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Obtaining Capital:
Methods of LongTerm Financing
Types of Financing
Venture Capital
Leasing
The Role of Investment Banks in Financing
Distributing Stock
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Obtaining Capital:
Methods of LongTerm Financing
(continued)
Comparing Public and Private Financing
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Obtaining Capital: Methods of Long-Term Financing > Types of Financing
Types of Financing
• Financing Life Cycle of the Firm
• Venture Capital
• Long-Term Debt
• Common and Preferred Stock
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Obtaining Capital: Methods of Long-Term Financing > Types of Financing
Financing Life Cycle of the Firm
• In the first stage, a new company's external financing needs (EFN) are high, since
it needs money to develop its idea but lacks retained earnings. They are usually
financed through debt, but may find investors who are willing to take on risk if
projected growth is high.
• In the growth stage, a firm's initial EFN is high relative to its current value; it needs
significant funds for growth. It can be financed through venture capital or issuing
equity.
• Growth eventually slows and the firm enters the mature stage. These firms can be
financed by equity or debt. If they have no new projects, EFN is relatively low.
• The firm may go into decline as their product becomes obsolete or a competitor
Firm Life Cycle
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outperforms them. In this case, they have very low external financing needs.
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Obtaining Capital: Methods of Long-Term Financing > Types of Financing
Venture Capital
• Young companies with high growth potential turn to venture capitalists for funding
because they cannot issue debt or raise capital in public markets.
• Venture capitalists assume high risk by investing in small, unproven companies,
rationalizing that successful investments will have so much growth that their
returns will far exceed any failed investments.
• By agreeing to fund a start-up company, the VC firm gets the potentials of high
future returns, significant control over company decisions, and a portion of the
company's ownership.
• Because a VC firm's returns are contingent on the company's performance, it is in
their interest to take an active role in company decision-making.
Structure of a Venture Capital Firm
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• A company receiving venture capital goes through several rounds of funding,
roughly corresponding to stages of company development.
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Obtaining Capital: Methods of Long-Term Financing > Types of Financing
Long-Term Debt
• Debt financing takes the form of loans that must be repaid by the borrower over a
specified period of time, usually with interest.
• Generally, debt financing is most appropriate for firms who are in the start-up
phase or have progressed to the maturity phase. For young companies, debt
financing usually takes the form of bank loans, while mature companies may
issue bonds.
• When investors buy a corporate bond or the bank loans to a small business, they
must have faith that the company will have the means to repay them. Riskier
investments will require compensation for the lender in the form of higher interest
rates.
Bank loans as a means of financing
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• Bonds may be an attractive alternative to getting bank loans or issuing stock
because it can have less restrictive loan terms and better interest rates than
loans, and it doesn't dilute equity or ownership as stock does. It also has
considerable corporate tax advantages.
• Costs of debt financing include: bankruptcy costs (in the event of inability to cover
payments to lenders) and increased uncertainty about future financing needs.
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Obtaining Capital: Methods of Long-Term Financing > Types of Financing
Common and Preferred Stock
• Firms using equity financing gain financial capital from investors, in exchange for
ownership stakes in the firm in the form of common and preferred stocks.
• The main advantage of equity financing is the lack of an obligation to pay back all
investors in the event of poor company performance, while the main disadvantage
is diminished control and business autonomy.
• In the event of liquidation and dividend payments, preferred stock has priority
claims to assets. Common stockholders must wait until all preferred stockholders
have been paid in full.
• In the event of bankruptcy, common stock investors receive any remaining funds
after bondholders, creditors (including employees), and preferred stock holders
Participating Preferred vs. Non-Participating
Preferred
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are paid.
• Common stockholders often have voting rights, exercising some measure of
control over company board elections and corporate policy, while preferred
stockholders usually lack these rights.
• Preferred stock is divided into a number of sub-categories including: cumulative
preferred stock, non-cumulative preferred stock, participating preferred stock, and
convertible preferred stock.
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Obtaining Capital: Methods of Long-Term Financing > Venture Capital
Venture Capital
• Defining Venture Capital
• Advantages and Disadvantages of VC Financing
• IPOs
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Obtaining Capital: Methods of Long-Term Financing > Venture Capital
Defining Venture Capital
• Venture capital is the financial capital provided to early-stage high-potential startups unable to acquire the necessary funding through conventional means.
• For venture capitalists, the high risk of investing is offset by the potential of high
returns.
