Deck 15: Raising Capital

Question 1

A major issue with venture capitalists and angel investors is the rate at which their funds will be used up. This is called the ________.

A) consumption or constriction rate
B) burn rate or bleed rate
C) IV rate
D) depreciation rate

Answer 1

B

Question 2

Which of the following statements is FALSE about sole proprietorships?

A) They mix the assets of the company with the personal assets of the owner.
B) The owner receives some, but not all, of the profits.
C) The limitation of capital may constrain growth.
D) The owner makes all decisions.

Answer 2

B

Question 3

Banks and other lending institutions ________.

A) frown upon family funding for start-up businesses
B) have lending models better fitted for start-up businesses compared with established businesses
C) are in competition with the Small Business Administration (SBA) for start-up loans
D) are often next sources of financing for businesses after personal and family contributions

Answer 3

D

Question 4

In the life cycle of a business, a stable life cycle stage is most closely identified with ________.

A) old age
B) youth
C) maturity
D) infancy

Question 5

Starting a business with ________ is by far the most common start-up financing.

A) bonds and equity
B) personal and family funds
C) bank loans
D) venture capital

Question 6

Which of the following is NOT typically involved when a start-up business applies for a loan at a commercial bank?

A) A viable business plan
B) Evidence of at least two months of projected sales already in inventory
C) A personal financial statement
D) Business financial statements, including projected cash flows

Question 7

Financing that will take ________ ten years for repayment is ________ to angel investors.

A) less than; not attractive
B) more than; attractive
C) more than; not attractive
D) None of the answer choices is accurate

Question 8

List the five active phases of a business life cycle as identified by the textbook. Do all business go through these five phases?

Question 9

The 7(a) Loan Guaranty Program of the Small Business Administration (SBA) delivers loans through ________ that are guaranteed by ________.

A) the SBA; commercial lenders
B) banks; the Federal Reserve System
C) commercial lenders; state government
D) commercial lenders; the SBA

Question 10

Angel financing is ________.

A) rare
B) usually for medium-term loans
C) usually limited to the early development of a business
D) All of the above

Question 11

If the SBA makes a loan guarantee, the guarantee is only ________. If the original borrower defaults, the government will repay the obligation up to the ________.

A) to the borrower; loan balance
B) to the public at large; percentage of the SBA guarantee
C) to the lending institution; percentage of the SBA guarantee
D) to the lending institution; loan balance

Question 12

The SBA only aids ________ when their applications would not be approved through normal processes.

A) banks
B) the FRS
C) creditors
D) small business owners

Question 13

In the life cycle of a business, a business that has peaked and is now in decline is most closely identified with ________.

A) old age
B) youth
C) maturity
D) infancy

Question 14

Firms move in an orderly fashion through each stage of the business life cycle without skipping any of the steps.

Question 15

Which of the following is NOT typically involved when a start-up business applies for a loan at a commercial bank?

A) Collateral and owner's contribution
B) Evidence of management capability
C) A contract for partial ownership by the bank of the proposed firm
D) Evidence of good character

Question 16

Typical SBA guaranty loans carry an interest rate equal to ________.

A) the prime rate
B) current market rates
C) the prime rate plus a 1.00% default risk premium
D) the prime rate less 1.00% due to the SBA guarantee

Question 17

Which of the following answer choices is more characteristic of a venture capitalist than an angel investor?

A) Usually individuals or groups; invest own money; early stages of the business
B) Usually corporate entities; often tied to individual or group expertise; early stages of the business
C) Usually individuals or groups; pooled money from range of investors; all stages of the business
D) Usually corporate entities; pooled money from range of investors; all stages of the business

Question 18

SBA guarantee loans have an interest rate that is on average ________.

