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FIN510 - Crib Sheet (MIDTERM).docx

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Ryerson University
ECN 204
Christopher Gore

Cash Flow + (Ending Value -Beginning Value) Operating Cash Flow (in Acc=EBITDA)- Cash flow from producing and selling Forms of Business Organization patents) % Rate of Return= Beginning Value x 100 a product or providing a service (amount remaining after the cost of goods sold Sole Proprietorships: business venture owned by an individual who is - no formal procedure for obtaining protection as a trade secret and other business expenses (primarily general and admin expenses, along with personally liable for the venture’s liabilities Trademarks: intellectual property rights that allow firms to differentiate their Chapter #1 g = ΔEquity g= Change In Equitg= Ending Equity−Beginning Equity marketing expenses) are subtracted from revenues - personal financial risk is high because proprietor has unlimited liability, which products & services through the use of unique marks Beginning Equity Beginning Equity Beginning Equity Free Cash Flow to Equity-Cash remaining after operating cash outflows is the personal obligation to pay a venture’s liabilities not covered by the - marks allow consumers to easily identify source & quality of products/services financing tax cash flows, investment in assets needed to sustain the venture’s venture’s assets - can be in shape of packages, colours, odours & sounds growth and net increases in debt capital - if venture’s debts or other obligations cannot be paid from the venture’s assets, - no formal government procedure exists for establishing a trademark Two Stage Approach to Venture’s Liability creditors have recourse to the proprietor’s personal assets, including bank - ownership is established b being first to use mark on products Stage One: Qualitative Screening – Interview with the Founder accounts, cash, etc - trademark can be registered in individual states or with U.S. Patent & questions & answers dialogue, useful to seek out others to engage in little role Partnerships: business ventures owned by 2+ individuals who are jointly & Trademark Office playing, four individual roles within members of the management team: personally liable for the venture’s liabilities Copyrights: intellectual property rights to writings in printed & electronically founder, marketing manager, operations manager, financial manager, in the - partnership agreement spells out how business decisions are to be made & stored forms event that a mgmt team is not in place at the time of the qualitative screening, how profits & losses will be shared (if partnership agreement doesn’t say - protects the “form of expression of an idea” and not just words themselves the entrepreneur or founder may have to play all of the roles, interview seeks otherwise, each general partner has complete managerial discretion over the - traditional way to establish copyright is to “publish” your book or other work 5 life cycle stages/Venture life cycle: info regarding intended customers, possible competition, intellectual property, conduct of business) accompanied by a copyright notice using the word “Copyright” or the symbol 1. development stage: period involving the progression from an idea to a challenges to be faced, etc, interviewer prepares a subjective assessment & Joint Liability: legal action treats all partners equally as a group “C” indicates one of the following: 1) high commercial potential, 2) avg commercial Joint & Several Liability: subsets of partners can be object of legal action Confidential Disclosure Agreements: documents used to protect an idea or other promising business opportunity (developing opportunities & seed financing) 2. startup stage: period when the venture is organized, developed, & an initial potential, 3) low commercial potential related to partnership forms of intellectual property when disclosure must be made to another revenue model is put in place (gathering resources and startup financing) Four Factor Categories in Evaluating a Initially Venture’s Limited Partnership: limits limited partner liabilities in a partnership to the individual or organization 3. survival stage: period when revenues start to grow & help pay some, but not - The Big Picture amount of their equity capital contribution to the partnership Employment Contracts: agreements b/w an employer & employee whereby - Know Thy Customer - formal organization governed by state law and, unless the partnership strictly employer employs the employee in exchange for the employee agreeing to keep all, of the expenses (gathering