• Venture capitalists typically spread out their fund over a number of investments so
that returns from successful investments will outweigh the losses from failed
ventures.
• Venture capitalists take an active role in a company's performance; guidance,
expertise, and industry connections can be just as valuable as financial capital.
Venture capital funds revolutionary social
networking services
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Obtaining Capital: Methods of Long-Term Financing > Venture Capital
Advantages and Disadvantages of VC Financing
• With VC financing, companies can acquire large sums of capital that would not be
possible through bank loans or other conventional methods.
• Venture capitalists provide expertise and industry connections that can be
extremely valuable.
• Accounting and legal costs make securing a VC deal a difficult process. If a deal
is secured, VC investors will be highly involved in deciding on the company's
strategic direction.
Weighing advantages and disadvantages
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Obtaining Capital: Methods of Long-Term Financing > Venture Capital
IPOs
• An initial public offering is the first time a company's stock is sold to the general
public on a securities exchange, transforming the company from private to public.
Though unpredictable and potentially costly, IPOs give benefits like increased
access to financial markets and more capital.
• Venture capitalists gain both financial returns and professional reputation from
successful IPOs.
• For venture-backed companies, their VC investors often expect the company to
go public within a certain time frame so that they can sell or distribute their
holdings of the company and exit the investment.
• Venture capitalists protect their ability to sell shares by contracting for registration
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rights prior to agreeing on funding the company. Demand rights allow the
investors to initiate an IPO, while piggyback rights allow investors to sell when the
company initiates an IPO.
• If the IPO market is weak, this threatens the venture capitalists' chances of a
successful exit. The VC investors may instead select a different method of exit, or
they can wait and hope for the market to improve.
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Obtaining Capital: Methods of Long-Term Financing > Leasing
Leasing
• Capital Leases vs. Operating Leases
• Impact of Leasing on the Income Statement
• Advantages of Leasing
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Obtaining Capital: Methods of Long-Term Financing > Leasing
Capital Leases vs. Operating Leases
• The finance company is the legal owner of the asset during duration of the lease.
However the lessee has control over the asset providing them the benefits and
risks of (economic) ownership.
• An operating lease is a lease whose term is short compared to the useful life of
the asset or piece of equipment (an airliner, a ship, etc. ) being leased.
• Unlike a Financial Lease or Finance lease, at the end of the operating lease the
title to the asset does not pass to the lessee, but remains with the lessor.
Lease
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Obtaining Capital: Methods of Long-Term Financing > Leasing
Impact of Leasing on the Income Statement
• Lessees can often benefit from comprehensive maintenance programs offered by
lessors while still paying a discounted premium due to the fact that the asset is
being leased, not purchased.
• The costs of leases on the income statement depend on the duration and type of
lease.
• EBITDA coverage ratio will improve if using operating leases.
• Leasing will influence depreciation expenses, maintenance expenses, other costs
and ratios on income statement.
Leasing impact
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Obtaining Capital: Methods of Long-Term Financing > Leasing
Advantages of Leasing
• Leasing is a process by which a firm can obtain the use of a certain fixed asset for
which it must pay a series of contractual, periodic, tax deductible payments.
• Capital assets may fluctuate in value. Leasing shifts risks to the lessor, but if the
property market has shown steady growth over time, a business that depends on
leased property is sacrificing capital gains.
• Depreciation of capital assets has different tax and financial reporting treatment
from ordinary business expenses.
• Leasing may provide more flexibility to a business which expects to grow or move
in the relatively short term, because a lessee is not usually obliged to renew a
lease at the end of its term.
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Obtaining Capital: Methods of Long-Term Financing > The Role of Investment Banks in Financing
The Role of Investment Banks in Financing
• Underwriter
• Market Maker
• The Role of an Advisor
• Agency
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Obtaining Capital: Methods of Long-Term Financing > The Role of Investment Banks in Financing
Underwriter
• Security issuers want to mitigate the risk of having an unsuccessful issue.
• Underwriters will buy the securities from the issuer and then sell it on the market.
The underwriter aims to buy the securities below market price, and then sell them
for a profit.
• Underwriters deal with both companies and government. The issuer could issue
stocks, bonds, or any other type of security.
NYSE
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Obtaining Capital: Methods of Long-Term Financing > The Role of Investment Banks in Financing
Market Maker
• Without sufficient liquidity, markets would become more inefficient because there
may not be a buyer/seller to transact with, even at what should be the market
price.
