Question 1

The accounting emphasis on accrued revenue and expenses and depreciation is the same emphasis as that of finance managers.

Accepted Answer

Accounting focuses on recording, summarizing, and reporting financial transactions, including accrued revenues, expenses, and depreciation, for the purpose of providing information about the financial position and performance of a business. Finance managers, while they use this information, are more concerned with planning, directing, and managing financial activities such as capital raising, investment decisions, and risk management, which may involve different emphases, such as cash flows and the strategic allocation of financial resources.

Question 2

The risk-free interest rate is the interest rate on debt that is virtually free of inflation risk.

Accepted Answer

The risk-free interest rate is the interest rate on debt that is virtually free of default risk, not inflation risk. It typically refers to the yield on government securities considered to have negligible risk of default.

Question 3

Startup financing usually comes from entrepreneurs, business angels, and investment bankers.

Accepted Answer

False

Question 4

A venture's "riskiness" in terms of poor performance or failure is usually high to moderate during the rapid-growth stage of its life cycle.

Accepted Answer

During the rapid-growth stage of a venture's life cycle, there is a high degree of uncertainty and risk as the business expands quickly, faces increased competition, and may require additional resources to sustain growth. This can increase the likelihood of poor performance or failure, making the riskiness of the venture high to moderate.

Question 5

The relationship between real interest rates and time to maturity when default risk is constant is called the term structure of interest rates.

Accepted Answer

The answer of The relationship between real interest rates and...

Question 6

Bond ratings reflect the inflation risk of a firm's bonds.

Accepted Answer

Bond ratings reflect the creditworthiness of a firm and the likelihood of default, not inflation risk. Inflation risk refers to the risk that inflation will erode the purchasing power of the bond's future cash flows.

Question 7

A nominal interest rate is an observed or stated interest rate.

Accepted Answer

A nominal interest rate is the observed or stated rate of interest without adjustment for inflation or compounding.

Question 8

Formal historical accounting procedures include explicit records of debt interest and principal) and dividend capital costs.

Accepted Answer

Formal historical accounting procedures do include explicit records of debt interest and principal as well as dividend capital costs. These records provide a detailed account of a company's financial transactions and help in evaluating the performance and financial health of the organization.

Question 9

A venture's "riskiness" in terms of the likelihood of poor performance or failure decreases as it moves from its development stage through to its rapid-growth stage.

Accepted Answer

The riskiness of a venture decreases as it moves from its development stage through to its rapid-growth stage because the venture has a more established business model, a more proven track record, and a more stable customer base.

Question 10

"Default-risk" is the risk that a borrower will not pay the interest and/or the principal on a loan.

Accepted Answer

Default risk is the risk that a borrower will not pay the interest and/or the principal on a loan.

Question 11

First-round financing during a venture's survival stage comes primarily from venture capitalists and investment banks.

Accepted Answer

First-round financing, also known as seed financing, typically comes from venture capitalists and investment banks during a venture's survival stage.

Question 12

The graph of the term structure of interest rates, which plots interest rates to time to maturity is called the yield curve.

Accepted Answer

This is a correct statement. The yield curve is a graph that shows the relationship between interest rates and the time to maturity of debt securities.

Question 13

The "prime rate" is the interest rate charged by banks to their highest default risk business customers.

Accepted Answer

The prime rate is the interest rate that commercial banks charge their most creditworthy customers, typically large corporations.

Question 14

Liquidity premiums reflect the risk associated with firms that possess few liquid assets.

Accepted Answer

Liquidity premiums reflect the additional return investors demand for holding securities that are not easily convertible into cash without a significant loss in value, not directly the firm's possession of liquid assets.

Question 15

The "real interest rate" RR) is the interest one would face in the absence of inflation, risk, illiquidity, and any other factors determining the appropriate interest rate.

Accepted Answer

The definition of real interest rate is correct.

Question 16

Traditional accounting does not focus on the implicit cost of equity that is the required capital gains to complement dividends. However, evaluation methods exist to determine this value by financial managers.

Accepted Answer

This statement is true. Traditional accounting does not cover the implicit cost of equity, but financial managers can use different methods to calculate it.

Question 17

Inflation premium is the rising prices not offset by increasing quality of goods being purchased.

Accepted Answer

Inflation premium refers to the extra yield on an investment that investors demand as compensation for the risk that inflation will erode the value of their investment's returns over time. It does not directly relate to the quality of goods being purchased.

Question 18

Commercial banks provide liquidity-stage financing for ventures in the rapid-growth stage of their life cycles.

Accepted Answer

The answer of Commercial banks provide liquidity-stage financing for ventures...

Question 19

Public financial markets are markets for the creation, sale and trade of illiquid securities having less standardized negotiated features.

Accepted Answer

Public financial markets are markets for the creation, sale, and trade of liquid securities having standardized negotiated features. Illiquid securities with less standardized features are traded in private financial markets.

Question 20

A venture's "riskiness" in terms of poor performance or failure is usually very high during the maturity stage of its life cycle.

Accepted Answer

The maturity stage of a venture's life cycle is characterized by stability and low risk. It is during the earlier stages (startup and growth) that risk is high due to uncertainty and lack of resources.

Quiz 7: Types and Costs of Financial Capital