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Quick and Easy way to check the risk of the banks

6/9/2016

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LEVERAGE RATIO

The Leverage ratio is the way to indicate the risk factor of banks, if the leverage ratio is too high then the risk of the bank is high. There are certain percentage of the fall in earnings the banks can handle without distressing the health of the bank. The leverage ratio is asset to equity. After obtaining the leverage ratio then we can find by how much the fall in the earning banks can handle.
The formula:
Leverage = Asset / Equity
Risk = 1 / Leverage Ratio

Comparing the leverage ratio of 3 Banks

BANK A 2015
 $`000,000
Total Asset: 500,000
Total Liabilities: 350,000
Total Equity: 55,000
The Leverage Ratio: 500,000/55,000=9.91
Risk factor in falling of earnings: (1/9.91)x100=11%
The Leverage ratio of Bank A is 9.91 and if Bank A has more than 11% fall in the earnings then the bank will be at risk. Bank A can bare up to 11% fall in the earnings.

BANK B 2015
 $`000,000
Total Asset: 400,000
Total Liabilities: 300,000
Total Equity: 35,000
The Leverage Ratio: 400,000/35,000=11.43
Risk factor in falling of earnings: (1/11.43)x100=8.75%
The Leverage ratio of Bank B is 11.43 and if the earnings falls by more than 8.75% then the bank will be at risk. The high the risk factors in falling of earnings then better it is because that is the percentage in fall the banks can bare without going into financial distress.
 
​BANK C 2015
 $`000,000
Total Asset: 350,000
Total Liabilities: 300,500
Total Equity: 50,000
The Leverage Ratio: 350,000/50,000=7
Risk factor in falling of earnings: (1/7)x100=14.3%
​The Leverage ratio of Bank C is 7 and if the earnings of Bank C falls by more than 14.3% then the bank will be at risk.  

Conclusion

When we compare all three Banks the Bank C has the lowest leverage ratio which means the Bank C has the lowest risk of financial distress. 
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Top 3 things you should not ignore in a contract with Venture Capital investors

6/7/2016

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Percentage of ownership

The Venture Capital investors will try get best deal as they can get, that is part of their job. As an entrepreneur you must focus on how many percent of the company will be yours, remember that the optimal ownership is 50/50 some entrepreneurs have hard time to get investors and they accept what ever deal they can get without realizing the consequences of the deal. The lower the share of ownership the entrepreneur has the lower the controlling power in making decisions. 
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​Will you get the 50 percent of the money that the company was sold?

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In many cases the entrepreneur thinks they will get 50 percent of the money when the company is sold. There are some cases where entrepreneur signed a deal with 50/50 contract but they missed or ignored the part where it says 50/50 of the profit. This means that if Venture Capital investors invested $5 million and if the company was sold for $10 million then as an entrepreneur you will only get $2.5 million or even less. Some entrepreneurs thinks that the VC gets most of the profit. Actually, Venture Capital investment company has their own investors which VC has to give back their investment as well as the profit. 

Pay attention to new contracts

In many cases the entrepreneur signed 50/50 contract but towards the end when it is time to sell the company the entrepreneur ends up getting 10% or less. This is because the more Capital requested might reduce your ownership. Another reason is, you might have to share your 50% with your team. Make sure your contract is clear among your team members. 
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Conclusion and Suggestion

Contracts between Venture Capital and Entrepreneur is among the key focus of many research academics in Finance. Most of the entrepreneurs ignore the importance of contract because they are so convinced that they will get 50 percent of the money that will be earned by the company. If you as an entrepreneur aware of exactly how much you will get when the company is sold in trade off or IPO then you will have no regrets. Venture Capital investors also tries their level best to avoid these kinds of misunderstanding because they cannot sell the company unless entrepreneur is fully agreed to sell when it is time to sell. For example if your company was sold for $30 million and you only get $2 million, you might not agree and destroy the contract. Transparency is important for Venture Capitalist and Entrepreneurs. Suggestion is to get a lawyer to have a look at it and explain the terms. 
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Top 5 investment partners to avoid

6/6/2016

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Investment partners with desire to spend on unnecessary things

Some startup companies can be started with initial capital much less than predicted capital, if you spend every dollar on valuable things. It is very risky and dangerous to have partner that does not value money and spends it on unnecessary things. Your company will run out of money and you will start borrowing money even that will not be enough. You company will fail and you will end up with huge debt
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Investment partners that cares only about profit

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When you look for partner pay attention to what they say. If the first thing they ask you how much will they make and how fast will they make money and how are they going to make money. Then he or she is not the right partner. Look for these values in investment partner, how can we add value, how can we improve the product and services. The partner that cares more about the value of the company knows exactly when, how much and how they are going to make money. If your partner ask you how much is the investment then tell him or her and try to see if he has any suggestion in raising capital. A partner that adds value are the ideal investment partners.