• Market-designated market makers provide liquidity by submitting both bids and
asks on certain securities. This helps ensure transactions can occur at the market
price.
• By submitting bids below ask prices, the market maker can make money.
• The difference between the highest bid and the lowest ask price is called the bid-
ask spread.
New York Spot Prices
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Obtaining Capital: Methods of Long-Term Financing > The Role of Investment Banks in Financing
The Role of an Advisor
• Mergers and acquisitions (M&A) require an investment bank to bring the buyer
and seller together and to help negotiate the deal.
• The advisor is hired by the client company to find a buyer/seller. The advisor
pitches the deal to potential buyers/sellers using a pitch book, which contains all
relevant financial information.
• The advisor also helps facilitate the deal which is incredible context because it
must account for everything from financial projections to assets to brand names.
Pricewaterhouse Cooper
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Obtaining Capital: Methods of Long-Term Financing > The Role of Investment Banks in Financing
Agency
• Many small and private companies cannot access traditional financial markets for
capital, so they need to either take on debt or find other sources of financing.
Investment banks help them find those other sources of capital.
• Common sources of financing are equity financing, mezzanine financing, and
specialist financing (e.g., government loans).
• The investment banks match their clients to investors and then charge a fee for
the service.
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Obtaining Capital: Methods of Long-Term Financing > Distributing Stock
Distributing Stock
• Defining Spread
• Pricing a Security
• Shelf Registration
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Obtaining Capital: Methods of Long-Term Financing > Distributing Stock
Defining Spread
• The party that initiates the trade is the liquidity demander who pays the spread.
The counterparty is the liquidity supplier who earns the spread.
• Liquidity suppliers use limit orders. A limit order is when the buyer waits until the
stock reaches a designated price.
• The spread is one component of transaction cost, which along with brokerage
fees, reflects the cost of making an instantaneous trade.
Signals from dividend policy may give clues
about stocks.
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Obtaining Capital: Methods of Long-Term Financing > Distributing Stock
Pricing a Security
• Several methods are used to determine the value of a company including Present
Value, Comparable Company Analysis, and Net Asset Value. The goal of each of
these methods is to determine the worth of a potential investment in the company.
• Financial analysis of this sort determines what investors are willing to pay for a
given security because it is what they think the security is worth.
• If most investors think a stock is worth a lot, or will be in the future, they buy it and
this demand drives price up. The opposite occurs if investors are not confident
about the stock. Therefore, stock price reflects investor expectations.
Price
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Obtaining Capital: Methods of Long-Term Financing > Distributing Stock
Shelf Registration
• A company can file a shelf registration statement with a prospectus that offers
different classes of securities. It can then sell all, none, or some of the classes at
any time.
• Regulators generally grant shelf registration to companies that are reliable. They
also require a statement of material changes in business since the prospectus
was filed before each security is actually sold.
• Shelf registration can be used by a company as a strategy to quickly sell
securities for funds when market conditions become favorable.
Shelf Registration
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Obtaining Capital: Methods of Long-Term Financing > Comparing Public and Private Financing
Comparing Public and Private Financing
• Advantages of Public Financing
• Advantages of Private Financing
• Types of Private Financing Deals: Going Private and Leveraged
Buyouts
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Obtaining Capital: Methods of Long-Term Financing > Comparing Public and Private Financing
Advantages of Public Financing
• The magnitude of funding available from public financing is its chief advantage.
• An initial public offering is when a private company converts to a public company
by selling shares of its stock publicly.
• A company can sell further shares of stock in secondary offerings.
• A company can also sell debt, in the form of bonds, in public exchanges.
Public Financing
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Obtaining Capital: Methods of Long-Term Financing > Comparing Public and Private Financing
Advantages of Private Financing
• One advantage of private financing is that private investors may infuse the
company with more capital than was available to it from public financing.
• Private financing also saves on administrative costs of being a publicly traded
company.
• Private financing can improve incentives for management, and increase investor
involvement.
Private financing
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Obtaining Capital: Methods of Long-Term Financing > Comparing Public and Private Financing
Types of Private Financing Deals: Going Private and Leveraged
Buyouts
• The acquiring party borrows money in addition to using its own funds to meet the
purchase price of the target. LBOs can also occur to public companies, such as in
public to private (PtP) transactions.