resources, managing & building operations & first-round financing) - Production and Development Challenges confirms to state restrictions, will be regarded as a general partnership confidential info secret & to assign ideas & inventions to the employer 4. rapid-growth stage: period of very rapid revenue & cash flow growth -Financial Fortune-Telling - at least 1 partner must be a general partner & face unlimited liability for firm Stage Two: Quantitative Screening – VOS Indicator obligations (managing & building operations & second-round mezzanine, & liquidity stage financing) Quantifies; Industry/Market, Financial/Harvest, Pricing/Profitability, - this general partner makes day-to-day business decisions, while limited 5. early maturity stage: period when the growth of revenue & cash flow Management Team partners are required, to a great extent, be the passive investors continues but at a much slow rate than in the rapid-growth stage (managing & High Potential (average scores of 2.34-3.00) - formation of limited partnership usually requires a formal filing w/ governing Ideas that have the potential to become high-growth, high-performance ventures authorities building operations & obtaining bank loans, issuing bonds, & issuing stock) Financing Through the Venture Life Cycle or “home runs” Corporations: legal entity separating personal assets of shareholder from assets 1. Seed financing: funds needs to determine whether the idea can be converted Average Potential (average scores of 1.67-2.33) of business into a viable business opportunity Low Potential (average scores of 1.00-1.66) Limited Liability: creditors can seize corporation’s assets but have no recourse KEY elements of business plan against the shareholders’ personal assets 2. Startup financing: funds needed to take the venture from having established a viable business opportunity to initial production & sales; venture capital: early- Cover Page, Confidentiality Statement, Executive Summary, Business Corporate Charter: legal document that establishes the corporation stage financial capital often involving substantial risk of total loss; venture Description, Marketing plan & strategy, Operations & support, Management - articles of incorporation: basic legal declarations contained in the corporate team, Financial plans & projections, Risks & opportunities, Appendix charter Seed, Startup and First-Round Financing Sources capitalists: individuals who can join in formal, organized firms to raise & Seed and Startup Financing: sources of financing available during the distribute venture capital to new & fast growing ventures Attempt to quantify the following areas: - corporate bylaws: rules & procedures established to govern the corporation development & startup stages of a venture’s life cycle 3. First-round financing: equity funds provided during the survival stage to 1) Industry/Market: market size potential, industry barriers to entry S (or Subchapter S) Corporation: provides limited liability for shareholders; cover the cash shortfall when expenses & investments exceed revenues; Trade 2)Pricing/Profitability: size of expected profit margins, accounting-based rates of plus, corporate income is taxed like personal income to the shareholders Financial Bootstrapping: minimizing need for financial capital & finding unique returns - fewer than 75 shareholders, & no shareholder can be another corporation ways of financing a new venture (less expensive in the short run to rent or lease credit: financing provided by suppliers in the form of delayed payments due on physical assets & start the new venture in the garage or basement) purchases made by the venture 3) Financial/Harvest: expected investment returns, potential for an initial public Limited Liability Companies (LLCs): business organization owned by Business Angels: wealthy individuals who invest money in fledgling ventures in 4. Second-round financing: financing for ventures in their rapid-growth stage to offering, 4) Management Team: quality of management team “members” (shareholders) with limited liability Operating Cash Flow: cash flow from producing & selling a product or - first LLC formed in Wyoming in 1977, under special-interest legislation for exchange for the excitement of launching a business & a share in any financial support investments in working capital, mezzanine: funds for plant expansion, rewards marketing expenditures, working capital, and product or service improvements, providing a service Hamilton Brothers Oil Company Chapter #4 & liquidity-stage; Mezzanine Financing: funds for plant expansion, marketing Free Cash Flow to Equity: cash remaining after