Deck 6: Financial Resources For New Ventures: How To Get Them, How To Manage Them

Question 1

Information asymmetry refers to the idea that entrepreneurs and potential investors tend to have different amounts and types of information about a the firm that the entrepreneur wants to start.

Answer 1

True

Question 2

The statement of cash flows shows how much money came into the business,and how much went out,over a certain period of time.

Answer 2

True

Question 3

Cash is a short-term liability.

Answer 3

False

Question 4

Once entrepreneurs obtain money to start a new venture,managing the money is quite easy.

Question 5

In general,the introduction of the entrepreneur to the investor does not take place until the middle of the financing process.

Question 6

Most new ventures require large amounts of start-up capital.

Question 7

If a company is profitable,that means it has adequate cash..

Question 8

Like all cost ratios,the return on sales ratio should be kept as low as possible.

Question 9

Any working capital that a new business needs to get started also needs to be included in start-up costs.

Question 10

When projecting increases in sales in financial statements,a new business should also project related increased costs.

Question 11

The single most important source of capital for new ventures is the entrepreneur's own savings.

Question 12

Which of the following is NOT an advantage provided to entrepreneurs by venture capital?

A) Serves as a major source of money for high-risk business.
B) Demonstrates the credibility of a new business.
C) Provides connections to important stakeholders.
D) Gives assistance running a new business.
E) All of the above are possible advantages.

Question 13

The financial statement that shows such things as revenues,cost of sales,and operating expenses is called the income statement.

Question 14

By syndicating,investors can gather information from a greater variety of different people with different experience and knowledge.

Question 15

Investors probably will expect an entrepreneur to show a reasonable way to manage financial resources before they will invest in the new firm.

Question 16

Most investors in new ventures need to focus on a particular industry and geographic location to develop enough expertise to manage their investments.

Question 17

When new ventures are very young,they rarely obtain debt financing and tend to obtain equity financing instead.

Question 18

If an investor knows the entrepreneur,then the entrepreneur will be less likely to try to take advantage of the investor.

Question 19

Cash inflows and outflows always occur at the same time as revenues and expenses are incurred.

Question 20

Investors in new ventures almost never make investments in companies located near them.

Question 21

The venture capitalists themselves,who make investment decisions in start-ups and manage those investments,are called

A) general partners.
B) limited partners.
C) full partners.
D) commercial investors.
E) business angels.

Question 22

Why do investors require entrepreneurs to put in a lot of their own capital?

A) Entrepreneurs know more about the venture opportunity than the investor.
B) Their capital serves as an incentive to be careful with the investor's capital.
C) It is useful for reducing venture finance problems.
D) All of the above.
E) None of the above.

Question 23

To convert information from your income statement to your cash flow statement,which of the following would you NOT do?

A) Take your net profit and add back depreciation.
B) Add increases in accounts receivable.
C) Subtract increase in inventory.
D) Add increases in accounts payable.
E) Subtract decrease in notes/loans payable.

Question 24

To calculate the amount of cash that a business has at a given point in time,the manager must construct a(an)

A) cash flow statement.
B) breakeven analysis.
C) equity statement.
D) capital ownership statement.
E) covenant statement.

Question 25

Which of the following is not one of the most important questions that an entrepreneur will need to ask herself before starting a venture?

A) How much money do I need?
B) Where should I get the money that I need?
C) When should I schedule to build my new house?
D) What should my salary be?
E) C and D are both not the most important questions to ask.

Question 26

Of the following statements,which one is false?

A) Proforma financial statements are also called breakeven reports..
B) Proforma income statements estimate the profit and loss for the new business.
C) Proforma balance sheets show the financial structure of the business.
D) Proforma balance sheets allow investors to conduct ratio analysis.
E) All of the above are true.

Question 27

When starting a new business,entrepreneurs often know more about the opportunities and problems related to the business than do potential investors. This is known as

A) Information asymmetry.
B) Uncertainty.
C) Information symmetry..
D) A and B only.
E) None of the above.

Question 28

Which of the following is a problem that could be raised by the fact that entrepreneurs have information about their business opportunities that investors don't have?

