svkt’s NMIMS UNIVERSITY, BANGALORE. MANAGEMENT PROGRAM FOR EXECUTIVES (MPE) BATCH 03 ‘TRIMESTER 05 FINAL EXAMINATION inance Elective - Entrepreneurial Finance Marks = 40 [oe [eroszon | | Date: 21/05/2011 Time: 11.0010 12.30 pm course SECTION A. 346440 19 MARKS Questions 1-3 are multiple choice questions. Choose the correct Answer 1. Which of the following does not have a limited liability for the promoter? a. Private Limited b. Public Company c. Limited Liability Partnership d. Sole Proprietorship 2. Pre money Valuation means? ‘a. Valuation of the firm before the funding at face value b._ Valuation of the firm before the funding at funding price . Valuation of the firm post the funding d. Valuation of the firm before the funding at Rs 10 per share 3. Aterm sheet will NOT have which of the following sections? Price of the deal Target Segment Anti - Dilution Terms, Voting Rights aege Questions 4 & 5 are subjective questions. 4. Explain the following terms in brief — with examples a. Anti Dilution Clause b. Convertible Preferred Stock 5. As a promoter of a company, you have to come up with a business plan on ANY ONE of the following businesses. Ensure that you cover all aspects a business plan has, and cover basic financials for the first year. a. A Wealth Management Firm — that manages money for Retail and High Net Worth Individuals. b. An outdoor travel and tourism company — primarily targeting 2-3 day trips in and around Bangalore “TRIMESTER V 1 Prosun's NIMIMS UNIVERSITY, BANGALORE. MANAGEMENT PROGRAM FOR EXECUTIVES (MPE) BATCH 03 ‘TRIMESTER 05 FINAL EXAMINATION Course: Finance Flective - Entrepreneurial Finance ‘Marks :40 Date = 21/05/2011 Time: 11.000 12.30 pm SECTION B: ANSWER ANY THREE 3X7=24 Marks 1. Do a comparative analysis from the point of view of the company which is looking at various options of financing from a Private Equity/Bank. The company currently not listed; is planning for a listing § years from now, which is the time PE is planning to exit (if PE funds) or the tenure of the loan from the bank (if bank lends). What all factors you take into consideration to decide the financing instrument or the combination of financing instruments from the following? a. Equity Share issue to a PEb. Preferred Stock a PE c. Mezzanine debt from a Bank 2. ABC started the business last year with an initial investment of $1 million and now needs an additional $3 milion to finance the expansion of its already profitable operations. To raise the funds the entrepreneur approaches EMG Partners. ABC is expected to have $2 milion in interest bearing debt in five years. Cash in hand at the end of five years $400,000. ABC's owners have forecasted an EBITDA of $5 million five years from now. EMG is convinced by the figure and they are using an exit multiple of 5 times the EBITDA of the fith year. Option 1- Full Financing EMG believes the opportunity is good and is willing to provide the $3 million that ABC needs in exchange for a share of company’s common equity. EMF's hoped for rate of return is 50% per year. EMF is having a five year investment horizon and receives no cash distribution until the end of this period. How much stock will the entrepreneur have to give up in the process of acquiring the needed funds? Compute the Post-Money and Pre-Money Investment Value of the Firm’s Equity. Option 2- Part Payment EMF suggested another option to ABC in terms of mode of funding. EMF invests $1.5 million initially (still requiring 50% rate of return, since this is first stage capital) but invests the second $1.5 million two years later, on the condition that the firm has received certain performance benchmarks. Since the second-stage investment is less risky that the first, EMF requires only 30% return on this second infusion of capital. What will be the total return in the Option 2 for EMF? 3. Many of the Indian company’s recent acquisitions in the international market were through LBO. What are the advantages and disadvantages of LBO? How does Covenant light and Covenant tight loans makes an impact on the LBO? TRIMESTER V 2 PTO,ski's NMIMS UNIVERSITY, BANGALORE. MANAGEMENT PROGRAM FOR EXECUTIVES (MPE) BATCH 03 TRIMESTER 05 FINAL EXAMINATION Course : Finance Elective - Entrepreneurial Finance Marks: 40 Date: 21/05/2011 Time :11.00t0 12.30 pm 4. The principals of the PE firm APEC Capital are considering the acquisition of Alumna Acquisition data indicate that Alumna has current EBITDA of $150 million. The acquisition is expected to require a purchase price equal to six times the current level of EBITDA. In addition to the equity investment from APEC, the acquisition is financed with 80% debt that has an interest rate of 14%. The debt has covenants that require 80% of excess cash be used to retire as principal. APEC projects that Alumna can grow EBITDA at a rate of 12% per year for four years and then sell the firm, hopefully for seven times EBITDA. When APEC sells the firm, the firm's outstanding debt will be repaid and the remaining funds distributed to the equity investors Alumna Fi Information Current year EBITDA $150 Growth rate in EBITDA 12% Planned holding period 4 years Corporate tax rate 35% Depreciable life of assets 10 years Current Depreciation Expense $50 LBO Capital Structure Debt to Value 80% Interest Cost 14% Annual Capex $60.00 Compute the return (IRR) for APEC at the end of four years. Suppose APEC has another investment opportunity with a different firm. The investment has a cost of equity of 40% and post tax cost of debt of 12% with a capital structure of debt 20% and equity 80%. APEC is expected to generate a return of 15% over and above the WACC. Which option is better for APEC? FEE IEEE AISI IIII TRIMESTER V 3 PIO