Entrepreneurial Finance Flashcards

Question

What is the trade off theory ?

Answer 1

The firm picks it capital structure by trading off the benefits of the tax shield from debt, against the costs of financial distress. V.L. = V.U. + PV(tax shield) x PV(financial distress costs) States that firms should increase their leverage unit, until it reaches the level for which the firm value is maximized

Answer 2

Business angels Private equity Venture capital Hybrids Investment Bankers

Answer 3

Crowdfunding Crowdlending Micro funds Syndicates SPACs New publicly trading PEs

Answer 4

Development / seed Startup Survival Rapid growth Maturity

Answer 5

Bootstrapping/3f’s Crowdfunding campaign Incubator / accelerator (also non profit) (Maybe Business angels)

Answer 6

Business Angels Venture Capital (IPO 1/10 companies)

Answer 7

Generated cash Second or third round of Venture Capital

Answer 8

Private equity IPO

Answer 9

Is a cooperate financing instrument in which many individuals support projects with usually small financial contributions.

Answer 10

The study and application of financial tools, techniques and principles for planning, organizing, operating and financing a new venture, during its entire lifecycle.

Answer 11

1. Financial planning and forecasting 2. Raising capital 3.Managing cash Flow 4. Financial reporting and analysis 5. Budgeting and cost control 6. Valuation and investment decisions 7. Risk management 8. Communication with stakeholders

Answer 12

1. Entrepreneurs have to meet potential backers to convince them of the project’s viability 2. Lack of credit history 3. Lack of track record 4. Insufficient collateral 5. High risk and uncertainty 6. Cash flow constraints

Answer 13

Crowdfunding maybe easier due to lower entry barrier, larger pool of potential backers, marketing and validation, flexibility in founding, speed of access.

Answer 14

1. Idea presentation (to the platform, detail description of the project, goals, target, timeline, benefits or rewards.) 2. Campaign launch (Goes live n the platform, with videos, images to attract and inform) 3. Promotion ad engagement (through social media, email marketing, press releases. Engaging and updating) 4. Fundraising (campaign runs for a period, and backers pledge money. If it meets the goal with in the timeframe the money goes to the project if not it’s paid back to the “investors”.

Answer 15

1. Crowd donation Donations based, charity community / social projects… 2. Crowdfunding Reward based (product or service related to the project) 3. Crowd investing Equity based (receive equity or shares, ROI) 4. Crowd lending Debt-based (re paid + interests, like traditional loans but online).

Answer 16

Yes, bank loans can be used for growth and expansion, as the business angels said, sometimes you need to be patient for your project to be selected, so when the firm is a bit more established it could help financing the venture, diversifying the sources of capital.

Answer 17

High risk investment in early stages of companies/ startups. Equity capital invested for a specific time to receive a financial return.

Answer 18

1. Fundraising 2. Investment 3. Value Addition / company growth 4. Exit 5. Returns 6. Re-investment

Answer 19

Is the process of verifying the viability of a business plan. All actions to gain info about the quality of a potential investment. 1. Identifying opportunities 2. Initial screening (evaluation criteria and pitch meetings) 3. Analysis and reference check (COMPANY DATA, RECORDS, OWNERSHIP, FINANCIAL DATA) - strategic, technical, marketing, sales, legal,environmental, HR, external, and orgnizational due diligence. 4. Negotiation

Answer 20

1. Initial fund formation -VC formed by GPs who raise capital from investors. As a LP 2. Fundraising stages - The GPS pitches to the investors, and then they commit the capital to the GPS 3.Capital deployment (give the capital to startups)

Answer 21

1. Investment return, carried interest (20%) - Exit strategies (ipos, merge, acquisition, sale of their equity) 2. Management Fees - annual fee t cover operations (2%)

Answer 22

1. VENTURE CAPITAL FIRM REQUIREMENTS 2. CHARACTERISTICS OF THE PROPOSAL 3. CHARACTERISTICS OF THE ENTREPRENEUR / TEAM 4. NATURE OF THE INDUSTRY 5. STRATEGY OF THE PROPOSED BUSINESS

Answer 23

Common stock Preferred stock Hybrids financial instruments (convertible & warrant bonds) Silent partnerships

Answer 24

Capacity of repay Capital - own money Collateral - assets or guaranties Conditions - purpose Character - you

Answer 25

Startup Over $1 billion No publicly traded

Answer 26

A ventures value today, of all future cash flows discounted to the present at the investor’s required rate of return

Answer 27

The internal rate of return indicates effective interest rate on the capital invested or the discount rate at which an investment’s NPV is 0.

Answer 28

IRR > i Accept IRR < i Reject IRR = I Don’t bother For financing options its the opposite

Answer 29

- IRR is strongly determined by the time structure of cash flows - IRR implicitly assumes that the whole commitment until COF & CIF can be invested at the IRR. - The calculations of IRR have no unique solution or solution at all.

Answer 30

Investments that a company plans to undertake Budgeting, the process is used to analyze the investments and decide which one to accept

Answer 31

The amount by which the firm’s earnings are expected to to change as a result of the investment decision

Answer 32

The incremental effect of a project on a firm’s available cash FREE CASH FLOW= unlevered net income+depreciation - capital expenses - increase in NWC Unlevered net income= (revenues -costs -depreciation) x (1-T)

Answer 33

NET WORKING CAPITAL = current assets - current liabilities. = cash+inventory+receivables-payables)

Answer 34

Are the actual cash outflows when an asset is purchased.