• The term typically applies to a deal in which a financial sponsor acquires a
company. In this instance, the sponsor uses debt to increase its return on equity.
• LBOs are appealing to the acquiring company because debt typically carries a
lower cost of capital than equity, which means that by employing more debt, the
acquiring party magnifies returns.
Financing deal
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Appendix
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Obtaining Capital: Methods of Long-Term Financing
Key terms
• ask The submitted price at which the trader is willing to sell.
• bid The submitted price at which the trader is willing to buy.
• bid price the amount offered by a buyer
• bid-ask spread the difference between the prices quoted for an immediate sale and an immediate purchase
• bond A documentary obligation to pay a sum or to perform a contract; a debenture.
• capital-intensive Capital intensity is the term for the amount of fixed or real capital present in relation to other factors of
production, especially labor.
• Common stock Shares of an ownership interest in the equity of a corporation or other entity with limited liability. Holders of this
type of stock are entitled to dividends. Importantly, the financial rights for holders of this type of stock are junior to preferred
stock and liabilities.
• debt Money that the borrowing entity owes or is required to pay to a lender.
• debt Money that the borrowing entity owes or is required to pay to a lender.
• EBITDA Coverage Times interest earned (TIE) or interest coverage ratio is a measure of a company's ability to honor its debt
payments. It may be calculated as either EBIT or EBITDA divided by the total interest payable.
• external financing needs Additional funds needed from sources outside the firm, in order to support firm operations.
• incentive Something that motivates, rouses, or encourages.
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Obtaining Capital: Methods of Long-Term Financing
• Initial public offering An initial public offering (IPO) or stock market launch is a type of public offering where shares of stock in a
company are sold to the general public.
• Initial public offering An initial public offering (IPO) or stock market launch is a type of public offering where shares of stock in a
company are sold to the general public.
• insolvency The condition of being insolvent; the state or condition of a person who is insolvent; the condition of one who is
unable to pay his debts as they fall due, or in the usual course of trade and business; as, a merchant's insolvency.
• investor A person who invests money in order to make a profit.
• IPO An initial public offering (IPO) or stock market launch is a type of public offering where shares of stock in a company are
sold to the general public for the first time. Through this process, a private company transforms into a public company.
• issuer The firm or government selling the security.
• leverage The use of borrowed funds with a contractually determined return to increase the ability of a business to invest and
earn an expected higher return (usually at high risk).
• liquidity Availability of cash over short term: ability to service short-term debt.
• liquidity Availability of cash over short term: ability to service short-term debt.
• M&A Mergers and acquisitions (M&A) are aspects of corporate strategy, corporate finance, and management dealing with the
buying, selling, dividing, and combining of different companies and similar entities that can help an enterprise grow rapidly in its
sector or location of origin, or a new field or new location, without creating a subsidiary, other child entity or using a joint
venture.
• overleveraged Subject to excessive leverage
• Preferred Stock Stock with a dividend, usually fixed, that is paid out of profits before any dividend can be paid on common
stock. It also has priority to common stock in liquidation.
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Obtaining Capital: Methods of Long-Term Financing
• present value Present value, also known as present discounted value, is the value on a given date of a payment or series of
payments made at other times.
• private A company that is not publicly traded.
• prospectus A document that describes a proposed endeavor (venture, undertaking) such as a literary work (which one
proposes to write).
• Registration rights A contractual agreement specifying conditions for registering shares of stock with the SEC prior to selling
them on a security exchange.
• security proof of ownership of stocks, bonds, or other investment instruments.W
• security proof of ownership of stocks, bonds, or other investment instruments.W
• security proof of ownership of stocks, bonds, or other investment instruments.W
• Stock The capital raised by a company through the issue of shares. The total of shares held by an individual shareholder.
• tender offer an invitation to shareholders of a corporation to exchange their shares in return for a monetary buy-out
• venture capital Money invested in an innovative enterprise in which both the potential for profit and the risk of loss are
considerable.
• venture capital Money invested in an innovative enterprise in which both the potential for profit and the risk of loss are
considerable.
• venture capital Money invested in an innovative enterprise in which both the potential for profit and the risk of loss are
considerable.
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Obtaining Capital: Methods of Long-Term Financing
• venture capital Money invested in an innovative enterprise in which both the potential for profit and the risk of loss are
considerable.
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Obtaining Capital: Methods of Long-Term Financing
Financing deal
An LBO is a type of financing deal.
