Lecture 7: Financing and Distributing Flashcards Preview

MOS 1023 Final > Lecture 7: Financing and Distributing > Flashcards

Flashcards in Lecture 7: Financing and Distributing Deck (75):
1

What is bootstrapping?

how entrepreneurs raise seed money to start their business

2

What is seed money from bootstrapping used for?

Is spent on developing a prototype of the product and also a business plan.

3

How long does bootstrapping usually last?

lasts 1-2 years

4

Who are venture capitalists?

are the people that help new businesses get started especially with early-sage financing. They are wealthy people who invest their own money.

5

What is another name for venture capitalists?

angel investors

6

What firms are the primary sources of funds for venture capital firms?

Financial and insurance firms

7

What are the 3 reasons as to why traditional funding does not work?

1. High degree of risk - don't know if the business will be successful
2. Types of Productive Assets- they have more intangible assets
3. Info asymmetry problems- the investor does not know as much about the product

8

What does venture capitalists investments give them?

equity investment, often in the form of stock that is convertible into common stocks

9

What is the most important role of venture capitalists?

to provide advice and council to entrepreneurs because they fall short on skills that are needed for growth

10

What are some tactics to reduce risk for venture capitalists?

1. Fund in stages (3-7)- not all at once
2. Make entrepreneurs make personal investments to prove their confidence in the business
3. Syndicating investments
4. in-depth knowledge about the industry

11

What is syndication?

when a venture capitalists sells a % of a deal to other venture capitalists

(splitting into 2 creates less risk)

12

What are 2 ways that syndication reduces risk?

1. increases diversification
2. sharing of investment shows that the investment is a good decision

13

What is the exit strategy of venture capitalists?

They are not long-term investors. They exit by selling their equity position.

14

How many years does it usually take for a venture capitalist to exit?

3-7 years

15

What are the 3 important details venture capitalists need to agree on in their exit strategy?

1. Time (when to exit)
2. The method of exit
3. What price is acceptable

16

What are the 3 types of buyers venture capitalists can sell to?

1. strategic buyer in a private market (create value through synergies)
2. Sell to a financial buyer (buying with the intention of holding it for 3-5 years then selling for profit)
3. IPO: selling a common stock in the initial public offering - does not sell all of the shares

17

What way do venture capitalists usually exit through?

strategic or financial buyers

18

How many new businesses are usually successful?

1-2/10

19

What is the usual annual return percentage venture capitalists receive back?

15-25%

20

What does an initial public offering do?

1. A way to raise money
2. Gives an opening of a venture capitalist to exit

21

What are the 5 advantages of going public?

1. Equity can be raised higher in public equity is larger
2. More equity can be raised after the IPO
3. give entrepreneur ability to fund a business without giving up control
4. stockholders can buy and sell in a secondary market after IPO
5. easier to attract top management team in public firm

22

What are the 4 disadvantages of going public?

1. High cost of IPO
2. Out of pocket costs
3. Cost of complying with SEC disclosure
-> transparency (provide detail about firm)
4.

23

How do you complete an IPO?

through the service of bankers who bring new securities to the market

24

What are the 3 service of bringing securities to market?

1. Origination- big businesses provide this for themselves
2. Underwriting
3. Distribution

25

What is origination?

- Banker gives the firm advice prior to selling it - then states if it is ready and get approvals for doing so
-then file a registration with SEC

26

What is preliminary prospectus?

allows investors to make intelligent decisions about investing a security issue

27

What is underwriting?

the risky part of investment banking

28

What two ways can securities be underwritten?

1. Firm commitment basis
-> investment banker promises the issuer a fixed amount of money even if the resell price is slower
2. Best effort basis

29

How much compensation does the investment banker get usually?

7%

30

What is best effort underwriting?

there is not guarantee from the investment banker to sell the securities at a fixed rate

31

What is compensation based on in best effort underwriting?

number of shares sold

32

What are underwriting syndicates?

when underwriters combine to form a group which entitles them to receive a portion of the underwriting fee and allocation of securities

33

what is a selling group?

when you enlist other investment banking firms in a syndicate

34

What is one of the most difficult tasks of being an investment banker in IPO?

to determine the highest price that bankers will be able to sell all of the shares
1. consider value of cash flow
2. consider stock price
3. Conduct a road show

35

What is a road show?

