Deck 14: Sources of Equity Financing

Question 1

________ capital is the pool of temporary funds of the business used to support the normal operation of the business on a short-term basis.

A)Growth
B)Fixed
C)Equity
D)Working

Answer 1

D

Question 2

The money Bert uses to build inventory for the upcoming Christmas season would be classified as ________ capital.

A)growth
B)working
C)fixed
D)efficiency

Answer 2

B

Question 3

One important intangible yet highly important advantage an investment from a large corporate partner gives a start-up is:

A)credibility.
B)success.
C)power.
D)None of the above

Answer 3

A

Question 4

An advantage of using friends and relatives as investors is that:

A)they tend to be more patient.
B)they take a lower return.
C)they don't want controlling interest in the company.
D)they don't tend to have unrealistic expectations.

Question 5

When receiving investment money from friends and relatives entrepreneurs should:

A)use a clear verbal contract to ensure no misunderstandings.
B)only borrow from close friends and relatives who won't cause them trouble.
C)discuss all the details of the investment up front.
D)not borrow more than 30% of the necessary capital from them.

Question 6

When looking for an angel,the key is:

A)networking.
B)using the SBA as a contact point.
C)searching the web.
D)using business incubators' computer matching services.

Question 7

"Angels":

A)are hard investors to please.Nearly 70% are dissatisfied with their investment.
B)tend to be easy to get money from as they accept nearly 60% of the opportunities presented.
C)have an average of $150,000 invested in 3.5 firms at any given time.
D)only finance deals requiring over $1 million in capital.

Question 8

When structuring a deal with an "angel," an entrepreneur should remember that:

A)"angels" tend to prefer a controlling interest in the business.
B)the deal needs an annual return of 60-75%.
C)"angel" money is patient,often waiting seven or more years to cash out.
D)they prefer to earn their returns through dividends and interest.

Question 9

Private "angel" investors tend to:

A)take 80% ownership by the time the company goes public.
B)provide seed money and less than $500,000.
C)look for returns of 60-75%.
D)only finance projects within their local area or region.

Question 10

A(n)________ is a private,for-profit organization that purchases equity positions in young businesses that will potentially produce returns of 300 to 500 percent over five to seven years.

A)commercial bank
B)venture capital company
C)"angel"
D)SB-1 filing

Question 11

A disadvantage of using friends and relatives as investors is:

A)they tend to demand more stock options.
B)familial seniority often conflicts with the "chain of command".
C)they require more leniency with benefits and pay.
D)unrealistic expectations or misunderstood risks destroy friendships or family relationships.

Question 12

________ financing includes the personal investment of the owners and is often called "risk capital."

A)Equity
B)Asset-based
C)Debt
D)Growth

Question 13

Private investors,or "angels," are often:

A)wealthy individuals.
B)entrepreneurs.
C)persons who invest in business startups in exchange for equity stakes in the companies.
D)All of the above

Question 14

Most "angel" investments:

A)are for growth or fixed capital.
B)are for between $10,000 and $2,000,000.
C)come from international or foreign investors.
D)are seeking a high and quick return on their investment.

Question 15

The most common source of equity funds used to start a small business is:

A)private investors or "angels."
B)loans from commercial banks.
C)the entrepreneur's pool of personal savings.
D)public stock issues.

Question 16

Unlike entrepreneurs of the past,today's entrepreneurs:

A)are finding more government interest and funding for business start-ups than ever before.
B)find fewer closed doors as small business start-ups have become less risky.
C)have to piece their capital together from several sources.
D)are spending nearly 75% of their time raising capital.

Question 17

________ is any form of wealth used to produce more wealth.

A)Debt
B)Equity
C)Capital
D)Capacity

Question 18

The credit crunch has hit those entrepreneurs seeking between $100,000 and ________.

A)$3 million
B)$500,000
C)$1 million
D)$750,000

Question 19

The largest single source of external equity capital for small businesses is:

A)angels.
B)venture capitalists.
C)Small Business Administration loans.
D)commercial bankers.

Question 20

Tien is looking for capital to purchase new buildings and equipment for her small manufacturing company.Tien is looking for ________ capital.

A)Working
B)Fixed
C)Growth
D)Asset-based

Question 21

The "wait to go effective" is the time period when:

A)the SEC registration statement is being prepared.
B)the underwriter decides what regulation to file under.
C)the firm prices the stock for the offering.
D)the company is waiting for SEC approval after filing the registration statement.

Question 22

Regulation D:

A)is a simplified registration process designed to make it easier for small companies to make public stock offerings but it is more expensive than an S-1 filing.
B)has a capital ceiling of $10 million,and the price of each share must be at least $25.
C)filing uses a standardized disclosure statement in a question-and-answer format.
D)can be accomplished without a professional broker or securities firm.

