#2 – Name three of the common loan restrictions and explain how they relate to new venturing financing. What are some additional common loan restrictions? A. Maintenance of accurate records and financial statements – having accurate records and financial statements will allow you to secure better financing. Without accurate records or financial statements your borrowing limits might be reduced as you will possibly be seen as a higher risk. B. Limits on total debt – putting a limit or restriction on total debt that can be incurred by the issuer. By doing this, we are trying to protect the interest of the lenders if we can maintain a certain degree of leverage. C. Restrictions of dividends or other payments to owners and/or investors – state law might prohibit how much money is allowed to be paid back to the owners and/or investors. Cash dividend payments reduce the amount of capital which might also have an effect on obtaining a loan. D. Restrictions of additional capital expenditures E. Restrictions of sale of fixed assets. F. Performance standards on financial ratios. G. Current tax and insurance. #7 – Identify and briefly describe four basic SBA credit programs. A. 7(a) loan – Lenders include commercial banks, credit unions, or financial services firm. Generally up to $2M with a 7-10 year loan. Can be used for most business purposes, including the financing of working capital needs. SBA approves loan and guarantees up to 85% of loan value. B. 504 loan – Lenders include commercial banks jointly with not-for-profit Certified Development Company. Generally, $4M for fixed assets and up to $2M for other business needs. SBA approves and guarantees the development company’s portion of debt. C. Microloan – Lenders include Not-for-Profit or government affiliated Community Development Financial institution. Generally, up to $35,000 for very small firm for general business needs. SBA provides a direct loan to community organization, which re-loans the funds in small amounts. D. Venture Capital – Lenders include Small Business Investments Company (SBIC), a private for-profit organization. Here, there is no limit, several-year loan provided by debenture SBIC; SBICs also make loans in exchange for equity investments. SBA borrows money to be lent to SBICs and guarantees payment to investors. #13 – What are some characteristics of a Community Development Financial Institutions (CDFI) loan? According to the textbook, CDFI’s often prefer, or are restricted, to lend to small businesses located in rural or economically depressed areas. CDFI’s typically offer technical and managerial assistance and seek small business owners who are receptive to coaching and
FIN 512_WEEK 3 HOMEWORK_DeANGELA DIXON 4. Why is it usually easier to forecast sales from seasoned firms in contrast with early-stage ventures? It is usually easier to forecast a seasoned firm’s sales compared to early-stage ventures because a seasoned firm has operating history. The forecast of the firm’s financials begins with the firm’s historical sales and the past relationships between sales and other assets and liability accounts. Early-stage ventures have no historical operating performance to benchmark at all. Pharma Biotech Corporation Part A A. Calculate the following financial ratios (as covered in Chapter 5) for Pharma Biotech for 2010: (a) net profit margin, (b) sales-to-total-assets ratio, (c) equity multiplier, and (d) total-debt-to-total-assets. Apply the return on assets and return on equity models. Discuss your observations . (a) net profit margin: 960/15,000 = .0640 = 6.40% (b) sales-to-total-assets: 15,000/12,000 = 1.2500 times (c) equity multiplier: 12,000/5,200 = 2.3077 times (d) total-debt-to-total assets: (4,600 + 2,200)/12,000 = 6,800/12,000 = .5667 = 56.67% ROA Model = 6.40% x 1.2500 = 8.00% ROE Model: 6.40% x 1.2500 x 2.3077 = 18.46% Pharma Biotech’s net profit margin is less than 7%. Once the venture expands the net profit margin will improve through the spreading of fixed costs. Sales-to-total-assets are greater than 1.00 times. Total-debt-to-total assets are more than 56%. Pharma Biotech is financed 56.67% by debt financing and 43.33% of the assets are financed by investors. The 8.00% ROA is improved to an 18.46% ROE. B. Estimate Pharma’s sustainable sales growth rate based on its 2010 financial statements. What financial policy change might Pharma Biotech make to improve its sustainable growth rate? Show your calculations. Beginning stockholders’ equity = ending stockholders’ equity – added 2010 retained earnings = (2,400 + 2,800) – 576 = 5,200 – 576 = 4,624 = (960/15,000) x (15,000/12,000) x (12,000/4,624) x (1 - .40) = .064 x 1.2500 x 2.5952 x .6 = .1246 = 12.46% The financial policy change Pharma Biotech might want to consider to improve its sustainable growth rate would be to change the cash dividends payout. If it changed to 80% then the rate would improve.