Deck 12: A Firms Sources of Financing

Question 1

Most startup investors limit their investing to firms that offer potentially high returns within a one- to three-year period.

Answer 1

False

Question 2

Venture capitalists restrict their investment in startup companies.

Answer 2

True

Question 3

Borrowing money rather than issuing common stock typically increases the potential for higher rates of return to owners.

Answer 3

True

Question 4

Generally, as long as a firm's return on assets is greater than the cost of debt, the owners' return on equity investment will decrease as the firm uses more debt.

Question 5

The age of a company has little impact on the types of financing available to it.

Question 6

For every firm, there is a "right" answer to the question of balancing debt and equity, and it is important that the small business owner find that balance.

Question 7

A firm with potential for large profits, as opposed to high growth potential, has many more possible sources of financing than does a firm that offers only unattractive returns.

Question 8

Small business owners sometimes accept higher levels of debt because doing so permits them to retain all of the stock and full ownership.

Question 9

Business loans are the primary source of financing for startups.

Question 10

Goodwill is considered an intangible asset and is highly valued when securing a loan.

Question 11

The main advantage of using credit cards for financing is the relatively low interest rate compared to bank loans.

Question 12

The "five Cs of credit" are character, capacity, capital, conditions, and collateral.

Question 13

One potential problem with acquiring funds from friends and relatives is that they might feel they have the right to interfere in the management of the business.

Question 14

A chattel mortgage is a loan for which real property, such as land or a building, serves as collateral.

Question 15

If a firm finances with equity rather than with debt, it will bear no interest expense and thus yield greater net profits.

Question 16

Assets such as the quality of a firm's employees are considered tangible in nature and thus have substantial value as collateral.

Question 17

Debt financing as opposed to equity financing allows owners to retain voting control of the company.

Question 18

Three basic characteristics determine how a firm is financed: the firm's economic potential, the size of the company, and the nature of its assets.

Question 19

Use of debt financing increases potential returns when a company is performing well, but it also increases the possibility of lower-even negative-returns if the company does not attain its goals in a given year.

Question 20

Lines of credit are legal obligations to provide capital.

Question 21

Both wholesalers and equipment manufacturers/suppliers can be used as sources of funds.

Question 22

A source of early-stage capital financing for a company is financing from commercial banks.

Question 23

The private sale of a firm's common stock is regulated by the Securities and Exchange Commission.

Question 24

Small Business Administration loans include guaranty loans and loans directly from the SBA.

Question 25

A company that has more than 100 employees with locations in several states is typically the type of company in which business angels make an investment.

Question 26

If a company has a signed purchase order from a creditworthy customer and the gross profit margin on the order is anticipated to be 36 percent, purchase-order financing is likely.

Question 27

Around 5 percent of the business plans reviewed by venture capitalists are funded.

Question 28

For entrepreneurial ventures with the potential for becoming significant businesses, initial public offerings have been the fastest-growing source of financing over the past two decades.

Question 29

Private placement is the selling of stock to select venture capitalists.

Question 30

Anna's new business looks like it can grow quickly and become profitable in its first year. Anna will likely find _____ possible sources of financing than those with less potential for growth and profits.

A) fewer
B) about the same number of
C) more
D) many more

Question 31

A small business that needs to purchase real estate could apply for a 7(a) guaranty loan.

Question 32

Common stock can be sold to underwriters, but they do not guarantee the sale of securities.

Question 33

Crowdfunding works strictly with individual donations made over the Internet.

Question 34

Companies that have business dealings with a new firm are possible sources of funds for financing inventory and equipment.

Question 35

Qualified small businesses that cannot obtain business loans through normal lending channels can get loans directly from the SBA through its 7(a) Loan Guaranty Program.

Question 36

Asset-based lending is a type of financing secured by assets such as equipment and inventory.

Question 37

State and local governments are becoming less involved in financing new businesses.

Question 38

The amount of trade credit available to a new company depends on the supplier's confidence in the firm and not the type of business.

Question 39

When a stock sale is restricted to private placement, an entrepreneur can avoid many of the demanding requirements of the securities laws.

Question 40

Commercial investors are sometimes called business angels.

Question 41

Elyse wants to calculate her return on equity but has forgotten the formula. You tell her that return on equity equals

A) net profits divided by total owner's equity.
B) total owner's equity divided by net profits.
C) total assets divided by total owner's equity.
D) total owner's equity divided by total assets.