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Obtaining Capital: Methods of Long-Term Financing
Venture capital funds revolutionary social networking services
Facebook is one example of a entrepreneurial idea that benefited from venture capital financing. The Menlo Park-based firm has seen immense success
since their launch in 2004. Unfortunately for Facebook's venture capitalist investors (Accel Partners, Greylock Partners and Meritech Capital), the IPO
has not performed as well as expected.
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Obtaining Capital: Methods of Long-Term Financing
Firm Life Cycle
Firms progress through stages of development, indicated by their changing profits over time.
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Obtaining Capital: Methods of Long-Term Financing
Weighing advantages and disadvantages
Pursuing venture capital financing may not be appropriate for most start-up companies. It is important to weigh the benefits of receiving abundant
resources against the costs of losing autonomy and ownership.
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Obtaining Capital: Methods of Long-Term Financing
New York Spot Prices
The highest price someone is willing to pay (bid) for gold is $742.30 and the lowest someone is willing to accept (ask) is $743.30. There is a bid-ask
spread of $1.10.
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Obtaining Capital: Methods of Long-Term Financing
Participating Preferred vs. Non-Participating Preferred
This graph shows an example of a liquidation event, illustrating how assets will be divided up between common, participating preferred, and nonparticipating preferred stock holders. All preferred stockholders are paid first, before common stock holders. Participating preferred stockholders can
"double dip", and are entitled to both their money back, as well as the leftovers for common stock, proportionate to the amount of common stock for
which their preferred stock can be converted into.
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Obtaining Capital: Methods of Long-Term Financing
Pricewaterhouse Cooper
Pricewaterhouse Cooper got it's name after the 1998 merger of Price Waterhouse and Coopers & Lybrand.
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Obtaining Capital: Methods of Long-Term Financing
Structure of a Venture Capital Firm
The venture capital firm pools capital from investors and allocates it to venture efforts deemed worthy of investment.
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Obtaining Capital: Methods of Long-Term Financing
Bank loans as a means of financing
A promissory note dating to 1926 from the Imperial Bank of India, Rangoon, Burma for 20,000 Rupees, plus interest.
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Leasing impact
Leasing will improve the ratios of the income statement.
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Obtaining Capital: Methods of Long-Term Financing
Signals from dividend policy may give clues about stocks.
The spread measures the cost of executing an instant trade.
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Shelf Registration
Some of the securities in the prospectus can be "shelved," and sold later.
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Lease
Leasing is a good way to lower the costs of a company.
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Obtaining Capital: Methods of Long-Term Financing
Apple Computers IPO Prospectus
The Initial Public Offering (IPO) Prospectus for Apple Computer Inc. in December 1980. A total of 5 million shares were offered to the public for $22
each. The total outstanding shares after the offering were 54,215,332. The company's officers, directors and major shareholders held 32 million shares
and the rest were held by the company for stock options plans and other needs. Apple's valuation after the IPO was over $1 billion. (54 million shares at
$22. )
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1903 stock certificate of the Baltimore and Ohio Railroad
Normally stocks are traded publicly, except in the instance of private stocks, which are only offered and traded by internal stakeholders such as
founders, employees, etc.
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NYSE
Firms may issue an IPO on an exchange such as the New York Stock Exchange (NYSE). They sell their stock in exchange for cash.
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Price
Price fluctuates depending on how the market values the security.
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Private financing
Private financing can offer advantages over public.
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Public Financing
Public financing offers immediate access to large amounts of funding.
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Obtaining Capital: Methods of Long-Term Financing
A company has developed a successful strategy and its sales are
steadily increasing despite an increase in competition. Which of
the following types of financing should the company consider?
A) Obtain funds from a Venture Capitalist.
B) All of these answers.
C) Pursue equity financing.
D) Offer its stock to the general public on a security exchange.
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A company has developed a successful strategy and its sales are
steadily increasing despite an increase in competition. Which of
the following types of financing should the company consider?
A) Obtain funds from a Venture Capitalist.
B) All of these answers.
C) Pursue equity financing.
D) Offer its stock to the general public on a security exchange.
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Obtaining Capital: Methods of Long-Term Financing
A company is looking for funding through a venture capitalist. The
company is selling its product but it is not profitable yet and needs
the additional investment as working capital. The company is in
which funding stage?
A) Start-up.
B) Second-round.
C) Seed money round.
D) Expansion financing.
