Chapter 15 - Chapter 15: 1. Why are there so many...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 15: 1. Why are there so many alternatives for new venture financing? Answer: Part of the answer is that the providers have different objectives, capabilities, and constraints. Some, like banks, seek low-involvement, low-risk investments. Others, like business angels, seek high-risk, high-involvement investments with medium to long duration. Others, like factoring companies and lenders, rely heavily on collateral. The other part of the answer is that different kinds of business have different financing needs. Financing needs may be small or large and short- or long-term. Some businesses are able to offer collateral or security and others may require investor to bear considerable risk. 2. As a general proposition, external financing is preferred to the financing provided by the entrepreneur. Outside investors generally are more diversified than the entrepreneur; consequently, they can justify lower return to the level of risk. Their involvement can increase value for the entrepreneur. However, the entrepreneur faces costs to outside financing. These costs include: A) loss of control over future decisions B) reporting and managing relationships with external investors C) increased taxes D) lower depreciation expenses Answer: A and B 3. “Taxes can affect the financing choice. The tax effect depends on the form of organizational structure.” Explain. Answer: Not all organizations produce taxable income. Also, the tax rate depends on organizational form: tax rates differ for C corporations, S corporations, and sole proprietorships. Also, the tax treatment of debt differs from equity (interest expenses are deductible for C corporations), suggesting a tax advantage for borrowing. If a firm is a C corporation but is unable to take advantage of the tax deductibility of interest (e.g. it has no taxable income), then this argues against financing with debt. Debt can be a tax shelter only if there is income to shelter! 4. Although borrowing generally is not the best form of financing for an early- stage venture, it sometimes can be an attractive alternative. Explain the conditions that might make it attractive. Answer:
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Borrowing is relatively more attractive if assets can be used to secure the loan, if the assets are of sufficient value to replay the loan, and if the venture is generating taxable income. 5. In an analysis of choice of financing, what is the benefit of categorizing financial needs in terms of “immediate, near-term, and cumulative?” Answer: The distinction between immediate and the near-term needs is based on the time required for negotiation. If financial needs are immediate, there is little time to negotiate over
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 5

Chapter 15 - Chapter 15: 1. Why are there so many...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online