Docstoc

FINANCING THE ENTERPRISE

Document Sample
FINANCING THE ENTERPRISE Powered By Docstoc
					                                      Financing the Enterprise, page 1 of 39




      FINANCING THE ENTERPRISE
Financing has blossomed into a huge smorgasbord
of simple, complex, and even exotic techniques for
raising capital. Our focus here will be on the basic
sources of financing that represent the large
majority of business funding. We will cover the
following topics.

  Principal differences between debt and equity,
   the two fundamental building blocks of all
   financing

  Alternative sources of financing

  How the financing is obtained

  How firms decide which financing methods best
   meet their needs
                                  Financing the Enterprise, page 2 of 39




TYPES OF FINANCING
Principal differences between debt and
equity, the basic elements of virtually all
financing

 Priority of Claim: Debt has priority over equity.
  In bankruptcy, creditors receive what is owed
  before shareholders receive anything.

 Cash Payments: Debt is promised principle and
  interest. Equity is promised nothing (dividends
  need not be paid)

 Control: Shareholders elect the board of
  directors, and vote on major firm decisions (e.g.,
  a merger or a sale of major assets). Lenders do
  not vote but may impose constraints on the firm,
  e.g., on dividends, capital investments, and
  various measures of performance.
                                    Financing the Enterprise, page 3 of 39



 Taxes:      Interest expense is tax-deductible;
  interest income is taxable for lenders. Firm
  income (net of interest expense) is taxed
  differently for C-corporations than for other types
  of firms.

  o C-Corporation: Virtually all publicly traded
    firms are C-Corporations, which are subject to
    two taxes on their income: Corporate
    income tax (34% tax rate for large firms);
    and a personal income tax on dividends
    and on capital gains (gains from selling
    shares) received by stockholders.

  o S-Corporations, Limited Liability
    Companies, Partnerships, and Sole
    Proprietorships: Firm income (whether or not
    distributed) is subject only to the personal
    income tax paid by the owners.
                                    Financing the Enterprise, page 4 of 39



The Taxation of a C-Corporation

   EXHIBIT 1. Income Tax of a C-Corporation
Sales                                $600,000,000
Cost of goods sold                    360,000,000
Gross profit                         $240,000,000
General and administrative expenses    40,000,000
Earnings before interest & taxes     $200,000,000
Interest expense                    100,000,000
Earnings before tax                  $100,000,000
Tax @ 34%                              34,000,000
Net income                          $ 66,000,000

C-Corporation and Double Taxation
If the $66,000 is paid as a dividend, the stockholder
pays an added tax up to 15%. If the tax is 15%:

     Exhibit 2. Tax on Dividend Income of
                    Stockholders
    Dividend received            $66,000,000
    Tax on dividend (at 15%)       9,900,000
    After-tax dividend           $56,100,000
                                   Financing the Enterprise, page 5 of 39




SOURCES OF DEBT FINANCING

TRADE CREDIT
Extra time to pay (after the invoice date) given by a
supplier to its customer. For example, suppose that
purchases from a supplier are made under the terms
2/10, net 30. This means that a 2 percent discount
is given if payment is within 10 days of the invoice
date, and the amount due must be paid within 30
days of the invoice date.
 An extremely convenient, and popular, method of
  short-term financing.
 Negligible transaction costs is using trade credit;
  but interest cost may be high or low.
 One should compute the implied interest rate on
  trade credit
 May be able to “stretch” payables, but must make
  sure that this does not involve an unacceptable
  penalty.
                                    Financing the Enterprise, page 6 of 39



The Cost of Trade Credit: Trade credit is not free.
Let’s compute its cost. Suppose that you buy a
$100 per unit (price if no discount) input on the
following terms.
 Terms: 2/10, net 30, i.e, pay $98 up to day 10,
 and $100 after that up to day 30.
Firm should pay either on day 10 or on day 30.
Paying $98 before day 10, or $100 before day 30,
ignores the time value of money (the interest that
you could earn on your funds).
If you pay on day 30 rather than day 10, you have
$98 for a 20 extra days, and you pay $2 more (like
borrowing $98 for 20 days with $2 in interest). So:

