RxDelivery Systems is an R&D venture specializing in the development and testing of new drug delivery technologies. The market for alternative drug delivery systems grew rapidly during the past several years. Driving factors behind this growth include efforts to reduce drug side effects through site-specific delivery, the need to maintain the activity of new biopharmaceutical compounds, and the extension of drug patent life. Improved drug delivery methods are expected to reduce the number of surgical interventions and the length of hospital stays, and improve patient compliance in taking prescribed drugs. The world market for biopharmaceuticals (including peptide, protein, RNA, and DNA drugs) was more than $50 billion in 2013. Sales of polymer-based drug delivery systems are forecasted to exceed $2.0 billion in 2020. Pulmonary delivery systems currently account for one-third of the drug delivery market and sales are projected to exceed $25 billion by 2020. RxDelivery Systems believes it can compete effectively in both the polymer-based and pulmonary drug delivery areas. The venture’s delivery technology is expected to utilize hydrophobic ion pairing and supercritical carbon dioxide precipitation to incorporate water soluble drug molecules into biodegradable controlled-release microspheres. The resulting microspheres will take the form of dry powders and will contain drug molecules small enough to allow for intravenous, intranasal, or pulmonary delivery. It is anticipated that this technology will be incorporated into products for controlled release applications including treatment of cancer, infectious diseases, and gene therapy. RxDelivery Systems, through an agreement with its pharmaceutical parent, a major drug company, will initially operate as an independent corporation but will be merged into the parent at the end of its second year. At that time, RxDelivery Systems’ entrepreneurial team will be paid a lump sum of $2,500,000 as the terminal value for the venture. Following are limited financial statement projections for the next two years for the RxDelivery Systems Corporation: First year revenues $12,500 Second year revenues $16,000 Expenses (including depreciation) $125,000 per year Initial time-zero (net) fixed assets $50,000 depreciation 10% of beginning-of-year net fixed assets Accounts Payable (Yr. 1 and 2) $750 Inventories (Yr. 1 and 2) $0 Corporate marginal tax rate 30% Accounts Receivable (Yr. 1 and 2) $0 Accrued Expenses (Yr. 1 and 2) $300 Required Cash $3000 Debt (all years) $0 A. Construct the venture’s balance sheet at startup. Then construct financial statements for Years 1 and 2. [Put initial fixed asset investments in Year 0 and initial working capital investments in Year 1. Assume the initial $50,000 is equity financed.] B. Construct the enterprise valuation cash flows including the $2,500,000 terminal payment. Treat existing liabilities at the terminal time as though the pharmaceutical firm assumes them. (The $2,500,000 is “free and clear.”) Strip all non-required cash out of net working capital (effectively declaring a pseudo dividend). C. What is the value of the enterprise at time 0 assuming a discount rate of 30%?? D. What is the value of the equity at time 0? E. Why does this value differ from the value for the equity method in the RxDelivery Systems mini case.
> After forecasting sales, describe how the income statement is projected.
> Describe the historical average annual return relationships among long-term U.S. government bonds, corporate bonds, small firm common stocks, and large firm common stocks.
> What is the percent of sales forecasting method?
> Explain how the AFN equation can be used to forecast the amount of funds that will be needed over a several year period.
> Why is it usually easier to forecast sales from seasoned firms in contrast with early-stage ventures?
> Describe the meaning of a “security” in terms of the Securities Act of 1933.
> What is securities crowdfunding?
> From the Headlines – Sock It to Me: The “Internet of Feet”: Discuss the role that Indiegogo played in the initial funding of Sensoria. Do you believe it was important in leading up to the $5 million A round?
> Describe the Jumpstart Our Business Staertups Act of 2012.
> What are the income and net worth requirements for being an accredited investor? What in the requirements for designation as an accredited investor relates to the level of sophistication? Do the criteria act as good proxies for sophistication?
> From the Headlines—Ecosphere: You have been retained as a consultant for Ecosphere and tasked with assessing the financial viability of their commercial ventures. What types of financial ratios would you enlist in your report to Ecosphere? What approach
> How do Rules 504, 505, and 506 of Reg D differ from one another?