Investment partners that are not honest

An investment partner that is honest are those who only cares about value adding rather than his own benefit. If your partner has some suspicious behaviors and if he or she avoids transparency then he is hiding something and he only cares about his own benefit rather than adding value to the company.
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Investment partners that devalues your abilities, ideas and contribution

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If you partner keeps saying negative things about you then you know he is not a team player, I love investment partners that are team players. An investment partner should suggest a solution if you make a mistake rather than put you down. An investment partner should support your idea if your ideas are good if they are not good then he or she should suggest an alternative or should inform you about the risks and reason that it will not work.

Investment partners that has high ambition with less patience

In corporate finance the CEO of a company with high ambitions are bad signal to investors, that is because they will invest in value destroying investments. An investment partner invest in projects that will have less risk with higher return. In fiancé high risk means high return, but it doesn’t have to be that way all the time. There are ideas that requires less risk high return
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Top 5 Essentials of convincing Venture Capital investors

6/5/2016

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Prepare convincing business plan

​If you have an amazing idea but if you do not prepare professional business plan that has all the necessary essentials of business plan to propose, then Venture Capital investors will not invest. 
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Have a good team

Venture Capital investors know what the essentials of succeeding in startup are. Venture Capitals have an ultimate goal of selling the company when it is established. VC will evaluate their options between trade off and Initial Public Offering (IPO). A good team shows that this startup has a team that will deliver the goal of making the company established.

Presentation and persuasion 

​As the person who came up with idea and as a leader of the team you might or you might not have all the qualities of persuasion. If you have the experience and qualities in persuading then it is great but if you have a team member who has good skill in presentation and persuading then let him deliver the presentation. It shows that you are not the only one convinced with your idea. 
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Dumb money

​Venture Capital investors knows which investments are dumb money, meaning that the invested money will not be used to increase the return. Make sure that your startup idea will generate high returns, and give them certain time line. Venture Capital investors have the goal to get high return with in 5 years so that they can sell the company short after 5 years. 

Patience

​Venture Capital investors knows which ideas are value adding and which ideas are more likely to get better offers. If you have an amazing idea then approach to more than one Venture Capital investors. Show them that you are not only after the money of Venture Capital investors but you are also looking for value adding Venture Capital Investors. 
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Top 3 risky habits you must avoid as an entrepreneur

6/4/2016

3 Comments

 
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www.cnbc.com

​Spending habits

Do not spend money on things that will have no value, but do not be too tight with money also, instead value your spending, if that specific spending will create value to your company then its worth spending but if there is no value then it is money that your company could have used for other things that would add value.

​Boss vs Leader habits.

Being an entrepreneur is not always easy because you have to balance between being a boss and leader. Find the optimal personality that will be best to run your company. Many studies and many people might suggest that being a boss is not good but in reality the companies that has strict directors or CEO achieve their goals. In some companies strict directors and CEOs destroy the company because most of the valuable employees start to leave or stop putting effort. Some entrepreneurs tries to be a leader but instead their employees takes advantage of them. A great leader is the best but these great leaders are very few. A great leader is the person that gives you hope and gives you a dream that you never thought it exists. A great leader is the person that lift you when you are at your lowest point. Try avoid habit of being a boss or being a leader unless you are naturally born as a leader, instead find the optimal balance between being a boss and a leader.
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Cares only for him self instead of adding value. 

