(F) Chapter 8: Equity Financing (1st set)

Question 1

Refers to the ff.:
→ investments with NO LEGAL OBLIGATION TO REPAY the principal amount/interest
→ requires sharing ownership and profits with the funding source (investors)

Answer 1

Equity Financing

Question 2

T or F: Equity Financing is relatively riskier than Debt Financing

Answer 2

False (equity is considerably much safer than debt financing due to no payment requirements)

Question 3

What are the 3 common instruments that give investors a share in ownership for equity financing?

Hint: remember LCS

Answer 3

1. Loans with Warrants
2. Convertible Debentures
3. Stocks

Question 4

Common Instrument for Equity Financing:
→ the investor has the right to buy stocks at a fixed price at some future date (terms are negotiable)

Answer 4

Loans with Warrants

Question 5

What is the usual percentage term in loans with warrants?

Answer 5

More than 100% (e.g. 130%)

Question 6

What is the common future date for loans with warrants?

Answer 6

5 years following the offer date

Question 7

Common Instrument for Equity Financing:
→ unsecured loans that can be converted into stock
→ conversion price, interest rate, and provisions are all negotiable

Answer 7

Convertible Debentures

Question 8

In convertible debentures, the loan started out as what? (mentioned during the discussion, not in the book)

Answer 8

Bonds

Question 9

Common Instrument for Equity Financing:
→ comes in the form of preferred or common

Answer 9

Stocks

Question 10

These stocks gives investors a place among creditors incase the venture is dissolved (is fixed but has lower returns)

Answer 10

Preferred Stocks (remember that people prefer stability hence why it is preferred)

Question 11

These stocks are the most basic form of ownership (is uncertain but yields higher returns when successful)

Answer 11

Common Stocks

Question 12

This is the term for when a company raises capital by selling securities in public financial markets

Answer 12

Initial Public Offerings (IPOs)

Question 13

What is another term for IPOs?

Answer 13

Going (seventeen char) Public

Question 14

What are the 4 advantages of IPOs?

Hint: LIVS

Answer 14

1. Size of capital amount
2. Liquidity
3. Value
4. Image

Question 15

Advantage in IPOs:
Selling securities is one of the fastest ways to raise large sums in a short amount of time

Answer 15

Size of Capital Amount

Question 16

Advantage in IPOs:
The market provides this for owners that can readily convert their stock into cash

Answer 16

Liquidity

Question 17

Advantage in IPOs:
The market puts importance on the stock which also places importance on the company

Answer 17

Value

Question 18

Advantage in IPOs:
A publicly traded venture is often viewed as “stronger” by suppliers, financers, and customers

Answer 18

Image

Question 19

T or F: A publicly traded venture is often viewed as “weaker” by suppliers, financers, and customers

Answer 19

False (stronger)

Question 20

What are the 4 disadvantages of IPOs?

Hint: CRDS

Answer 20

1. Costs
2. Disclosure
3. Requirements
4. Shareholder Pressure

Question 21

Disadvantage in IPOs:
Expenses in IPOs are higher than other sources (e.g. accounting, legal, printing, distribution, etc.)

Answer 21

Costs

Question 22

Disadvantage in IPOs:
Company affairs must be made public (new ventures prefer to keep their details private)

Answer 22

Disclosure

Question 23

Disadvantage in IPOs:
Paperwork (e.g. SEC regulations) drains large amounts of time, energy, and money

Answer 23

Requirements

Question 24

Disadvantage in IPOs:
Management decisions are sometimes short-term which can lead to failure in giving consideration to the long-term goals

Answer 24

Shareholder Pressure

Question 25

Refers to raising capital through private investors instead of the public market

Answer 25

Private Placements

Question 26

What are the 3 subcategories in Private Placements?

Hint: DSE

Answer 26

1. Direct Public Offerings (DPOs)
2. Sophisticated Investors
3. Equity-based Crowdfunding

Question 27

Private Placements:
→ the business invites investors
→ eases regulations for reports and statements required for selling stocks privately (makes the process easier)

Answer 27

Direct Public Offerings (DPOs)

Question 28

Private Placements:
→ wealthy people who invest in new, early- and late-stage ventures
→ are knowledgeable about technical & commercial opportunities and the risks involved

Answer 28

Sophisticated Investors

Question 29

Private Placements:
→ raises monetary contributions from a large number of people via the internet

Answer 29

Equity-based Crowdfunding

Question 30

A financial phenomenon of the 21st century that creates funds through the use of the general public

Answer 30

Crowdfunding

Question 31

What are the 3 principal parts in Equity-based Crowdfunding?

Answer 31

1. The entrepreneur
2. The people who support the idea
3. The moderating organization (the platform)

Question 32

What are the 2 types of Equity-based Crowdfunding?

Answer 32

1. Rewards Crowdfunding
2. Equity Crowdfunding

Question 33

Equity-based Crowdfunding:

The entrepreneur offers a gift/incentive for those who participated (e.g. gift cards)

Answer 33

Rewards Crowdfunding

Question 34

Equity-based Crowdfunding:

The entrepreneur shares equity in the early stages of the venture in exchange for money pledged

Answer 34

Equity Crowdfunding

Question 35

T or F: Crowdfunding is essentially viewed in a positive light

Answer 35

False (some critique that crowdfunding may just be all hype and will fail to improve the supply of investment capital and investment returns)

Question 36

T or F: Those who seek accredited investors via crowdfunding are most likely the desperate entrepreneurs

Answer 36

False (non-accredited)

Question 37

What are the 4 issues on crowdfunding?

Hint: DIRP

Answer 37

1. Reputation
2. Intellectual Property Protection
3. Donor Dilution
4. Public Fear

Question 38

Issues on Crowdfunding:
Reaching financial goals and gathering support but being unable to deliver on the venture could lead to negative views and impacts

Answer 38

Reputation

Question 39

Issues on Crowdfunding:
Is concerned about idea theft

Answer 39

Intellectual Property Protection

Question 40

Issues on Crowdfunding:
If the same supporters are reached out to multiple times, they will eventually grow tired of supporting

Answer 40

Donor Dilution

Question 41

Issues on Crowdfunding:
Without regulation, chances for scams and abuse of funds are high

Answer 41

Public Fear