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

Lecture 7: Financing and Distributing Flashcards

1
Q

What is bootstrapping?

A

how entrepreneurs raise seed money to start their business

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2
Q

What is seed money from bootstrapping used for?

A

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

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3
Q

How long does bootstrapping usually last?

A

lasts 1-2 years

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4
Q

Who are venture capitalists?

A

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

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5
Q

What is another name for venture capitalists?

A

angel investors

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6
Q

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

A

Financial and insurance firms

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7
Q

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

A
  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
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8
Q

What does venture capitalists investments give them?

A

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

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9
Q

What is the most important role of venture capitalists?

A

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

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10
Q

What are some tactics to reduce risk for venture capitalists?

A
  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
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11
Q

What is syndication?

A

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

(splitting into 2 creates less risk)

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12
Q

What are 2 ways that syndication reduces risk?

A
  1. increases diversification

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

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13
Q

What is the exit strategy of venture capitalists?

A

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

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14
Q

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

A

3-7 years

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15
Q

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

A
  1. Time (when to exit)
  2. The method of exit
  3. What price is acceptable
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16
Q

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

A
  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
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17
Q

What way do venture capitalists usually exit through?

A

strategic or financial buyers

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18
Q

How many new businesses are usually successful?

A

1-2/10

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19
Q

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

A

15-25%

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20
Q

What does an initial public offering do?

A
  1. A way to raise money

2. Gives an opening of a venture capitalist to exit

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21
Q

What are the 5 advantages of going public?

A
  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
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22
Q

What are the 4 disadvantages of going public?

A
  1. High cost of IPO
  2. Out of pocket costs
  3. Cost of complying with SEC disclosure
    -> transparency (provide detail about firm)
    4.
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23
Q

How do you complete an IPO?

A

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

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24
Q

What are the 3 service of bringing securities to market?

A
  1. Origination- big businesses provide this for themselves
  2. Underwriting
  3. Distribution
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25
Q

What is origination?

A
  • 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
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26
Q

What is preliminary prospectus?

A

allows investors to make intelligent decisions about investing a security issue

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27
Q

What is underwriting?

A

the risky part of investment banking

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28
Q

What two ways can securities be underwritten?

A
  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
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29
Q

How much compensation does the investment banker get usually?

A

7%

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30
Q

What is best effort underwriting?

A

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

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31
Q

What is compensation based on in best effort underwriting?

A

number of shares sold

32
Q

What are underwriting syndicates?

A

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

33
Q

what is a selling group?

A

when you enlist other investment banking firms in a syndicate

34
Q

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

A

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
Q

What is a road show?

A

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

36
Q

What are due diligence meetings?

A

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

37
Q

What is a pricing call?

A

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

38
Q

Who makes the pricing decision?

A

Management- rejection or acceptance

39
Q

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

A
  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
Q

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

A

sell securities as quick as possible because conditions can change

41
Q

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

A

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

42
Q

What happens in the closing?

A

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

43
Q

When does the closing usually take place?

A

The third day

44
Q

What is the cheapest source of external funding?

A

private markets (bootstrapping and venture capital)

45
Q

When does private placement occur?

A

when firms sell unregistered securities directly to investors

46
Q

What are advantages of a private placement?

A
  1. lenders are more willing to negotiate
  2. solve financial issues without bankruptcy court
  3. faster and more flexible
47
Q

what is the disadvantage to private placements?

A

restrictions on resale of securities

48
Q

What do private equity firms do?

A

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

49
Q

What is the goal of private equity firms?

A

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

50
Q

What is a dividend policy?

A

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

51
Q

A dividend

A

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

52
Q

What is a pro-rata basis

A

in proportion to the firms shares

that they own

53
Q

What is a regular cash dividend?

A

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

54
Q

What is an extra dividend?

A

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

55
Q

What is a special dividend

A

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

56
Q

What is a liquidating dividend?

A

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

57
Q

What is the order of the dividend payment process?

PREPB <-

A
  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
Q

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

A
  • shares are bought and sold less
  • fewer stockholders
  • no stock exchange
59
Q

What are stock repurchases?

A

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

60
Q

Do stockholders have to participate in a repurchase?

A

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

61
Q

What are the 3 ways that stock can be repurchased?

A
  1. Open-market Repurchase
  2. Tender Offer
  3. Targeted Stock Repurchase
62
Q

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

A

Open-market repurchase

63
Q

What happens in the open-market repurchase?

A

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

64
Q

What is a tender offer repurchases?

A

large amounts of cash distributes without special dividends

65
Q

What are the two kinds in tender offer repurchases?

A
  1. Fixed Price: management announces price and the amount of shares
  2. Dutch Action: price is lowered until it receives a bid
66
Q

What happens in Targeted Stock Repurchase?

A

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

67
Q

What is the reaction to targeted stock repurchases?

A

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

68
Q

What are stock dividends?

frequent

A

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

69
Q

What are stock splits?

infrequent

A

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

70
Q

What is the benefit of stock splits?

A

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

71
Q

What is a reverse stock split?

A

number of stock shares of the shareholder is reduced

72
Q

Trading Range Argument

A

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

73
Q

What is a round lot?

A

100 shares

74
Q

What is a odd lot?

A

<100 shares

75
Q

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

A

No

MOS 1023 Final (3 decks)

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