Value is the most important thing in business. As an entrepreneur you must always think about adding value to your company, employees, products and services. All these values will increase the chances of creating successful company. 
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Signals by Capital Structure of Companies

4/26/2016

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Franco Modigliani
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Merton Miller
The modern capital structure was formed in 1958 by F. Modigliani and M. Miller, they were important contributors of capital structure in corporate finance. They proposed irrelevance theorem which means that it does not matter how the companies finance their capital. The main sources of companies that finance their capital is by issuing debt or equity. The debt can be obtained from Banks and equity is when the capital is raised by issuing shares or selling the stake of the company. The irrelevance theorem focused on the capital structure without tax, when there is tax it does matter on how the company finance their capital, which was published in 1963. 

Why capital structure is very important for investors?

Every company pays tax which reduces the profit therefore companies would rather finance their capital by debt because debt is tax deductible and dividend payments are not. The investors should be aware of the capital structure of companies because it can be vital information on giving signals.

Signals by Capital Structure

  • Risky debt
When company has high debt it increases the risk of the company because high debt gives extra power to managers, therefore it increases the chance of investing in bad projects. High debt reduces the ability to pay the debt of the company. Usually it takes long time for projects or businesses to give high return but the banks have their system where debts must be paid according to the given time regardless of the ability of company to make fast return or not. High debt also reduces the companies ability to acquire additional debt when needed. The ideal debt in capital structure is the optimal debt level which is usually calculated by debt to equity ratio. 
  • Power management
There are some managers who cares about their self interest, when the company has too much equity it reduces the power of the manager. When we say manager it is usually the CEO for established companies and it usually the entrepreneurs for new businesses. One of the good example is Apple inc when Steve Jobs was fired by his own company because he did not own enough equity in the company therefore he did not have that much power. Having too much equity is also bad for the company because it reduces the motivation of the managers to work harder. The managers that are really good at adding value to the company sometimes held back because of power allocation and also lack of motivation. ​
  • Self interested Managers 
The self interested managers are the managers that wants to increase the equity of the company so that they can increase their monetary rewards. The study that was publish by Jensen and Meckling (1976) demonstrated that the managers can increase their spending for their private use. The value of the company reduces every time when the managers spends money for their personal use therefore if the company is owned by managers then he will not be able to increase his personal spending because the value of the company will reduce dramatically. The managers can share the cost of their personal spending when the company has 50% equity which will reduce the value by little compared if the managers owned all the equity. In other words managers can spend more for the same reduced value. 

Conclusion

In conclusion on the ideal capital structure of company is always depends on the managers of the company. Increasing debt can increase the risk of company being bankrupt due to redirection in ability to payback their debt. To much of equity can also signal that the manager might not be motivated and instead they might use too much of the companies money for their personal use. They might also try to increase their equity by investing too much in new projects. It is best for the investors to learn corporate finance to understand how the corporate finance can increase or reduce the value of the company.   
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4 Dynamic Impact of Venture Capital on Startups

4/25/2016

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Dynamic Impact of Venture Capitalist on Financial Capital of Start-Ups

Venture Capital (VC) is one of the way to finance the initial part of a business in return for equity. The venture capital companies invest in variate of ideas but mostly in technology because after the company becomes establish and when the big value is created the venture capitalists will have exit plan through Initial Public Offering (IPO) or trade sale. Usually the venture capital companies help to invest for up to 6 years and then list it on financial market for IPO to have large capital gain to pay of the shareholder with return.  The venture capitalist have been the backbones of many great companies but there are also problems regarding the equity when the VC wants to exit. 
  • Who needs Venture Capital? 
The entrepreneurs with great ideas usually needs venture capital, because their ideas are uncertain and it is hard for them to get large amount of loans from the banks. The venture capitalist understand how the financial market and business works and they know how to make the ideas come to life and make the company established. 

Dynamic Impact of Venture Capitalist on Human Resources of Start-Ups

Start-ups tends to grow fast and becomes large establish company with complex issues, that requires talented employees. The human resources becomes one of the issues of start-up companies, the technological start-up companies requires specific skilled employees. The venture capital companies are experienced in providing support with human capital to the start-up. The VCs will not only provide but they will also provide support with human capital. 