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Obtaining Capital: Methods of Long-Term Financing
A company is looking for funding through a venture capitalist. The
company is selling its product but it is not profitable yet and needs
the additional investment as working capital. The company is in
which funding stage?
A) Start-up.
B) Second-round.
C) Seed money round.
D) Expansion financing.
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Obtaining Capital: Methods of Long-Term Financing
Which of the following statements regarding how companies use
long-term debt is correct?
A) From a tax perspective, debt financing have some advantages over
equity financing.
B) Riskier businesses are required to pay higher interest rates.
C) All of these answers.
D) Most corporate bonds are fixed-rate bonds.
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Which of the following statements regarding how companies use
long-term debt is correct?
A) From a tax perspective, debt financing have some advantages over
equity financing.
B) Riskier businesses are required to pay higher interest rates.
C) All of these answers.
D) Most corporate bonds are fixed-rate bonds.
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Obtaining Capital: Methods of Long-Term Financing
A company issues preferred stock that gives the shareholders
rights to dividends. If the company does not pay any dividends in
a given year, the preferred shareholders cannot claim those
unpaid dividends in the future. What type of stock is this?
A) Cumulative preferred stock.
B) Participating preferred stock.
C) Non-cumulative preferred stock.
D) Convertible preferred stock.
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A company issues preferred stock that gives the shareholders
rights to dividends. If the company does not pay any dividends in
a given year, the preferred shareholders cannot claim those
unpaid dividends in the future. What type of stock is this?
A) Cumulative preferred stock.
B) Participating preferred stock.
C) Non-cumulative preferred stock.
D) Convertible preferred stock.
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Obtaining Capital: Methods of Long-Term Financing
Which of the following statements regarding venture capital is
correct?
A) Venture capitalists are selective in their investments because each
investment must turn a profit.
B) When a VC firm invests, they generally take a hands off approach
regarding the firm's management.
C) All of these answers.
D) Most venture capital investments are done with pooled investment
vehicles.
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Obtaining Capital: Methods of Long-Term Financing
Which of the following statements regarding venture capital is
correct?
A) Venture capitalists are selective in their investments because each
investment must turn a profit.
B) When a VC firm invests, they generally take a hands off approach
regarding the firm's management.
C) All of these answers.
D) Most venture capital investments are done with pooled investment
vehicles.
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Obtaining Capital: Methods of Long-Term Financing
Which of the following is an advantage for a firm seeking VC
financing?
A) The company retains autonomy.
B) VC funding offers companies an opportunity to expand that is not
possible with other methods.
C) The accounting and legal fees associated with the funding are not
shouldered by the firm.
D) All of these answers.
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Obtaining Capital: Methods of Long-Term Financing
Which of the following is an advantage for a firm seeking VC
financing?
A) The company retains autonomy.
B) VC funding offers companies an opportunity to expand that is not
possible with other methods.
C) The accounting and legal fees associated with the funding are not
shouldered by the firm.
D) All of these answers.
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Obtaining Capital: Methods of Long-Term Financing
Which of the following is NOT a benefit associated with a
company initiating an Initial Public Offering (IPO)?
A) The company will be able to increase its exposure, prestige, and
public image.
B) The company is guaranteed to raise additional capital necessary to
expand its business.
C) The company will be able to attract and retain better management and
employees.
D) The company will have cheaper access to capital.
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Obtaining Capital: Methods of Long-Term Financing
Which of the following is NOT a benefit associated with a
company initiating an Initial Public Offering (IPO)?
A) The company will be able to increase its exposure, prestige, and
public image.
B) The company is guaranteed to raise additional capital necessary to
expand its business.
C) The company will be able to attract and retain better management and
employees.
D) The company will have cheaper access to capital.
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Obtaining Capital: Methods of Long-Term Financing
Which of the following is a characteristic of an operating lease?
A) At the end of the lease, the lessee obtains ownership of the asset.
B) The term of the lease is at least 75% of the asset's estimated useful
life.
C) The present value off the lease payments equals or exceeds 90% of
the original cost of the asset.
D) At the end of the lease, the company has the opportunity to purchase
the asset at its market value.
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Which of the following is a characteristic of an operating lease?
A) At the end of the lease, the lessee obtains ownership of the asset.
B) The term of the lease is at least 75% of the asset's estimated useful
life.
C) The present value off the lease payments equals or exceeds 90% of
the original cost of the asset.
