Raising Capital 2005 Edition David E. Vance - Solutions

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2. A common argument against regulation is that unfettered competition always assures the most efficient outcome. Discuss whether this argument is valid in imperfect capital markets.
1. Many investors and lawmakers have blamed financial leverage for the economic crisis during 2008 and 2009. Discuss whether the academic literature supports this assertion.
4. How can capital structure choice modify the behavior of product market rivals due to predation strategy?
3. What is the role of product-market reputation on financing decisions?
2. According to the stakeholder theory of capital structure, would someone prefer to work for a high-debt or a low-debt firm? Explain why.
1. What firm-specific factors boost underinvestment and overinvestment problems in a company? In which case does the use of debt reduce opportunism?
4. What are the most important stylized facts derived from empirical studies that relate leverage and capital structure factors?
3. What are possible empirical measures for leverage, and what is the rationale for using either book or market leverage ratios?
2. What are the assumptions and predictions of the pecking order theory? Why do empirical studies generally find a negative abnormal stock return upon the announcement of an equity issue?
1. What are the assumptions and predictions of the trade-off theory? How can agency problems lead to a target leverage ratio?
Suppose a company purchases a $2,000,000 factory using $1,200,000 from a first mortgage finance company, $600,000 from a CDA loan.Suppose further that the business fails and the facility is sold for$1,600,000. Who gets paid? How much? And from what source?Name five specialized loan programs other
How does the subordinate mortgage financing available under the 504 Loan Program work? Suppose a company wants to purchase a property for $1.5 million, but the first mortgage company will only lend $1.0 million. What is the minimum a business can put down and how can the difference be financed?
How much of a $200,000 loan would be guaranteed? How much of a$2,000,000 loan would be guaranteed?
How much of a guarantee does a lender get under the SBA's 7(A)Loan Program? How much of a $100,000 loan would be guaranteed?
Name seven types of documents an SBA lender would expect if loan proceeds were to be used to purchase a company?
What considerations go into calculating the building's value as collateral?
Why does the SBA require collateral? What types of collateral should an entrepreneur owner expect to post?
What are the most important factors in underwriting an SBA guaranteed loan?
What is the difference between a Preferred Lender and a Certified Lender? How are such lenders found?
How does the SBA define small businesses for purposes of the SBA loan program?
If the Small Business Administration Loan Program doesn't make loans, how do they help?
Are banks reliable business partners? If not, what steps should a business take to lessen dependence on banks and lessen the impact of abrupt changes in policy?
What are the benefits of using bank financing? Is bank financing superior to other forms of financing in any specific ways?
What are bank covenants? If a customer makes all payments timely, but violates a covenant, what are the consequences? Do covenants give a bank an unfair bargaining position?
What is tangible net worth? What is borrowing capacity? How are they calculated? What is their relevance?
Banks complain that one of the biggest problems in lending to small businesses is lack of reliable information. What can a bank do to improve the quality of information it has?
Financial underwriting usually involves an analysis of ratios. How does a bank know whether a company's ratios are good or bad?If a company has a good understanding of what a bank is looking for in terms of financial performance and collateral, what can a business do to help close a loan?
What is credit scoring? When and where is it used? What are the five main factors used in credit scoring?
For small business borrowers, exactly how personal do banks get?What are they likely to demand from small business owners in addition to an application, company financial statements, and a lien on company assets?
What are the main factors that go into each?
What are the two main approaches banks use to underwrite loans?
What are a banks three major credit facilities and when might a company use each of them?
What are some of the external factors that limit a bank's lending flexibility?
What should a company's overarching financial objective be when raising capital through friends and family, credit cards, a home equity loan, or when getting credit from vendors?
What are the advantages and disadvantages to using a lease to acquire capital assets?
How can customers supply capital?
How can vendors and suppliers supply capital?
What are the advantages and risks of using a home equity loan? Is there any way to estimate the rate an entrepreneur will pay for a home equity loan?
What are the advantages and disadvantages of using credit cards?What strategies can be used to exploit advantages and avoid the disadvantages?
What are the main issues in soliciting funds from friends and family?
What are seven sources of capital an entrepreneur can use besides a bank loan?
How much capital does it take to start a successful business? What is typical?
What are the most common sources of capital for start-ups and small businesses?
Why are angel investors and venture capitalists so focused on exit strategy, whereas bankers and commercial credit companies are not?
What kinds of issues might an investor try to address by looking at financial statements and using ratios?
What is the relationship between the stage of a company's development and the risk of providing funds at that stage? Can you cite any facts to support your answer?
Is there any over-arching principal that can be used to describe which capital source is likely to close a deal with a company at any point in its life cycle? If so, what is that principal? What does it mean?
Is there a "best" source to get capital under all circumstances? Why or why not?
