Deck 15: Small Business Finance: Using Equity, Debt, and Gifts

Question 1

A legal obligation to pay money in the future is called equity capital.

Answer 1

False

Question 2

Majority of small business start-ups are funded by bootstrapping.

Answer 2

True

Question 3

In the U.S. ,government programs are the number one source for financing small businesses.

Answer 3

False

Question 4

Community development organizations are private businesses that are authorized to make SBA insured loans to start-ups and small businesses.

Question 5

During the start-up phase of a small business the emphasis is on conserving what little cash the new business has.

Question 6

Knowing one's personal worth is not important when starting a business.

Question 7

People who buy ownership rights but are not part of the management of the business are known as outside equity investors.

Question 8

Limited liability companies' primary advantage is that owners may easily choose whether to be taxed as an entity or have tax items pass through.

Question 9

Payments of profits to the owners of corporations are called dividends.

Question 10

Giving a gift has tax implications.

Question 11

When a business enters a phase of rapid growth,one of the challenges it faces is that very few sources of money are available to support its growth.

Question 12

The more debt that is included in the capital mix,the higher is the weighted average cost.

Question 13

Money borrowed for the purpose of investment in a business is called debt capital.

Question 14

A measure of the amount of debt relative to total investment is called cost of capital.

Question 15

Borrowing money for capital investment enhances the potential for higher rates of return for the owners.

Question 16

Investing in multiple businesses increases the chances of offsetting possible losses incurred from one business.

Question 17

Equifax is one of the four primary CRAs in the United States.

Question 18

The SBIR and the STTR programs require that every U.S.agency that makes research grants provide a minimum of 2 percent of its grant budget to small businesses,as defined by the SBA.

Question 19

A company's goodwill is its best collateral.

Question 20

Reduced taxes are the most common form of institutional gift financing.

Question 21

Money contributed to businesses in return for part ownership of the business is called a(n)_____.

A) debt
B) equity capital
C) gift
D) loan

Question 22

Which of the following describes angel investors?

A) They are wealthy individuals who invest in companies in relatively early stages of development.
B) They are individuals who act as brokers to help connect owners to organizations that provide funding.
C) They are state-run organizations that buy stakes in companies in the early stages of development.
D) They are government organizations that help small-scale companies grow.

Question 23

_____ is money from selling part of a business to people who are not and will not be involved in the management of the business.

A) Dividend
B) Bond
C) Equity capital
D) Outside equity

Question 24

A charge for the use of money,usually figured as a percentage of the principal is called _____.

A) interest
B) dividend
C) tax
D) chargeback

Question 25

In the Small Business Administration guaranteed loan payment programs,the owners must be _____ before they qualify.

A) backed by personal equity for half the loan sum
B) turned down by a bank
C) partnered with a successful entrepreneur
D) the heads of an already successful business

Question 26

Which of the following is true of an LLC?

A) LLCs are the same as partnerships.
B) LLCs have a choice of being taxed as either corporations or partnerships.
C) LLCs are a legal form of business that have no flexibility regarding taxes.
D) LLCs are the same as S-corporations.

Question 27

The number one source of financing for small businesses is from _____.

A) the owners themselves
B) angel investors
C) government programs
D) banks

Question 28

An organization authorized by the SBA to make insured loans to small businesses that are expected to increase economic activity within a specific geographic area is referred to as a(n)_____.

A) community development organization
B) accelerator
C) economic cooperation organization
D) limited partnership

Question 29

Investing in multiple investments of differing risk profiles for the purpose of reducing overall investment risk is called _____.

A) digression
B) deviation
C) specialization
D) diversification

Question 30

In general,all forms of business organization can be categorized based on the owners' responsibilities for the organization's liabilities,and _____.

A) how the business is taxed
B) how the business is financed
C) the business's target market
D) whether it is a manufacturing or service organization

Question 31

A(n)_____ is a legal obligation to pay money in the future.

A) equity capital
B) stake
C) debt
D) gift

Question 32

The level of probability that an investment will not produce expected gain is called _____.

A) interest
B) dividend
C) risk
D) diversification

Question 33

A legal "artificial" entity that is formed by filing specific documents with a state government is called a _____.

A) sole proprietorship
B) partnership
C) corporation
D) general partnership

Question 34

Any valuable asset that is donated to a business without any obligation to repay or to give any ownership interest is called a(n)_____.

A) debt
B) equity capital
C) gift
D) investment

Question 35

Orion Inc.was started as a small organization with five employees.After the first year's profits were made,the owners decided to invest the profits in expanding the business.This is an example of financing the business using _____.

