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FIN510 - Crib Sheet (MIDTERM)*.docx

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ECN 204
Christopher Gore

Cash Flow + (Ending Value -Beginning Value) & issuing stock) Net Profit= dollar profit left after all expenses, including financing co1) Industry/Market: market size potential, industry barriers to entry % Rate of Return= x 100 Financing Through the Venture Life Cycle and taxes, have been deducted from the revenues 2) Pricing/Profitability: size of expected profit margins, accounting-based Beginning Value AFN = TA o(ΔNS) - AP o+ AL o(ΔNS) - (NS ) NIo (RR ) NS o NS o NS o where: TA = Total assets NS = Net sales ΔNS = Change in net sales between next year and current year AP = Accounts payable AL = Accrued liabilities NI = Net Income RR = Retention Rate NI NI NS TA ROE = = x x CE NS TA CE NI NS TA g= x x x RR NS TA CE beg g= Operating Performance x Financial Policies g = ROA x FP ROE = Net Profit Margin x Asset Turnover x Equity Multiplier ΔE = Net Income x Retention Rate g= ΔEquity ΔE/E beg=(NI/E b) x RR Beginning Equity g = (NI/E be) x RR C Change In Equity Ending Equity−Beginning Equity g= g= 1. Seed financing: funds needs to determine whether the idea can be rates of returns Beginning Equity Beginning Equity converted into a viable business opportunity Case 1: High Profit Margins & Low Asset Turnovers 3) Financial/Harvest: expected investment returns, potential for an initial hapter #1 2. Startup financing: funds needed to take the venture from having Examples: products and services based on technological innovations public offering Entrepreneurial process comprises of developing opportunities, established a viable business opportunity to initial production & sales Case 2: Low Profit Margins & High Asset Turnovers 4) Management Team: quality of management team gathering resources, managing and building operations – goal of creating value venture capital: early-stage financial capital often involving substantiaExamples: commodity-type products and services Operating Cash Flow: cash flow from producing & selling a product or risk of total loss Components of a sound business plan: providing a service Entrepreneurship: process of changing ideas into commercial venture capitalists: individuals who can join in formal, organized firms - Business model is a description how the firm makes money Free Cash Flow to Equity: cash remaining after operating cash outflows, opportunities, creating value to raise & distribute venture capital to new & fast growing ventures - Generate revenue (You must have customers and sell them something) financing & tax cash flows, investment in assets needed to sustain the Entrepreneur: individual who thinks, reasons, & acts to convert ideas 3. First-round financing: equity funds provided during the survival - Make profit (You must eventually have revenues that exceed the venture’s growth, & net increases in debt capital into commercial opportunities & to create value stage to cover the cash shortfall when expenses & investments exceed expenses of generating those revenues) Internal Rate of Return (IRR): compound rate of return that equates the Entrepreneurial finance: the application & adaptation of financial tools, techniques, & principles to the planning, funding, operations, and revenues - Produce Free cash Flows (You must generate cash inflows that exceed present value of the cash inflows received with the initial investment 4. Second-round financing: financing for ventures in their rapid-growth net working capital and capital expenditures) Chapter #3 valuation of an entrepreneurial venture stage to support investments in working capital, mezzanine: funds for Viable venture opportunity: creates or meets a customer need, provides Venture life cycle: stages of a successful venture’s life from plant expansion, marketing expenditures, working capital, and product or an initial competitive advantage, is timely in terms of time-to-market, development through various stages of revenue growth service improvements, & liquidity-stage and offers the expectation of added value to investors Early-stage ventures: new or very young firms with little operating financing: rapid-growth stage of a successful venture’s life cycle Operating Cash Flow (inAcc=EBITDA)- Cash flow from producing history typically provides venture investors with an opportunity to cash in on thand selling a product or providing a service (amount remaining after the Seasoned firms: have produced successful operating histories & are in return associated with their risk cost of goods sold and other business expenses (primarily general and their rapid-growth or maturity life cycle stages bridge financing: temp financing needed to keep venture afloat until admin expenses, along with marketing expenses) are subtracted from Venture Life Cycle next offering revenues Development – progression from an idea to a promising business initial public offering: corporation’s first sale of common stock to the Free Cash Flow to Equity-Cash remaining after operating cash outflows opportunity investing public financing tax cash flows, investment in assets needed to sustain the Startup – period when the venture is organized, developed, and an initialseasoned securities offering: offering of securities by a firm that has venture’s growth and net increases in debt capital revenue model is put in place previously offered the same or substantially similar securities Two Stage Approach to Venture’s Liability Survival – revenues start to grow and help pay some, but typically not 5. Seasoned financing: takes place during the venture’s maturity stage Stage One: Qualitative Screening – Interview with the Founder Seed, Startup and First-Round Financing Sources all, of the expenses Role of the financial manager: questions & answers dialogue, useful to seek out others to engage in littSeed and Startup Financing: sources of financing available during the Rapid growth – very rapid revenue and cash flow growth -Apply and adapt financial tools and techniques to the planning, funding,role playing, four individual roles