A) Investors have to make decisions based on limited information.
B) Since entrepreneurs have superior information, they can use it to obtain capital from investors and use it for their own benefit.
C) The existence of adverse selection.
D) A and C only.
E) A, B, and C.

Question 29

An investor will provide money for a new business only if she can get the money back when she wants it. This is known as

A) equity right.
B) proforma right.
C) geographical investing right.
D) voting right.
E) mandatory redemption right.

Question 30

Which of the following can be used by an entrepreneur to help determine how much money will be needed to start a new business?

A) Adverse selection reports.
B) Convertible securities.
C) forfeiture provisions..
D) Breakeven analysis.
E) Asset-based financing reports..

Question 31

Why might venture investors limit their investments to local entrepreneurs?

A) Localized investing makes it easier for investors to get heavily involved in new companies.
B) Investors want entrepreneurs to give them regular updates about their ventures.
C) Investors may have to step in to the day-to-day operations of new firms if something starts to go wrong.
D) Local investing makes it easier to pick the right companies to back.
E) All of the above.

Question 32

People who work for organizations that raise money from large institutional investors and invest those funds in new firms are called

A) limited partners.
B) general partners.
C) venture capitalists.
D) business angels.
E) equity lenders.

Question 33

When someone is unable to distinguish between two people,one who has a desired quality and the other who doesn't,it presents a problem known as

A) confusions.
B) adverse selection.
C) critical selection.
D) indistinguishable qualities.
E) syndication.

Question 34

Venture capitalists

A) provide assistance in operating new businesses.
B) help to identify key employees.
C) assist with operations and strategy formulation and implementation.
D) develop strong relationships with investment bankers who underwrite initial public offerings.
E) do all of the above.

Question 35

Which of the following would be a step towards increasing cash flow and attempting to keep a business from becoming insolvent?

A) Try to maximize the accounts receivable.
B) Increase the amount of credit that you extend to customers.
C) Sell your receivables to companies that purchase accounts receivable at a discount in return for immediate cash.
D) Increase the raw material and finished products inventory that you hold.
E) All of the above.

Question 36

Which one of the following types of debt is the most common for new ventures that do obtain debt financing?

A) Guaranteed by personal assets.
B) Asset-based financing.
C) Supplier credit.
D) A and B only.
E) A, B, and C.

Question 37

A system for guaranteeing loans to new and small businesses to finance inventory or accounts receivable is offered by

A) Small Business Administration Program.
B) CAPLine Program.
C) Large Business Administration Program.
D) SADF Program.
E) None of the above.

Question 38

Which of the following are needed to calculate breakeven?

A) Determine the sales price of the product.
B) Estimate the variable cost of the product.
C) Estimate the business' fixed costs.
D) Divide the fixed costs by the contribution margin percentage to calculate the breakeven sales volume.
E) All of the above.

Question 39

An investor has joined a small group of other investors in an attempt to invest a relatively small amount of money in each of 15 different businesses. This is known as

A) geographically localized investing..
B) syndication.
C) accurate market analysis.
D) accurate profit margins.
E) None of the above.

Question 40

Which of the following statements about business angels is NOT true?

A) They tend to demand higher return on their investment than venture capitalists.
B) The typical business angel is a former entrepreneur.
C) Many invest in new companies to stay involved with the entrepreneurial process.
D) They generally invest between $10,000 and $200,000 per venture in businesses.
E) All of the above statements are true.

Question 41

Identify and discuss the tools that investors can use to manage information and asymmetry problems.

Question 42

List several different sources of capital that a new business can have and discuss the characteristics of each.

Question 43

Entrepreneurs might use an initial investment to reach a milestone,or a set target that they need to achieve for investors to consider additional financing. Which of the following is an example of a milestone?

A) The development of a prototype for the product.
B) Obtaining customer feedback through a survey or focus group.
C) Organizing the relevant venture team.
D) Hiring employees.
E) Any of the above.

Question 44

An entrepreneur needs office equipment for the new business. In order to raise the money to buy the equipment,the entrepreneur takes a loan and pledges the equipment as collateral for the loan. This type of financing is known as

A) equity-based.
B) asset-based.
C) covenant-based.
D) social-based.
E) cost of capital-based.

