1. Compare and contrast the features of common stock and preferred stock :
Common stock is actually a form of security taken by an individual bearing no special preference in regards to receiving dividends or in the event of bankruptcy ( Boudry, Deroos & Ukhov, 2016 ). In this case, it pertains to a situation whereby a person is partly entitled to ownership. The individual with this kind of stock is able to control activities within the organization by appointing people to sit on the board as well as making sure that policies are adhered to with voting taking place as required ( Boudry, Deroos & Ukhov, 2016 ). It is, however, essential to note that common stock owners are viewed as low level shareholders. This is due to the fact that assets are only at their disposal once debts have been paid off by the business.
In comparison, preferred stock also stands for ownership. This type of ownership, nevertheless, can be contrasted to that of common stock owing to the fact that there is more to offer in regards to assets ad also general earnings. Contrary to common stock, the preferred stock shareholders are not entitled to voting rights and dividends have to be paid out before such shareholders are compensated ( Boudry, Deroos & Ukhov, 2016 ). Debt is inclusive though dividends and equity are also paid.
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2 . Describe the characteristics of long-term debt
One of the characteristics of long-term debt is that the interest rate is generally low. This is due to the fact that the risk is wide-spread compared to short-term obligation which warrants high interest rates.
Secondly, there is a requirement for the borrower of this kind of debt to have sufficient collateral. This is due to the fact that the risk is greater in regards to long-term debt. Take for instance, a loan of $300000 and another loan amounting to $15000. The lender is likely to be at a greater loss in case the borrower defaults on the first loan compared to the second one.
Thirdly, the principal for long-term financing is high. This can be explained by the fact that the only way people can make large purchases at once especially mortgages is by taking up this type of debt obligation.
It is also apparent that long-term debt has a long-lasting impact on a person`s cash flow. Compared to short term debt, chances are high that someone might spend a lot of time having such deductibles on their monthly income.
3. Distinguish between floating rate and fixed rate corporate bonds
The fixed rate corporate bond is fixed whereas the floating corporate bond can vary over time. For instance, if the government decides to issue a bond and the percentage being offered is 12% for the entire duration of the bond, then it is a fixed rate corporate bond. If the percentage changes over time then it can be termed as a floating corporate bond.
4. Describe the stages in venture capital financing
There are six stages in venture capital financing as illustrated below:
The first stage is the seed money stage. This is the kind of financial aid that is required in order for the borrower to demonstrate what they plan to do.
The second stage is the start up. At this stage, the financier decides to cater for marketing incentives and product development.
Thirdly, once the start-up funds have been replenished another stage the first round financing comes into play ( Boudry, Deroos & Ukhov, 2016 ). Here, funds are provided to cater for manufacturing and sales.
Second round financing is the fourth stage, which is offered to a firm that is running at a loss.
The third round financing then follows close by; whereby funds are offered to a Company that is breaking even to a point of envisaging expansion.
Finally, the fifth round financing also referred to as bridge financing, is the last stage. In this case financing is offered to companies that are planning to go public.
5. Explain the methods used to issue new securities
One of the methods used to issue new securities is the firm commitment. This occurs in an instance where the investment bank opts to purchase securities for a price that is lower than the asking price ( Moles, Parrino & Kidwell, 2011 ). This occurs despite the bank facing the risk of not being in a position to make a resale.
Best efforts happen to be another method whereby the underwriter acts as the risk bearer. In this case the syndicate steers clear off the risk since they do not purchase the risk.
The third method is the Dutch auction underwriting. In this particular method, the underwriter ends up conducting an auction necessitating investors to bid for shares instead of offering fixed prices for shares.
6. Explain the role of investment banks in the underwriting process
The sole purpose of investment banks in the underwriting process is to serve as an intermediary between the investors and the corporation. The investment bank offers new stocks for a corporation that makes a decision to go public and requires to be funded.
7. Describe the uses and sources of cash
Some of the uses of cash include:
Payments of accounts payables. In this case the cash is used to cater for necessities such as raw materials.
Cash is also used for wages taxes and also other expenses. This can generally be termed as the cost of doing business.
Capital expenditures also represent another way in which the cash is used. This involves long-lived assets purchased by the handler ( Robson, Chamberlin & Freel, 2016 ).