Question 42

If he holds true to the average, before becoming president, Donald Trump likely invested approximately _____ of his investment in later-stage businesses.

A) one-fourth
B) one-half
C) three-fourths
D) nearly all

Question 43

Glenda is trying to decide between the use of debt and the use of equity to finance her young business. She should remember that

A) her return on assets will be less if she uses debt financing.
B) using other people's money to finance one's business is seldom a good idea.
C) the lender will have partial control of the business.
D) debt must be repaid even if the company does not make a profit.

Question 44

If a Eugenie finances her firm with equity rather than debt, her net profits could potentially be greater because

A) equity financing almost always leads to better firm performance than debt financing.
B) the terms of equity financing are more stable than the terms of debt financing.
C) equity financing has a positive impact on asset selection.
D) there is no interest expense.

Question 45

To determine how well her business is doing, Darlene should monitor the return on her investment (equity) because it is a better measure of performance than the

A) return on assets ratio.
B) current ratio.
C) quick ratio.
D) absolute dollar amount of net profits.

Question 46

Floyd's income statement for the current year showed operating profits of $45,000, and his balance sheet showed total assets of $300,000. His return on assets is _____ percent.

A) 30
B) 15
C) 12
D) 6

Question 47

Amir left a large company to start his own firm. Which of the following is he more likely to rely on for financing in the early stages?

A) Bank loan
B) IPO
C) Retirement savings
D) Bond sales

Question 48

Williams Alternative Power, Inc. a company developing solar panels, is applying for a loan. The research the company has done for the manufacturing process would be a(n) _____ asset for the loan evaluation.

A) collateral
B) intangible
C) revolving
D) tangible

Question 49

David is trying to decide whether to add capital through investing more of his own money or through borrowing money from the bank. To help him decide, you remind him that as long as his firm's rate of return on assets is greater than the cost of the debt, his rate of return on equity will _____ as the firm uses more debt.

A) decrease
B) increase
C) remain the same
D) fluctuate

Question 50

One factor that influences the choice between debt and equity is the

A) state of the economy.
B) risk of nationalization.
C) degree of control the owners hope to retain.
D) state of the owners' estate plan.

Question 51

Andrew is a venture capitalist who would like to find a good new business in which to invest. He's done this before so he has learned to limit his investing to firms with potentially high returns in a _____ period.

A) 6- to 12-month
B) 1- to 2-year
C) 3- to 5-year
D) 5- to 10-year

Question 52

Williams Alternative Power, Inc., a company developing solar panels, has done considerable research and limited production during its two-year life. It is about ready for its IPO. At this stage of its life cycle, its ability to attract venture capital is

A) greater.
B) lessened.
C) optimal.
D) limited.

Question 53

It's been George's "baby" from the beginning, and he really doesn't want to be accountable to any outsider for the decisions he makes in his business. In George's case, he should seek initially to secure _____ financing.

A) debt
B) equity
C) internal
D) asset

Question 54

Aileen Lee is ranked among the world's top venture capitalists, but when she invests in a company, she cannot demand more than

A) those who have invested debt in the enterprise.
B) what is earned.
C) anticipated future financing.
D) established cash flows.

Question 55

Ben left the corporate rat race to start his own business that will allow him to earn a small income while providing plenty of time to pursue his love of pottery making. He does not expect either growth or high profits. Ben's prospects for attracting outside financing are

A) plentiful.
B) limited.
C) moderate.
D) nonexistent.

Question 56

Phil is approaching a banker for some additional financing. Which of the following assets would be most important to the banker?

A) Goodwill
B) Inventory
C) Current patents
D) Business reputation

Question 57

If the firm's rate of return on its assets is _____ than the cost of borrowing, then the owners' rate of return on equity will _____ as the firm uses _____ debt.

A) less; decrease; less
B) greater; decrease; more
C) greater; increase; more
D) less; increase; more

Question 58

Maguire was considering selling stock as a source of funds but was concerned about

A) damaging his corporate image.
B) the loss of voting control of the company.
C) the effect that might have on future financing.
D) estate planning.

Question 59

Carla is a loan analyst at the bank. When Cameron applied for a loan, Carla looked at his balance sheet for _____ to evaluate a possible loan for his company's financing.