> Describe the following: (a) expected rate of return, (b) standard deviation (c) coefficient of variation.
> What types of information need to be disclosed to offerees under Reg D?
> What are the restrictions on general solicitation and advertising covered in Rule 504?
> Briefly describe the importance of the 1953 SEC vs. Ralston Purina case in terms of securities registration requirements.
> What rates of returns have venture capitalists earned on average in recent years? How do these returns compare against the average venture capitalists returns over the past twenty years?
> What does the term accredited investor mean in terms of the Securities Act of 1933? Why does the designation matter?
> Provide a brief description of the use of Regulation A when issuing securities.
> Describe Sustainable Northwest’s short-term inflows and outflows of cash. What would you expect to be the main ingredients of each part of the cash conversion cycle?
> Indicate some of the concerns or cautions that need to be considered when conducting ratio analysis.
> What are the three ratio components of the ROE model? How is each calculated and what financial dimensions do they measure?
> Identify and describe the two components of the ROA model both in terms of what financial dimensions they measure and how they are calculated.
> Explain the meaning of investment risk of loss and describe how risk can be defined relative to an average value.
> Identify and describe four efficiency/return ratios that combine data from both the income statement and the balance sheet.
> What are four measures used to indicate how efficiently the venture is in generating profits on its sales? Describe how each measure is calculated.
> Describe the two types of “coverage” ratios that are typically calculated when trying to assess a venture’s ability to meet its interest payments and other financing-related obligations?
> What is the importance of the relationship between a venture’s current liabilities and its total debt?
> Briefly describe what is meant by the statement “Registering securities with the Securities and Exchange Commission (SEC) is both costly and a time-consuming process.”
> What are the three components of the cash conversion cycle (C3)? How is each component calculated?
> Briefly describe venture debt capital and venture equity capital.
> Describe how the costs of debt and equity differ from the perspective of accounting measures.
> Provide a description of the financing cost implications associated with a venture’s need for additional funds.
> What is meant by a cash budget? Describe how a cash budget is prepared.
> Briefly explain how changes in the conversion times of the components of the C3 can be interpreted.
> Describe the types of financial ratios and other financial performance measures that are used during a venture’s successful life cycle. Who are the users of financial performance measures?
> What does short-term financial planning involve?
> Kareem Construction Company has the following amounts of interest-bearing debt and common equity capital: FINANCING DOLLAR INTEREST COST OF SOURCE AMOUNT RATE CAPITAL Short-term loan $200,000 12% Long-term loan $200,000
> Assume the operation of your business resulted in sales of $730,000 last year. Year-end receivables are $100,000. You are considering factoring the receivables to raise cash to help finance your venture’s growth. The factor imposes a 7 percent discount a
> Artero Corporation, discussed in Problem 7, is a retailer of toy products. The firm’s management team recently extended the monthly sales forecasts that were prepared for the last three months of 2017 for an additional 6 months in 2018. These forecasts
> Short-term financial planning for the PDC Company was described during the early part of this chapter. Refer to the PDC Company’s projected monthly operating schedules in Table 6.2. PDC’s monthly sales for the remainder of 2017 are expected to be: Sep
> The firm’s management team recently extended the monthly sales forecasts through the last six months of 2018. Artero expects to spend $100,000 on fixed assets in July 2018 and depreciation charges will increase to $12,000 per month beginning in August 2
> The VirtualStream Company has developed proprietary server and control software for providing communication and media-on-demand services via the Internet. The company is in the process of collecting prerecorded video and audio content from clients and t
> Suppose you become an intern at a local VC firm and are asked to assist in due diligence on a proposed investment in a telecommunication company. Explain how you would approach such a task and where and how you would structure your investigation. What
> Determine the three largest venture capital firms in the U.S. How much money do they have under management? In what areas, if any, do they specialize? Where are they located? Where are their branch offices?
> Describe the cash conversion cycle (C3).
> List three venture capital firms active in your region and describe their investing style and restrictions.