Question 23

One of the biggest advantages of going public is:

A)the ability to attract low cost equity funding.
B)the ability to retain control while gaining maximum funding.
C)better employee morale and productivity.
D)enhanced credibility and improved corporate image.

Question 24

The two factors that make a deal attractive to venture capitalists are:

A)effective marketing strategies and networking opportunities.
B)high returns and a convenient (and profitable)exit strategy.
C)high returns and networking opportunities.
D)a convenient and (profitable)exit strategy and effective marketing strategies.

Question 25

When taking a company public,investment bankers look for:

A)a leading position in a stable market.
B)3 to 5 years of audited financial statements.
C)a strong record of revenues.
D)a moderate growth rate.

Question 26

It typically takes ________ to take a company public.

A)30 days
B)one year
C)60 to 180 days
D)two weeks

Question 27

Under a ________ agreement,the underwriter agrees to purchase all of the shares in a company's public offering and then resells them to investors.

A)best effort
B)lock-up
C)final price
D)firm commitment

Question 28

In a public offering,the underwriter:

A)advises the owner as to the best structure of the business going into the sale.
B)serves as an adviser and consultant to the small business in preparing the registration statement for the SEC.
C)is bound to the offering until it is executed.
D)is listed as one of the officers of the company.

Question 29

Most venture capitalists purchase ownership in a small business through:

A)a common stock or convertible preferred stock.
B)an ESOP.
C)loans with an option to buy stock.
D)a general partnership.

Question 30

The formal underwriting agreement is signed:

A)on the last day before the registration statement becomes effective.
B)when the statement of registration is filed.
C)during the road show.
D)at the time of the letter of intent.

Question 31

To ensure an "aftermarket" for a company's stock,most underwriters prefer to offer a minimum of ________ shares.

A)10,000 to 20,000
B)100,000 to 150,000
C)400,000 to 500,000
D)1,000,000 to 1,500,000

Question 32

Venture capitalists look for all of the following except:

A)competent management.
B)industry stagnation.
C)viable exit strategy
D)competitive edge

Question 33

A lock-up agreement:

A)prevents the sale of "insider" shares for a specific period of time-often 12 to 36 months-after an initial public offering (IPO).
B)prevents a small company from signing on with other underwriters to make an IPO.
C)prevents a company about to make an IPO from signing a union contract.
D)establishes the final price of the IPO so that it cannot fluctuate before the stock offering is actually made.

Question 34

The largest cost in a public stock offering is:

A)printing expenses.
B)filing fees with the SEC.
C)the underwriter's commission.
D)legal fees.

Question 35

The document outlining the details of the agreement between the entrepreneur and the stock underwriter is called:

A)Regulation D.
B)a filing.
C)the letter of intent.
D)the registration statement.

Question 36

________ governs private placements and is designed to reduce the registration requirements for small companies going public.

A)Regulation D
B)Form SB
C)Form S-1
D)Regulation A

Question 37

Venture capitalists look for ________ as the most important ingredient in the success of any business.

A)innovation
B)a growth industry
C)a competitive edge
D)competent management

Question 38

The single most important ingredient in making a successful public offering is:

A)choosing a capable underwriter.
B)negotiating a favorable letter of intent.
C)preparing a suitable registration statement.
D)filing Regulation D with the SEC.

Question 39

Probably the biggest disadvantage of "going public" to the entrepreneur is the:

A)dilution of ownership interest.
B)diminished corporate image.
C)future threat of being acquired through the use of stock.
D)loss of key employees.

Question 40

When filing with the SEC,the initial registration statement:

A)prohibits a "road show."
B)is filed without share price,proceeds,or commissions listed.
C)signals the time to sign the formal underwriting agreement.
D)is generally accepted without corrections by the SEC.

Question 41

________ are typically wealthy individuals or entrepreneurs themselves.

A)Venture capitalists
B)Seed funders
C)Venture funders
D)Angels

Question 42

Choosing the right source of capital is as important as choosing the right form of ownership for the small business owner.

Question 43

A foreign stock market that caters to small companies is:

A)AIM.
B)AMX.
C)the NASDAQ.
D)DPOX.

Question 44

Equity capital is also called:

A)equity money.
B)stock money.
C)risk capital.
D)None of the above

Question 45

Most companies that make Rule 5 offerings raise between $1 million and:

A)$50 million.
B)$10 million.
C)$5 million.
D)$20 million.

