Law Test Notes

Topics: Internal rate of return, Discounted cash flow, Cash flow Pages: 17 (5921 words) Published: December 4, 2014
Equity 4
Textbook 1 Chapter 7 Equity- The first Building Block
Liability is a fixed obligation and must be paid back. Equity is residual and does not have a fixed repayment requirement. Equity can also be thought of as the foundation of a business as in the old adage. Equity provides: The cushion to absorb shrinking asset in a downturn

The resilience to withstand operating losses;
The leverage to avoid debt carrying costs
Equity represents the ultimates business risk. In relation to the risk/reward curve, equity is at the extreme end - it taked the greatest risk, and therefore, deserves the greatest reward. The common observation: equity is costly. The cost of debt it measured in terms of interest to be paid: the cost of equity is related to the amount or share of ownership given up and dividends paid. When does a business need additional equity?

A significant amount of equity is needed at the start. As circumstances change throughout the life cycle of the business, additional equity will be needed. (example: a major plant and equipment expansion, market expansion by introducing new products, etc) Determining the Debt-to-equity Ratio

For many business, a debt/equity ratio from 1:1 to 2:1 is considered satisfactory. The debt burden must also be weighed in relation to the profitability, cash flow and product or service cycle that determine the company's ability to service the obligation. Main sources of equity

1. Personal Assets, close friends, relatives
2. Angels
3. Government Programs
4. Industry
5. Venture Capital
6. Strategic Partnering
7. Initial Public Offering (IPO)
Carefully Assess Potential Sources of Equity
Many sources of referrals for potential equity investors: Government industry department, local Chambers of Commerce, Area industrial development department, Entrepreneur clubs, professional advisors (lawyer, accountants), suppliers, bankers. The following are the sources of equity financing available to the entrepreneur: Private sources- informal investors (personal funds, friends, relatives, angesl, clients of professional advisors, customers, recently successful entrepreneurs) Government sources (provincially sponsored business development equity corporations, grants or subsidies) Industry sources (significant competitors, suppliers or customers, strategic partnership) Foreign sources (investors immigrating to Canada, schedule 2 banks) Venture capital (corporate holding companies, private investment syndicates) Employee Stock Ownership Plan ESOPs

INternal sources (retained earnings, sale/leaseback of fixed assets, turf financing by the sale of certain rights

There are clearly many positives from having investors join you business, but only if you choose that investor carefully. In evaluation an investor consider: 1. Personal chemistry (are you comfortable with the person0

2. Value-added assistance (does the investor has relevant experience to assist the company's board and management, can he/she help to grow the company) 3. Deep pockets (Most investments require follow-on funding before full maturity. Will it have additional funds available in its capital pool in the future. 4. Reputation (ask references, what was the investor behavior in different situations from his past investment) Textbook 2

Chapter 7 The Valuation: Create the Framework for Fund Managers One CEO asks Knox to explain which characteristics appearing within those first fifteen minutes he feel show good leadership. Know said that if you are pushing to change the way your industry looks and works, you will be a very successful CEO. Investors define the value of a company by its strong market position, growing finances, growing revenues and long-term cash flow from year-in and year-out customers. Early on in our initial discussions, the CEP must align company interests with the private equity investors and devise a value-creation plan together with the management team, discussing the opportunities to create wealth. It is...
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