A) benchmarking
B) bootstrapping
C) piggybacking
D) outside equity

Question 36

Which of the following is true of financing small businesses?

A) There are several resources available for financing start-ups.
B) Funding is only important when a business is just starting.
C) A business has fixed financial goals in all stages of its development.
D) The most popular source of financing for start-ups is from commercial banks.

Question 37

Ownership of corporations is established by _____.

A) stock certificates
B) share agreements
C) member share certificates
D) partnership share agreements

Question 38

A business formed by an individual who is responsible for all debts and claims against the business is called a:

A) limited liability company.
B) conglomerate.
C) partnership.
D) sole proprietorship.

Question 39

The percentage amount that the payout of an investment differs from original cost is known as:

A) dividend on capital.
B) gain on investment.
C) risk on investment.
D) interest on the principle.

Question 40

Which of the following is true of limited partnerships?

A) All the owners have full responsibility of repaying debts.
B) All the owners face the potential of having to pay business debts from their own wealth.
C) None of the owners,except the general partner,is fully liable.
D) None of the owners are at a risk of losing what they invested in the business.

Question 41

The most common form of institutional gift financing is in the form of _____.

A) state loans
B) reduced taxes
C) state grants
D) donated capital

Question 42

Private businesses that are authorized to make SBA insured loans to start-ups and small businesses are called _____.

A) community development organizations
B) accelerators
C) small business investment companies
D) LLCs

Question 43

_____ refers to a type of formal gift where someone buys something on behalf of the entrepreneur's business and lets the entrepreneur benefit from it.

A) Overpayment
B) Accelerated cash-out
C) Picking up the tab
D) Piggybacking

Question 44

There are two general sources of gift financing:

A) institutional and personal.
B) friends and family.
C) consumer and commercial banks.
D) angel and venture investors.

Question 45

Hugh starts his own animation company by borrowing funds from his parents.His parents tell him that he can repay them when the business is generating profits.This is an example of _____.

A) accelerated cash-out
B) deferral
C) free work
D) free use

Question 46

When an entrepreneur gets funding for his business from an account that his family had initially set up for his future education or a first home,it is referred to as _____.

A) piggybacking
B) accelerated cash-out
C) free use
D) overpayment

Question 47

Which of the following is true of government agencies that issue grants?

A) They publish RFPs that specify the conditions of a grant.
B) They require each business to create a proposal using formats that best fits the business.
C) They only provide funding after a long evaluation of applications which generally takes over a year to process.
D) They are unstructured and prefer informal approaches from companies.

Question 48

_____ is provided by state and local governments,primarily to encourage specific activities that are expected to improve the blighted areas or provide additional employment.

A) Debt capital
B) Venture investment
C) Tax abatement
D) Equity capital

Question 49

Which of the following is a form of personal gift?

A) Tax credits
B) Free use
C) Grants
D) Tax abatements

Question 50

_____ refers to the value of a business that exceeds the sum of the value of all individual assets but that cannot be sold separately from the business.

A) Goodwill
B) Collateral
C) Inventory
D) Debt

Question 51

Which of the following statements is true regarding the Fair Credit Reporting Act?

A) It requires that consumers investigate and directly report any inaccuracies to the source of the inaccurate information.
B) It provides CRAs with a period of one year to investigate cases of inaccurate information.
C) It requires that CRAs independently confirm information.
D) It requires that the CRA forward copies of all relevant information to the source of the inaccurate information.

Question 52

The amount that revenues exceed expenses is referred to as _____.

A) profit
B) cash flow
C) operating margin
D) debt

Question 53

Something of value given or pledged as security for payment of a loan is called _____.

A) chargeback
B) capital equity
C) collateral
D) personal equity

Question 54

An organization,usually associated with universities,that supports start-up technology businesses by providing inexpensive office space,a variety of support services,and resources is called a(n)_____.

A) LLC
B) community development organization
C) small business investment company
D) incubator

Question 55

_____ refers to family or friends letting you add your purchases with theirs in order to get lower prices.

A) Piggybacking
B) Accelerated cash-outs
C) Free use
D) Overpayment

Question 56

_____ exist for the purpose of addressing some identified social need that cannot be adequately met by market forces.

A) SBAs
B) Limited Liability Companies
C) EDAs
D) Foundations

Question 57

Direct reductions in the amount of taxes that must be paid,dependent upon meeting some legal criteria are referred to as _____.

