Question 1

The five C's of credit are character, capacity, capital, conditions, and collateral.

Accepted Answer

The five C's of credit are indeed character, capacity, capital, conditions, and collateral.

Question 2

Most startup investors limit their investing to firms that offer potentially high returns within a one to three year period.

Accepted Answer

Startup investors typically seek investments in firms with a longer-term growth potential and are willing to wait several years, even up to a decade, for a return on their investment. They prioritize a company's ability to become a successful, sustainable business in the long run, rather than just short-term gains.

Question 3

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

Accepted Answer

The statement is incorrect. A firm with high growth potential often has many more possible sources of financing than a firm with potential for large profits but no growth. Investors are often more willing to invest in a high-growth company with the potential for high returns, even if there is more risk involved.

Question 4

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

Accepted Answer

While credit cards may have lower interest rates than some high-interest bank loans, they typically have much higher interest rates than traditional bank loans. Additionally, credit card interest rates can vary significantly based on the cardholder’s credit rating and history, while bank loans typically have fixed interest rates.

Question 5

Business loans are the primary source of financing for startups.

Accepted Answer

While business loans are one source of financing for startups, there are also other options such as angel investors, venture capital, crowdfunding, and personal savings.

Question 6

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

Accepted Answer

Equity financing does not involve interest payments and thus does not impact the net income calculation. However, it does dilute the ownership of existing shareholders, and the cost of equity financing (in terms of required return to shareholders) may be higher than the cost of debt financing (in terms of interest payments).

Question 7

Venture capitalists restrict their investment in startup companies.

Accepted Answer

Venture capitalists typically have strict criteria for the types of startups they invest in, such as a strong management team, innovative technology or product, and potential for high returns. They may also limit their investments to certain industries or geographic regions.

Question 8

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

Accepted Answer

The age of a company can have an impact on the financing available to it. For example, younger companies may have difficulty obtaining traditional bank loans and may need to seek alternative financing options such as venture capital or crowdfunding. Older and more established companies may have more options for financing, including access to bond markets or public offerings.

Question 9

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

Accepted Answer

The statement is incorrect. As a firm uses more debt, its financial risk increases which will result in a higher cost of equity. Therefore, the owners' return on equity investment may increase or decrease depending on the level of financial risk and the cost of equity.

Question 10

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.

Accepted Answer

This is a common principle in finance known as the "leverage effect." Debt financing can amplify gains, but it can also amplify losses if the company performs poorly.

Question 11

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

Accepted Answer

The factors that determine how a firm is financed include various financial and non-financial factors such as market conditions, interest rates, availability of funds, regulatory environment, credit rating, growth potential, ownership structure, and tax implications. The personal preferences of owners with respect to the marketing mix are not considered as a primary factor in determining how a firm is financed.

Question 12

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

Accepted Answer

A chattel mortgage is a loan for which personal property, such as equipment or vehicles, serves as collateral. Real property cannot serve as collateral for a chattel mortgage.

Question 13

Lines of credit are legal obligations to provide capital.

Accepted Answer

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Question 14

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.

Accepted Answer

When individuals invest in a business, they may feel entitled to provide input and suggestions for the management and decision-making process. This can potentially cause conflicts and strain personal relationships.

Question 15

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

Accepted Answer

This is true. With debt financing, the company borrows money from lenders and agrees to pay it back with interest over time. In contrast, equity financing involves selling shares of ownership in the company to investors in exchange for funding. With debt financing, the company retains voting control as the lenders do not have any ownership stake in the company.

Question 16

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

Accepted Answer

The answer of For every firm, there is a "right"...

Question 17

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

Accepted Answer

The answer of Goodwill is considered a intangible asset and...

Question 18

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

Accepted Answer

Borrowing money typically results in a financial leverage which can amplify the return on equity for a company. This is because the cost of borrowing (interest) is typically lower than the cost of issuing and servicing common stock (dividends and returns). However, this strategy also carries the risk of increased debt and interest payments, which could lead to financial distress if not managed properly.

Question 19

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

Accepted Answer

Assets that are considered tangible are physical in nature, such as property or equipment. The quality of employees is considered an intangible asset and is not considered collateral.

Question 20

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

Accepted Answer

By taking on more debt, small business owners are not diluting their ownership by selling off shares to investors.

Quiz 12: A Firm S Sources of Financing