Cash is also used for long-term financing. This involves catering for long-term debts and also other obligations such as dividends to shareholders.
In general, uses of cash involve decreasing a liability or increasing an asset.
The most common sources of cash are from borrowing and equity.
Take for instance that the accounts payables go up by $80 while the accounts receivables also go up by $120. The first case represents a form of short-term borrowing; in this case the source of cash has been increased. An increase in the receivables on the other hand, indicates that money has been loaned out, which is a perfect example of one of the uses of cash.
8. Describe the characteristics of the operating cycle and the cash cycle
The operating cycle has two main characteristics. The first one involves the entire duration of time it takes to receive inventory commonly referred to as the inventory period. The second feature is the duration taken to sell the inventory which is usually the accounts receivable period.
The cash cycle on the other hand is the period taken to collect cash from a particular sale. This duration is measured from the time the inventory is paid for. The cash cycle is therefore, shorter than the operational cycle.
9. Explain how the cash budget is used in short-term financial planning
Cash is very essential in short-term financing. This is due to the fact that offers insight to the financial manager regarding short-term financial needs. In this case, the manager will be in a position to know the money required to be borrowed for the short-term duration. Besides, it also becomes easy to identify the gap existing in a particular cash flow ( Moles, Parrino & Kidwell, 2011 ).
10. Explain what is meant by bootstrapping when raising seed financing and why bootstrapping is important. Describe the role of venture capitalists in the economy and discuss how they reduce their risk when investing in start-up businesses. Find (via the Internet) and discuss a company that used angel funding or venture capital.
Bootstrapping involves a process via which human capital is transformed into financial capital ( Honjo, 2014 ). It is very essential when raising seed capital since it reinforces financial discipline. In this case it means that one can only spend what they earn to avoid having to take up any form of external funding.
The role played by venture capitalists is that of overseeing, offering advice and ensuring that they monitor the Companies that they choose to invest in. Majority of venture capitalists have a lot of relevant experience in the business field which is why they make frequent visits as they seek to advise the board ( Moles, Parrino & Kidwell, 2011 ). In regards to reducing risk, the venture capitalists search for an exit strategy such as making the Company public. On the other hand, they can choose to sell the business.
Angel investors are very fundamental owing to the assistance they offer to many start-up businesses. One such company that depended in angel investors is Citelighter. This Company is committed to offering solutions to the many students overwhelmed by reports and other complex academic problems ( Moles, Parrino & Kidwell, 2011 ). The main agenda of this organization is to offer educators an easy time as they learn how to apply their talents in assisting students in the best way possible. It offers an easy approach to the writing process for anyone experiencing any sort of difficulty.
11. Optical Supply Company offers credit terms of 2/10, net 60. If Optical Supply is considering a change in its credit terms to one of those indicated below, explain whether each change would increase or decrease sales. (a) 2/10, net 30; (b) net 60; (c) 3/15, net 60; (d) 2/10, net 30, 30 extra.
a) 2/10, net 30 are likely to decrease the sales since it has to be paid back within duration of 30 days as opposed to 60 days.
b) net 60 will also decrease sales owing to the fact that no incentive is offered that payment will be made within a period of 10 days.
c) 3/15, net 60 will in this case increase sales. The reason behind this is that it increases the duration and percentage of discount.
d) 2/10, net 30, 30 extra is expected to amount to no change in sales since it corresponds to 2/10 net 60
References
Badoer, D. C., & James, C. M. (2016). The Determinants of Long ‐ Term Corporate Debt Issuances. The Journal of Finance , 71 (1), 457-492.
Boudry, W. I., Deroos, J. A., & Ukhov, A. D. (2016). Diversification Benefits of REIT Preferred and Common Stock: New Evidence from a Utility ‐ based Framework. Real Estate Economics .
Honjo, Y., Kato, M., & Okamuro, H. (2014). R&D investment of start-up firms: does founders’ human capital matter?. Small Business Economics , 42 (2), 207-220.
Moles, P., Parrino, R., & Kidwell, D. S. (2011). Fundamentals of corporate finance . Hoboken, NJ: Wiley.
Robson, P., Chamberlin, T., & Freel, M. (2016). 9. The capitalisation of new firms: exploring the influence of entrepreneurial characteristics on start-up finance. Entrepreneurship, Innovation and Regional Development , 170.
