18MBO409T - Finance For Engineers UNIT 4 & 5 (4 MARKS)

MAM HAS NOT GIVEN EXACT QUESTIONS FOR 4M SO THERE MIGHT BE MANY 4M. JUST STUDY GENERALLY. EVEN 12M CAN BE ASKED FROM THESE 4M. ALL THE SUBTOPICS CAN BE ASKED SEPARATELY.


4M:


Seed Capital - Definition, Importance, Advantages and Disadvantages:

Seed capital:

  • It refers to the initial funds required by a budding entrepreneur to kickstart a new business venture

  • The term ‘seed’ signifies the early stage of a business; while ‘capital’ refers to the money needed at the outset

  • Seed capital is crucial for turning business ideas into reality


Importance:

  • Starting point: provides necessary foundation for a business to take off

  • Research and development: supports market research, product development and feasibility studies

  • Attracting investors: makes business more attractive to potential investors

  • Risk mitigation: mitigate risks associated with untested business concepts


Advantages: 

  • Business launch: enables entrepreneurs to launch their ventures

  • Competitive edge: gives startups an edge

  • Growth acceleration: helps businesses grow faster

  • Mentorship: investors offer valuable mentorship and guidance


Disadvantages: 

  • Limited amount: typically small

  • Equity dilation: giving up portion of ownership

  • High risk: early stage businesses face uncertainties

  • Strategic decisions: seed investors may influence decisions


Venture Capital - Definition and Stages 

Venture capital:

  • Venture capital is a form of private equity funding provided to startups and companies in the early stage

  • VC is often offered to firms that demonstrate significant growth potential and the ability to generate substantial revenue, thus creating the potential for high returns

  • Venture capitalists are individuals who invest in early stage companies with promising futures


Stages of venture capital investment:

Broadly two stages:

  • Early stage financing

  • Late stage financing

Early stage financing:

  • Seed capital stage

  • Start up stage

  • Second round financing

Late stage financing:

  • Expansion finance

  • Replacement finance

  • Turn around

  • Buyout deals


Angel Investment vs Venture Capital vs Private Equity



ASPECTS

ANGEL INVESTMENT

VENTURE CAPITAL

PRIVATE EQUITY

Stage of business

Founding, startup, pre revenue

Early stage, pre-profitability

Mid to later stage, profitable, cash flow

Size of investment

10,000s to a few million

A few millions to tens of millions

Wide range; a few millions to billions

Type of investment

Equity, safe

Equity, convertible debt

Equity with leverage

Investment team

entrepreneurs / past founders

Mix of entrepreneurs and bankers/finance professionals

Mostly bankers/finance professionals

Level of risk

Extreme risk, high chance of losing all money

High risk, moderate chance of losing all money

Moderate risk, low chance of losing all money

Examples 

AngelList

VantagePoint

Apollo


Working capital:

  • It is the amount of funds required for meeting day to day expenses of the business

  • Capital required for purchase of raw materials and for meeting day to day expenditure on salaries, wages, rent and advertising

Types of working capital:

  • Permanent / fixed working capital

  • Temporary / fluctuating working capital


Factors affecting working capital:

  • Nature of the business

  • Length of the manufacturing process

  • Credit policy

  • Inventory policies

  • Production policy

  • Seasonal fluctuations

  • Scale of operations

  • Business standing

  • Business cycle


Receivable management:

Receivables: 

  • When a firm makes an ordinary sale of goods or services and does not receive payment, the firm grants trade credit and creates accounts receivable which could be collected in the future

Receivables management:

  • It aims at raising the sales volume and profit of the business by managing and providing credit facilities to customers

  • The overall process of receivables management involves properly recording all credit sales invoices, sending notices on due date to collection department, recording all collections and calculation of outstanding interest on late payments



Private equity - Definition and exit strategies

Private equity:

  • Investment capital provided to private companies or public companies that are taken as private

  • PE firms invest in companies with the goal of enhancing their value and achieving substantial returns

Exit strategies:

  • Trade sale: selling the investment to another company for cash or a combination of cash and equity

  • Initial Public Offering: listing the business on a stock exchange and issuing shares to the public

  • Recapitalization: restructuring the company’s capital, often involving debt and equity adjustments

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