FIN 444 Week 7 Notes
FIN 444 Week 7 Notes FIN 444
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This 2 page Class Notes was uploaded by Patricia Soto on Friday February 26, 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 22 views. For similar materials see Small Business Finance in Finance at University of Illinois at Chicago.
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Date Created: 02/26/16
FIN 444 Week 7 Notes Week 7 Financial Markets • Public Financial Markets- markets for the creation, sale and trade of liquid securities having standardized features • Private Financial Markets- markets for the creation, sale and trade of illiquid securities having less standardized negotiated features. Determining Cost of Debt Capital • Interest rate – price paid to borrow funds • Default Risk- risk that a borrower will not pay the interest and/ or principal on a loan (US. Treasury (Low), Bank (High) • Nominal Interest Rate – observed or stated interest rate • Real interest rate –interest one would face in the absence of inflation, risk, illiquidity and any other factors determining the appropriate interest • Risk-free interest rate – interest rate on debt that is virtually free of default risk • Inflation – rising prices not offset by increasing quality of the goods or services being purchased • Inflation premium • Prime rate – interest rate charged by banks to their hightest quality (lowest default risk) business customers • Bond Rating – reflects the default risk of a firms bonds as judged by a bond rating agency • Senior agency – debt secured by a ventures assets • Subordinated debt – debt with an inferior claim (relative to sernior debt (gets paid first) to venture assets) Estimating the Cost of Equity Capital • Organized Securities Exchange • Over the counter Market • *Market capitilazation – determined by multiplying a firms current stock price by the number of share that are outstanding Cost of Equity Capital for Private Ventures • Venture Hubris Valuation Workshop PPT Valuation • $/$ + pre-money valuation • ex. 1/ 1+4 = 1/5 = 20% equity to capital • Rubber meets road • Why important? Importance of Entrepreneurship • Market based economy FIN 444 Week 7 Notes • Life’s supply & demand curves • Competition • Global economy • Relevant Facts o 1 million companies created per year o 60-80% of new jobs are small businesses Why Failure • Not working hard enough • Not enough resources • No market Levels of Value- when business owners gift their stock to family members* Test Question • Control Company Value o Minority Discount about 30% • Public Company Value o Marketability Discount about 15% • Restricted Stock Value o Marketability Discount about 25% • Private Company Value Three Valuation Approaches: • Income Approach – Values company by discounting future cash flows • Market Approach – values company using multiples of similar companies • Cost approach – values company assuming liquidation of tangible assets Know what an investment banker does* Accredited Investor – an individual that has either 1 million dollars in net worth or has had $250,000 in 2 consecutive years Entrepreneurship – starting your own business, taking a risk, “changing ideas into commercial activities”
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