A road show is when a manager makes presentations about the firm to potential investors

36

What are due diligence meetings?

before shares are sold when investment bankers have meetings to protect their reputation to reduce risk of lawsuits

37

What is a pricing call?

when the due diligence meetings are over, the issuer determines the final offer price

38

Who makes the pricing decision?

Management- rejection or acceptance

39

What 3 costs are associated with issuing stock in an IPO?

1. underwriting spread -> difference between proceeds an issuer receives and total amount raised
2. Out-of-pocket expenses: other investment fees
3. Underpricing: difference between offering price and the closing price at the end of the first day

40

What is the syndicates (the group formed) primary concern?

sell securities as quick as possible because conditions can change

41

What happens if securities are not sold within a few days?

the underwriting syndicate disbands and members sell the securities at whatever price

42

What happens in the closing?

the issuing firms delivers the security certificates and the underwriter delivers the payments

43

When does the closing usually take place?

The third day

44

What is the cheapest source of external funding?

private markets (bootstrapping and venture capital)

45

When does private placement occur?

when firms sell unregistered securities directly to investors

46

What are advantages of a private placement?

1. lenders are more willing to negotiate
2. solve financial issues without bankruptcy court
3. faster and more flexible

47

what is the disadvantage to private placements?

restrictions on resale of securities

48

What do private equity firms do?

pool money but invest in more mature companies and purchase 100% of the business

49

What is the goal of private equity firms?

to increase value of the firm for about 3-5 years then sell it for profit

50

What is a dividend policy?

policy regarding distributions of value to stockholders - when dividends are given out equity is reduced

51

A dividend

reduces the stockholders investment in a firm by returning some of the investment back to them

52

What is a pro-rata basis

in proportion to the firms shares
that they own

53

What is a regular cash dividend?

cash dividend that is paid out on a regular basis/ quarterly basis

54

What is an extra dividend?

management can afford to set the dividend low because it has the option to pay out extra

55

What is a special dividend

one time payment to stockholders that is larger then an extra and less frequent

56

What is a liquidating dividend?

a dividend that is paid to stockholders when a firm is liquidated (firm ceases to exist)
-> stockholder being the last to receive

57

What is the order of the dividend payment process?
PREPB <-

1. Board vote- to pay a dividend
2. Public announcement- announces to pay it
3. Ex-dividend date- the first date that the stock will trade without rights to dividend
4. Record Date- 2 days after ex-dividend-> investor becomes a stock holder of record
5. Payable date - the stockholders receive the dividend 2 weeks after record date

58

Why is the dividend payment process not the same for private companies?

-shares are bought and sold less
- fewer stockholders
- no stock exchange

59

What are stock repurchases?

when a company repurchases its own shares not in proportion to the shares that they own

60

Do stockholders have to participate in a repurchase?

No they do not and then can choose when they pay taxes

61

What are the 3 ways that stock can be repurchased?

1. Open-market Repurchase
2. Tender Offer
3. Targeted Stock Repurchase

62

What is the most common way that stock can be repurchased?

Open-market repurchase

63

What happens in the open-market repurchase?

when companies have a large amount to distribute they use this because there is a limited # of shares per day

64

What is a tender offer repurchases?

large amounts of cash distributes without special dividends

65

What are the two kinds in tender offer repurchases?

1. Fixed Price: management announces price and the amount of shares
2. Dutch Action: price is lowered until it receives a bid

66

What happens in Targeted Stock Repurchase?

there is direct negotiation with a stockholder and used to buy blocks of shares

67

What is the reaction to targeted stock repurchases?

Negative. Because it may insist pessimism towards company driving down stock price

68

What are stock dividends?
frequent

when a company distributes new stock to existing stockholders -- no value change

69

What are stock splits?
infrequent

the distributions of a larger outstanding shares - actual division of stocks into more then one share

70

What is the benefit of stock splits?

send a positive signal to investors about the future of the business

71

What is a reverse stock split?

number of stock shares of the shareholder is reduced

72

Trading Range Argument

successful companies use stock dividends or stock splits to make their company more attractive to investors

73

What is a round lot?

100 shares

74

What is a odd lot?

<100 shares

75

After a stock trade, does the stock dollar appear to be higher then before?

No