operating cash outflows, - owners of an LLC are called members & are shielded from LLC liability expenditures, working capital, and product or service improvements financing & tax cash flows, investment in assets needed to sustain the venture’s except for their individual acts in connection with the LLC business Life Cycle Approach: DEVELOP. STAGE TO EARLY-MATURITY STAGE growth, & net increases in debt capital -an LLC is like a limited partnership with no general partner 1. Development: screen business ideas, prepare business plan, obtain seed Liquidity – Stage Financing: Bridge Financing: temporary financing needed to financing; 2. Startup: choose organizational form, prepare initial F/S, obtain keep the venture afloat until the next offering; Initial Public Offering (IPO): a Internal Rate of Return (IRR): compound rate of return that equates the present - major incentive for LLC: earnings can be taxed at personal income tax rate of startup financing; 3. Survival: monitor financial performance, project cash corporation’s first sale of common stock to the investing public; Secondary stock value of the cash inflows received with the initial investment members offering: founder and venture investor shares sold to the public; Investment Best Practices of High-Growth, High-Performance Firms Number of owners and ease of startup, firm life needs, obtain first-round financing ; 4. Growth: create & build value, obtain Marketing Practices - deliver high quality products or services Proprietorship: one; low time & legal costs (often difficult to transfer additional financing, examine exit opportunity; 5. Early-maturity: manage banking firms: firms that advise and assist corporations regarding the type, ongoing operations, maintain & add value, obtain seasoned financing timing, and costs of issuing new securities; Venture law firms: law firms - develop new products or services that are considered to be the best ownership) Total Assets = Total Liabilities + Owners’ Equity specializing in providing legal services to young, fast-growing entrepreneurial - offer products or services that command higher prices & margins Partnership: two and up; moderate time & legal costs (often difficult to transfer - develop efficient distribution channels & superior service support facilities ownership) EBDAT = Revenues (R) - Variable Costs (VC) – Cash Fixed Costs (CFC) firms; seasoned securities offering: offering of securities by a firm that has EBDAT is Zero: R = VC + CFC previously offered the same or substantially similar securities; 5. Seasoned Financial Practices - prepare detailed monthly financial plans for the next year & Limited Partnership: 1 and up general or limited partners; moderate time & Survival Revenues (SR) = VC + CFC financing: takes place during the venture’s maturity stage annual financial plans for the next five years legal costs Chapter #2 - anticipate & obtain multiple rounds of financing as the venture grows Corporation (C): 1 & up, with no limit; high time & legal costs (easy to transfer CFC = SR – VC; CFC = SR[1 – (VCRR)] - efficiently & effectively manage the firm’s assets, FIN resources, & OPS ownership) SR = [CFC/(1 – VCRR)] NPM = Net Profit/Sales ▯ GPM= Gross Profit/Sales ▯ Asset Turnover = CFC = cash fixed costs = admin ex + marketing ex + interest ex Revenues/Total Assets performance S (Subchapter S) Corporation: less than 100 owners (since 2005); high time & VC = variable costs = COGS Debt/equity ratio = Total debt/Total equity - plan an exit strategy consistent with the entrepreneur’s objectives & business legal costs (often difficult to transfer ownership) Equity multiplier = Total assets/Total equity plan Limited Liability Company: 1 & up, with no limit; high time & legal costs Contribution Profit Margin = 1 – VCRR Management Practices - assemble a mgmt team balanced in functional area (often difficult to transfer ownership) NOPAT Breakeven Revenues (NR): amount of revenues needed to cover a Profit margin = Net income/Sales venture’s total operating costs ROA = Net income/Total assets, ROA = NPM x ATO coverage & industry/market knowledge Intellectual Property: a venture’s intangible assets & human capital, including NR = TOFC/(1 – VCRR) ROE= Net income/Total equity= ROE = Net income/Sales × Sales/Assets × - employ a decision-making style that is viewed as being collaborative inventions that can be protected from being freely used or copied by others - identify & develop managers that support entrepreneurial endeavors Patents: intellectual property rights granted for inventions useful, novel, & non- TOFC is the total operating fixed costs which consist of cash operating