Chapter 14 Solutions - Question 14-1 Question 14-1 a Early...

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Question 14-1 Question 14 - 1 a. Early - stage R&D ventures have mainly intangible assets. Except for lab and testing equipment, which might be leased, the financing would likely be private equity from angels, or a strategic partner, or some VCs. A venture that is generatin g revenue has more ability to link financing to attained revenue. VCs and strategic partners still would be potential providers of financing. Depending on the risk of the revenue stream, borrowing also could be feasible. b. A venture that is growing rapidly will need to finance its current assets (cash, accounts receivable, inventory. It can do so partly by increasing current liabilities such as accounts payable, and wages payable. In addition, it can reduce the financing need by tightening the credit term s on which it sells. Receivables and inventory are collateral that can be used to secure short term credit financing from a bank. In addition, accounts receivable can be factored. A business that is growing at the inflation rate is normally much less in need of adding financing. c. A profitable and growing venture is a candidate for credit financing and/or equity. Profitability gives the venture the ability to take advantage of the tax deductibility of interest payments. Rapid growth, however, may make de bt service difficult, even though the company is profitable. In that case, equity, or long - term debt (that does not require a high level of continuing debt service) could be better. A growing venture that is not profitable is better suited for equity fin ancing. d. A C corporation pays taxes at the corporate level, and can benefit from being able to deduct interest payments. In addition, a C corporation can raise large amounts of equity from a large number of investors. An S corporation passes through gains and losses. While it avoids the double taxation of the C Corporation, the tax advantage of debt is lost. S corporations are limited as to the number of potential investors and
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This note was uploaded on 02/19/2012 for the course FIN 124 taught by Professor Jackson during the Spring '05 term at University of Texas at Dallas, Richardson.

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Chapter 14 Solutions - Question 14-1 Question 14-1 a Early...

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