                              $2
Interest rate for 20 days =       = 2.04%
                              $98

                                  365
Annualized rate (365 day year) =       2.04%
                                  20 
                                = 37.23%

Borrowing from the vendor (waiting until day 30 to
pay) is like borrowing at an annual rate of 37.23
percent. Rather high, don’t you think?
                                  Financing the Enterprise, page 7 of 39



BANKS AND FINANCE COMPANIES

Commercial banks take deposits, loan money, and
serve both consumers and businesses. Familiar
names include Bank of America, Wells Fargo,
KeyBank and Citibank. Commercial banks have
relatively stringent lending standards. Loans are
both secured and unsecured.

Commercial finance companies are non-
depository institutions that provide capital to
business firms, particularly higher risk firms that
may not qualify for bank credit. These finance
companies focus on asset-based financing (lending
backed by the borrower’s assets), but they also
provide unsecured loans.       Leading commercial
finance companies include CIT Finance, GE
Commercial Finance, GMAC Commercial Finance,
PNC Business Credit, Wells Fargo Business Credit,
Bank of America Business Capital, and CitiCapital.
                                   Financing the Enterprise, page 8 of 39



Below are some recent announcements of financing
transactions. We will later define the terms that are
used.
 (Dallas, Texas; March, 2004) - Dresser, Inc.
 secures a new six-year $125 million senior
 unsecured term loan, and a new $235 million
 term loan under its existing Senior Secured Credit
 Facilities.
 (Basking Ridge, New Jersey; February, 2005) –
 Avaya Inc., a leading provider of business
 communications software, systems and services,
 arranges a $400 million five-year unsecured
 revolving credit facility. The facility replaces an
 existing $250 million secured credit.
 (Denver Colorado, January 2005) – Sierra Hills
 arranges a $6,950,000 of interim financing for its
 119-unit independent, senior living apartment
 complex in Porterville, California. The facility,
 constructed in 1999, consists of four buildings
 totaling 103,441 square feet.
 (Garland, Texas, January, 2005) Arena Brands, a
 western wear manufacturer, establishes with GE
 Commercial Finance a $30 million senior secured
 credit facility to replace existing debt.
                                    Financing the Enterprise, page 9 of 39



Seasonal Line of Credit – Short-term
Borrowing to Meet Temporary Needs

 Borrowing for less than a year to finance seasonal
  needs

 Use to finance seasonal increases in inventory or
  accounts receivable

 Can be cancelled by bank at any time (but this
  option is very carefully, and infrequently, used)

 Expected to be “out of the bank” a couple of
  months during the year

 Traditionally   unsecured,    although                 security
  requirement is increasingly common

 Interest rate can be floating or fixed
                                   Financing the Enterprise, page 10 of 39



Term Loan – Fixed term business loan for
more than one year

 Usually one to five years, but may be as long as
  25 years (mortgage loan).

 Usually secured. May be unsecured if borrower
  has a high credit rating. The security is generally
  property, plant and equipment.

 Usually floating interest rate based on prime,
  federal funds rate or LIBOR; may be an ARM.
  May be a fixed rate; or can arrange an interest
  rate swap of floating into fixed.
                                     Financing the Enterprise, page 11 of 39



Revolving Credit – Agreement to lend, for a
stated time period, up to a given amount.
 Usually one to three years, with a majority of lines
  one year. Can be up to seven years.
 Security is accounts receivable or inventory, and
  is sometimes property, plant and equipment.
  Receivables must meet credit standards; a
  percent of value is loaned (better accounts mean
  a higher percent). Inventory collateral must have
  stable market value; manufactured finished
  goods, consumer durables, or raw materials with
  stable markets (e.g., wheat) are good collateral.
 Usually floating rate or an ARM; can swap into
  fixed.
 Lender may charge a fee for any unused portion
  of the line (for example, for a $3 million line with
  $1 million currently borrowed and $2 million
  unused, interest is charged on $1 million, and .5
  percent per year fee on the unused $2 million).
 Relatively high interest rate.
 Floor planning is credit line often used in financing
  automobile     dealers,     farm    and     industrial
  equipment, and sellers of consumer durables.
                                   Financing the Enterprise, page 12 of 39