Businesses must tell capital sources why they need capital and what they are going to do with it. What are some of the things investors are likely to respond favorably to, and what are some of things they are going to respond unfavorably to? Why?
Name the four major factors in determining whether a particular funding source is right for a particular company.
What is capital? Why is it important for a company to have it?
How and why does a super priority loan work?
What is a Super Priority loan? Where does a super priority loan fit into the risk / reward / size / time to exit spectrum? When should a company consider a super priority loan?
What are the mechanics of PIPE financing?
What is a PIPE? Where does PIPE financing fit into the risk / reward/ size / time to exit spectrum? When should a company consider PIPE financing?
How does securitization work?
What is securitization? Where does securitization fit into the risk /reward / size / time to exit spectrum? When should a company consider securitization?
What is mezzanine financing? Where does mezzanine financing fit into the risk / reward 1 size / time to exit spectrum? When should a company seek mezzanine financing?
What is a bridge loan? Where does a bridge loan fit into the risk /reward / size / time to exit spectrum? When do companies use bridge loans?
How can syndication benefit a business?
How does a syndicated loan work?
What is a syndicated loan? Where does a syndicated loan fit into the risk / reward / size / time to exit spectrum?
What is meant by a maturity strategy? What should an issuer be aware of when selecting maturities for commercial paper offerings?
What are the mechanics of issuing commercial paper and receiving the funds?
What is the risk in using commercial paper? How can that risk be managed?
What are transaction costs for selling commercial paper and what strategies are available to manage the net cost of commercial paper?
What are typical interest rates for commercial paper?
What are typical maturities for commercial paper?
What would motivate a company to issue commercial paper? What would motivate an investor to buy commercial paper? Who typically invests in commercial paper?
Where does commercial paper fit into the risk / reward / size / stage of development spectrum?
What is commercial paper? What are the characteristics of commercial paper? How is it regulated?
About how much capital is raised with a typical junk bond issue?What are typical underwriting fees for managing a junk bond issue?
What are the two classes of junk bonds? What is the strategy in issuing junk bonds that is why would a company want to issue junk bonds? What is the risk reward profile of these bonds?
Who generally makes a market in bonds? How do these market makers get paid?
What is a bond sinking fund? What is its purpose? How are they set up and what must a bond issuer do on an on-going basis? What document controls the operation and payments due to a sinking fund?
What is early bond redemption? Why would companies want to do it? What types of information is generally provided in bond redemption notifications?
List five bond types, features or strategies that issuers use to change the risk / reward profile of bonds.
What are two types of federal regulation that bond issuers must be aware of? Briefly describe what an issuer must do to comply with each.
What is a discount rate? What is the relationship between a discount rate and a bond's stated or coupon interest rate?
What does a bond look like to an investor in terms of cash flows? Is it possible for a bond to be worth more or less than its face value?What are the mechanics of computing bond value? What is a bond premium? What is a bond discount?
What are bond rating agencies? What is their role in capital markets?
Where do bonds fit into the entire risk / reward / size / stage of development spectrum of capital sources?
What are the advantages of issuing bonds as compared to raising capital through other means?
How would a company identify plant, property and equipment assets that can be converted to cash?
Is there a process for identifying an eliminating slow moving inventory? If so, what is it?
How would an entrepreneur or manager proactively set goals for raising cash from inventory?
What is the cash effect of accumulating inventory? What is the cash effect of selling inventory? Is there a way to measure the efficiency of inventory accumulation and use? What is the best measure for communicating this to manufacturing, warehouse and other factory floor personnel? What are the
How would an entrepreneur or manager proactively set goals for raising cash from accounts receivable?
Is there a way to measure the efficiency of collections? What is the best way to communicate collections performance and goals to collections staff!
What is the cash effect of selling on credit? What is the cash effect of collecting accounts receivable?
What is the cash cycle? How can an understanding of the cash cycle reduce dependence on outside capital?
Assume a company has been in operation for a number of years, how can it estimate the appropriate level of assets?
What are the risks to the entrepreneur in having to generate outside capital through debt or equity offerings?
What is the relationship between assets and capital? If the assets of a company increase, what is the implication for capital demand?
List seven categories of information an SBIC will need to evaluate and investment? Briefly describe each.
What types of information provided in an SBIC listing that can be used to help the entrepreneur identify an SBIC that is right for his or her company?
How does one find an SBIC? How are SBIC listings organized?
What are the eligibility criteria for SBIC funding?
Do SBIC's invest primarily in mature companies or start-up / early stage companies? About how much of SBIC capital is invested in companies in business three years or less? What percentage of SBIC capital is invested in companies in business six years or less?
How is a participating SBIC organized? What fees and preferences does it pay to SBA? What are the implications for the entrepreneur?

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Raising Capital 2005 Edition David E. Vance - Solutions

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