Deck 1: Introduction to Finance for Entrepreneurs

Question 1

Studies by Phillips and Kirchhoff, and by Headd, found that about 38%-40% of new firms survived six years of operation.

Answer 1

True

Question 2

Although the risks associated with starting a new entrepreneurial venture are large, there is always room for one more success.

Answer 2

True

Question 3

The Office of Advocacy of the U.S. Small Business Administration documents that "employer firm births" have exceeded 700,000 annually in recent years.

Answer 3

True

Question 4

The so-called "baby boom" generation applies to people born in the United States during the 1946-1964 time period.

Question 5

An entrepreneur is an individual who thinks, reasons, and acts to convert ideas into commercial opportunities and to create value.

Question 6

Phillips and Kirchhoff, using Dun & Bradstreet data, found that 24 percent of new firms were still in existence after two years of operation.

Question 7

"Fads" are not predictable, have short lives, and do not involve macro changes.

Question 8

Small high-technology firms are responsible for twice as many product innovations per employee and obtain more patents per sales dollar than large high-technology firms.

Question 9

One study of Inc. magazine's 500 high-growth firms suggests that about 88 percent of founders feel their firms' successes are due to extraordinary ideas, while the remaining 12 percent feel their firms' successes are due to exceptional execution of ordinary ideas.

Question 10

In 1982, Harry Dent identified several major or megatrends shaping U.S. society and the world.

Question 11

Perhaps the most important invention shuttling us from an industrial society to an information society is the computer chip.

Question 12

"Fads" are large societal, demographic, or technological trends or changes that are slow in forming but once in place continue for many years.

Question 13

Nearly half of business failures are due to economic factors such as inadequate sales, insufficient profits, and industry weakness.

Question 14

Entrepreneurs provide the financing to individuals who think, reason, and act to convert ideas into commercial opportunities and create opportunities.

Question 15

Three major megatrends discussed in Chapter 1 include: societal trends or changes, demographic trends or changes, and technological trends or changes.

Question 16

Small businesses, those with less than 500 employees, represent over 99 percent of all employers, and account for about one-half of the gross domestic product in the United States.

Question 17

Entrepreneurship is the process of changing ideas into commercial opportunities and creating value.

Question 18

Small and growing enterprises are critical to the U.S. economy; small firms provide 20 to 30 percent of net new jobs.

Question 19

Mark Twain once said, "I was always able to see an opportunity before it became one."

Question 20

Environmental commerce, or e-commerce, involves the use of electronic means to conduct business online.

Question 21

A study by Phillips and Kirchhoff using Dun & Bradstreet data found that about three-fourths of new firms were still in existence after two years of operation.

Question 22

The second stage in a successful venture's life cycle is the startup stage.

Question 23

Entrepreneurial finance is the application and adaptation of financial tools and techniques to the planning, funding, operations, and valuation of an entrepreneurial venture.

Question 24

Free cash is all the cash available to cover operating expenses.

Question 25

A venture's financial objective is to survive.

Question 26

Bill Gates once said: "I was seldom able to see an opportunity, until it ceased to be one."

Question 27

The financial objective of increasing value is inconsistent with developing positive character and reputation.

Question 28

Free cash flow is the net income forecast to be available to the venture's owners over time.

Question 29

Free cash flows are adjusted for risk and the time value of money when used to calculate the value of a venture.

Question 30

Owner-manager agency) conflicts are differences between manager's self-interest and that of the owners who hired the manager.

Question 31

Early-stage ventures include firms in their development, startup, orsurvival live cycle stages.

Question 32

Studies by Phillips and Kirchhoff, and by Headd, found that one-half of new firms or new employers were still in existence after four years of operation.

Question 33

Business angels are wealthy individuals acting as informal or private investors, who provide venture financing for small businesses.

Question 34

Free cash exists when cash exceeds that which is needed to operate, pay creditors, and invest in assets.

Question 35

The owner-debtholder conflict is the divergence of the owners' and lenders' self-interest as the firm gets close to going "public."

Question 36

Financial distress occurs when cash flow is insufficient to meet current debt obligations.