Interim (Bridge) Financing – Short-term loan
for an interim period until long-term financing
is obtained.
 Generally collateralized (with        real          property,
  equipment, inventory, etc.)
 Often used to finance construction (or to provide
  temporary refinancing) of industrial plants,
  apartment houses, shopping centers, etc.



Mortgage Loan – Collateral is real property
 Secured by real property
 Can be up to 25 years
 Usually a variable rate (floating or ARM)
 Often an origination fee, e.g., .5% of the loan
 Will need three years of financial statements and
  personal (and/or corporate tax returns). The
  lender runs its own cash flow projections,
  although borrower may submit them. Lender
  runs analysis of return on equity, etc. If leased
  property, will want a security interest in leases.
                                    Financing the Enterprise, page 13 of 39



FACTORING

Factoring is the sale of accounts receivable to a
“factor,” which is a firm engaged in the business of
buying such accounts. The factor evaluates the
accounts and chooses those it is willing to purchase;
the purchase price depends on the quality of the
accounts receivable.
Factor does a credit analysis of the accounts,
chooses those it will buy, and pays a price for the
accounts in accordance with the credit analysis.
 Non-recourse (factor the assumes risk of non-
  payment)
 Usually non-notifcation basis;        customers                  are
  unaware of sale of receivables.
 Factor may provide additional unsecured
  financing, credit analysis of customers, and
  collections of amounts due.
 Relatively expensive
                                  Financing the Enterprise, page 14 of 39



SMALL BUSINESS ADMINISTRATION (SBA)
LOANS
 Loans are provided by banks, commercial finance
  companies, and other institutional commercial
  lenders
 Loans are up to 80 percent guaranteed by the
  SBA
 Business must be a “small business” by SBA
  standards (size varies by industry)
 Loans can be for a longer term than is typical for
  commercial loans
 Loans are available to borrowers who might not
  be able to obtain financing elsewhere
See Appendix A for details on SBA programs.
                                   Financing the Enterprise, page 15 of 39



PUBLIC FINANCING

Public financing is the public issuance of securities.
The securities may be debt (bonds, commercial
paper, notes, etc.), stock (typically common stock or
preferred stock), or any of a number of derivative
securities (such as convertibles, warrants, and put
options). Public sale of a security requires approval
by the Securities and Exchange Commission.

Commercial Paper – Very short-term debt

 Maturity is 2 days to 270 days (majority is 30 days
  or less)

 Issued by only prime rated commercial firms and
  financial companies (e.g., banks)

 Unsecured; usually backed by a bank line of credit

 Low interest cost (most issued on a discount
  basis; some make interest payments)

 Can be publicly offered or privately placed
                                   Financing the Enterprise, page 16 of 39



Notes and Bonds

 Notes usually refer to debt instruments with a
  maturity of up to 10 years, and bonds to debt
  instruments with a maturity of more than 10 years

 May be secured or unsecured (debentures)

 Contain restrictive covenants

 May pay a regular coupon (interest) every six-
  months; or one balloon payment when mature
  (zero-coupon)

 Interest rate is usually fixed, but may be floating
  (tied to LIBOR, prime, etc.)

