Case Study:

Assume Jayda tells her friends Ahmad and Malak about an innovative idea for a new business, which is a portable car wash service. Ahmad likes the idea and immediately starts drafting a feasibility study for the business. They have the idea and they can understand the know-how that they need to implement it, especially as Malak has a strong information systems background and can work on the application for the new business.

Lets start then!!!! says Ahmad, Shall I text my friends to see who needs a car wash?

Wait!! laughs Malak, we dont have the equipment, we need machines, tools, a couple of vans, the application to be launched, drivers, workers, legal licensing.

Oh Boy, interrupted Jayda, thats a lot of work and it also needs a lot of money and we need to meet daily to get to work and we have no where to meet, and none of us have a marketing background or have managed a business before, it may not be a piece of cake.

Money, well I am personally broke, I just graduated, and I know Ahmad for sure just wasted all his savings on the new wrangler he just bought, so I am pretty sure we wont have much money, explained Malak.

Fine fine, said Ahmad I wont text anyone, I think we have a lot to do first. Hey Jayda do you remember when we took financial markets course, the doctor had mentioned something about a financial firm that can help us when we are in the very first steps of creating a business, even if its just an idea with good potential and not much more yet.

Oh yes, and it could provide us with office space, what was it called? replied Jayda.

QUESTION 1) What is the name of the financial firm that they are trying to remember.

QUESTION 2) Help them out by explaining what benefits they can gain by seeking help from this firm? (4 marks)

BONUS 1) (OPTIONAL) Name two of these firms that they can actually resort to in EGYPT.

Guys you know that I heard from a friend that we can raise all the funds we need, online. It can be as easy as using social media, said Malak excitedly.

No way! replied Ahmad, well through social media we can reach tons of people but that still doesnt make sense, wouldnt we have to give them something in return or better yet wont we have to make them owners with us in our company to be?

I dont know about that, let me call my friend to clarify that, said Malak.

Malak called her friend Ramy and he explained everything to her.

Okay guys, Ramy explained that there are different types and what we give in return differs according to the type.

QUESTION 3) What funding source are they talking about, and what are the different types? Provide an explanation of each type. (7 marks)

QUESTION 4) As Malak and Jayda explained above, there is a lot that they are lacking in order to start their business, they do not just lack funds. Keeping this in mind, explain why this funding source is not very beneficial in their case (2 marks).

Jayda, Malak and Ahmad have chosen to resort to the firm referred to in question 1, which helped them find a proof of concept and allowed them to take their entrepreneurship from just an innovative idea to the first few steps of a start-up. Their parents started to see the potential they have and therefore agreed to help them out with some funding, which allowed them to find a market and a product fit as well as start raising some revenue. In addition to funding, Malaks dad introduced them to his very dear friend Mr. Hisham Ezz-EL-Arab who is extremely passionate about anything related to cars and therefore found their idea extremely interesting and was excited to provide them some funding himself.

QUESTION 5) In this case, Mr. Hisham Ezz-EL- Arab would be referred to as _________________? And how much do you think is the maximum fund he would have given them? ________________________ (2 marks)

AFTER TWO YEARS

Jayda says, Cant believe we got this far we actually have a client base, I can still remember us in Blaze having coffee when I suggested that idea.

Ahmad added, Oh yes, weve been through a lot to get where we are today, but Im actually worried about whats coming next, we are at a point where we need to have more employees. The employees and the vans we have are not enough.

Youre definitely right Ahmad, especially with the forecast you did last week for the marketing campaign we are launching at the end of the month. I remember it said we are expected to have a 60% increase in our client-base, replied Malak.

What should we do? asked Jayda, We need a lot of cash to buy more vans, more equipment, get more drivers, more workers. Not only that, we have never worked on a bigger scale before, we have only experienced a very small closed client circle. I fear it may get out of hand for us.

Thats true, we cannot ask our families for any more funds honestly they helped out a lot. Im sure theres a solution other than family and the bank. I heard with our status it would be so hard to get a bank loan, said Malak. Any ideas?

Yes, replied Jayda. I actually have the solution that will help us not only get the fund but can also help us through the coming phase which we are a bit worried about. I just need to tell you guys that they would be a bit involved in our business and they would have a share in our business for a period of time, she added.

QUESTION 6) What is the solution that Jayda could be suggesting here, who should they go to for funding at this point?

Why would this type of financial institution be willing to provide them with funds when banks would not? (explain in details how they have the means to do so). (8 marks)

The solution suggested by Jayda was indeed a successful one. They did apply for this fund type and they got selected, received the fund and immediately put it into good use, they have also received a lot of guidance and were able to overcome many obstacles, throughout the past four years since they have received this last fund. They are now considered an established firm.

Throughout these years one of the obstacles they faced was a time when they had very high expectations that the price of the dollar would increase. This would have a big impact on their business as some of their products and their machines are from the USA, thus would mean that they would have to increase their prices a lot and that would affect the demand on their product. They gathered for an emergency meeting to try and find a way to hedge this huge risk of increase in dollar price.

What solution are you looking for? Asked Malak sarcastically, How can you avoid an increase in the dollar? An increase in its price is applicable to everyone. There are no solutions this time my friends.

Ofcourse there is, replied Ahmad and Jayda, We studied it in university in more than one course, there is a way to hedge the increase in prices when you are buying anything.

QUESTION 7) What are Ahmad and Jayda talking about, what financial instrument is used to hedge the risk of prices increasing and how?

QUESTION 8) Are there different instruments they can use? If yes, what are they and explain the difference between them (5 marks)

After a while, Ahmad came up with an idea, Now that we are established in Cairo, why dont we seek one last fund and expand our business to Alexandria.

QUESTION 9) If they manage to apply Ahmads idea and receive an additional fund to expand to Alexandria, what stage would this fund be? Explain why. (3 marks)

A few years later they are now well-established in Cairo and in Alexandria and they have worked enough to have a good valuation and are now ready to be independent of any funds, so they need to chose an exit method to allow them to return the funds to the firms that funded them and maintain their position in the market. After consulting with many experts and endless discussions together, the trio have decided that the best exit option for them is through an initial public offering. They are aware of the many listing requirements that they need to meet, but they also need to decide on the type of security they will issue.

QUESTION 10) What institution will they depend on to issue their shares to the public?

QUESTION 11) What are the steps this institution needs to follow to be able to make the securities of this business available to the public? (8 marks)

BONUS 2) (OPTIONAL) Why couldnt Ahmad, Jayda and Malak just issue their securities to the public, why is it important for them (and for potential investors) to rely on this institution to sell their securities?

The few following years the shares of their large well-established business have been trading in the secondary market as they have been listed on the stock exchange. After sometime, they started witnessing some financial distress, but it will besuch a hassle to implement any of their solutions, they are no longer the three friends who agree on crucial matters alone.They also dont have enough time to sit and brainstorm as they have much bigger obligations.

QUESTION 12) Which financial institution can help them out at this stage?

QUESTION 13) According to your understanding and the circumstances described in the paragraph above, what could this institution provide them and how would this benefit their business?