Question 37

The "time value of money" is an important component of the rent one pays for using someone else's financial capital.

Question 38

Nine principles of entrepreneurial finance are identified and explored in this entrepreneurial finance textbook,

Question 39

Private financial markets are a place where standardized contracts or securities are traded on organized security exchanges with restrictions on how they can be transferred.

Question 40

The rapid growth stage directly follows the startup stage.

Question 41

Maximizing the value of the venture to its owners is the common financial goal of which of the following?

A) the entrepreneur
B) the debtholders
C) the venture equity investors
D) both a and b
E) both a and c

Question 42

The "sharing economy" refers to the cross-referencing of innovations for record-keeping purposes.

Question 43

Which of the following is considered to be an "agency" conflict?

A) owner-manager conflict
B) stockholder-manager conflict
C) stockholder-debtholder conflict
D) manager-debtholder conflict

Question 44

Which of the following does not describe activity during the venture's life cycle startup stage?

A) venture's organization
B) venture's development
C) operating cash flows are generated
D) initial revenue model is put in place

Question 45

Which one of the following possible conflicts of interest increases in divergence at venture gets close to bankruptcy?

A) owner-manager conflict
B) owner-employee conflict
C) manager-employee conflict
D) manager-debtholder conflict

Question 46

"Crises and bubbles" and "emerging economies and global change" are considered to be sources of entrepreneurial opportunities.

Question 47

About 60 percent of all newly created businesses in the U.S. are dissolved or cease operations within how many years after being started?

A) two years
B) four years
C) six years
D) eight years

Question 48

One principal of entrepreneurial finance is "risk and expected reward go hand in hand.

Question 49

Which one of the following possible conflicts of interest is usually minimized through the use of equity incentives?

A) owner-manager conflicts
B) owner-employee conflicts
C) manager-employee conflicts
D) manager-debtholder conflicts

Question 50

Which is not a major source of start-up financing for a venture's startup stage?

A) entrepreneur's assets
B) business operations
C) family and friends
D) business angels
E) venture capitalists

Question 51

Obtaining bank loan, issuing bonds, and issuing stock is characteristic of which type of financing during the venture's life cycle?

A) seed financing
B) second round financing
C) mezzanine financing
D) seasoned financing
E) liquidity stage financing

Question 52

Which of the following is not a life cycle stage of a successful venture?

A) development stage
B) startup stage
C) survival stage
D) cash cow stage
E) early-maturity stage

Question 53

Mezzanine financing is temporary financing needed to keep the venture afloat until the next offering.

Question 54

At which stage of the venture's life cycle stage is best characterized by the period when revenues start to grow and when cash flows from operations begin covering cash outflows?

A) survival stage
B) startup stage
C) rapid growth stage
D) early-maturity stage

Question 55

Successful entrepreneurs exhibit which of the following traits?

A) recognize and seize commercial opportunities
B) economic pessimism
C) tend to be doggedly optimistic
D) both a and b
E) both a and c

Question 56

Entrepreneurial opportunities can occur only when there are societal changes in the world.

Question 57

Disruptive innovation is an innovation that creates a new market or network that disrupts and displaces an existing market or network.

Question 58

While cash is the language of business, accounting is the currency.

Question 59

Venture character and reputation can be assets or liabilities.

Question 60

In Chapter I five mega-trend categories are identified as sources of entrepreneurial opportunities.

Question 61

Financial markets where customized contracts or securities are negotiated, created, and held with restrictions on how they can be transferred are called:

A) private financial markets
B) public financial markets
C) domestic financial markets
D) international financial markets
E) all of the above

Question 62

You are considering investing in two independent projects "A" and "B". Project A requires an initial investment of $12,000. In one year, there is a 30% chance of a $10,500 return; a 50% chance of a $12,500 return; and a 20% chance of a $14,500 return. Project B requires an initial investment of $1,000. In one year, there is a 25% chance of a $950 return; a 25% chance of a $1,000 return; and a 50% chance of a $1,200 return. If you require a 7% return on your investment after one year, you should:

A) Accept A and reject B
B) Accept B and reject A
C) Accept both projects
D) Reject both projects

Question 63

A project requires an initial investment of $1,000,000. In one year, there is a 40% chance of a $950,000 return; a 50% chance of a $1,200,000 return; and a 10% chance of a $2,000,000 return. What is the project's expected return one year from now?