 Issued through investment banker, who either
  guarantees the price, issues on a best-efforts
  basis, or conducts an auction

 Can be publicly offered or privately placed

 Publicly traded debt has lower interest cost than
  privately placed debt with the same credit rating
                                 Financing the Enterprise, page 17 of 39



 Bonds, and General Credit, are Rated by Standard
  & Poor’s, Moody’s and Fitch. Here are some
  examples.
       General Electric: AAA
       Wal-Mart: AA
       Target: A+
       Coke: A
       Best BUY: BBB
       Gap Inc.: BBB-
       Ford: BB+
       General Motors: BB
       Continental Airlines: B-
       Paxon Communications: CCC+
       Delta Airlines: CC
                              Financing the Enterprise, page 18 of 39



          TABLE 1. BOND RATINGS
Moody's    S&P       Fitch             Definitions
 Aaa       AAA       AAA     Prime. Maximum Safety
 Aa1       AA+       AA+     High Grade High Quality
 Aa2       AA        AA
 Aa3       AA-       AA-
  A1        A+       A+       Upper Medium Grade
  A2        A         A
  A3        A-        A-
 Baa1      BBB+     BBB+      Lower Medium Grade
 Baa2      BBB      BBB
 Baa3      BBB-     BBB-
 Ba1       BB+       BB+     Non Investment Grade
 Ba2        BB       BB               Speculative
 Ba3       BB-       BB-
  B1        B+       B+         Highly Speculative
  B2        B        B
  B3        B-        B-
 Caa1     CCC+       CCC          Substantial Risk
 Caa2      CCC         -          In Poor Standing
 Caa3      CCC-        -
  Ca        CC         -     Extremely Speculative
  C         -          -          May be in Default
   -        -        DDD                 Default
   -        -         DD
   -        D         D
   -        -          -
                                   Financing the Enterprise, page 19 of 39



LENDERS’ EVALUATION OF A PROSPECTIVE
BORROWER

Virtually all lenders directly, or indirectly, examine
most or all of the following company characteristics
to evaluate a prospective borrower (often dubbed
“the five Cs”).

Character: The talent and integrity of the firm’s
management.
Capital: Debt relative to equity financing. A lower
debt-to-equity ratio usually means a lower likelihood
of financial distress.

Cash Flow: Relationship between a company’s cash
flows and the cash requirements for servicing
financial obligations.

Conditions: Macroeconomic conditions faced by the
firm.

Collateral: Liquidation value of the collateral
relative to the loan, and the specific claim that the
lender has on the assets (priority of the lender).
This critical for asset based loans.
                                        Financing the Enterprise, page 20 of 39



The firm’s financial ratios reflect some of the
information used to evaluate the firm. Some of the
ratios that are used:
                  current assets
Current ratio:
                 current liabilitie s
               current assets - inventory
Quick ratio:
                   current liabilitie s
             debt
Debt ratio:
            assets
                            EBIT  interest
Times interest earned:
                               interest
                                  EBIT
Fixed charges coverage:
                              fixed charges
                        cost of goods sold
Inventory turnover:
                        average inventory
                     average accounts receivable
Collection period:
                             credit sales
                       net income
Return on equity:
                     average equity
                                   Financing the Enterprise, page 21 of 39




SOURCES OF EQUITY FINANCING

PRIVATE SOURCES OF EQUITY CAPITAL

Private Placement
 Financing for established firms that is secured
  through direct negotiation with equity investors
  (not through a public offering); investment banker
  may be involved.
 Does not require SEC approval (unlike a public
  offering)
 May be from an institutional investor or from an
  individual
 If from an individual, must meet requirements of
  the Regulation D (U.S. Securities Act of 1933, as
  amended) – Restrictions on who may participate,
  manner of offering, resale of securities, etc.
  Fewer restrictions on smaller offerings ($5 million
  or less)
 Lower issuance costs than a public offering
 Slightly higher rate of return must be offered to
  the buyer since privately placed securities are less
  liquid (i.e., are not publicly traded).
                                   Financing the Enterprise, page 22 of 39



Angel Investor

 Wealthy individual who supplies equity or debt
  capital to start-ups and small firms

 Usually equity, or securities convertible to equity,
  given in return for financing

 Estimated 250,000 angel investors in the U.S.

