Question

 

1. Why do venture capital companies often choose preferred stock for their equity position?

Preferred stock is a class of stock that provides certain rights, privileges, and preferences to investors. Which compared to common stock that is normally held by the founders, its a superior security. "Almost all venture capital firms and seed investors will require the company they are investing in to issue them preferred stock" ("Financing Options," n.d.). The vast majority of equity dollars invested in startups are securitized with preferred stock. Preferred stock takes its name from a critical feature of preferred stock called liquidation preference, "liquidation preference means that in a sale (or liquidation) of the company, the preferred stock holders will have the option of taking their cost out or sharing in the proceeds with the founders as common stock holders" ("Financing Options," n.d.).

2. Explain how supply and demand influences the price of common stock.

Stock prices are a function of supply and demand although other influences, such as earnings, debt, balance sheets, and the economy, might affect the desirability of owning or selling a particular stock. Once a company goes public and starts trading on the exchange, its common stock price is determined by supply and demand for its shares in the market. If there is a high demand for its shares due to favorable factors the price will increase. If the company's future growth potential doesn't work good, sellers of the stock could drive down its price.

3. How does the use of accelerated depreciation encourage investment?

Accelerated depreciation is any method of depreciation used that allows greater deductions in the earlier years of life of an asset. Straight line method spreads cost evenly over the life of an asset, where accelerated depreciation allows the deduction of the higher expenses in the first years after purchase and lower expenses as the depreciated item ages. The main benefit of this is the tax shield it provides. "Accelerated depreciation is the largest corporate tax break , allowing companies to deduct the costs of assets faster than their value actually declines" ("The Tax Break," 2013). With a quicker depreciation schedule, companies can claim higher expenses and thus lower their short term taxable income. "Although over time a company theoretically pays the same amount of tax, an earlier deduction allows companies to take advantage of the time value of money to reap higher interest savings on investment returns" ("The Tax Break," 2013).

"Financing Options: Preferred Stock." (n.d.). AVC. Retrieved from https://avc.com/2011/07/financing-options-preferred-

   stock/

"The Tax Break Down: Accelerated Depreciation." (2013). Committee for Responsible Federal Budget. Retrieved from

http://www.crfb.org/blogs/tax-break-down-accelerated-depreciation

Answer 1

 

1. It is advisable to define what exactly venture capital is and what venture capital companies do for the people who are reading it for the first time. Its provides better understanding of the subject.

Defination

Start up companies or New Companies with a potential to grow need a certain amount of investment. Wealthy investors like to invest their capital in such businesses with a long-term growth perspective. This capital is known as venture capital and the investors are called venture capitalists or venture capital companies.

Liquidation preference is were in case of sale of the company the lender of capital get to be paid back first and then other lenders. As start ups have the risk of liquidation in the starting years if there business idea does not really workout. So lenders choose such preference for safe side.

2. Explaination is to the point and understandable.

3. In simpler terms the company that goes for accelerated depriciation is allowed a certain amount of tax relief that is it saves on some cash which it can invest and earn interest. So this encourages investment.