Class 11

Question 1

what are some key features of equity financing

Answer 1

voting rights
board decides if dividend is paid or not / what amount

Question 2

what is equity financing

Answer 2

funds in exchange for ownership interest in the firm

Question 3

what is limited liability

Answer 3

corporate loss will not exceed amount invested in partnership

Question 4

who is paid first in bankruptcy?

Answer 4

debt financiers

Question 5

key features of debt

Answer 5

principal payment
maturity date, payment schedule, interest
indenture and covenants

Question 6

what is debt financing?

Answer 6

creditors offer loans in return for interest on loans and principle value at maturity date

Question 7

what is an indenture

Answer 7

legally binding agreement, contract or document between two or more parties

Question 8

what is a covenant

Answer 8

term placed on loan/debt ensuring borrower continues or stops certain activity

Question 9

what are hybrid securities (+examples)

Answer 9

combine characteristics of debt and equity
examples: preferred shares, convertible debt

Question 10

examples of frictions in capital markets

Answer 10

information assymmetry
investors limited ability to monitor mangers discretional use of funds

Question 11

what are equity financing options for small firms

Answer 11

insider financing, angel investors, venture capitals

Question 12

what is insider financing

Answer 12

owner/manager providing personal savings to firm

Question 13

what are angel investors

Answer 13

wealthy individuals who are willing to fund startups in exchange for shares in the business (shark tank)

Question 14

what is venture capital

Answer 14

firms that specialize in raising money for startups
Limited Partners (LPs) provide funds
General Partners (GPs) manager the company

Question 15

what are debt financing options for small firms

Answer 15

short term debt financing, trade credit

Question 16

what is short term debt financing

Answer 16

• short term loans
• banks effectively monitor and discipline borrowers
• builds trust and long term relationships with creditors

Question 17

what is trade credit

Answer 17

• credit terms give a certain number of days to make payment, giving firms enough time to sell product and then use those funds to pay back creditors

Question 18

examples of equity financing for medium size firms

Answer 18

private equity firms

Question 19

what are private equity firms

Answer 19

similar to VC but focus on established and more mature private firms (scope and size is much greater than VC)

Question 20

examples of debt financing for medium sized firms

Answer 20

larger bank loans (medium term debt)
syndicated bank loans

Question 21

what is a syndicated bank loan

Answer 21

single loan that is funded by a group of banks

Question 22

what are examples of other investors providing private equity

Answer 22

• institutional investors (banks, pension plans, insurance companies)
• sovereign wealth funds (state owned pools of money that are invested in businesses)
• corporate investors (investors for strategic purposes)

Question 23

what are advantages of offering an IPO and going public

Answer 23

1) greater liquidity (stocks to cash)
2) better access to capital
3) firm is more visible

Question 24

what are disadvantages of offering an IPO and going public

Answer 24

1) owners reduce ownership
2) firms must comply with all requirements of public companies

Question 25

examples of equity financing for large firms

Answer 25

• common stock
• dual class stock
• preferred shares
• warrants

Question 26

what is dual class stock

Answer 26

two classes of stock with different voting power

Question 27

what is a warrant

Answer 27

investors can buy shares of the firm anytime until the expiration for a FIXED price

Question 28

examples of debt financing for large firms

Answer 28

• commercial paper
• corporate bonds

Question 29

what is commercial paper

Answer 29

short term loans (mature in 1 to 6 months)