 Most angels provide $50,000 to $500,000 of
  financing
                                   Financing the Enterprise, page 23 of 39



Venture Capital

 Financing for start-ups, turn-arounds or other
  high-risk ventures provided directly through a
  private placement.

 Offered by venture capital firms, corporations,
  institutions, and wealthy individuals (see Appendix
  B for a list of venture capital firms and for
  corporations with venture capital units)

 Provides equity capital      (common              stock            or
  convertible preferred)

 Participates in company governance (e.g., position
  on board of directors)

 Provide advice and other         assistance                 (e.g.,
  contacts with other firms)

 Funds may be offered in stages

 Some only participate in first round, second
  round, or mezzanine level (pre-IPO) financing
                                      Financing the Enterprise, page 24 of 39



Note that the venture capital is invested on an “after
the money” basis (this is also true for an offering of
securities by the firm, whether public or private).

Example: Venture capital firm Star Capital plans to
invest $10 million in Hi Wire Technologies, Inc. It
currently has 12 million shares outstanding. The
intrinsic value (fair market value) of Hi Wire’s assets
and liabilities (before the venture capital investment)
are as shown below.

   Market Value Balance Sheet of Hi Wire Technologies
              Before Venture Investment
ASSETS:
 Cash                                                   $1,000,000
 Intellectual property                                  $4,000,000
 Property, plant and equipment                          $3,000,000
 Goodwill (excess above liquidation
    value of other assets)                            $8,000,000
       Total Assets                                  $16,000,000
LIABILITIES:
  Accounts payable                                        $200,000
  Wages and salaries payable                              $100,000
  Short-term bank loan                                    $700,000
       Total Liabilities                                $1,000,000
EQUITY (ASSETS  LIABILITIES)                       $15,000,000
                                      Financing the Enterprise, page 25 of 39



   Market Value Balance Sheet of Hi Wire Technologies
               After Venture Investment
ASSETS:
 Cash                                                $11,000,000
 Intellectual property                                $4,000,000
 Property, plant and equipment                        $3,000,000
 Goodwill (excess above liquidation
    value of other assets)                           $11,000,000
       Total Assets                                  $29,000,000
LIABILITIES:
  Accounts payable                                      $200,000
  Wages and salaries payable                            $100,000
  Short-term bank loan                                  $700,000
       Total Liabilities                              $1,000,000
EQUITY (ASSETS  LIABILITIES)                        $28,000,000

Veture Capitalists have invested $10 million and the
firm’s equity fair market value is $28 million. The
increase in value is due to two things:
 $10 million additional cash
 $3 million increase in value due to rise in
  probability of Hi Wire’s success due to the
  injection of $10 million in cash, and the intangible
  benefits of the venture capitalist’s participation
  (management skills, contacts and network, etc.).
                                  Financing the Enterprise, page 26 of 39



Star Capital will want to receive shares worth more
than $10 million (more than it invested). Hi Wire
must be ahead as a result of the $10 million capital
venture funding (i.e., Hi Wire must have a remaining
interest worth more than its original $15 million).

How many shares paid to Star Capital will satisfy
both Star Capital and Hi Wire?
                                   Financing the Enterprise, page 27 of 39



PUBLIC SOURCES OF EQUITY CAPITAL

Exchanges
 New York Stock Exchange (“Wall Street”) and the
  American Stock Exchange are major exchanges
  (both located in New York City)
 New York Stock Exchange lists the stocks of the
  largest and strongest firms – minimum
  capitalization and earnings requirements
 American Stock Exchange - second largest U.S.
  exchange; largest market for foreign securities.
  Options and derivatives are traded here.


