Summit Partners Case Solution
The tax rate was given as 40% in the case study and cost is assumed on an average basis. If we evaluate the overall performance; we can see that the internal rate of return (IRR) for Debt holders is 5%, while for equity holder, it is 9%. The conclusion is that the equity holders are on the beneficial edge as compared to the debt holders.
Sources and Uses of Funds
Main funds through
- Growth equity, provided by the firm
- Venture capital.
- Credit for growth.
- Management buyouts.
Additional funds
- The company earns through charging profit on the margin of cost and providing data-center automation to different firms.
- It also provides business intelligence, which helps the firms to improve their artificial intelligence and also downsize their overall cost.
- The company also provides consultation for the security software solutions.
Usage of funds
- The company invests in different companies through funding them, which is why the company has investments in over 340 companies.
- Third-party financing for Summit’s equity fund investments and for investing in Summit’s subordinated debt funds.
Investment Performance
By analyzing the company’s position in terms of both the investments; it is visible that after investing in equity funding; the IRR is greater as compare to the Debt financing. The higher the return; the better the company’s profit.
Risk and Return
Returns on Equity Funding
- It categorically outlines the percentage return earned by the equity shareholders.
- Investors compares the performance of different equity investments with the Return on equity’s help, which also influences the investor’s future investment strategies.
- As an investor, Return on equity can benefit you, because it allows you to benchmark the companies’ performance against each other.
- This allows you to perform a quick analysis of the stocks and gives you details for a major investment.
- Return on equity can be used to decide the performance of a company's manager.Those managers are more efficient who create more profits from investments. If a company has a higher return on equity, it means, its managers are more efficient according to the author of "Principles of Accounting,"
Risk of Equity Funding
- The risk of Equity funding is that, in the initial days of a new companies; the requirement of capital is high, which results in lower ROE. It also misleads the companies by manipulating the ROE and using many accounting caveats like increasing the project’s life and decreasing its depreciation rate............................
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