FIN 305 Lecture Notes - Lecture 10: Retained Earnings, Due Diligence, Accredited Investor
14 Nov 2016
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Equity = ownership interest in exchange for investment capital and other resources (e. g. patent) Legal form is a certificate of ownership in common/preferred shares. Financial reporting- amt biz receives is recorded on bs, no adjustments are made after (don"t use fair value, keep with cost principle) The big attraction: entitled to receive x% of future earnings, potential roi could be bigger than what you"d earn at a job. Established operating businesses w track record- values from formulas to determine. So many what-ifs, therefore at early stages of development, values are estimated and negotiated at time of transaction. Investor would have experience in past, entreps have knowledge of biz opportunity = determined at time of transaction. Example: biz with two founders, f1 (60% owner), f2 (40% owner) Biz growing rapidly, need 200k to fund growth. Expenditures can"t be financed with conventional debt, so bring in more equity, but each exhausted, so they go to a new source.
