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Explain where a growth company can obtain required cash injections and outline the sort of pressures that can be incurred from each of the respective sources.
Guideline
The students are expected to describe the associated difficulties in relation to these different types of funding (for example, Equity, Debt, Government subsidy and cash from operations, listing). Student should discuss the possible drawback/risks associated with different sources of finance.
Question 2.
Modigliani and Miller (1958) suggest that capital structure and dividend policy is irrelevant to the creation of shareholders? wealth. Critically evaluate this view by using corporate life cycle theory.
Guideline
Students may begin their discussion with a brief explanation of MM proposals. Students should then explain how taxation (tax shield) and cost of financial distress lead to recommended financial strategies in different stages of the corporate life cycle.
Question 3
With reference to appropriate theory explain where a start up company can obtain required cash injections and evaluate the different source of finance available to a start up company.
Guideline
Students may wish to start their discussion by presenting the different sources of finance.
Debt
Vs.
Equity
– Venture capital/business angels
– Corporate venture
– Retained earnings
– Listing
In their evaluation student should demonstrate an understanding of the role of business risk and financial risk in the capital structure of a company. Students should demonstrate an understanding of why increasing financial risk is a risky strategy with limited payoffs for a start up business. Students should refer to appropriate theory (e.g. Cost of financial distress, tax shield. Then, students can assess the feasibility and the pros & cons of different forms of equity finance.
Question 4
Explain the motivations of venture capital companies and corporate ventures to provide funds to start up companies.
Guideline
Students should demonstrate an understanding of the differing motivation between venture capital companies and corporate ventures. In particular, students should make reference to the form of reward/return each typology of investor is expecting.
EACH QUESTION IS WORTH 33 MARKS EACH SO TRY NOT TO HAVE LONG ESSAYS FOR EACH OF THEM! MUST COVER GUIDELINES GIVEN AND AIM TO ANSWER 1 QUESTION ON 1 PAGE!
REFER TO Ruth Bender and Keith Ward, (2008), Corporate Financial Strategy 3nd edition.
Critically evaluate the option of floatation for a) a growth company and b) a mature company.
Answer
Students are required to discuss the feasibility, costs and benefits of floatation in the context of growth and mature companies.
Growth companies
– Have some cash inflows but have significant cash needs.
– Preferred source of finance is equity
– Possibility of listing is restricted.
o Short on successful trading records
o Few years of published accounts
o Usually limited profitability and confidence by investors
Usually listing is only possible in financial markets specializing in smaller/growth/high-tech companies can be achieved
Mature companies
Limitations to the possibility of getting listed have been removed at this stage.
Pros
– Cheaper finance
– Increase choice of sources of finance
– Visibility/reputation
– etc
Cons
– Floatation costs
– Corporate Governance and other regulations
– Vulnerable to hostile takeovers
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