to grow at a 30 percent annual rate for each of the next three
Wok Yow Imports, Inc., is a rapidly growing, closely held corporation that imports and sells Asian style furniture and accessories at several retail outlets. The equity owners are considering selling
RxDelivery Systems is an research and development venture specializing in the development and testing of new drug delivery technologies. The market for alternative drug delivery systems grew rapidly
What evidence exists on whether entrepreneurs think about and/or develop exit strategies?
What is a systematic liquidation of a venture? What are some of the advantages and disadvantages of a systematic liquidation?
Describe an outright sale of a venture. What are the four categories of possible buyers?
Describe what is meant by (a) A leveraged buyout (LBO) and (b) A management buyout (MBO).
What is an employee stock option plan (ESOP)? How is an ESOP used to buy out a venture?
Describe the terms (a) “Control premium” and (b) “Illiquidity discount” when discussing possible external or outside buyers of a venture.
Describe an initial public offering (IPO). What are the differences between a primary offering and a secondary offering?
What is investment banking? What is an underwriting spread?
Describe the terms tombstone ad and red herring disclaimer.
What is meant by due diligence? How does a traditional registration differ from a shelf registration?
When an investment banking firm decides whether to underwrite or market a securities issue, what is meant by a firm commitment and best efforts?
Describe the two following terms that may be involved in underwriting a new securities issue:(a) Green shoe and (b) Lockup provision.
What is meant by initial public offering (IPO) underpricing?
Briefly describe how securities are traded on an organized stock exchange such as the New York Stock Exchange.
Indicate some of the differences between the NASDAQ’s National Market System and SmallCap listing requirements.
Describe some of the preparations that a venture can undertake that may increase the possibility of IPO success.
What are the steps or stages in a “typical” execution and time line schedule used in planning and executing an IPO?
From the Headlines—Tesla: Comment on Tesla’s trip from incorporating in 2003 to its IPO in 2010. What impact do you think the IPO will have on competitors in the electric car market?
The venture investors and founders of ACE Products, a closely held corporation, are contemplating merging the successful venture into a much larger diversified firm that operates in the same
The BETA firm is proposing to acquire ACE Products, described in Problem 1. BETA estimates that ACE’s free cash flow for next year could be improved to $5.5 million because of synergistic
The WestTek privately held venture is considering the sale of the venture to an outside buyer. WestTek has net sales = $21.2 million, EBITDA = $11.1 million, net income = $2.9 million, and interest
Benito Gonzalez founded and grew the BioSystems Manufacturing Corporation over a several-year period. However, Benito has decided to harvest or exit BioSystems now at the end of 2010 with the
Gamma Systems Manufacturing Corporation has reached its maturity stage, and its net sales are expected to grow at a 6 percent compound rate for the foreseeable future. Management believes that, as a
Assume that some of the information relating to Gamma Systems Manufacturing Corporation has changed. Answer the following questions using the financial statement data in Problem 5.A. How would your
New information for Gamma Systems Manufacturing Corporation has been brought to management’s attention. Use the financial statement information in Problem 5 and take into consideration that sales
Brian Motley founded MiniDiscs Corporation at the end of 2005 with a $1 million investment. After nearly one year of development, the venture produced an optical storage disk (about the size of a
What are the three types or methods of restructuring available when trying to turn around financially troubled ventures?
Identify major factors that cause ventures to get into financial trouble.
What is meant by loan default? Also, describe (a) An acceleration provision and(b) A cross-default provision.

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