NASDAQ
 Shares traded electronically by dealers; is located
  on a telecommunications network rather than a
  physical trading floor
 Is merged with the American Stock Exchange
 “Over-the-counter” stocks – smaller companies,
  although some giants are listed on the NASDAQ
  (such as Microsoft and Intel)
                                    Financing the Enterprise, page 28 of 39



BECOMING A PUBLIC COMPANY

Reasons for Going Public
 Increases company’s market visibility
 Makes the stock far more liquid - shareholders
  (including employees who have exercised their
  stock options) can trade the stock more easily
  because a ready market exists [This liquidity, on
  average, raises the market value of equity by
  about 25 percent.]
 Shares may be worth more because the company
  is regulated by the SEC and is covered by
  Sarbannes-Oxley
 To raise funds through sale of stock in the IPO
 To make it easier to raise capital in the future


Reasons for Not Going Public
 Greater regulation and disclosure requirements
  (SEC and Sarbannes-Oxley) and the associated
  costs
 The time and expense of the initial public offering
  (investment banking fees, legal fees, etc.)
                                   Financing the Enterprise, page 29 of 39



Steps in “Going Public”:
 Firm selects an investment banker (Morgan
  Stanley, Goldman Sachs, CSFirstBoston, etc.)
 Firm files the IPO registration with SEC
 SEC reviews and approves the registration
 Company must make sure complies with the “blue
  sky” laws (laws on security sales) of each state
 Investment bankers and firm go on a “road show”
  to promote the offering to analysts, fund
  managers, and potential investors.
 Investment banker obtains tentative commitments
  by investors to buy the stock
 IPO. On the day of the initial public offering, the
  price and number of shares is set

Primary Issue – Security sale by the issuing firm.

Seasoned Issue – Issue of securities by a firm that
has already issued that type of security, e.g., shares
issued by a public company.

Secondary Market (After Market) – Market for
publicly traded securities after they have been
initially issued (sold).
                                              Financing the Enterprise, page 30 of 39



 SUMMARY - SOURCES OF FINANCING
                  Exhibit 3a. Debt Financing
                                     Security               Interest; fixed
                     Term          Required?                   or floating
Trade Credit    Less than 1 year   No                       Fixed
Seasonal Credit Less than 1 year   Usually                  Usually floating
Line
Term Loan         One to 15 years       Usually             Usually floating
Revolving         Usually, 1 to 3       Usually             Usually floating
Credit Line       years, potentially
                  longer
Bridge Loan       Up to 2 years         Usually             Varies
Mortgage Loan     Up to 25 years        Always              Usually floating
Factoring         Immediate             No                  Fixed
SBA               Up to 25 years        Varies              Varies
Public Debt       Up to 50 years or     Secured and         Usually fixed;
                  more                  unsecured           may be floating

                    Exhibit 3b. Equity Financing
                                Where funds         Type of security
                 Purpose           obtained               offered
Private       Investment or Private investors      All types of equity
Placement     other          Private equity funds
                             Institutions
Angel         Startup or     Wealthy individuals Common stock or
Financing     young firm                           convertible security
Venture       Startup or     Venture capital       Common stock or
Capital       turnaround     firms; corporations convertible security
Public        Investment or Any party allowed      All types of equity
Offering      other          to invest in equities
                                    Financing the Enterprise, page 31 of 39



 THE DATA –

 Below are data on the average proportions of
 financing from various sources for U.S. corporations.


    Table 2a. Sources of Corporate Financing
           Source of Financing
 Internal Funds                             90%
 Net equity issues*                         -2%
 Debt instruments                           12%
 *New shares sold minus shares repurchased.


       Table 2b. Debt Instruments Used by
                   Corporations
             Source of Financing
Short-term debt                                                    38%
Long-term loans – banks                                            14%
Long-term loans – non-bank financial institutions                  23%
Bonds                                                              25%
                                                Financing the Enterprise, page 32 of 39



THE DEBT-EQUITY FINANCING DECISION

Below is table that shows the results of three
surveys of financial managers regarding the factors
that are important in setting the firm’s debt-to-
equity ratio. Each of the six factors is explained.