> In 2016, Jennifer (Jen) Liu and Larry Mestas founded Jen and Larry’s Frozen Yogurt Company, which was based on the idea of applying the microbrew or microbatch strategy to the production and sale of frozen yogurt. Jen and Larry began producing small quan
> Wok Yow Imports, Inc., is a rapidly growing, closely held corporation that imports and sells oriental style furniture and accessories at several retail outlets. The equity owners are considering selling the venture and want to estimate the enterprise or
> The Minoso Corporation anticipates a 20 percent increase in sales for 2017, 2018, and 2019. Minoso is currently operating at full capacity and thus expects to increase its investment in both current and fixed assets in order to support the increase in f
> RxDelivery Systems is an R&D venture specializing in the development and testing of new drug delivery technologies. The market for alternative drug delivery systems grew rapidly during the 1990s. Driving factors behind this growth include efforts to re
> What is the meaning of leverage ratios? What are typical ratios used for relating total debt to a venture’s assets and/or its equity?
> Following is rate of return component information for FirstVenture investors. Rate Return Component Component Liquidity premium 5.5% Risk-free rate 6 Advisory premium 9 Investment risk premium 11.5 Target rate of return 40 A. Calculate
> Refer to Problem 7. Show how your answer to Part A of Problem 7 would change if Jerry were willing to pay 16 percent annual interest and a principal payment of $100,000 at the end of three years. Problem 7 with Part A: Jerry’s Tree Services is trying t
> Jerry’s Tree Services is trying to raise debt funds from a prospective venture investors, SureWay LLC. SureWay indicated to Jerry Lau that the annual interest rate on risky venture loans is currently 15 percent. Jerry is seeking a 3-year loan with annu
> What is meant by a venture’s operating cycle?
> Draw the payoff for a portfolio of a share of venture equity and a short call option to buy that share at $5.
> Draw the payoff diagram for the following options: A. Call option to buy a venture’s stock at $3 B. Put option to sell a venture’s stock back to the venture at $15
> Following is interest rate information currently being observed by the Electronic Publishing Corporation. One-year U.S. government securities 4.5% One-year bank loans 6.0 Five-year U.S. government securities 7.0 Five-year bank loans
> For Voice River, Inc. A. Estimate the WACC if the cost of common equity capital is 20 percent. B. Estimate the WACC if the cost of common equity capital is at the representative target rate of 25 percent for typical ventures in their late rapid-growth l
> Sometimes the combination of a share and a warrant is called a “stock unit.” What does the payoff diagram look like for such an investment?
> List ten web sites or hardcopy magazines that contain venture capital investing information that might be of use to entrepreneur’s seeking venture capital.
> Locate a recent study covering venture capital fundraising (not investing) for the previous year. Determine what the current sources of funds tend to be.
> Describe what is meant by (a) a leveraged buyout (LBO), and (b) a management buyout (MBO).
> Describe an outright sale of a venture. What are the four categories of possible buyers?
> What are the steps or stages in a “typical” execution and time line schedule used in planning and executing an IPO?
> Besides the cash budget, what additional financial statements are projected monthly in conjunction with short-term financial planning?
> What evidence exists as to whether entrepreneurs think about and/or develop exit strategies?
> What is meant by initial public offering (IPO) underpricing?
> Describe the two following terms that may be involved in underwriting a new securities issue: (a) green shoe and (b) lockup provision.
> When an investment banking firm decides whether to underwrite or market a securities issue, what is meant by a firm commitment and best efforts?
> What is meant by due diligence? How does a traditional registration differ from a shelf registration?
> What is the meaning of harvesting a venture?
> What is meant by a (a) full ratchet clause, and (b) down (reset) round?
> Why is the conversion feature in convertible preferred important for venture investors?
> How do debt investors get paid in the enterprise method?
> What is meant by (a) NOPAT, and (b) EBIAT? How do they compare with each other?
> The Biometrix Corporation has been in operation for one full year (2016). Financial statements follow. Biometrix’s management is interested in determining the value of the venture as of the end of 2016. Sales are expected to grow at a 20 percent annual r
> Assume you started a new business last year with $50,000 of your own money that was used to purchase equipment. Now you are seeking a $25,000 loan to finance the inventory needed to reach this year’s sales target. You have agreed to pledge your venture
> Suppose you know σ and you want an 85% confidence level. What value would you use as z in formula (9–1)?