A) the same as current market rates on business loans
B) lower than current market rates on business loans
C) higher than current market rates on business loans
D) the same as mortgage loans

Question 19

________ is a general term applied to lenders who provide funding for new, high-risk ideas.

A) Angel investing
B) SBA loan agreement
C) Investment banking
D) None of the above

Question 20

________ employer businesses (businesses that employ others besides the owners) will close within the first six years

A) Two out of every five
B) One out of every two
C) Three out of every five
D) Seven out of every ten

Question 21

You have agreed to a $25,000 fixed-rate loan from Valley State today and promise to repay the loan with 24 equal monthly payments at an APR of 7.50%. How large are your monthly payments? Use a financial calculator to determine your answer.

A) $1,124.99
B) $1,218.17
C) $1,532.45
D) $1,602.71

Question 22

You have agreed to a $50,000 fixed-rate loan from First National Bank today and promise to repay the loan with 36 equal monthly payments at an APR of 6.50%. What is the EAR of this loan?

A) 6.50%
B) 6.70%
C) 6.90%
D) 7.10%

Question 23

The most popular loan program provided by the Small Business Administration is the basic 7(a) Loan Guaranty program. What is the 7(a) Loan Guaranty program? In your answer please address the following points: who is eligible for the loans, how the loans are administered, typical requirements of the applicant, who is responsible for the repayment of the loan, and what happens if there is a loan default.

Question 24

"A company can borrow money at a preset rate from the bank at any time without seeking approval of the loan each time it needs funds" is a description of what type of loan?

A) Discount loan
B) Compensating balance loan
C) Line of credit
D) Straight loan with preset payment schedule

Question 25

You have agreed to a $50,000 fixed-rate loan from First National Bank today and promise to repay the loan with 36 equal monthly payments at an APR of 6.50%. How large are your monthly payments? Use a financial calculator to determine your answer.

A) $1246.77
B) $1,45821
C) $1,532.45
D) $1,650.71

Question 26

Financing through angel investors is a fairly common way for funding a start-up.

Question 27

Robertson Lumber has a $250,000 compensating balance loan with its bank. The terms of the loan call for Robertson to keep 10% of the loan as a compensating balance and pay interest at an annual rate of 6.50% on the entire amount. If the firm borrows the maximum amount for one year, how much interest is due at the end of the year?

A) $14,625
B) $16,250
C) $22,500
D) $25,000

Question 28

With a line of credit, the bank is compensated ________.

A) based on the outstanding balance of the loan
B) based on the principal value of the credit line
C) exclusively with a fixed annual payment
D) based on a fixed interest rate tied to the T-bill rate

Question 29

A ________ type of loan is similar to a line of credit. However, even though only a portion of the loan is available to the borrower, interest is paid on the entire face value of the loan.

A) line of credit
B) compensating balance loan
C) straight loan with preset payment schedule
D) discount loan

Question 30

Ventures that have low burn or bleed rates may require less ________ compared to a venture with a high bleed rate.

A) time from the financier
B) monitoring by the venture capitalist
C) performance benchmarks
D) All of the above

Question 31

If you go to your bank and it grants you a lump sum loan today that requires monthly payments for a fixed period of time to repay the borrowed money, you have most likely received a ________.

A) discount loan
B) line of credit
C) straight loan with a preset payment schedule
D) compensating balance loan

Question 32

SBA loans are delivered directly to the small business and bypass the need for a commercial bank.

Question 33

The venture capitalist's objective is to help small business owners qualify for loans when they may not be able to qualify through the normal lending policies of a commercial lender.

Question 34

Which of the following characteristics of angel financiers are not important considerations for a firm or entrepreneur seeking financing?

A) The financial strength of the angel or venture capitalist
B) Contacts of the angel or venture capitalist
C) The exit strategy of the angel or venture capitalist
D) All of the above are important considerations regarding an angel or venture capitalist

Question 35

Your bank grants you a lump sum loan today equal to the face value of the loan less the interest. Further you must repay the face value of the loan amount in a single lump sum at the end of one year. These terms most closely resemble which of the following types of bank loan?