Dynamic Impact of Venture Capitalist on Sales and Marketing of Start-Ups

The start-up companies needs to reach curtain goal in terms of sales before it can be considered as established company to be listed as public in Financial Market. The entrepreneurs with ideas might only have technological background and they might not have the skills with marketing and sales, which is why it is essential that they have skilled manager to achieve the targeted goals.  The Venture Capitalist provides support in terms of appointing Managers with great skills in sales and marketing. The managers with essential marketing skills that has critical, analytical and outside the box thinking to achieve the targeted goals of stat up company.  The venture capitalist support with sales and marketing to achieve the goals faster to make their gains from the company when it is time to exit with IPO or Trade Sales.   

Dynamic impact of Venture Capitalist on Internal Organization of Start-ups

As the start up company grows it becomes complex and it requires organizational planning, the company needs to start putting all the things together in organized ways by creating departments and allocating the manpower accordingly. The company needs to make plans in terms of allocating departments for production, sale and marketing, Research and Development, human research department and board of directors. The entrepreneurs with the initial idea might not be the CEO of the company even that he owns up to half of the company's equity. There are some cases where the entrepreneurs might not be able to adopt to the CEO position to manage complex and establish company to add value. The venture capitalist and entrepreneurs might come to an agreement to appoint the CEO to add value to the company. Some people are just born to be a leader.
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3 Ways to detect dumb money

4/21/2016

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Dumb money is an investment that does not make a return. In business and in finance the dumb money is one of the biggest issue why investors lose their investments. When companies look for investors to invest in their company, then investors trust these investments but in the end the company fails and as well as the investments are lost. In corporate finance there is Venture Capital companies that invest in businesses, VCs can help entrepreneurs with great idea to make their dreams to come true. VCs also needs investors to invest in their Venture Capital company, if the normal investor invest in VC company then they might also invest an investment that does not make return. There are other factors when the company has too much money that they invest in wrong investment therefore it reduces the value of the company and these also one of the types of dumb money. There are 3 ways you can detect dumb money. 

Demand for transparency

Best ways to demand for transparency is by asking questions before you make your investments. The important questions are:
  • What am I investing in?
  • How is the company going to make return?
  • How much return will I get?
  • When will I get my return? 
  • Can we have a say in it?
Some times the Venture Capital companies invest in the new businesses and when it is time to sell the company or to list it in Financial Market with IPO then the entrepreneurs do not come to an agreement therefore they close down the company. When these two parties do not come to an agreement then most of the time the investors are forgotten. If the business that VC invested fails then the investors lose their money. 

Detection of dumb investment by Venture Capitalists

There are great entrepreneurs that knows how to build and fund the businesses, these entrepreneurs can convince the investment companies to invest in almost anything. The Venture Capital companies usually detect bad investment but even for them it is hard sometimes. One of the tactics used by entrepreneurs is that they wait for more than half a year before they start blowing the money. Waiting builds trust from VCs and then they get the 2nd payment from VC companies, usually it take long before entrepreneurs get the money. Venture Capitalist can usually detect this when the entrepreneurs present their proposal and during the interview by also asking the right questions. The VCs also wait before their invest in the business ideas of entrepreneurs until they see the response of other Venture Capitalist. 

Dumb money in established companies

In corporate finance there is one of the complex issue but I will try to make it as simple as possible to explain it. The investors and shareholders do not want the company to have too much money  which is called free cash but some call it dumb money. When established companies have too much extra money then they want to make investments which could be a bad investments. These usually can be detected by knowing the type of business and also the type of CEO or managers. The CEO with high ambitions are usually not favorable by the investors because they make too many investments that could lead to failure which will heart the value of the company. Always know the CEO of the company you want to invest. 

Conclusion

The person who holds the money has the power, it is the most important thing every investors should know. As soon as you let that money go then you transfer the power to other party. It is best to invest in investment that you know it will make a return in as short period of time as possible. The economy is always uncertain therefore sooner you make your return the better it is for you. 
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Stages of listing your company in Capital Markets

2/20/2016

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There are many capital markets around the world, and the procedures for listing a company is different in every market. Capital market is also a financial market where companies raise capital to finance their business. The companies must apply based on the business sector. It is also important that companies know which market they want to be listed and which market they can afford to be listed. With in capital market the are several different markets where companies can be listed, some of the markets can help companies to raise more capital but it can be costly and the requirements are more difficult. 

