英语论文网

ry difficult to mesh together.
 Clash of corporate cultures

Question 3

Jeffrey A. Timmons indicates, in his book New Venture Creation (1999), that averagely venture capital investors require high rates of return. For example, their required rates of return on investment in seed and start up businesses ranged from 50% to 100%. However, such high discount rates cannot be explained as being a reward for systematic risk according to the capital asset pricing model.
Discuss the reasons venture capital investors require such high rates on investment.
33 marks
Suggested Solutions:
Four (limited) “rationales”:
1. Compensate VC for illiquidity of investment;
 The VC cannot sell an investment in a private company as easily as it could sell public company shares.
 All else equal, this lack of marketability makes private equity investments less valuable than easily-traded public investments.
 Practitioners in private equity investments often use liquidity discounts of 20%-30%, i.e., they estimate the value to be 20% to 30% less than an equivalent stake in a publicly traded company.
2. Compensate VC for adding value;
 Spend a large amount of time,
 Reputational capital;
 Access to skilled managers;
 Industry contacts, network,
A large discount rate is a crude way to compensate the VC for this investment of time and resources.
3. Correct optimistic forecasts;
Forecasts tend not to be expected cash flows (i.e., an average over many scenarios).

A higher discount rate is a crude way to correct forecasts:

That the VC judges optimistic;
4. Market power.
Valuations are influenced by the distribution of bargaining power between VC and entrepreneur
Affects the rent distribution between VC and entrepreneur
Factors that influence bargaining power: Supply and demand for capital; when a lot of capital flows into the VC market, valuations are higher. Valuations increases with the number of active VC firms in the market. Reputation and track record of VC/entrepreneur; repeat entrepreneurs get better valuations.

Question 4

Explain what is meant by the term “capital rationing”, and differentiate between hard rationing and soft rationing. Discuss the effects of capital rationing on investment appraisal.
(33 marks)
Suggested solution
Capital Rationing

Liberal economic financial management presupposes that shareholder wealth can be maximised by accepting every + NPV project

The only decision rule is therefore +/- NPV

What about internal / external limiting factors or corporate constraints

Capital Rationing exists where there is a limit on the amount of funds available for potential investment

Soft Capital Rationing
Internal decision rule set
Limits NPV or size of capital budget
used mainly for internal efficiency / evaluation purposes

Hard Capital Rationing
External decision rule set
Funding constraints sufficient to warrant rejection of + NPV investments

(Hard) Capital Rationing - decision rules

Use incremental cash flows analysis
(Problem - multiple sign changes)

Profitability Index
Highest PV per £ invested
(Ratio on PV to Initial Investment)

PI = PV/Initial Investment
(Problem - may favour smaller outlay projects or short lived projects) 本论文由英语论文网提供整理，提供论文代写，英语论文代写，代写论文，代写英语论文，代写留学生论文，代写英文论文，留学生论文代写相关核心关键词搜索。