Business Analysis and Valuation

Case study 1 The Dot-Com Crash

1. What is the intended role of each of the institutions and intermediaries discussed in the case for the effective functioning of capital markets?

i. Venture capitalists

* They provide capital for companies in their early stages of development.

* They screen good business from bad ones.

* They nurture the companies until they reach a point where they are ready to face the scrutiny of the public capital markets after IPO, because partners at a VC firm are very experienced.

ii. Investment bank underwriters

* They help entrepreneurs to deal with an initial public offering by the following:

* Providing advisory financial services.

* Helping companies price their offerings.

* Underwriting the shares and introducing them to investors.

iii. Sell-side analysts

* Publish research on public companies by forming relationships with an talking to managements of the companies, following industry trends and making buy or sell recommendations on the stocks.

* Interact with buy-side and portfolio managers to market or ‘sell’ their ideas.

* Provide support during a company’s IPO process.

iv. Buy-side analysts and Portfolio managers

* Buy-side analysts are responsible for doing industry research, talking to the companies’ management teams, coming up with earning estimates, doing valuation analysis, and rating the stock prices.

* Portfolio managers actually manage money and they are responsible for buying and selling securities.

v. Auditors

* Independent accountants audit the financial statements of public companies to verify their accuracy and freedom from fraud.

* Issue opinion based on their works and findings.

vi. The regulator-FASB

* To establish and improve standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors, and users of financial information.

2. Are their incentives aligned properly...