Stage 1, Preparation and submission

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First stage of listing a company is to prepare the documents and make proposal. Companies must make a proposal for Initial Public Offering (IPO). The companies must also know the documents required and prepare all the documents and prospectus for submission.  Companies should submit all the documents and proposals when they are fully prepared. If it is first time the company is trying to be listed then it is most advisable to hire professionals to help with all the documents. This stage usually will take about 10 to 12 weeks depending on the country and market. 

Stage 2, The process of application

​In the second stage companies will make public exposure of company prospectus, after that the regulators will ask for additional documents if required or comment on the prospectus. At the second stage the companies will also visit the company to make sure that the company is legit. Finally the regulators will evaluate and approve.  This stage will take about 10 weeks but it could take more, depending on the regulators. 

Stage 3, Registration of prospectus

Companies will update their prospectus before registration and lodgement of prospectus. The companies will make all the necessary payments for registration.  After this the companies will start making plans for marketing. The stage 3 takes about 5 weeks.

Stage 4, Launching of prospectus

Initial Public Offering will be made in this stage, the underwriters will set the best price to offer for IPO and the number of shares to offer. The underwriters are the investment companies or banks that buys or sponsors the shares from the company and sells it to the public as IPO. Usually this stages takes about 1 week to 2 weeks. 

Stage 5, Listing the company

At the final stage the shares will be allocated according to the category, for example if the company is food production company then it will be listed accordingly. The trading will be live on capital market. The final stage can take from 2 to 3 weeks. 
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Bonds and Risk Free Assets

2/3/2016

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There are two types of bond market in some of the countries, such as primary and secondary bond market. There are also types of bond and one of the bond that I will be talking about is government bond and how it can help to control the inflation rate. Government usually produce bond to gain some capital to improve the economy, bond is very good way for government to generate capital for their investment, but it can be no use if the government spends on things that does not generate returns. Bond has maturity date and when the maturity date is expired the government must pay back the original price of bond. Usually bond has very little returns and the value of bond reduces when it gets closer to the maturity date. The reason why bond is bought by many people is because it is considered as risk free and it has coupon payment. 

Why the value of Bond reduces when it gets closer to due?

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The value of bond reduces as it gets closer to the due date, the reason is because the bond has a coupon payment. The coupon payments are usually made annually and the longer the maturity date of bond the longer the coupon payment will be. Lets say if a person has bond and it has maturity date of 10 years, that means he will receive coupon payments every year for 10 years. If there is another person who holds a bond with 5 years then this person will only get coupon payment of 5 years. It is better to be paid for 10 years rather than 5 years. It can also be proved by formula that the closer the maturity date the lower the value of bond. 

Why the price of bond fluctuates even that it is risk free asset?

Bond is risk free asset in a long run, if the person that holds the bond does not sell their bond until the maturity then it is risk free. Usually the bond price fluctuates in the secondary market. Where bond is traded among the people, the value of bond usually dependent to the interest rate, because if the coupon payment of the bond that the customer is already holding is lower than the new coupon payment then the price of bond will reduce. The new buyers would rather buy bond that gives higher and longer maturity. Lets say there are two person John and Mike, if John has 1000 dollar worth of bond with 5 percent coupon payment and suddenly interest rate goes down, then the new coupon payment is 3 percent then Mike would be willing to buy the bond from John for higher price such as 1400 dollars. If the coupon payment goes up to 8 percent then Mike would rather buy new bond than buying Johns old bond with lower coupon payment and lower percentage. If Mike does want to buy the bond then he would buy it for less maybe for about 800 dollars or 600 dollars. The price of bond also fluctuates when the government wants to buy back their bonds or issue new bond.  Therefore it is risk free in the sense that if you hold the bond until the maturity and also you can get coupon payment. Shares do not have maturity therefore you never know how much u will get after some years, but if you hold your bond until the maturity then you will get your money back. 

Bond is good for portfolio

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The investors will buy risk free asset like bond with their portfolio to reduce their risk by diversifying. It is not good to put all eggs in one basket therefore it is best to have a portfolio with multiple shares and risk free asset.  Usually the investors will construct an efficient frontier by drawing capital market line, the portfolio will have number of shares with high risk and to minimize the risk they will also include risk free asset. It is one of the best ways to reduce risk in investment, it helps the diversify risk, if one 2 shares goes up and 3 goes down it reduces the risk of losing everything. 

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