EntFin-Ch13

Question 1

common stock

Answer 1

least senior claim to venture assets.

get: voting rights, right to dividend, preemptive rights

Question 2

preemptive rights

Answer 2

right for existing shareholders to buy additional shares to not get diluted. first chance to buy new issues

Question 3

preferred stock

Answer 3

equity claim senior to common stock. preference on dividends and liquidation proceeds. dividends usually percentage of par value

Question 4

participating preferred stock

Answer 4

participation rights to common dividends (at least partly) before everyone else

Question 5

paid in kind preferred stock

Answer 5

your dividends are allowed to be paid in more preferred stock. good if company wants to conserve cash

Question 6

redemption feature

Answer 6

company can buy back your preferred stock within certain time period

Question 7

convertible preferred stock

Answer 7

preferred stock able to be converted to common stock

Question 8

conversion ratio

Answer 8

how many common stock you get per preferred convertible stock

Question 9

conversion price

Answer 9

par value divided by how many commons stocks you can get for it

Question 10

where to find conversion ratio

Answer 10

articles of incorporation

Question 11

down (reset) round

Answer 11

venture round (common stock?) priced last round

Question 12

antidilution protection

Answer 12

• allows changes to conversion price (and ratio) to protect value in the event of a down round
• two kinds:full ratchet and weighted average

Question 13

full ratchet protection

Answer 13

• adjust conversion price to the new down round value
• no dilution
• preferred shares reset to current round price per share

Question 14

weighted average protection

Answer 14

only partially adjusts the conversion price to protect against dilution

Question 15

two types of weighted average protection

Answer 15

• conversion price formula

- market price formula

Question 16

conversion price formula

Answer 16

new price=(old conversion value+new issue value)/(total shares after)

BENEFITS NEW INVESTORS

Question 17

market price formula

Answer 17

new price=(old conversion price)*(shares before issue+%of mkt value new capital raised)/(total shares after issue)

BENEFITS OLDER INVESTORS

Question 18

convertible debt

Answer 18

• debt that converts to common equity

- bankrupcy rights senior to preferred shares

Question 19

option

Answer 19

right to buy of sell shares of stock

Question 20

call option

Answer 20

right (not obligation) to buy shares in future at specified price. almost like a coupon

Question 21

put option

Answer 21

right (not obligation) to sell shares at specified price

Question 22

American-style option

Answer 22

can be done at anytime before expiration

Question 23

European-style option

Answer 23

option can only be exersized at expiration

Question 24

bermuda style option

Answer 24

option can only be exersized at specific set of dates

Question 25

out of money options

Answer 25

options not worth cashing in. option price>selling price

Question 26

at the money options

Answer 26

breakeven with market

Question 27

in the money options

Answer 27

currently profitable if excersized

Question 28

call option payoff diagrams

Answer 28

payoff is where s0 crosses the line. in the money if s0>K(exersize price)

Question 29

put option diagram

Answer 29

you want s0

Question 30

value and risk of call options

Answer 30

good for when you dont want downside (when price goes down) risk

Question 31

warrants

Answer 31

call options issued by COMPANY

Question 32

fundamental rule of options

Answer 32

"put low, call high"

Question 33

"pro rata" latin

Answer 33

"in proportion"

Question 34

cumulative dividend

Answer 34

all passed missed dividends must be paid before any new ones to common

Question 35

preferred stock "overhang"

Answer 35

preferred usually more valuable because convertible and more flexible

Question 36

registration rights

Answer 36

For private companies, shares are able to be registered in certain circumstances to be able to sell to the public -two types:demand and piggyback

Question 37

demand registration

Answer 37

owner can demand registration, may be limited to certain number per time

Question 38

piggyback registration

Answer 38

security holder can demand registration (to sell to public) when certain conditions met

Question 39

enterprise method

Answer 39

valuation method for all types of financial capital.

Question 40

equity value

Answer 40

remove market value of debt from enterprise value to get equity value

Question 41

enterprise valuation cash flow

Answer 41

essentially CFFA with adjustment for surplus cash

Question 42

EV cash flow formula

Answer 42

NOPAT+Dep-NOWC-capex

Question 43

equity value using EVCF

Answer 43

EVCF-market value of debt