Question 1

Even with all his billions and influence,Donald Trump,as an equity investor,cannot demand more than

Accepted Answer

As an equity investor, Donald Trump can only demand what is earned, meaning he is entitled to profits or returns based on the company's earnings, unlike debt investors who have fixed claims.

Question 2

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

Accepted Answer

The answer of Maguire was considering selling stock as a...

Question 3

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.

Accepted Answer

Venture capitalists typically invest in firms with potentially high returns over a 5-10 year period.

Question 4

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

Accepted Answer

The answer of Cameron has applied for a loan to...

Question 5

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:

Accepted Answer

At this stage of its life cycle, with considerable research and limited production, Williams Alternative Power, Inc. has likely gained attention and demonstrated potential to investors. As a result, the ability to attract venture capital is greater.

Question 6

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.

Accepted Answer

The research that the company has done for the manufacturing process is intangible in nature as it cannot be physically touched or seen. It is an intellectual property that adds value to the business and can be used to secure a loan or attract investors.

Question 7

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

Accepted Answer

This statement refers to the concept of leverage, which is the use of borrowed money to increase returns on equity. As long as the rate of return on assets is greater than the cost of debt, the return on equity will increase due to the additional leverage. However, it's important to note that too much debt can also increase the risk of the firm, which could potentially decrease the return on equity.

Question 8

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

Accepted Answer

Debt financing requires repayment regardless of a company's profit levels, distinguishing it from equity financing where investors share in the profits and losses.

Question 9

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

Accepted Answer

Return on equity is calculated by dividing the net income by the owners equity. This ratio shows how efficiently the company is using its equity to generate profits.

Question 10

When Ben 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:

Accepted Answer

Bootstrapping refers to starting a business with minimal external funding, often relying on personal savings or resources. In this case, Ben used his retirement savings to finance his pottery business. The other options, self-starting and folly, do not accurately describe this situation, and cashing out suggests that Ben withdrew all of his retirement savings instead of just using a portion to invest in his business.

Question 11

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

Accepted Answer

The degree of control the owners hope to retain is a key factor in choosing between debt and equity, as issuing equity may dilute ownership and control, while debt does not.

Question 12

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

Accepted Answer

Since there is no interest expense with equity financing, more of the firm's earnings are available to be distributed as net income.

Question 13

People like Ben who "bootstrap" company financing are

Accepted Answer

"Bootstrapping" refers to relying on one's own resources and initiative to obtain the capital necessary to start or grow a business. This method of financing allows the entrepreneur to maintain more control over the company and avoid taking on excessive debt or giving away equity too early in the business's development. While it may be more challenging to bootstrap a business, it can lead to greater long-term financial success. There is no mention of corporate image, subordinating future capital formation, or waiting to establish a reputation in the marketplace in the description of bootstrapping.

Question 14

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:

Accepted Answer

Since Ben does not expect growth or high profits, the potential return on investment for outside investors would be low. Therefore, his prospects for attracting outside financing are limited.

Question 15

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.

Accepted Answer

When the firm's rate of return on its assets is greater than the cost of borrowing, using more debt amplifies the owners' rate of return on equity through financial leverage.

Question 16

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.

Accepted Answer

The answer of It's been George's "baby" from the beginning...

Question 17

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

Accepted Answer

The absolute dollar amount of income does not account for the size of the investment, whereas return on equity measures the efficiency of generating profit from shareholders' equity, providing a better performance metric.

Question 18

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

Accepted Answer

Return on assets is calculated by dividing operating income by total assets and multiplying by 100. So, ROA = (Operating income/Total assets) x 100. Substituting the given values, we get ROA = (45,000/300,000) x 100 = 15%. Therefore, the correct answer is option B - 15%.

Question 19

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

Accepted Answer

Donald Trump, like many investors, tends to invest a significant portion of his portfolio in later-stage businesses, which is typically around three-fourths of his investments.

Question 20

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

Accepted Answer

Carla, as a loan analyst, would likely want to examine both tangible assets (those that have a physical presence, such as property or equipment) and intangible assets (such as intellectual property or goodwill) when evaluating a loan application. Direct and indirect assets, those founded upon past performance, and industry-specific/firm-specific assets may also be important considerations, but they are not as directly related to the evaluation of assets for loan approval as tangible and intangible assets.

Quiz 12: A Firms Sources of Financing