> The cumulative frequency and the cumulative relative frequency polygon for a distribution of selling prices ($000) of houses sold in the Billings, Montana, area is shown in the graph. a. How many homes were studied? b. What is the class interval? c. On
> Two of the teams competing in the America’s Cup race are Team Oracle U.S.A. and Land Rover BAR. They race their boats over a part of the course several times. Below are a sample of times in minutes for each boat. Assume the population s
> Grand Strand Family Medical Center treats minor medical emergencies for visitors to the Myrtle Beach area. There are two facilities, one in the Little River Area and the other in Murrells Inlet. The Quality Assurance Department wishes to compare the mean
> A coffee manufacturer is interested in whether the mean daily consumption of regular-coffee drinkers is less than that of decaffeinated-coffee drinkers. Assume the population standard deviation for those drinking regular coffee is 1.20 cups per day and 1
> A sample of 65 observations is selected from one population with a population standard deviation of 0.75. The sample mean is 2.67. A sample of 50 observations is selected from a second population with a population standard deviation of 0.66. The sample m
> The null and alternate hypotheses are: H0: μ1 ≤ μ2 H1: μ1 > μ2 A random sample of 20 items from the first population showed a mean of 100 and a standard deviation of 15. A sample of 16 items for the second population showed a mean of 94 and a standard de
> Dr. Patton is a professor of English. Recently she counted the number of misspelled words in a group of student essays. She noted the distribution of misspelled words per essay followed the normal distribution with a population standard deviation of 2.44
> The Tennessee Tourism Institute (TTI) plans to sample information center visitors entering the state to learn the fraction of visitors who plan to camp in the state. Current estimates are that 35% of visitors are campers. How many visitors would you samp
> As part of an annual review of its accounts, a discount brokerage selected a random sample of 36 customers and reviewed the value of their accounts. The mean was $32,000 with a sample standard deviation of $8,200. What is a 90% confidence interval for th
> You plan to conduct a survey to find what proportion of the workforce has two or more jobs. You decide on the 95% confidence level and a margin of error of 2%. A pilot survey reveals that 5 of the 50 sampled hold two or more jobs. How many in the workfor
> Dylan Jones kept careful records of the fuel efficiency of his new car. After the first nine times he filled up the tank, he found the mean was 23.4 miles per gallon (mpg) with a sample standard deviation of 0.9 mpg. a. Compute the 95% confidence interva
> In a binomial situation, n = 5 and π = .40. Determine the probabilities of the following events using the binomial formula. a. x = 1 b. x = 2
> A survey of 25 randomly sampled judges employed by the state of Florida found that they earned an average wage (including benefits) of $65.00 per hour. The sample standard deviation was $6.25 per hour. a. What is the population mean? What is the best est
> Families USA, a monthly magazine that discusses issues related to health and health costs, surveyed 20 of its subscribers. It found that the annual health insurance premiums for a family with coverage through an employer averaged $10,979. The standard de
> The First National Bank of Wilson has 650 checking account customers. A recent sample of 50 of these customers showed 26 have a Visa card with the bank. Construct the 99% confidence interval for the proportion of checking account customers who have a Vis
> In a poll to estimate presidential popularity, each person in a random sample of 1,000 voters was asked to agree with one of the following statements: 1. The president is doing a good job. 2. The president is doing a poor job. 3. I have no opinion. A tot
> During a national debate on changes to health care, a cable news service performs an opinion poll of 500 small-business owners. It shows that 65% of small-business owners do not approve of the changes. Develop a 95% confidence interval for the proportion
> Pharmaceutical companies promote their prescription drugs using television advertising. In a survey of 80 randomly sampled television viewers, 10 indicated that they asked their physician about using a prescription drug they saw advertised on TV. Develop
> PrintTech, Inc. is introducing a new line of ink-jet printers and would like to promote the number of pages a user can expect from a print cartridge. A sample of 10 cartridges revealed the following number of pages printed. a. What is the point estimat
> An important factor in selling a residential property is the number of times real estate agents show a home. A sample of 15 homes recently sold in the Buffalo, New York, area revealed the mean number of times a home was shown was 24 and the standard devi
