FIN 423 Midterm Exam
February 12, 2008
Read the article below from the Wall Street Journal and then answer the question below it.
Sevin
Rosen Scuttles New Fund To Re-Evaluate Venture Climate
By
REBECCA BUCKMAN
October
9, 2006; Page C4
Another venture-capital firm, Sevin Rosen Funds, is aborting efforts to raise more money amid a tough environment for early-stage, high-tech investing.
Sevin
Rosen, a 25-year old firm with offices in
In an interview over the weekend, Mr. Dow said his firm concluded the venture industry was suffering from structural, fundamental issues -- including too much money funding too many companies, as well as a lackluster market for initial-public offerings of small companies' stock -- and needed to rethink its investing approach. Sevin Rosen's letter to investors noted that "overall returns for the venture industry are way too low" and are "insufficient" even for firms in the upper quartile of performers.
"We're not going out of business," Mr. Dow said, adding that Sevin Rosen was still actively working with investments in a $300 million fund raised in 2004. A larger fund raised in 2000 remains underwater, he said. Mr. Dow said he and his partners were "cautiously optimistic" the firm would "come back next year sometime" with a new investing model, possibly a smaller fund. Sevin Rosen has $1.87 billion under management.
In
recent months other well-known
Mr. Dow said he hoped Sevin Rosen's move would spark a broader discussion about whether too much money is being invested in venture capital, and whether the old investing model still works. "I'm waiting for someone to call me and tell me our analysis of the problem is wrong," he said.
Based
on what you have read and learned in FIN 423 and this WSJ
article, do you think that this would be a good time to consider seeking venture
capital funding if you were the CFO of a private firm seeking to grow?
Why, or why not?
2. (25 points)
Read the article below from the Wall Street Journal and then answer the questions below it.
Wall Street Journal. Aug 14, 2006. pg. A.2
By DENNIS K.
BERMAN
Both
US LEC and Paetec are relatively small actors in the telecommunications realm,
each fighting to control a niche amid industry giants such as AT&T Inc.
and Verizon Communications Inc. There was a flowering of such players in the
late 1990s, after Congress deregulated the telecom industry to allow entrants
to challenge the nation's dominant phone companies with new services and pricing.
Investors
committed billions of dollars to these companies, and most eventually ended
up in bankruptcy proceedings or were quietly swept up in consolidation years
afterward. That now is the course for US LEC, based in Charlotte, N.C., and
Paetec, based in Fairport,
N.Y., both of which provide medium-size and larger businesses with voice and
data services.
Under
the plan expected to be announced today, Paetec
shareholders will control about two-thirds of the new company, with US LEC
holders getting the rest at no premium to their current market price. The
company will continue to trade under US LEC's existing Nasdaq Stock Market
symbol, but will use the Paetec name.
In Nasdaq
Stock Market composite trading Friday, US LEC shares rose 31 cents, or 7%,
to $4.77. The equity value of the deal is about $450 million, based on US
LEC's current stock market value of almost $150 million. The company will
also carry an additional $850 million in debt.
Combined,
the company will have annual revenue of almost $1 billion and $187 million
in earnings before interest, taxes, depreciation and amortization. The company
hopes to save $25 million in costs in the first year after the merger closes
and $40 million annually thereafter. By comparison, AT&T has revenue of
$55 billion and a market value of more than $117 billion.
In a
joint interview, US LEC Chairman Richard Aab and Arunas Chesonis, Paetec
chairman and chief executive, said that competitors to the biggest telecom
franchises enjoy better prospects today than they have had in a long time.
That is because the large phone players are in the midst of integrating some
historic mergers of their own: Verizon purchased MCI Corp., for example, while
SBC Communications Inc. purchased AT&T and took on AT&T's name.
"It's
almost been a reverse of the last few years," Mr. Chesonis said. "Our
toughest competitors were AT&T and MCI. They're going through a transition,
with a dislocation of employees and policy changes. It's tough for them to
stay focused on their customers. People are worried about their jobs. They
have different priorities."
Now,
adds, Mr. Chesonis: "We've been tripping all over each other for their
business."
Deutsche
Bank AG, Houlihan Lokey Howard & Zukin and law firm Skadden, Arps, Slate,
Meagher & Flom LLP advised US LEC. Merrill Lynch & Co., Blackstone
Group, Capitalink LC and law firm Hogan & Hartson advised Paetec.
3. (25 points)
Compare and contrast
the advantages and disadvantages of different methods of selling seasoned
equity:
(c) a private placement of stock;
(d) a stock purchase plan connected
with a dividend reinvestment plan.
4. (25 points)
The evidence in
Asquith and Mullins' paper indicates that the stock market doesn't like it
when firms sell stock, and the evidence in Eckbo's paper indicates that the
market doesn't seem to mind sales of debt.
Given these facts, answer the following questions:
(c) Why doesn't the stock market react
positively to debt sales, given that it reacts negatively to stock sales?
(i.e., Is there a profitable trading rule here?)
(d) How would you as the CFO choose between stock and bond issues to maximize the value of the firm?
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