Explore BrainMass

Venture Capital

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

Venture capital is increasingly becoming an important source of finance for small and start-up firms. Why do you think this is so? Would you recommend to your firm to engage in venture financing? Why or why not?

© BrainMass Inc. brainmass.com October 25, 2018, 4:33 am ad1c9bdddf

Solution Preview

Venture capital is becoming an important source of financial capital for small and start-up companies for two main reasons. One reason venture capital is more prevalent with start-up companies are because there is such a limited operating history with the smaller companies that they cannot raise capital in public markets. If a start-up company ...

See Also This Related BrainMass Solution

Study Questions for Final Exam

Study Problems for Final Exam

1. a. Why do venture capital companies prefer to advance money in stages? If you were management in a new enterprise, would you be happy with such an arrangement? With the benefit of hindsight would the venture capital company gain or lose by advancing money in stages?

b. The price at which venture capitalist (A) would invest more money in new enterprise (B) was not fixed in advance. But "B" could have given "A" an option to buy more shares at a preset price. Would this have been better?

c. At the second stage, "B" could have tried to raise money from another venture capital company in preference to "A". To protect themselves against this, venture capital firms sometimes demand first refusal on the new capital issues. Would you recommend this arrangement?

2. Here is recent financial data on Made Up Construction, Inc.

Stock price $40, Market value of firm $400,000
Number of shares 10,000, Earnings per share $4
Book Net Worth $500,000 Return on investment 2% quarterly
Made Up Construction has not performed spectacularly to date. However, it wishes to issue new shares to obtain $100,000 to finance expansion into a promising market. The company's financial advisors think a stock issue in a poor choice because, among other reasons, "sale of stock at a price below book value per share can onl depress the stock price and decrease shareholder's wealth." To prove the point they construct the following example: "Suppose 2,500 new shares are issued at $40 and the proceeds are invested.

Suppose return on investment does not change. Then:
Book net work = $600,000
Total earnings = .0824 (600,000) = $49,440
Thus, EPS declines, book value per share declines, and share price will decline proportionately to $38.40.

Evaluate this argument with particular attention to the assumptions implicit in the numerical example.

View Full Posting Details