Chapter 10 3. [Venture Capital Valuation Method] A venture capitalist wants to estimate the value of a new venture. The venture is not expected to produce net income or earnings until the end of year 5 when the net income is estimated at $1,600,000. A publicly-traded competitor or “comparable firm” has current earnings of $1,000,000 and a market capitalization value of $10,000,000. A. Estimate the value of the new venture at the end of year 5. Show your answer using both the direct comparison method and the direct capitalization method. What assumption are you making when using the current price-to-earning relationship for the comparable firm? P/E of comparable firm = $10,000,000/$1,000,000 = 10 times New Venture Value: $1,600,000 net income times 10 = $16,000,000 Assumptions: 1. The “comparable firm” is really comparable to the new venture. 2. The current price-to-earning relationship of 10 will still be the appropriate multiple to use 5 years from now. B. Estimate the present value of the venture at the end of year 0 if the venture capitalist wants a 40 percent annual rate of return on the investment. $16,000,000/1.40 5 = $2,974,950.91 Chapter 11 8. Who are the major suppliers of venture capital by type and size of commitment? Refer to Figure 11.4 which shows Suppliers of Venture Capital as determined by the National Venture Capital Association, 2004. Major suppliers are: (1) Pension Funds = 42%; (2) Finance and Insurance = 25%; (3) Endowments and Foundations = 21%; (4) Individuals and Families = 10%; (5) Corporate VCs = 2% 9. What is meant by the terms (a) capital call, (b) deal flow, and (c) due diligence? (a) capital call: when the venture fund calls upon the investors to deliver their investment funds; (b) deal flow: flow of business plans and term sheets involved in the venture capital investing process; (c) due diligence: process of ascertaining the validity of a business plan. 10. What is meant by the terms (a) lead investors, (b) SLOR, and (c) term sheet?
FIN 512_WEEK 6 HOMEWORK_DeANGELA DIXON Chapter 12 2. Name three of the common loan restrictions and explain their relation to new venturing financing. What are some additional common loan restrictions? Limits on total debt are placed on venture firms to limit the amount of leverage the firm has. Dividend restrictions are placed on firms to prevent the firm from paying out the newly issued debt in the form of a dividend. Maintenance of financial statements may be required to provide the lending institution with a current representation of the company’s financial situation. Some additional common loan restrictions are: restrictions on additional capital expenditures, restrictions on sale of fixed assets, performance standards on financial ratios current tax and insurance payments. 7. Identify and briefly describe four basic SBA credit programs. The four basic SBA credit programs: 1) Loan: traditionally has been the SBA’s primary loan program and approached $14 billion in loans in 2006. 2) 504 Loan: this is the SBA’s rapid-growth loan program. 3) Microloan: intended for very small businesses with a maximum amount of $35,000 to be used for general purposes. 4) Venture Capital: this credit program works through Small Business Investment Companies (SBICs) which are private for-profit investment firms. 13. What are some characteristics of a Community Development Financial Institutions (CDFI) loan? In 1994, Congress created the Treasury Department’s Community Development Financial Institutions (CDFI) Fund. Most CDFIs currently still focus on promoting affordable housing and homeownership. However, CDFIs are increasing their financing of small businesses through the making of microloans as well as larger loans. The SVA makes direct loans to CDFIs, which, in turn, make microloans to small businesses. See Figure 12.4 for factors to review when considering a CDFI loan. 2. [Factor Financing] Assume the operation of your business resulted in sales of $730,000 last year. Year-end receivables are $100,000. You are considering factoring the receivables to raise cash to help finance your venture’s growth. The factor imposes a 7 percent discount and charges an additional 1 percent for each expected ten-day average collection period over thirty 30 days.