A) direct and indirect assets
B) tangible and intangible assets
C) assets founded upon past performance and those depending on future performance
D) industry-specific and firm-specific assets

Question 60

Cameron has applied for a loan to expand his young business. When bankers look for evidence of whether he will be able to repay a loan, they usually base their assessment on

A) what Cameron's firm has done in the past.
B) what Cameron says the firm will do in the future.
C) the opinion of investment analysts.
D) the business plan of the enterprise.

Question 61

A source of short-term funds for many small companies with inventories is

A) trade credit.
B) long-term bank loans.
C) mortgages.
D) asset-based notes.

Question 62

Florence wants to obtain a loan for a large color laser printer for her copy shop. Because the printer will last approximately eight years, the ideal loan would be a(n) _____ loan.

A) mortgage
B) trade credit
C) asset-based
D) term

Question 63

A balloon payment

A) is an upfront payment to obtain a loan.
B) may be required by the bank at about halfway through the loan term.
C) may be due at any time during the term of a loan.
D) is used to lift (remove) a loan covenant.

Question 64

Family and friends provide almost _____ percent of startup capital beyond the entrepreneur's personal savings

A) 25
B) 40
C) 60
D) 80

Question 65

A loan covenant is very likely to require

A) a bank officer on the board of advisors.
B) salary limitations.
C) voting rights.
D) a fixed business strategy.

Question 66

Even though Evan's company is a corporation, the bank imposed a loan covenant that required Evan to

A) make a balloon payment after three years.
B) pay a loan origination fee.
C) make quarterly rather than monthly payments.
D) personally guarantee the loan.

Question 67

If Joan is applying for a loan for a shelving system to improve her retail sales where the system will serve as collateral, which of the following types of loan would be the most appropriate?

A) Chattel mortgage
B) Line of credit
C) Real estate mortgage
D) Term loan

Question 68

Although not the primary source of financing for most small business startups, another source of early financing can be

A) family members.
B) commercial banks.
C) business suppliers.
D) asset-based lenders.

Question 69

A line of credit is the _____ amount of credit a bank will provide a borrower at any one time.

A) average
B) annual
C) maximum
D) minimum

Question 70

Penelope is planning to launch her first business. She will most likely acquire her initial financing from

A) venture capitalists.
B) personal savings.
C) wealthy individuals.
D) the securities market.

Question 71

In the beginning, some entrepreneurs use _____ as a source of financing.

A) asset-based lenders
B) personal credit cards
C) wealthy individuals
D) venture capitalists

Question 72

Small firms frequently run into problems when they

A) offer equipment as collateral for a term loan.
B) underutilize the equipment purchased with the loan.
C) overestimate the cash inflows from the equipment purchased with the loan.
D) fail to match a term loan's payment terms with the expected cash inflows from the equipment purchased with the loan.

Question 73

LIBOR is _____ the prime rate.

A) approximately equal to
B) considerably higher than
C) considerably lower than
D) a lagging indicator of

Question 74

When considering a loan application, which of the five Cs is vital even if not sufficient alone to secure a loan?

A) Capacity
B) Capital
C) Character
D) Collateral

Question 75

In addition to the interest rate on his business loan, Paul should also give attention to the

A) maturity date.
B) reserve requirement.
C) tax liability of the loan.
D) LIBOR on the day the loan is approved.

Question 76

Joann is buying an existing convenience store. Her best choice for a bank would be

A) a national bank that processes credit card payments.
B) the credit union where she is already a member.
C) a bank close to her store.
D) the largest bank in her town, which is located on the other side of town from her store.

Question 77

In his presentation to the banker when he applies for a business loan to purchase additional equipment, Alan should emphasize

A) how much profit the new equipment will generate.
B) how he will be able to repay the principal of the loan.
C) how energy-efficient the new equipment is.
D) how much income he will generate for the bank.

Question 78

Which of the following financing sources has the greatest advantage of speed?

A) Local bank
B) Credit card
C) Angel investor
D) Venture capitalist

Question 79

Granville owns a construction company and would like to purchase a mobile construction office. The bank would likely offer him a _____ mortgage.

A) chattel
B) real estate
C) revolving
D) term

Question 80

Instead of borrowing money from suppliers to purchase equipment, an increasing number of small businesses are

A) obtaining trade credit instead.
B) making these purchases outright.
C) choosing to lease the equipment.
D) opting to streamline assembly processes to reduce expenditures.