Final Exam Flashcards

Question

Venture capitalists

Answer 1

Investors who prefer equity investments in nonpublic corporations with the contractual agreements (spelled out in “term sheets”)

Answer 2

1. Prospective investors should have all relevant information necessary to make informed investment decisions 2. Investors in securities available to the general public should not be permitted to benefit from nonpublic or inside information 3. Deceived investors should receive relief in the event of securities fraud

Answer 3

>>main body of the federal law governing the creation and sale of securities

Answer 4

>> federal law that deals with the mechanisms and standards for public security trading

Answer 5

JOBS act title III’s small offering registration exemption form SEC registration requirements involving crowdfunding for the sale of securities

Answer 6

State laws designed to protect individuals from investing in fraudulent security offerings offer — every attempt or offer to dispose of or solicitation Sale — offer to buy

Answer 7

Weighted average of a set of scenarios or possible outcomes

Answer 8

Net income or profits (after taxes) earned over an accounting period — to calculate: >>sustainable sales growth rate: Rate at which a firm can grow sales based on the retention of profits in the business

Answer 9

Funds needed to acquire assets necessary to support a firm’s sales growth

Answer 10

Increases in accounts payables and accruals (wages and taxes) that accompany sale increases

Answer 11

Gap remaining between the financial capital needed and that funded by spontaneously generated funds and retained earnings AFN = required increase in assets - spontaneously generated funds - increase in R/E

Answer 12

Forecasting method that makes projections based on the assumption that most expenses and balance sheet items can be expressed as a percentage of sales

Answer 13

Variant of the percent-of-sales forecasting method that projects selected cost and balance sheet items at the same growth rate as sales The financial forecasting method: 1. Forecasted sales 2. Project the income statement 3. Project the balance sheet 4. Project the statement of cash flow

Answer 14

- Having personal stakes and have raised funds - Individuals who join in formal, organized firms to raise and distribute venture capital to new and fast-growing ventures

Answer 15

1st investment : high voltage engineering corporation, a venture organized by MIT physicists and engineers

Answer 16

- tax advantages | - borrow 4 x the SBIC equity base

Answer 17

1. Determine (next) fund objectives and policies 3 common characteristics: - industry - stage and size of investment - geographic area 2. Organize new fund (usually a partnership) 3. Solicit investments in new fund 4. Obtain commitment for series of capital calls 5. Conduct due diligence and actively invest 6. Arrange harvest or liquidation 7. Distribute cash and securities proceeds (as available) 8. Determine (next) fund objectives and policies

Answer 18

- organization that helps startup companies develop by providing management, operating, and financial services - usually formed as a nonprofit - length of time a co. Can stay in the program depends: —complexity of the business model, predetermined revenue, or other benchmark targets

Answer 19

- organization that usually provides both an equity investment and a mentoring and educational, fixed-term , cohort program to help startup co. succeed Business incubators and seed accelerators offer mentoring, networking, and business educational skills to startup firms accepted into their programs. These benefits, along with obtaining loan funds by business incubators and the injection of seed equity by business accelerators, providing important assistance and support for entrepreneurs who are successful applicants.

Answer 20

- process of obtaining business ideas, development support, and operating services from a large network of non-employees - lower development and opportunity costs at a faster speed

Answer 21

- process of financing ideas, ventures, and projects by gathering funds from a large network of people Reward-based crowdfunding - involves soliciting non-equity funds to finance specific business products and services or to request donations form a specific purpose - keep what is raised or all-or-nothing Equity crowdfunding - involves soliciting funds from a large number of small investors in exchange for an equity position in the venture requesting the funding.

Answer 22

Capacity - an indicator of future payment performance Capital - personally invested Collateral - “guarantees” Conditions - purpose of loan Character - general impression

Answer 23

—- Firm’s ability to pay off loan + interest

Answer 24

Maintenance of accurate records and financial statements Limits on total debt Restrictions on dividends or other payments to owners and/or investors Restriction on additional capital expenditures Restrictions on sale of fixed assets Performance standards of financial ratios Current tax and insurance payments

Answer 25

- provide contract assistance and counseling - 7(a) loans - 504 loans - micro loans - venture capital

Answer 26

- selling receivables to a third party at a discount from their fv - could be with recourse or without recourse

Answer 27

Use of receivables as collateral for a loan

Answer 28

Leasing contracts where one component of the return to the lessor is a type of ownership in the venture, usually through warrants

Answer 29

Security offering made directly to a large number of investors

Answer 30

Process of exiting the privately held business ventures to unlock the owner’s investment value. 1. Through a systematic distribution of assets directly to the owners 2. Through an outright sale of the going concern to others.