A) tax abatements
B) grants
C) tax credits
D) debts

Question 58

A business that collects,collates,and reports information concerning an entity's use of debt is referred to as a(n)_____.

A) accelerator
B) credit reporting agency
C) debt reporting organization
D) community development organization

Question 59

Gifts of money made to a business for a specific purpose are referred to as _____.

A) equities
B) debts
C) tax credits
D) grants

Question 60

The two largest governmental grant programs that are specifically intended for small business are:

A) SBIR and STTR.
B) SBA and SBDC.
C) EDA and DBED.
D) EDA and SBA.

Question 61

Which of the following ways does borrowing help increase potential profits?

A) By increasing the weighted average cost (WAC)of the business
B) By allowing less debt to be included in the capital mix
C) By providing capital funds for additional business opportunities
D) By increasing the cost of capital of the business

Question 62

_____ is a measure of how much money can be made available to pay obligations within the fiscal year.

A) Current ratio
B) Return on investment
C) Return on equity
D) Profitability ratio

Question 63

_____ ratios measure the business's ability to pay debts and expenses that are due in the current accounting period.

A) Liquidity
B) Profitability
C) Activity
D) Leverage

Question 64

_____ ratios measure how productive a particular asset is in producing sales movement.

A) Current
B) Profitability
C) Activity
D) Leverage

Question 65

_____ measures the extent to which a business can meet its obligations for the long haul.

A) Profitability ratio
B) Current ratio
C) Return on investment
D) Debt-to-equity ratio

Question 66

_____ ratios measure the relative risk that a business setback could cause bankruptcy.

A) Liquidity
B) Gross margin
C) Leverage
D) Profitability

Question 67

Which of the following is true of the debt-to-equity ratio?

A) It measures the relative risk that a business setback could cause bankruptcy.
B) It is calculated using the formula: Total Liabilities/Total Assets.
C) If the ratio is lower,it indicates lesser solvency.
D) If the ratio is greater,it indicates increased business risk.

Question 68

Crowdfunding refers to:

A) approaching several foundations to acquire grants to fund a business.
B) approaching several commercial banks to fund a business.
C) funding a business through partnerships with several companies.
D) funding a business online through gifts made to the business.

Question 69

Restrictions imposed by loan contracts on the operations of a business,such as requiring that a specific minimum net worth be maintained,a specific debt-to-equity ratio not be exceeded,no dividends be paid to stockholders and so on,are known as _____.

A) loan amortizations
B) loan yields
C) loan covenants
D) credit assurance

Question 70

When debt increases as a percentage of total investment,the value of the firm:

A) increases at a decreasing rate.
B) decreases at an accelerated rate.
C) increases at an accelerated rate.
D) decreases at a decreasing rate.

Question 71

_____ is a measure of the amount of debt relative to total investment.

A) Cost of capital
B) Financial leverage
C) Optimum capital structure
D) Financial risk

Question 72

Borrowing money is a better alternative to investing additional personal funds because obtaining equity investment from others:

A) reduces the potential loss for any single investor.
B) allows lesser debt to be included in the capital mix.
C) increases the cost of capital for the business.
D) increases the weighted average cost (WAC)of the business.

Question 73

Uncertainty of returns in a business is referred to as _____.

A) financial risk
B) accelerated cash-out
C) overpayment
D) collateral

Question 74

The weighted average cost (WAC)refers to:

A) a legal reduction in taxes by the government.
B) the average equity capital costs incurred by a firm per year.
C) the percentage cost of obtaining future funds.
D) the expected average future cost of funds.

Question 75

Which of the following is the formula for calculating owner's return on equity (ROE)?

A) Net Income/Average Investment
B) Net Income/Owner's Equity Investment
C) Total Liabilities/Total Owner's Equity
D) Total Liabilities/Total Assets

Question 76

The ratio of profits to owner investment in a business is referred to as _____.

A) return on equity
B) return on assets
C) return on sales
D) return on inventory

Question 77

_____ measure a management's effectiveness in using the invested capital of the business to provide profits.

A) Profitability ratios
B) Gross margin ratios
C) Return on investments
D) Return on equity

Question 78

_____ refers to the percentage expense of obtaining future funds.

A) Risk
B) Cost of capital
C) Rate on investment
D) Return on investment

Question 79

The ratio of debt to equity that provides the maximum level of profits is called _____.

A) cost of capital
B) declining financial leverage position
C) optimum capital structure
D) weighted average cost

Question 80

_____ ratios measure management effectiveness in creating wealth from sales and from invested funds.

A) Liquidity
B) Activity
C) Leverage
D) Profitability