5283answers15.apr053

5283answers15.apr053 - 1 End of Chapter 15 Questions,...

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End of Chapter 15 Questions, Problems and Solutions CORPORATE FINANCE Professor Megginson April 5, 2003 Questions [See problems in book] *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** Answers to End of Chapter 15 Questions 15.1. Entrepreneurial firms differ from large companies in a number of ways. Entrepreneurial companies have volatile cash flows, and in fact may have negative cash flows at their inception. Entrepreneurial firms often are involved in risky ventures and they tend to give incentives to talented employees in the form of stock and stock options. Entrepreneurial firms often have few tangible assets. 15.2. Entrepreneurial firm financing differs from large company financing in that entrepreneurial companies rely first on personal equity financing and then on outside private equity. After the firm does an initial pubic offering, its financing choices broaden considerably. By comparison, large firms with more stable cash flows will be better able to obtain low cost financing, particularly debt financing. “Bootstrap” financing refers to the fact that many entrepreneurial ventures are financed by their founders initially and typically operate on a shoestring, often short of capital. 15.3. An angel capitalist is a wealthy investor who funds risky ventures. Angel investors are generally not as active in overseeing the firm as VC firms are. Though not entirely passive investors, angel investors tend to be less aggressive in dealing with management than VC firms are. 15.4. Venture capital funding is provided by small business investment companies. These are federally chartered corporations established through the Small Business Administration Act of 1958. Historically, these companies borrow U.S. treasury securities to provide entrepreneurial financing. Recently, they have obtained equity capital from the Treasury in the form of preferred equity and some have organized themselves as limited partnerships. Financial venture capital funds are subsidiaries of financial institutions, particularly commercial banks. Corporate venture capital funds are subsidiaries of stand-alone firms established by nonfinancial corporations who wanted to gain access to emerging technologies by making early-stage investments in high tech firms. Venture capital limited partnerships are funds established by professional venture capital firms. These act as general partners organizing, investing, managing and ultimately liquidating capital raised from limited partners. Limited partnerships are the dominant form partly because they make their investment decisions free from outside influences. 15.5.
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5283answers15.apr053 - 1 End of Chapter 15 Questions,...

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