D) At the end of the lease, the company has the opportunity to purchase
the asset at its market value.
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Obtaining Capital: Methods of Long-Term Financing
Which of the following is NOT an expense that can be decreased
by a company through leasing?
A) Interest expense.
B) Depreciation expense.
C) Maintenance expense.
D) Acquisition costs.
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Which of the following is NOT an expense that can be decreased
by a company through leasing?
A) Interest expense.
B) Depreciation expense.
C) Maintenance expense.
D) Acquisition costs.
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Obtaining Capital: Methods of Long-Term Financing
Which of the following is an advantage a company can obtain by
leasing its equipment?
A) A business can grow more rapidly by leasing property instead of
purchasing it.
B) Leasing shifts the risk of capital asset value fluctuations from the
lessee to the lessor.
C) All of these answers.
D) Leasing provides flexibility to companies that expect to grow or move
in the short term.
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Which of the following is an advantage a company can obtain by
leasing its equipment?
A) A business can grow more rapidly by leasing property instead of
purchasing it.
B) Leasing shifts the risk of capital asset value fluctuations from the
lessee to the lessor.
C) All of these answers.
D) Leasing provides flexibility to companies that expect to grow or move
in the short term.
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Obtaining Capital: Methods of Long-Term Financing
Which of the following statements describe the role of
underwriters?
A) The underwriter minimizes the risk to company that is issuing stock.
B) The underwriter sells a company's IPO shares to the market at large.
C) All of these answers.
D) The underwriter determines at what price a company's IPO shares will
sell .
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Obtaining Capital: Methods of Long-Term Financing
Which of the following statements describe the role of
underwriters?
A) The underwriter minimizes the risk to company that is issuing stock.
B) The underwriter sells a company's IPO shares to the market at large.
C) All of these answers.
D) The underwriter determines at what price a company's IPO shares will
sell .
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Obtaining Capital: Methods of Long-Term Financing
Which of the following defines the role of a market maker?
A) Market makers purchase securities where the bid-ask spread is too
great.
B) Market makers are exchanges, like the New York Stock Exchange.
C) Market makers quote both ask and bid prices for certain securities.
D) All of these answers.
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Obtaining Capital: Methods of Long-Term Financing
Which of the following defines the role of a market maker?
A) Market makers purchase securities where the bid-ask spread is too
great.
B) Market makers are exchanges, like the New York Stock Exchange.
C) Market makers quote both ask and bid prices for certain securities.
D) All of these answers.
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Obtaining Capital: Methods of Long-Term Financing
What are some of the tasks investment banks undertake when
they advise companies?
A) Prepare the company's pitch book.
B) Find companies that might be interested in acquiring the business.
C) All of these answers.
D) Negotiate the terms of the acquisition between the acquiring and
acquired business.
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Obtaining Capital: Methods of Long-Term Financing
What are some of the tasks investment banks undertake when
they advise companies?
A) Prepare the company's pitch book.
B) Find companies that might be interested in acquiring the business.
C) All of these answers.
D) Negotiate the terms of the acquisition between the acquiring and
acquired business.
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Obtaining Capital: Methods of Long-Term Financing
Which of the following statements correctly defines a source of
capital?
A) Equity financing occurs when a company sells some of its stock to
investors.
B) Mezzanine capital are government loans or special grants that the
company qualifies for.
C) Specialist financing is subordinated debt or preferred equity
instrument that represents a claim on company assets.
D) All of these answers.
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Obtaining Capital: Methods of Long-Term Financing
Which of the following statements correctly defines a source of
capital?
A) Equity financing occurs when a company sells some of its stock to
investors.
B) Mezzanine capital are government loans or special grants that the
company qualifies for.
C) Specialist financing is subordinated debt or preferred equity
instrument that represents a claim on company assets.
D) All of these answers.
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Obtaining Capital: Methods of Long-Term Financing
Which of the following statement regarding stock "spread" is
correct?
A) A trader initiating a transaction is said to supply liquidity; the
counterparty demands liquidity
B) A stock's bid-offer spread is the sole component of a transaction cost.
C) All of these answers.
D) The bid-offer spread is the difference between the prices quoted for
sale and for purchase.
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Obtaining Capital: Methods of Long-Term Financing
Which of the following statement regarding stock "spread" is
correct?
A) A trader initiating a transaction is said to supply liquidity; the
counterparty demands liquidity
B) A stock's bid-offer spread is the sole component of a transaction cost.