    Table 3. Determinants of Long-term Capital Structure
             As Reported by Financial Executivesa
                                            Stonehill           Conference
     Determinant               Scanlon        et al.              Board
Business & Default Risk            Y            Y                        Y
Interest tax effect b              Y            Y                        Y
Timing                             Y            Y                        Y
Clientele Effect                   N            Y                        Y
Bond Rating                        Y          N.Ac                       Y
Flexibility                        Y            N                        Y
a
  Y = Yes, this factor is important; N = No, this factor is not
  important. Only publicly traded firm (all of which were C-
  corporations) were surveyed.
b
   Tax-deductibility of interest
c
    Possibility not included in questionnaire format.
                                     Financing the Enterprise, page 33 of 39



Business Risk: For any given debt-to-equity ratio,
a higher underlying business risk (i.e., higher
uncertainty of cash flows and firm value) implies a
greater risk of default. Typically, firms in riskier
lines of business maintain lower debt-to-equity
ratios.

Tax Deductibility of Interest: The corporate tax
benefit from debt interest is greater the higher is the
firm’s tax rate. For example, if interest paid is $100
million, the tax resulting tax savings is $34 million if
the firm’s tax rate is 34 percent, is $10 million if the
tax rate is 10 percent, and is zero if the firm has no
taxable income. Generally, only firms with a high
corporate tax rate should have significant long-term
debt relative equity.

Clientele Effect: Stockholders and lenders assume
that the debt policy (debt/equity) will not change
radically. To keep these clienteles happy, firms try
to maintain stable policies.
                                   Financing the Enterprise, page 34 of 39



Timing: Management usually has a general view as
to whether the firm’s stock is markedly undervalued
(i.e., is well below intrinsic value (fair value)),
markedly overvalued, or, roughly, reasonably
valued.    If management believes the stock is
undervalued (stock price is less than intrinsic value)
and interest rates are low, debt financing will be
preferred. Stock overvaluation and high interest
rate encourage management to use equity
financing.

Bond Rating: Typically, a company wants its bond
rating to remain at or above some particular
achievable threshold, such as investment grade
(S&P BBB). Falling below this threshold conveys
negative information to the market, and means
higher interest rates on the firm’s new borrowing.

Flexibility: It is desirable to maintain borrowing
capacity to meet unexpected needs, either to exploit
a new opportunity or to deal with an unanticipated
problem.
                                             Financing the Enterprise, page 35 of 39



 OBSERVED CAPITAL STRUCTURES
 Table 4 shows the average capital structures of U.S.
 corporations.
  Table 4. Capital Structure of U.S. Business Firms*
                    Debt to        Representative
      Industry      Equity*          Companies
Dairy Products        .15    Ben and Jerry’s, Dreyer’s
Fabric apparel        .30    VF Corp., Jones Apparel
Paper                 .59    Kimberly-Clark, For James
Pharmaceuticals       .03    Pfizer, Warner-Lambert
Petroleum Refining    .44    ExxonMobil, USX-Marathon
Rubber footwear       .41    Nike, Reebok
Steel                1.26    Nucor, USX-US Steel
Computers             .07    Cisco, Dell
Motor Vehicles        .71    Ford, General Motors
Aircraft              .20    Boeing
Airlines              .90    Delta, Southwest
Cable television      .69    Cablevision, Cox Comm.
Electric utilities    .99    Southern Co.
Department stores    1.10    Sears, Kohl’s
Eating places         .39    McDonald’s, Wendy’s
*Debt is the book value of debt. Equity is the market value of
 outstanding shares.
*Ibbotson Associates
                                    Financing the Enterprise, page 36 of 39



Comments on the observed capital structures.
 Debt-to-equity ratios differ widely among
  industries.
 The average debt-to-equity ratio of U.S. firms is a
  little less than the average debt-to-equity ratio of
  other major industrialized countries.
 Firms within an industry vary widely with respect
  to debt-to-equity ratio (not indicated by the above
  table). This is because firms vary in profitability
  (ability to use the corporate interest tax
  deduction), stability of cash flow, assets, and
  other characteristics.
                                                            Financing the Enterprise, page 37 of 39



APPENDIX A: Small Business Administration Loans
Here are the main SBA loan programs for small businesses.

