BAC 822: Entrepreneurial Finance Notes – Kenyatta University

TABLE OF CONTENTS
1.0 Introduction…………………………………………………………………………………………………1
Characteristics of small businesses at each stage of development……………………………….8
History of venture capital. …………………………………………………………………………………37
4.8 THE MONEY MARKET …………………………………………………………………………….58
The analyst’s perspective…………………………………………………………………………………..65
5. 4 Business Valuation methods………………………………………………………. 67
5.5 Cash Flow Calculation ……………………………………………………………….. 73
Investment cash flow………………………………………………………………………………………..75
Financing cash flow………………………………………………………………………………………….76
PROPULSION PLE. ………………………………………………………………………………………77
Net cash inflows from operating activities……………………………………………………………78
Net cash flow from returns on investment…………………………………………………………….78
and servicing of finance…………………………………………………………………………………….78
Taxation………………………………………………………………………………………………………..78
Net cash outflow for taxation……………………………………………………………………………..78
Capital expenditure ………………………………………………………………………………………..78
Net cash outflow for capital expenditure………………………………………………………………78
Equity dividends…………………………………………………………………………………………….78
Net cash outflow for capita; expenditure………………………………………………………………78
Management of liquid resources………………………………………………………………………78
Net cash inflow from management of liquid …………………………………………………………78
Resources……………………………………………………………………………………………………….78
Financing ………………………………………………………………………………………………………78
Net cash outflow for financing……………………………………………………………………………78
5.7 Financial Ratios ………………………………………………………………………… 79
Important financial ratios………………………………………………………………………………….81
5.8 Working Capital Needs……………………………………………………………… 83
Important calculations under working capital. ……………………………………………………..83
5.9 Sales Volume Breakeven Analysis……………………………………………….. 84
Important calculations under break even analysis…………………………………………………84
5.10 Credit Assessment……………………………………………………………………. 85
Important calculations in credit assessment………………………………………………………….85
5.11 Inventory Analysis. ………………………………………………………………….. 86
Important calculations for inventory analysis. ………………………………………………………86
6.8 Working of the stock exchange………………………………………………….. 89
MARKET MAKERS………………………………………………………………………………………90
6.1 What is ‘to go public’? ………………………………………………………………………………..91
Public company management team ……………………………………………………. 95
The board of directors……………………………………………………………………… 96
6.8 Working of the stock exchange ……………………………………………………. 99
MARKET MAKERS………………………………………………………………………………………99
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Nairobi Stock Exchange Today…………………………………………………….. 100
FINANCIAL MANAGEMENT………………………………………………………. 102
7.1 COMPANY OBJECTIVES ………………………………………………………. 102
7.3 FINANCIAL OBJECTIVES……………………………………………………………………….104
Growth of institutional investment…………………………………………………………………….106
8.2 The cost of equity capital ………………………………………………………….. 111
General approach to the cost of capital ………………………………………………………………111
Analytical approaches to calculating the cost of capital…………………………………………112
8.3 Dividends……………………………………………………………………………….. 112
Dividends growth model: ………………………………………………………………………………..112
8.4 Cost of retained earnings…………………………………………………………… 114
8.5 Cost of preference share capital………………………………………………….. 114
COST OF LONG TERM DEBT……………………………………………………… 114
8.7 cost of other forms of borrowing………………………………………………… 116
Capital cost of new issues………………………………………………………………………………..116
8.8 The efficient market hypothesis…………………………………………………………………..117
A Perfect Market ……………………………………………………………………………………………117
Random Walk ………………………………………………………………………………………………. 118
The Efficient Market Hypothesis………………………………………………………………………118
The Semi-Strong form of the EMH……………………………………………………………………119
The Strong Form of the EMH…………………………………………………………………………..120
8.9 Implications of the EMH for financial management………………………………………..121
LESSON SEVEN …………………………………………………………………………. ………………122
HARVESTING A BUSINESSS …………………………………………………………………………122
8.2 Why would a business be harvested? ………………………………………….. ……………122
Changes in personal situations…………………………………………………………………………123
Retirement…………………………………………………………………………………………………….123
Case illustration……………………………………………………………………………………………..123
Relocation …………………………………………………………………………………………………….124
Change in life cycle ………………………………………………………………………………………..124
Stress……………………………………………………………………………………………………………124
Other interests……………………………………………………………………………………………….125
Passing on the business to the other family members. ……………………………………….126
Direct Sale…………………………………………………………………………………………………….127
Employee Stock Option Plan ……………………………………………………………………………127
Leveraged Buyout…………………………………………………………………………………………..129
How does a leveraged buy out work? ……………………………………………………………..129
Advantages of a leveraged buy out …………………………………………………………………130
Disadvantage ……………………………………………………………………………………………….130
Advantages of a merger…………………………………………………………………………………130
Going public………………………………………………………………………………………………….131
8.4 LIQUIDATION………………………………………………………………………………………..131