C) All of these answers.
D) The bid-offer spread is the difference between the prices quoted for
sale and for purchase.
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Obtaining Capital: Methods of Long-Term Financing
Which of the following correctly defines a method used to value a
company's securities?
A) A company's net asset value equals the market value of a company's
assets minus its liabilities.
B) All of these answers.
C) Comparable company analysis determines a firm's value by observing
the prices of similar companies.
D) Present value determines a company's stock price using the firm's
projected cash flows.
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Obtaining Capital: Methods of Long-Term Financing
Which of the following correctly defines a method used to value a
company's securities?
A) A company's net asset value equals the market value of a company's
assets minus its liabilities.
B) All of these answers.
C) Comparable company analysis determines a firm's value by observing
the prices of similar companies.
D) Present value determines a company's stock price using the firm's
projected cash flows.
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Obtaining Capital: Methods of Long-Term Financing
Which of the following statements regarding shelf registration is
true?
A) Shelf registration is available to any business, but are examined
rigorously.
B) Shelf registration allows a company to sell securities without a
separate prospectus for each offering.
C) Shelf registration is for new issues, must be prepared up to five years
in advance.
D) Once the application is filed, a business does not make any additional
filings prior to the sale.
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Obtaining Capital: Methods of Long-Term Financing
Which of the following statements regarding shelf registration is
true?
A) Shelf registration is available to any business, but are examined
rigorously.
B) Shelf registration allows a company to sell securities without a
separate prospectus for each offering.
C) Shelf registration is for new issues, must be prepared up to five years
in advance.
D) Once the application is filed, a business does not make any additional
filings prior to the sale.
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Obtaining Capital: Methods of Long-Term Financing
Which of the following is the main advantage for a company to go
public?
A) By being publicly traded, the company has greater access to capital.
B) The company can diversify its equity base.
C) The company can attract and retain better managers and employees.
D) The company has more opportunities for acquiring other businesses.
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Obtaining Capital: Methods of Long-Term Financing
Which of the following is the main advantage for a company to go
public?
A) By being publicly traded, the company has greater access to capital.
B) The company can diversify its equity base.
C) The company can attract and retain better managers and employees.
D) The company has more opportunities for acquiring other businesses.
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Obtaining Capital: Methods of Long-Term Financing
Which of the following is a reason a public company might decide
to go private?
A) Private investors can offer expert knowledge and oversight, where
public investors generally cannot.
B) Privately financed companies generally have lower administrative
costs.
C) Generally private companies are owned by the managers, which
incentivizes them to improve performance.
D) All of these answers.
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Obtaining Capital: Methods of Long-Term Financing
Which of the following is a reason a public company might decide
to go private?
A) Private investors can offer expert knowledge and oversight, where
public investors generally cannot.
B) Privately financed companies generally have lower administrative
costs.
C) Generally private companies are owned by the managers, which
incentivizes them to improve performance.
D) All of these answers.
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Obtaining Capital: Methods of Long-Term Financing
Which of the following statements regarding leveraged buyouts
(LBOs) is correct?
A) LBOs mostly occur in public companies.
B) In an LBO, the junior debt is secured with the assets of the target
company.
C) All of these answers.
D) An LBO is an acquisition that is financed by debt secured by the cash
flows of the target company.
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Obtaining Capital: Methods of Long-Term Financing
Which of the following statements regarding leveraged buyouts
(LBOs) is correct?
A) LBOs mostly occur in public companies.
B) In an LBO, the junior debt is secured with the assets of the target
company.
C) All of these answers.
D) An LBO is an acquisition that is financed by debt secured by the cash
flows of the target company.
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Obtaining Capital: Methods of Long-Term Financing
Attribution
• Wikipedia. "Public company." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Public_company
• Wikipedia. "Initial public offering." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Initial_public_offering#Reasons_for_listing
• Wiktionary. "security." CC BY-SA 3.0 http://en.wiktionary.org/wiki/security
• Wikipedia. "Valuation (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Valuation_%2528finance%2529
• Wiktionary. "security." CC BY-SA 3.0 http://en.wiktionary.org/wiki/security
• Wikipedia. "Bid–offer spread." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bid%25E2%2580%2593offer_spread
• U.S. Securities and Exchange Council. "Limit Orders." Public domain http://www.sec.gov/answers/limit.htm
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