Answer 35

1. DCF - Discounted cash flows 2. Comparable company analysis 3. Precedent Transaction analysis 4. Leveraged buyout analysis

Answer 36

1. Is based on subjective assumptions 2. Is highly sensitive to the discount (uses the WACC) and growth rate 3. The TV is often account for the majority of the value

Answer 37

The terminal value is a crucial component of the DCF valuation, capturing the value beyond the forecast period.

Answer 38

Equity value reflects the value attributable to the shareholders. Uses as discount factor the Cost of equity. Enterprise Value reflects the company’s total value from the perspective of both equity and debt holders. Uses as discount facto the WACC.

Answer 39

-It’s affected by short term market forces -Could be difficult to select best comparables -Requires adjustments -Availability of good quality short term forecasts - Static analysis - Based n assumptions

Answer 40

- Public data on past transactions can be limited and misleading - Precedent transactions are rarely directly comparable - Not all aspects of a transaction can be captured in multiple or premium valuation - Market conditions at the time of transaction can have substantial influence

Answer 41

Is valuation based on historic valuations for comparable assets. Based on similar metrics as the C.C. Includes control premium

Answer 42

The ownership dilution since every round more investors take a percentage of the company’s ownership. This leads to a control dilution as well. The value of individual shareholders stake may increase even if there is dilution. (Example of a piece of a bigger pizza).

Answer 43

Is a market value negotiated between present shareholders and new investors. Based on the growth potential that new investors see. Equity market value before the issue, based on te new issue price/share. Present value of the venture before the new money investment.

Answer 44

Total value of the new shares issued at a given round

Answer 45

Equity market value after the issue

Answer 46

Estimates the value by projecting only a terminal flow to investors at the exit event. Cash return at exit time discounted at the investors target return vs cash investment today divided by the venture’s present value. = % of ownership to be sold in order to provide the investor’s target return.

Answer 47

Capitalization Tables, is a spreadsheet of who owns the company and what they have paid. It includes number and price of securities, successive rounds and ownership stakes.

Answer 48

Leveraged buyout is an outright sale to managers, where a purchase price of a firm is financed largely with debt financial capital. Somebody buys a company using large debt.

Answer 49

Management buyout is an outright sale to managers, a special type of LBO, where the firm’s top management continues to run the firm and has substantial equity position in the reorganized firm. The managers decide to buy the company or big part of it, possibly aso with debt.

Answer 50

EMPLOYEE STOCK OWNERSHIP PLAN, is an outright sale to employees. The ESOP uses the gains from the sale of debt to purchase equity, employees gain an ownership stake in the company. Give shares to employees, for motivation and retention, and tax benefits.

Answer 51

The venture liquidated by distributing the cash flows to the owners.

Answer 52

• Liquidation proceeds are treated as ordinary income (vs. 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

Answer 53

Because of large synergies like, cost reduction (eliminating redundant resources) and revenue enhancement. 70% overestimate the synergies.

Answer 54

The target shareholders

Answer 55

Situation when shareholders of the target company benefit from the improvements and value added by the acquiring company without actively participating in the takeover process. This problem can make it challenging for the acquiring company to gain full control at a reasonable cost. The free rider problem can make it difficult for the acquirer to obtain a controlling interest if too many shareholders hold out, expecting further value appreciation.

Answer 56

it is a bad signal to investors when an entrepreneur sells her own shares, because lost of confidence, perceived overvaluation, commitment concern, or negative market perceptions. But it still might make sense for some to cash out some of their wealth, because liquidity, reward for risk.

Answer 57

Is te one finding and making the connection with the future investors for the IPO, the company choose their underwrite(s).

Answer 58

In average 1.5 years

Answer 59

Seasoned equity offering. Or Secondary Equity Offer. Is a public offering of additional shares by a company that has already gone through an IPO. This means that the company is already publicly traded, and the SEO is a way for it to raise additional capital from the equity markets. (Through new shares or shareholders selling shares). With SEO we know the price with IPO we don’t have history of the price.

Answer 60

Underpricing, refers to the potential money that a company could have raised if the shares were priced higher.

Answer 61

Special Purpose Acquisition Companies, companies with no commercial operations made strictly to raise capital through IPO to buy another company, typically within 2 years. An alternative to IPOs. Like the Jay C, example, the sponsor takes 20% of shares and the rest is sold to other investors at the IPO for normally $10. They usually contain a warrant in case no company is found or vote against the merger.

Answer 62

M&A involves companies combining for strategic growth or synergy, while SPACs are shell companies formed to raise capital through IPOs specifically to acquire private companies and take them public. M&A entails negotiation, due diligence, and regulatory approvals for merging operations, whereas SPACs bypass the traditional IPO process, seeking a private company acquisition within a limited timeframe.

Answer 63

1. IPO: SPAC raises funds through an IPO and the proceeds are held in a trust account. 2. Search for Target: SPAC has a limited time frame (typically 18-24 months) to identify and acquire a target company. 3. Business Combination: If a target is found, a merger or acquisition takes place, and the target company becomes publicly traded through the SPAC. 4. Redemption Option: Investors have the option to redeem their shares for a pro-rata share of the trust account if they do not approve of the acquisition.

Entrepreneurial Finance Flashcards

(90 cards)