Answer 31

High-expected growth companies with valuations in excess of $1 billion

Answer 32

>> a venture liquidated by distributing the venture’s assets to the owners Advantages: -the entrepreneur and other owners maintain control throughout the harvest period - the harvesting of the investment value can be spread out over a number of years - the time, effort, and cost of finding a buyer for the venture can be avoided Disadvantages: -The treatment and taxation of liquidation proceeds as ordinary income (rather than capital gains) - the commitment of the entrepreneur’s wealth, abilities, and focus to a dying venture, rather than other venture pursuits that might be more lucrative. - the acceleration of the rates of decline in the going concerns’ value as other industry participants respond to the reduction in the investment

Answer 33

>> venture sold to others, including family members, managers, employees, or external buyers

Answer 34

Can transfer through - heir - selling

Answer 35

>> have limited personal resources for an outright buy * leveraged buyout (LBO) * Management buyout (MBO) ***LBO/MBO exit strategy requires a tight plan for streaming operations and cutting costs

Answer 36

>> Purchase price of a firm is financed largely with debt financial capital ~ existing investors equity is retired from an aggressive debt issue

Answer 37

>>special type of LBO where the firm’s top management continues to run the firm and has a substantial equity position in the reorganized firm

Answer 38

- employee stock ownership plans (ESOPS) | - available in leveraged (harvest all at once) and un-leveraged securities

Answer 39

Valuation analysis for an acquisition - control premium: “value of controlling the venture” ~related to the value -illiquidity discount : “compensate for the resale of disadvantages”

Answer 40

- a venture’s first offering of SEC registered securities to the public Primary shares offering: the sale of new shares (securities) Secondary shares offering: the sale of used shares (securities)

Answer 41

>> an intermediary assisting in the creation, sale, and distribution of financial assets. >>experts; initiate markets ``` Underwriting spread (typically 7 to 10 percent) -difference between what the investment bank gets from selling securities to public investors and what it pays to the issuing firms ```

Answer 42

Obligatory disclaimer disavowing any intent to act as an offer to sell, or solicit an offer to buy securities

Answer 43

The process of ascertaining, to the extent possible, an issuing firm’s financial condition and investment intent

Answer 44

Type of agreement with investment bank involving the investment banks’ underwritten purchase and resale of securities

Answer 45

Type of agreement with investment bank involving only marketing and distribution efforts

Answer 46

A firm that has already had publicly traded shares

Answer 47

When the issuer has not previously issued that type of security

Answer 48

When cash flow is insufficient to meet current debt obligations

Answer 49

Occurs when there is a failure to meet interest or principal payments when due on a loan

Answer 50

Provides that all future interest and principal obligations on a loan become immediately due when default occurs

Answer 51

Provides that defaulting loan places all loans in default

Answer 52

Legal process used by creditors to try to collect amounts owed on loans in default

Answer 53

>> when a venture has a negative book equity or net worth position and /or when its cash flow is insufficient to meet current debt obligations A) balance sheet insolvency B) cash flow insolvency

Answer 54

- exists when a venture has negative book equity or net worth because total debt exceeds total assets - common during early stages

Answer 55

Exists when a venture’s cash flow is insufficient to meet its current contractual debt obligations

Answer 56

>> turnaround a financially distressed venture - operations restructuring - asset restructuring - financial restructuring

Answer 57

Involves growing revenues relative to costs and/or cutting costs relative to the venture’s revenues

Answer 58

Involves improving the working capital to sales relationships and/or selling off fixed assets

Answer 59

Involves changing the contractual terms of the existing debt obligations and/or the composition of the existing the venture - debt payment extension - debt composition change

Answer 60

Involves postponing due dates for interest and principal payments on credit purchases

Answer 61

Occurs when creditors reduce their contractual claims against the venture

Answer 62

Ch. 11 - business reorganizations Ch.7 - procedures for liquidating a ventures assets