Question 45

An investor who wants to invest in only one start-up business is trying to decide between two new businesses. The entrepreneurs in both businesses seem quite similar to the investor. However,they are not similar. One has much better skills than the other,who is misrepresenting his skills. The investor is facing the situation known as

A) equity apprehension.
B) breakeven syndrome.
C) adverse selection.
D) covenants.
E) cash flow condition.

Question 46

Investors in new ventures demand high rates of return for several reasons.Which of the following is NOT a reason?

A) New ventures are extremely risky.
B) Investors in new ventures are able to diversify their risks fairly well.
C) Entrepreneurs have information about new ventures that they don't share with investors, allowing them an unfair advantage.
D) Entrepreneurs are often overoptimistic when they project the future prospects of their new ventures.
E) Unlike investors in the stock market who are largely passive, investors in new ventures provide several types of assistance to new ventures and they want compensation for this assistance.

Question 47

Due diligence typically includes an investigation of

A) the business model.
B) the market.
C) the legal entity.
D) the financial records.
E) all of the above.

Question 48

An entrepreneur wants to start a new business and is writing down estimates of sales,cost of sales,and net profits. This entrepreneur is crating a

A) balance sheet.
B) pro-forma income statement.
C) cash flow statement.
D) selection of adverse impact.
E) long-term liability.

Question 49

Total assets divided by total debt is called

A) the income statement ratio.
B) debt ratio.
C) operating expenses.
D) cost of sales.
E) profit margin.

Question 50

Which of the following is a fixed asset?

A) Inventory.
B) Cash.
C) Marketable securities.
D) Long-term liabilities.
E) Buildings.

Question 51

When dealing with the staging of investment,staging

A) helps to protect investors against efforts by entrepreneurs to use their information advantage to gain at the expense of the investor.
B) gives the investor the opportunity to gather information about how the venture is doing before putting more money into the venture.
C) helps investors manage the uncertainty of investing in new ventures.
D) A and C only.
E) A, B, and C.

Question 52

Define debt and equity financing and discuss how they differ from each other.

Question 53

Explain how you making a loan and then buying a car with the proceeds from the loan is the same thing as asset-based financing used by a business.

Question 54

Assume that you are running a small business and you estimate that you will run out of cash in two months. Which of the following could you do to avoid running out of cash?

A) Arrange to pay accounts payable later.
B) Offer customers a discount for paying more quickly.
C) Reduce raw materials.
D) All of these will help to increase cash available.
E) None of these (a, b, or c) will help to increase cash.

Question 55

Two separate entrepreneurs have approached a potential investor to raise money for starting up their new businesses. One entrepreneur has good experience and skills for the planned new business. The other entrepreneur has considerably less experience and skills. The potential investor does not know this and decides to invest in the new business proposed by the entrepreneur with less experience and skills because that person was a more convincing speaker. This demonstrates the idea of

A) proforma financing.
B) insolvent financing.
C) adverse selection.
D) self financing.
E) mandatory redemption.

Question 56

An investor will provide money for a start-up business only if the entrepreneur will agree to giving the investor the right to approve any purchase or sale of assets totaling $100,000 or more. This is know as

A) a proforma statement.
B) a breakeven statement.
C) a mandatory redemption.
D) a covenant.
E) a business angel.

Question 57

Net income divided by net sales is known as

A) profit margin.
B) cost of sales ratio.
C) return on sales.
D) both profit margin and cost of sales ratio.
E) both profit margin and return on sales.

Question 58

The financial statement that shows assets,liabilities,and owners' equity is known as

A) income statement.
B) balance sheet.
C) cash flow statement.
D) profit margin statement.
E) profit and loss statement.

Question 59

Define illiquidity premium and explain why it would be used.

Question 60

Because investors in a new business venture cannot sell the investment easily,they might demand some form of extra compensation. This is known as

A) an illiquidity premium.
B) a break even charge.
C) adverse effect.
D) capital method.
E) terminal value.

Question 61

Explain how the social capital of an entrepreneur can help with raising money to start a new business.