A) 12.8%
B) 15.5%
C) 18.0%
D) 38.3%

Question 64

The first three stages of a successful venture's life cycle occur in the following order:

A) development, rapid growth, survival
B) startup, development, rapid growth
C) startup, survival, rapid growth
D) survival, rapid growth, early-maturity
E) development, startup, survival

Question 65

One study of successful entrepreneurs indicated that a majority felt that the most important factor in the long-term success of their ventures was:

A) being greedy
B) having high ethical standards
C) working hard
D) taking frequent vacations

Question 66

Which of the following advise and assist corporations on the type, timing, and costs of issuing new debt and equity securities and facilitate the sale of firms?

A) brokerage firms
B) venture law firms
C) specialist firms
D) investment banking firms

Question 67

You have the opportunity of making a $5,000 investment. The outcomes one year from now will be either $4,500 or $6,000 with an equal chance of either outcome occurring. What is the expected outcome?

A) $4,500
B) $6,000
C) $5,250
D) $5,750
E) $5,000

Question 68

Which of these statements is correct?

A) The development stage occurs between the startup and survival stages of a venture's life cycle
B) The early-maturity stage is the final stage of a new venture's lifecycle
C) Firms typically begin to cover all expenses with internally-generated funds during the survival stage
D) During the startup stage, revenues grow much more rapidly than cash expenditures
E) None of the above

Question 69

During a venture's rapid growth stage, funds for plant expansion, marketing expenditures, working capital, and product or service improvements is obtained through?

A) seed financing
B) second round financing
C) mezzanine financing
D) seasoned financing
E) liquidity stage financing

Question 70

Lindsey and Tobias have the opportunity to invest in a project that requires an investment of $3,000. There is a 35% chance of a $2,900 return; a 40% chance of a $3,400 return; and a 25% chance of a $4,500 return one year from now. Lindsey requires a 15% return on the project after the first year, but Tobias requires a return of only 12%. Using the expected rate of return:

A) Lindsey and Tobias should both invest in the project
B) Only Tobias should invest in the project
C) Only Lindsey should invest in the project
D) Lindsey and Tobias should both reject the project

Question 71

The type of financing that occurs during the survival stage of a venture's life cycle is typically referred to as the:

A) seed financing
B) startup financing
C) first round financing
D) second round financing
E) mezzanine financing

Question 72

Which stage in the venture life cycle is characterized by creating and building value, obtaining additional financing, and examining opportunities?

A) survival stage
B) startup stage
C) rapid growth stage
D) early-maturity stage

Question 73

The last stage in a successful venture's life cycle is called the:

A) rapid growth stage
B) early-maturity stage
C) development stage
D) survival stage
E) startup stage

Question 74

Assume that you can sell a new product at $5.00 per unit. Your variable costs are $3.00 per unit and you fixed costs are $20,000. What will be your profit before taxes if you sell 12,000 units next year?

A) $0
B) $1,000
C) $2,000
D) $4,000
E) $8,000

Question 75

You have the opportunity of making a $5,000 investment. The outcomes one year from now will be either $5,000 or $6,000 with an equal chance of either outcome occurring. What is the expected rate of return?

A) 10%
B) 15%
C) 20%
D) 25%
E) 30%

Question 76

Which one of the following would not be considered a type of venture financing?

A) seed financing
B) startup financing
C) mezzanine financing
D) liquidity-stage financing
E) seasoned financing

Question 77

Assume that you can sell a new product at $5.00 per unit. Your variable costs are $3.00 per unit and you fixed costs are $20,000. What is your breakeven point in sales units?

A) 5,000
B) 7,500
C) 10,000
D) 12,500
E) 15,000

Question 78

Founder and venture investor shares are sold to the public after the initial offering to the public is called?

A) secondary market transaction
B) secondary stock offering
C) venture offering
D) bridge loan