Question 1

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 net profits by total owner's equity.

Question 2

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

Accepted Answer

Before becoming president, Donald Trump likely invested approximately three-fourths of his investment in later-stage businesses, reflecting a common strategy among investors to allocate a significant portion of their portfolio to more mature companies that are perceived as less risky compared to early-stage startups.

Question 3

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 4

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

Accepted Answer

If Eugenie finances her firm with equity rather than debt, there is no interest expense which means her net profits would be greater. Interest expense is a cost to the firm that reduces net profits, which is not the case with equity financing. However, the other options given in the question are not necessarily true and cannot be chosen as the best choice without additional information.

Question 5

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

Accepted Answer

Return on equity (ROE) measures how effectively a company uses its equity to generate profits, providing a clearer picture of performance than just looking at net profits, which don't account for the size of the investment.

Question 6

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.

Accepted Answer

Return on assets (ROA) is a profitability ratio that measures the amount of operating profit generated per dollar of assets. ROA is calculated by dividing operating profit by total assets.

ROA = Operating profit / Total assets

In this case, Floyd's operating profit is $45,000 and his total assets are $300,000. Therefore, his ROA is:

ROA = $45,000 / $300,000 = 0.15 or 15%

Therefore, the answer is B) 15.

Question 7

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?

Accepted Answer

Amir is more likely to rely on personal savings, such as retirement savings, for financing in the early stages of starting his own firm, as access to bank loans, IPOs, and bond sales typically requires a more established business history and creditworthiness.

Question 8

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 done for the manufacturing process is an intangible asset since it is not physical in nature. It is something that adds value to the company but cannot be touched or seen.

Question 9

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.

Accepted Answer

This is known as the "leverage effect" or "financial leverage." By using debt, David's firm can increase its return on equity since he is able to amplify the returns on his invested capital. However, this strategy also increases the risk that his firm will not be able to generate enough revenue to make its debt payments, causing David to experience larger losses than if he hadn't used debt.

Question 10

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 determining whether to choose debt or equity. Equity provides ownership in the company and therefore more control, while debt does not grant ownership but does require repayment with interest. If owners prioritize retaining control, equity may be the better choice.

Question 11

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

The answer of Andrew is a venture capitalist who would...

Question 12

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 13

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 14

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

Accepted Answer

When investing in a company, Aileen Lee, like any investor, cannot demand more than what is earned by the company. This is because returns on investment are inherently tied to the company's performance and profitability.

Question 15

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

Ben's business does not have growth potential or high profits, which makes it an unattractive investment option for most outside investors. Thus, his prospects for attracting outside financing are limited.

Question 16

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

Accepted Answer

Inventory is the most liquid and easily sellable asset in case of default, so it is the most important asset for a banker when considering additional financing. Goodwill, current patents, and business reputation may be important factors as well, but they are harder to quantify and harder to convert into cash in case of default.

Question 17

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 18

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

Accepted Answer

Selling stock could lead to a loss of voting control if a significant portion of shares is sold, potentially affecting decision-making power within the company.

Question 19

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.

Accepted Answer

Carla used Cameron's balance sheet to evaluate his company's financing, which means she was looking at his assets. The options given suggest different ways of categorizing assets, such as by direct/indirect or past/future performance, but only option B is based on the distinction between tangible and intangible assets. This is a common and important categorization in financial analysis, as it can affect how assets are valued and how reliable they are as collateral for a loan.

Question 20

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

Bankers typically assess a borrower's ability to repay a loan based on the firm's past performance, as it provides concrete evidence of financial stability and management capability.

Quiz 12: A Firms Sources of Financing