Question 46

________ is when a company raises capital by selling shares of its stock to the general public for the first time.

A)Preferred stock selling
B)Rule 157 Offerings
C)IPO
D)All of the above

Question 47

________ is a key criteria that most venture capitalists look for.

A)Intangible factor
B)High working capital
C)Fair ROI
D)None of the above

Question 48

These ________ are wealthy individuals,often entrepreneurs themselves,who invest in business start-ups in exchange for equity stakes in the companies.

A)venture capitalists
B)rich family members
C)angels
D)public investors

Question 49

________ are private,for-profit organizations that purchase equity positions in young businesses they believe have high-growth and high-profit potential,producing annual returns of 300 to 500 percent over five to seven years.

A)Angel investors
B)Venture Capital Companies
C)Government Bonding Investors
D)Corporate Venture Investors

Question 50

Some suggestions for maintaining family relationships and friendships when borrowing for a business are:

A)Keep the arrangement strictly family.
B)Borrow as much as you can.
C)Oral contract as good as written contract.
D)Treat the money as "bridge financing."

Question 51

Typically,________ is needed to purchase the business's permanent or fixed assets.

A)Working Capital
B)Growth Capital
C)Fixed Capital
D)None of the above

Question 52

Working capital can be calculated by:

A)Current Asset - Current Liabilities.
B)Total Asset - Current Liabilities.
C)Total Liabilities - Total Asset.
D)Total Asset - Total Liabilities.

Question 53

For an IPO,most investment bankers look for:

A)consistently high growth rates & strong record of earnings.
B)three to five years of audited financial statements & a solid position in rapidly growing markets.
C)a sound management team and a strong board of directors.
D)All of the above

Question 54

A highly possible source of funding for a start-up and early business is:

A)Venture capital and Private Placement.
B)Personal savings and retained earnings.
C)Personal savings and partners.
D)IPO and Regulation A.

Question 55

To qualify for a Rule 147 Intrastate public stock offering,a company must:

A)be a limited partnership.
B)file an SB-1 with the SEC 60 days before the offering.
C)derive 60% of its revenues in the state in which it makes this offering.
D)use 80% of the offering proceeds for business in the state in which it makes this offering.

Question 56

Which of the following is the most popular rule of Regulation D exemptions?

A)501
B)502
C)503
D)504

Question 57

Most Venture Capitalists look for:

A)competent management.
B)competitive edge.
C)companies in growth industry.
D)All of the above

Question 58

Interstate offerings (Rule 147)is not best suited when a company is at the ________ stage.

A)startup
B)early
C)expansion
D)later

Question 59

Regulation A is best suited when a company is at the ________ stage.

A)startup
B)early
C)expansion
D)later

Question 60

The outstanding publicly held stock is also called:

A)the public float.
B)equity stock.
C)preferred stock.
D)available float.

Question 61

Investors like to see entrepreneurs devote at least 30% of a business plan to marketing and selling.

Question 62

Most venture capitalists make investments in promising business ventures in return for a share of the ownership.

Question 63

The most common source of equity funds used to start a small business is an SBA loan.

Question 64

A small company needs fixed capital to expand and grow the business.

Question 65

The need for growth capital is created by the uneven flow of cash into and out of the business due to normal seasonal fluctuations.

Question 66

Lenders of fixed capital expect the assets purchased to increase the borrowing firm's efficiency,profitability,and cash flows.

Question 67

Most entrepreneurs seeking money to launch their businesses need more than $1,000,000.

Question 68

Locating "angels" to finance a business is essentially a matter of networking-finding the right contacts.

Question 69

If an entrepreneur is not willing to risk funds in a business venture,other potential investors and lenders are not likely to provide capital either.

Question 70

An entrepreneur should not take advantage of offers from family and friends to lend or invest money for the business venture.

Question 71

"Angels" usually prefer to invest in businesses they know something about.

Question 72

Layered financing is the process of piecing start-up capital together from a variety of sources rather than relying on a single source of funds.

Question 73

"Angels" typically invest in businesses in the start-up phase,providing the seed capital needed to get the business going.

Question 74

Seed capital for the entrepreneur is risk capital for investors.

Question 75

Private investors,or "angels," seek 60-75% annual return-on-investment and tend to take a 51%+ share of the business.

Question 76

The problem with the lack of funding for start-ups is that the seed capital and funding sources just aren't there.

Question 77

"Angels" control a larger pool of venture capital than venture capitalists.

Question 78

In exchange for the financing they receive from venture capitalists,entrepreneurs must give up a portion of their businesses,sometimes surrendering a majority interest and control of its operations.

Question 79

The primary advantage of equity capital is that it does not have to be repaid with interest.

Question 80

The owner of a small retail shoe store and the owner of a small furniture manufacturer would likely have very different capital requirements.