within members of the management Maturity – growth of revenue and cash flow continues but at a much operation, and valuation of an entrepreneurial venture team: founder, marketing manager, operations manager, financial development & startup stages of a venture’s life cycle slower rate - Focus on the financial management of a venture as it moves through its manager, in the event that a mgmt team is not in place at the time of theFinancial Bootstrapping: minimizing need for financial capital & finding Principles of E-Finance unique ways of financing a new venture (less expensive in the short run life cycle, beginning with its development stage & continuing through to qualitative screening, the entrepreneur or founder may have to play all oto rent or lease physical assets & start the new venture in the garage or 1. Real, Human, and Financial Capital Must be Rented from Owners when the entrepreneur exists or harvests the venture the roles, interview seeks info regarding intended customers, possible basement) 2. Risk and Expected Reward Go Hand in Hand Chapter #2 competition, intellectual property, challenges to be faced, etc, intervieBusiness Angels: wealthy individuals who invest money in fledgling 3. While Accounting is the Language of Business, Cash is the Currency NPM = Net Profit/Sales prepares a subjective assessment & indicates one of the following: 1) 4. New Venture Financing Involves Search, Negotiation, and Privacy GPM= Gross Profit/Sales high commercial potential, 2) avg commercial potential, 3) low ventures in exchange for the excitement of launching a business & a 5.AVenture’s Financial Objective is to Increase Value Asset Turnover = Revenues/TotalAssets commercial potential share in any financial rewards 6. It is Dangerous to assume that PeopleAct Against Their Own Self- Chapter #4 Interest Debt/equity ratio = Total debt/Total equity Four Factor Categories in Evaluating a Initially Venture’s Life Cycle Approach: DEVELOPMENT STAGE TO EARLY- Equity multiplier = Total assets/Total equity - The Big Picture MATURITY STAGE 7. Venture Character and Reputation Can beAssets or Liabilities Profit margin = Net income/Sales - Know Thy Customer 1. Development: screen business ideas, prepare business plan, obtain seed 5 life cycle stages/Venture life cycle: ROA= Net income/Total assets, ROA= NPM xATO - Production and Development Challenges 1. development stage: period involving the progression from an idea to a ROE= Net income/Total equity= ROE = Net income/Sales × -Financial Fortune-Telling financing promising business opportunity (developing opportunities & seed Sales/Assets ×Assets/Equity = Profit margin × Total asset turnover × Stage Two: Quantitative Screening – VOS Indicator 2. Startup: choose organizational form, prepare initial F/S, obtain startup financing) financing 2. startup stage: period when the venture is organized, developed, & an Equity multiplier Quantifies; Industry/Market, Financial/Harvest, Pricing/Profitability, 3. Survival: monitor financial performance, project cash needs, obtain P/E ratio = Price per share/Earnings per share Management Team first-round financing initial revenue model is put in place (gathering resources and startup Dividend payout ratio = Cash dividends/Net income High Potential (average scores of 2.34-3.00) 4. Growth: create & build value, obtain additional financing, examine financing) Market capitalization = Current market price per share x number of Ideas that have the potential to become high-growth, high-performance 3. survival stage: period when revenues start to grow & help pay some, shares outstanding ventures or “home runs” exit opportunity but not all, of the expenses (gathering resources, managing & building BEP (basic earning’s power) = EBIT/TA Average Potential (average scores of 1.67-2.33) 5. Early-maturity: manage ongoing operations, maintain & add value, operations & first-round financing) TIE (times interest earned) = EBIT/I Low Potential (average scores of 1.00-1.66) obtain seasoned financing 4. rapid-growth stage: period of very rapid revenue & cash flow growth Total Assets = Total Liabilities + Owners’Equity Asset Intensity= Total Assets/Revenues KEY elements of business plan EBDAT = Revenues (R) - Variable Costs (VC) – Cash Fixed Costs (managing & building operations & second-round mezzanine, & liquidity NI= (EBIT-I) * (1-T) Cover Page, Confidentiality Statement, Executive Summary, Business (CFC) stage financing) Free Cash Flow to Equity=Net Profit + depreciation charges-Δ Description, Marketing plan & strategy, Operations & support, EBDAT is Zero: R = VC + CFC 5. early maturity stage: period when the growth of revenue & cash flow NWC- CAPEX(physical capita expenditures) + net new debt Management team, Financial plans & projections, Risks & opportunities, continues but at a much slow rate than in the rapid-growth stage Gross Profit= Revenues-COGS Appendix Survival Revenues (SR) = VC + CFC (managing & building operations & obtaining bank loans, issuing bonds, Attempt to quantify the following areas: CFC = SR – VC; CFC = SR[1 – (VCRR)] SR = [CFC/(1 – VCRR)] CFC = cash fixed costs = admin ex + marketing ex + interest ex Spontaneously Generated Funds: increases in accounts payables and Market Capitalization (market cap): determined by multiplying a Term Sheet: summary of the investment terms & conditions VC = variable costs = COGS accruals (wages and taxes) that occur with a sales increase firm’s current stock price by number of shares that are outstanding accompanying an investment Contribution Profit Margin = 1 – VCRR Additional Funds Needed (AFN): gap remaining between the financial Calculating an Expected Return VC Screening Criteria NOPAT Breakeven Revenues (NR): amount of revenues needed to capital needed and that funded by spontaneously generated funds and 1. Venture Capital Firm Requirements cover a venture’s total operating costs retained earnings, or, Cost of Equity Capital for Public Corporations Cash out potential; Equity share; Familiarity with technology, product, NR = TOFC/(1 – VCRR) g>g* à cash deficit, 2. g
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