FIN 444 Week 2 Notes
FIN 444 Week 2 Notes FIN 444
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This 3 page Class Notes was uploaded by Patricia Soto on Sunday January 31, 2016. The Class Notes belongs to FIN 444 at University of Illinois at Chicago taught by John Bintz in Winter 2016. Since its upload, it has received 113 views. For similar materials see Small Business Finance in Finance at University of Illinois at Chicago.
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Date Created: 01/31/16
FIN 444 Chapter 1 – Introduction & Overview Entrepreneurship Fundamentals • Entrepreneurship: process of changing ideas into commercial opportunities and creating value • Entrepreneur: individual who thinks, reasons, and acts to convert ideas into commercial opportunities and to create value • 65-75% businesses remain after 2 year • About half the companies fail after 4 years, and 6 years • Remember: It’s not easy but can be really rewarding. Characteristics: Optimistic, Passionate, Willingness to Fail, Learn from your mistakes, come up with a distinct path (strategy), if you don’t know what you’re doing then LISTEN (be a sponge), hard work (if you don’t have this you are doomed to fail). There is no substitute for hardwork 60-80% new jobs are created by small businesses Small businesses (under 500 employees) employ 65% of the work force. A successful entrepreneur • Sees and seizes a commercial opportunity • Tends to be doggedly optimistic (perhaps even to a fault) • Plants to obtain the physical, financial and human resources needed for the venture to succeed Sources of Entrepreneurial Opportunites • Research suggests 12% of Inc. 500 success is due to extraordinary idea • 88% due to exceptional execution of ordinary idea Trends suggesting possible entrepreneurial innovations • Societal changes • Demographic changes • Technological changes Societal Changes • Industrial Society to Information Society o Suggested focus on human response to information • Global economy o Awareness of international innovation and sourcing E-finance Principle #1 o Real, Human, and Financial Capital Must be Rented from Owners o o -Money has owners and therefore costs § Time value FIN 444 § Risk o Expect to provide a return or the venture will not survive in a market economy o *****FICO – credit score (350-850) § Reliability on payments, bankruptcy, how old you are § Important when you borrow money o o US Treasury bond 10 year (least riskiest bond) – 2.05% o 15 year home mortgage – 3.00% § biggest benefit: the interest on paying it off is tax deductible (tax benefit) ex 100,000 / yr 15,000 interest income = 85,000 pay tax on that new amount § Another benefit, built up equity § Value of the home increases 3% each year o Prime Rate – 3.50% § The rates that banks charge people with the best credit (usually companies) § It can be adjusted if you’re not the best customer o HELOC – 5.50% § Home Equity Line of Credit ú Ex. 200,000 home, value 250,000, owes only 100,000 & invest in a business (50,000) pay this amount ú Using the equity on the house as collateral to borrow more money o Now Recourse loan – 7.75% § No cash tied to it, promise to pay it back o Corp debt – 9% § Corporate goes and borrows money with ok credit o Credit card – 14-25% o o Why do companies fail? Why businesses fail Shrink – people stealing from the business Adapt or die Too much debt/ no capital Not enough sales Management Business/ family conflict E-finance Principle #3 FIN 444 While accounting is the language of Business, cash is the currency • Two important reasons to employ accounting o Tracking and accountability for actions taken o Quantifying different visions Principle #4 New venture financing involves search, negotiation and privacy • Public financial markets- standard contracts traded on organized exchanges • Private Financial markets- customized contracts bough and infrequently sold in inefficient private negotiations Principle #6 It’s dangerous to assume that people act against their won self- interest • Aligning incentives (stakeholders = investors, founders, employees, spouses, etc.) is critical • As situations change, incentives diverge and renegotiation is important • Owner-manager conflicts: differences between a manger’s self interest and that of the owners who hired him/her • Owner-debt holder agency conflict: divergence of the owners’ and lenders’ self-interest as the firm gets close to bankruptcy
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