Deck 12: A Firms Sources of Financing

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

Venture capitalists restrict their investment in start-up companies.

Question 7

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

Question 8

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

Question 9

Business loans are the primary source of financing for start-ups.

Question 10

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 11

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 12

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

Question 13

The basic factors that determine how a business is financed are restricted to the business's past economic performance, the nature of its assets, and the personal preferences of owner(s) with respect to the marketing mix.

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

Lines of credit are legal obligations to provide capital.

Question 19

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

Question 20

Most start-up investors limit their investing to businesses that offer potentially high returns within a one- to three-year period.

Question 21

Qualified small businesses that cannot obtain business loans through normal lending channels can get loans directly from the Department of Trade and Industry.

Question 22

The Department of Trade and Industry guarantees loans for small businesses.

Question 23

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 businesses with potentially high returns in a _____ period.

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

Question 24

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

Question 25

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 26

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

Question 27

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 per cent, purchase-order financing is likely.

Question 28

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

Question 29

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 30

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

Question 31

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

Question 32

Crowdfunding works strictly with individual donations made over the Internet.

Question 33

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

Question 34

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

Question 35

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

Question 36

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

Question 37

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

Question 38

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

Question 39

The private sale of a business's shares is regulated by the Financial Services Board.

Question 40

Commercial investors are sometimes called business angels.

Question 41

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

Question 42

Lesedi 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 43

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 business's rate of return on its assets is greater than the cost of the debt, his rate of return on equity will _____ as the business uses more debt.

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

Question 44

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

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

Question 45

If he holds true to the average, Donald Trump is likely to invest approximately _____ of his investment in later-stage businesses.

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

Question 46

Johan was considering selling shares 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 47

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

A)the return on assets ratio.
B)the current ratio.
C)the quick ratio.
D)the absolute rand amount of income.

Question 48

Floyd's income statement showed for the current year his company had an operating income of R45 000 and his balance sheet showed total assets of R300 000.His return on assets is _________ per cent.

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

Question 49

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

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

Question 50

When Sibusiso left the corporate rat race to start his own pottery business, he used some of his retirement savings to finance the business.This practice is known as:

A)self-starting.
B)cashing out.
C)bootstrapping.
D)folly.

Question 51

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

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

Question 52

If Ayanda finances her business with equity rather than debt, her net income could potentially be greater because:

A)equity financing almost always leads to better business 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 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

Karen 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 55

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

A)returns anticipated from the enterprise.
B)risk of nationalisation.
C)degree of control the owners hope to retain.
D)state of the owners' estate plan.

Question 56

People like Sibusiso who 'bootstrap' company financing are:

A)enhancing the "corporate image" of the enterprise by the way they raise capital.
B)depending on their own initiative to obtain the capital necessary to start up and grow.
C)subordinating future capital formation to short-term financial performance.
D)waiting to establish a reputation in the marketplace before raising the bulk of the needed capital.

Question 57

Ismail Alternative Power (Pty) Ltd., 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 58

Even with all his billions and influence, Donald Trump, as an equity investor, 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 59

Ismail Alternative Power (Pty) Ltd., 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 60

Sibusiso 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.Sibusiso's prospects for attracting outside financing are:

A)plentiful.
B)limited.
C)moderate.
D)non-existent.

Question 61

JIBAR is _____ the prime rate.

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

Question 62

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

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

Question 63

Which financing source has the greatest advantage of speed?

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

Question 64

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 65

Renata has asked her family members to help her launch her new business.She must consider that:

A)along with their financial futures, she may be putting the relationships at risk.
B)family members are not always the best business analysts.
C)some family members are unable to offer financial assistance.
D)getting their support does not guarantee the success of her business.

Question 66

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.

Question 67

If Tshegofatso is applying for a loan for a shelving system to improve her retail sales where the system will serve as collateral, what type of loan would be the most appropriate?

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

Question 68

When considering a loan application, bankers will consider:

A)the credit score of the applicant.
B)the four Cs of credit
C)the five Cs of credit.
D)the applicant's character only.

Question 69

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 70

A balloon payment:

A)is an upfront payment to obtain a loan.
B)may be required by the bank at about midway in 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 71

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 72

Demitrius runs a Greek restaurant and is currently considering leasing or purchasing some updated equipment.What statement is correct?

A)Because the equipment he is buying will become outdated in two years, leasing would be a better option than purchasing.
B)Because the restaurant is new and he wants to protect his cash flow, purchasing would be better since purchasing costs less than leasing.
C)If the equipment is leased, the restaurant's lines of credit will be increased.
D)Leasing is always more expensive than purchasing over the term of the lease.

Question 73

Small businesses frequently run into problems when:

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

Question 74

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

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 75

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 76

Although not the primary source of financing for most small business start-ups, another source of early financing is:

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

Question 77

Pieter 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 78

Florence wants to obtain a loan for a large colour laser printer for her copy shop.Since the printer will last approximately eight years, the ideal loan would be a _____ loan.

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

Question 79

Joann is buying an existing convenience store.When she considers which bank to use, her best choice 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 one in her town, which is located on the other side of town from her store.

Question 80

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