Capital Financing

Question 1

What is capital financing?

Answer 1

Any type of funding that is used to finance the purchase of an asset/project (an investment)

Question 2

What is the definition of capital structure?

Answer 2

The amount of debt/or equity employed by a firm to fund its operations and finance its assets. In order to optimize the structure, a firm will decide if it needs more debt or equity and can issue whichever it requires.

Question 3

What factors influence the debt vs. equity decision?

Answer 3

1. current economic climate
2. the business’ existing capital structure
3. The business’ life cycle state

Question 4

What is the weighted average cost of capital (WACC)

Answer 4

The proportion of debt and equity a firm has, multiplied by the respective costs. The optimal capital structure is often defined as the option with the lowest cost of capital for the firm.

Question 5

What are three components of the capital stack

Answer 5

Senior debt, subordinated debt, and equity

Question 6

What are three types of equity and their characteristics?

Answer 6

1. S/H loans - higher liquidation postions, no dividends but pays interest
2. Preferred shares - higher liquidation and higher dividend priority
3. common shares - last liquidation position and last dividend position

Question 7

What are two categories of private equity funds?

Answer 7

1. Venture capital funds - invest in early state companies
2. Buyout or LBO funds - invest in mature companies .

Question 8

What are reasons to use debt in an acquisition as a corporation?

Answer 8

1. to lower cost of capital
2. avoid equity dilution

Question 9

What are examples of senior debt?

Answer 9

1. Revolver - Revolving line of credit
2. Term loans - have a fixed schedule where they repay or are amortized, and have a final principal repayment. Can be stacked.

Question 10

List the order of subordinated debt in terms of subordination and increasing dilution and return.

Answer 10

1. High Yield Bonds
2. Mezz Warrantless
3. Mezz warranted
4. PIK Notes
5. Vendor Notes

Question 11

What are some characteristics of mezzanine debt?

Answer 11

1. Non-traded
2. Subordinated to senior debt
3. Repaid as a bullet (not amortized)
4. Combination of cash and accrued interest built into return.
5. Can have equity warrants attached
6. Debt with warrants, convertible loan stock, convertible preferred shares