fixed Assets/Equity = Profit margin × Total asset turnover × Equity multiplier costs (excluding interest expenses) plus noncash fixed costs (e.g., depreciation) P/E ratio = Price per share/Earnings per share - assemble a board of directors balanced in terms of internal & external members obvious Dividend payout ratio = Cash dividends/Net income Factor Category: Industry/Market 1. Utility Patent covers mechanical, general, chemical, or electrical inventions Market capitalization = Current market price per share x number of shares Market Size Potential Average: $20-$100 million - new idea itself cannot be patented (idea must be part of an invention that has a Venture Growth Rate Average: 10%-30% “physical form” such as a product) outstanding Chapter #5 BEP (basic earning’s power) = EBIT/TA Market Share (Year 3) Average: 5%-20% - physical form can exist as a sequence of steps contained in a process or TIE (times interest earned) = EBIT/I Entry Barriers Average: Timing/Size delivery of service Factor Category: Pricing/Profitability - must prepare (you, or registered patent attorney on your behalf) a patent Cash Burn: cash a venture expends on its operating and financing expenses and Asset Intensity= TotalAssets/Revenues; NI= (EBIT-I) * (1-T) its investments in assets Free Cash Flow to Equity=Net Profit + depreciation charges- Δ NWC- Gross Margins Average: 20%-50% application Cash Burn Rate: cash burn for a fixed period of time, typically a month CAPEX(physical capita expenditures) + net new debt After-Tax Margins Average: 10%-20% - file application in U.S. Patent & Trademark Office – utility patent life = 20 Gross Profit= Revenues-COGS Asset Intensity Average: 1.0-3.0 turnover years (prior to mid- 1995 the life was 17 years) Cash Burn = Inventory-related expenses + Admin expenses + Marketing Return on Assets Average: 10%-25% - useful: invention has to be useful (the invention cannot just “do nothing”) expenses + R& D expense + Interest expenses + Change in prepaid expenses – Net Profit= dollar profit left after all expenses, including financing costs and (Change in accrued liabilities + Change in payables) + Capital investment + taxes, have been deducted from the revenues Factor Category: Financial/Harvest - novel: invention was not previously produced, described in a publication, or Taxes Case 1: High Profit Margins & Low Asset Turnovers Cash Flow Breakeven Average: 2-4 years patented Examples: products and services based on technological innovations Rates of Return Average: 20%-50% per year - non-obvious: should be non-obvious to person w/ ordinary skills in art of Cash Build = Net sales – Change in receivables IPO Potential Average: 2-5 years invention’s area Net Cash Burn: when cash burn exceeds cash build in a specified time period; Case 2: Low Profit Margins & High Asset Turnovers also cash burn less cash build Examples: commodity-type products and services Founder’s Control Average: High Minority - timing: must be filed within 1 year of first introduction to public & in future, it Net Cash Burn= Cash burn – Cash build Components of a sound business plan: Factor Category: Management Team may be necessary to file prior to any public disclosure or use Experience/Expertise Average: General/General 2. Design Patent: “appearance” of items (e.g., sports uniforms, electronic Liquidity Ratios - Indicate the ability to pay short-term liabilities when they - Business model is a description how the firm makes money come due - Generate revenue (You must have customers and sell them something) Functional Areas Average: Most Covered products, & auto) Current Ratio = Average current assets/Average current liabilities - Make profit (You must eventually have revenues that exceed the expenses of Flexibility/Adaptability Able to Adapt 3. Plant Patent: protect discoveries of asexual reproduction methods of new generating those revenues) Entrepreneurial Focus Average: Founder plant varieties Liquid assets: sum of a venture’s cash and marketable securities plus its VOS Indicator™ Average Scores 4. Business Method Patent: protect specific ways of doing business & receivables - Produce Free cash Flows (You must generate cash inflows that exceed net Quick Ratio = (Avg current assets – Avg inventories)/Average current liabilities working capital and capital expenditures) High Potential (average scores of 2.34-3.00) ideas that have the potential to underlying computer codes & technology Net working capital (NWC): current assets minus current liabilities Viable venture opportunity: creates or meets a customer need, provides an initial become high-growth
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