Answer 63

When a petition for bankruptcy is filed with a federal bankruptcy court. - voluntary bankruptcy petition - involuntary bankruptcy petition

Answer 64

1. a successful reorganization and continuing of operations 2. Merging the venture with another firm 3. liquidating the venture under Ch. 7 of the bankruptcy law

Answer 65

- Common Pool problem | - holdout problem

Answer 66

When individual creditors have incentive to foreclose on the venture even though it is worth more as a going concern Automatic Stay provision: A restriction on the ability of an individual creditors to foreclose to try to recover their individual claims

Answer 67

When one or more of the creditors refuses to agree tot eh reorganization term because of the potential for a larger individual recovery. Cram-down procedure: - Bankruptcy court accepts a reorganization plan for all creditors, including dissenting creditor classes Debt-in-possession financing -short-term financing, made all existing unsecured debt, to help meet liquidity needs during the reorganization process

Answer 68

1. restrict management from fraudulently transferring the ventures assets. 2. provides a court-decided "fair and equitable" basis for allocating the asset proceeds to all claimants 3. Allows the entrepreneur and other shareholders to "walk away" from the venture with no further obligations

Answer 69

1. administrative costs associated with the venture's liquidation 2. wages and other unpaid employee benefits (limited to amounts earned within the past three months with a maximum of $2,000 per employee) 3. specific consumer claims ($900 maximum per claim) 4. Tax claims (property and income taxes) 5. Secured creditors (entitled to the proceeds from sale of plan and equipment pledged as security for mortgage loans or bonds ) 6. unfunded pension plan liabilities ( a portion may have prior claim over general creditors while the remainder has a claim equal to the general creditors) 7. General (unsecured) creditor claims (includes holders of trade credit, unsecured loans including debenture loans, and unpaid portions of secured loans) 8. preferred stock holder claims 9. common stock holder claims (differential priorities might exist if different classes of common stock had been previously issued)

Answer 70

- implicit - explicit Difference between accounting perspective and finance perspectives 1. Cash flow is a new venture's lifeblood. 2. Finance perspective demands that, where possible, the cost of financial capital be explicitly incorporated in evaluations, projections, and strategy.

Answer 71

- in addition to federal restrictions, issuers must also consider restrictions imposed by the various states - state securities regulations are "blue sky" laws - designed to protect individuals from investing in fraudulent security offerings

Answer 72

- Federal laws frequently are predicated on some offending behavior's affecting more than one state - This focus is due to "state-rights" traditions and the notion that an infraction confined to one state is a state, not a federal, matter.

Answer 73

- It is unlawful for a person in the offer or sale of securities: - to employ any device, scheme, or artifice to defraud - to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact - to engage in any transaction, practice, or course of business which operates as fraud or deceit upon the purchaser

Answer 74

Financial forecasting process to project financial statements 1. forecast sales 2. project income statement 3. project balance sheet 4. project statement of cash flows

Answer 75

portion of profits paid tot eh professional venture capitalist as an incentive compensation

Answer 76

investment management firms having a contract that gives them a 2% of assets annual management fee and 20 percent carried interest

Answer 77

when the venture fund calls upon the investors to deliver their investment funds - it is common to require subsequent investments consistent with the levels of investors' initial contributions

Answer 78

flow of business plans and term sheets involved in the venture capital investing process

Answer 79

process of ascertaining the viability of a business plan

Answer 80

1. venture capital firm requirements 2. characteristics of the proposal 3. Characteristics of the entrepreneur/team 4. nature of the proposed industry 5. strategy of the proposed business

Answer 81

Summary of the investment terms and conditions accompanying an investment - valuation - ongoing funding needs - size and staging of financing - preemptive rights on new issues - commitments for future financing rounds and performance conditions - form of security or investment - redemption rights and responsibilities

Answer 82

1. acceleration provision: provides all future interest and principal obligations on loan become due immediately upon default 2. cross-default provision: provides that defaulting on one loan places all others in default

Answer 83

voluntary agreement between a venture's owners and its creditors that provides for a financial restructuring of the venture's outstanding debt

Answer 84

assignment: transfer of title to the ventures assets to a third-party assignee or trustee

Final Exam Flashcards

(108 cards)