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Capital Market Finance Paper

Please apply the basic financial principles and use your common sense—as indicated you will also need to do some research.  Your grade will be based on your thinking process and your subject knowledge of what we have covered.

Part One of your paper should be between 5 and 7 pages single-spaced and Part Two should be between 3 and 4 pages single-spaced. 

PART ONE:

  1. We have discussed the essential elements of a business plan. As you may recall, a typical business plan has a number of standard sections to it, including a section that helps investors understand the market for the company’s intended product and the competitive environment that already exists.  For this question, please write a two page executive summary of this section focusing on the  “competitive market, market size and market opportunity” for a start-up automobile rental company whose core target market is environmentally sensitive mid to upper income urban city dwellers. The key unique element of this start-up as that as opposed to rental companies who buy their cars and rent them out to others by the day (Hertz, Avis, National) or by the hour (Zip), this start-up company’s business model is premised on not buying any cars, but instead, offering for rent, the unused time from private owners of cars who use the company’s website like an “ebay” marketplace to “sell” this unused time.  To help you with this, please find below a descriptive paragraph of the proposed start-up below:

“MYCAR (‘the Company’) is a newly formed national automobile rental company targeted for price sensitive, environmentally conscious urban dwellers who have an occasional need for a car and who the company believes will differentially choose to use its services since MYCAR’s cars are not adding to the total number of cars congesting their city and because MYCAR’s prices will be 20% less expensive than the competition. In addition the company believes that because of its mission to lower the carbon footprint of typical rental car companies, certain corporate users will convert their corporate use to MYCAR in order to gain a competitive consumer advantage with their end-customers through marketing and other brand enhancing uses.”

Remember that you need to address a number of key points in this section, among them are the following:

a) how big is the rental market in the United States today and how big is it likely to be over the next three years;

b) who else is operating in the new company’s intended market;

c) what barriers to entry may or may not exist: and

d) how fast can the company grow its market size and where will its customers come from.

  1. From our discussions in class, you know what a risk factor section of a public company’s 10-K filing looks like. Lets assume its five years later and now MYCAR has grown in size and plans to file an IPO, please write 15 risk factors that you would expect to see the company disclose to its investors in a typical risk factor section.

PART TWO:

1.   Listed below are the names of seven public companies. Briefly describe each company’s business model, its core market, its prime competitors and opportunities for growth. At the end of your brief description indicate whether you expect the stock price of the company to be higher or lower 6 months from today and five years from today and state your reasons for projecting this.

a) Starbucks

b) General Electric

c) Bank of America

d)Wal-Mart

e) Google

f) Exxon-Mobil

g)Apple

2.  You are the General Partner of a newly created Private Equity Fund that has raised about $40M in equity and can borrow another $10M. Therefore you have about $50M of capital to deploy over a five-year window. Your team has brought you the following three prospective deals for the Fund to invest in and you want to be cautious so you’re only going to invest in one. The prospective deals are:

  1. a bio tech startup that has been formed by professors at MIT and Harvard to deploy gene sequencing technology to human disease prevention;
  2. a small chain of urban bookstores that is trying to raise capital to build two new stores in Boston;
  3. a new media company that wants to deploy wireless technology to laundry mats so that you can access the Internet while cleaning your clothes. To date, they haven’t engineered the software and licensing agreements they need to deploy the technology.
  4.  

Given the amount of capital you have, what makes the most sense to invest in and what is your thinking process in reaching this conclusion?

3.  Your architect college roommate called you to brag about his new business idea. Its called “Buildings Designed for Free.” You laugh, because it’s not really true. Your roommate’s idea is that his firm provides architecture and design fees for real estate developers and in return, if the building is developed, once the building is fully occupied, his firm gets 400% of its normal billing rates. If the building is never developed—well that’s where the “free” part comes in—your roommate’s firm doesn’t get paid. As of this morning, they’ve designed 15 buildings and they have accrued fees of $5 million. But none are occupied yet.  Knowing what you know about cash flow, what advice can you give your friend? He had raised $2M from investors when he started the business and has $500,000 left. His total expenses are approximately $100,000 a month and his best guess is that the first building will be fully occupied in ten months.

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SAMPLE SOLUTION :

  1. Risk Factor

The company though has made all adequate provision and has made sure that all concerns and contingencies are duly addressed but still some risk can arise

Legal Risk:
The change in rule demanding the business to own its own fleet or demanding registration of cars can pose threat as these cars are privately owned and are not part of company’s asset.


Risk of Deferred Tax liabilities
Business is based on forecast and hence can be subject to deferred tax liabilities


Risk of nonperforming loans
Future trends in the domestic economy, fluctuations in real estate and stock prices, and changes in the management condition of borrowers––the Group may have to make loan write-offs and provisions larger than is currently expected.


Market Operation Risk
When market fluctuations substantially exceed the forecast range, as they did at the time of Black Monday and on other occasions, especially in the case of sharp rises in interest rates, the value of bond holdings may decline significantly more than anticipated

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