BASIC 7(A) LOAN GUARANTY – This is the SBA’s primary business loan program.
Available to assist qualified small businesses or start-ups that may not otherwise be
able to secure financing. It is also the agency’s most flexible business loan program,
since financing under this program can be guaranteed for a variety of general business
purposes. Loan proceeds for such uses as working capital, machinery and equipment,
furniture and fixtures, land and building (including purchase, renovation and new
construction), leasehold improvements, and debt refinancing (under special conditions).
Loan maturity is up to 10 years for working capital and generally up to 25 years for
fixed assets. The loans are made by commercial lending institutions, generally banks.
WEBSITE: www.sba.gov/financing/sbaloan/7a.htm

CERTIFIED DEVELOPMENT COMPANY (CDC) 504 LOAN PROGRAM – SBA
guarantees long-term, fixed-rate financing to small businesses to acquire real estate,
machinery or equipment. Typically, a loan obtained from a private-sector lender with a
senior lien, a loan secured from a CDC (funded by a 100 percent SBA-guaranteed
debenture) with a junior lien covering up to 40 percent of the total cost, and a
contribution of at least 10 percent equity from the borrower. The loans are made by
Certified Development Companies, which are private, nonprofit corporations set up to
contribute to the economic development of their communities or regions.
WEBSITE: www.sba.gov/financing/sbaloan/cdc504.htm

MICRO-LOAN 7(M) LOAN PROGRAM – Short-term loans up to $35,000 to small
businesses and not-for-profit child-care centers for working capital, inventory, supplies,
furniture, fixtures, machinery and/or equipment. May not used to pay existing debts or
to purchase real estate. The SBA makes or guarantees a loan to an intermediary, which
makes the micro-loan to the applicant. The loans are not guaranteed by the SBA. The
micro-loan program is available in selected locations in most states. Borrower must
give personal guarantee of the loan. These loans are provided by designated
intermediary lenders (nonprofit organizations with experience in lending and in
technical assistance).
WEBSITE: www.sba.gov/financing/sbaloan/microloans.htm

LOAN PREQUALIFICATION – Business applicants have their loan applications for
$250,000 or less reviewed and potentially sanctioned by the SBA before applications are
submitted to lenders (standard financial intermediaries). The SBA evaluates the
applicant’s character, credit, experience and reliability rather than assets. An SBA-
designated intermediary works with the business to review and strengthen the loan
application. The review is based on key financial ratios, credit and business history, and
the loan-request terms. The program is administered by the SBA’s Office of Field
Operations and SBA district offices.
WEBSITE:www.sba.gov/financing/sbaloan/prequalification.htm
                                        Financing the Enterprise, page 38 of 39



           APPENDIX B. Providers of Venture Capital

VENTURE CAPITAL FIRMS
  Accel Partners
  Alliance Technology Ventures
  Austin Ventures
  AVI Capital
  Bachow & Associates
  Batterson
  Battery Ventures
  Bessemer Venture Partners
  Capital Access Partners
  Crosspoint Venture Partners
  Draper Fisher Jurvetson
  Edison Venture
  EOS Partners LP
  Fleet Equity Partners
  Hummer Winblad
  J.L. Albright Venture Partners
  JP Morgan
  Kleiner Perkins Caufield & Byers
  Norwest
  Oak Investment Partners
  Pacific Century Group Ventures
  Polaris Venture Partners
  Shawmut Capital Partners
  Sierra Ventures
  St. Paul Venture Capital
  Summit Partners
  Technology Funding
  Triden
  U.S. Venture Partners
                                        Financing the Enterprise, page 39 of 39



CORPORATE VENTURE CAPITAL
  Chevron Corporation
  Coca-Cola Corporation
  Comcast Corporation
  Electronic Data System Corporation
  Fujisawa Pharmaceutical Corporation
  Intel Corporation
  Microsoft
  Oracle Corporation
  Reader’s Digest Association
  Texas Instruments
  Toys R Us

				
DOCUMENT INFO