A) Straight loan with a pre-set payment schedule
B) Compensating balance loan
C) Line of credit
D) Discount loan

Question 36

Your bank has agreed to grant you a discount loan with an APR of 5.25%. If you need $5,000 today, the loan is to be repaid in full in one year, and the total interest to be paid is $277, what is the EAR of the loan?

A) 5.25%
B) 5.54%
C) 5.73%
D) 5.91%

Question 37

Robertson Lumber has a $250,000 compensating balance loan with its bank. The terms of the loan call for Robertson to keep 10% of the loan as a compensating balance and pay interest at an annual rate of 6.50% on the entire amount. If the firm borrows the maximum amount for one year, what is the EAR on this loan?

A) 6.50%
B) 6.87%
C) 7.22%
D) 7.39%

Question 38

Loans to start-ups without sufficient outside resources for collateral are the exception for commercial banks. This type of lending is usually left to the SBA.

Question 39

Your bank has agreed to grant you a discount loan with an APR of 5.25%. If you need $5,000 today, how large is the face value of the loan?

A) $4,751
B) $5,000
C) $5,263
D) $5,277

Question 40

Jensen Wholesalers has a $150,000 compensating balance loan with its bank. The terms of the loan call for Robertson to keep 8% of the loan as a compensating balance and pay interest at an annual rate of 7.50% on the entire amount. If the firm borrows the maximum amount for one year, how much interest is due at the end of the year?

A) $10,650
B) $11,250
C) $12,375
D) $14,250

Question 41

An investment bank is an agent that works with the firm to meet all the listing requirements of the bond issue, the design of the bond terms, the marketing of the bond, and the auction of the bond.

Question 42

The bond ________ contains much of the information filed in the bond registration and is used to inform potential buyers about the bond.

A) debenture
B) sinking fund
C) indenture
D) prospectus

Question 43

Jensen Wholesalers has a $150,000 compensating balance loan with its bank. The terms of the loan call for Robertson to keep 8% of the loan as a compensating balance and pay interest at an annual rate of 7.50% on the entire amount. If the firm borrows the maximum amount for one year, what is the EAR on this loan?

A) 7.50%
B) 8.15%
C) 8.35%
D) 8.67%

Question 44

The bond indenture contains ALL BUT WHICH of the following?

A) The coupon rate
B) The yield-to-maturity
C) The maturity date
D) The par value

Question 45

________ provides financial advice, helps design bond terms, makes sure that new bonds meet listing requirements, and then markets new bond issues.

A) The Securities and Exchange Commission
B) An investment banker
C) The Federal Reserve
D) A stock broker

Question 46

A discount loan features a series of repayments to the bank.

Question 47

Syndicated loans are ________.

A) loans where multiple banks join together to make a loan to a single company
B) loans made to television stations to purchase re-runs
C) loans where one bank makes several loans to firms in the same industry as an effort to diversify the bank's loan portfolio
D) loans bought by other banks that have unused funds available for loans

Question 48

The prospectus is the formal contract for the bond.

Question 49

The public auction of bonds in the United States is regulated by the Federal Reserve System.

Question 50

Western Equipment Company will issue 30-year, semiannual bonds with an 8.0% coupon rate and a $1,000 par value. Bonds of similar risk and maturity are currently selling to yield 7.0% in the market place. What is the market price of one of the firm's new bonds? Use a financial calculator to determine your answer.

A) $1,000.00
B) $1,124.72
C) $886.88
D) $1,124.09

Question 51

The ________ is the formal contract for the bond between the issuing company and the buyer.

A) debenture
B) sinking fund
C) indenture
D) prospectus

Question 52

________ is a government-authorized agency created to enforce the 1933 Securities Act.

A) The Securities and Exchange Commission (SEC)
B) The Federal Reserve System (FRS)
C) The Federal Deposit Insurance Corporation (FDIC)
D) The Stock Exchange Commission (SEC)

Question 53

For a bond auction, a company selects a commercial banker to help design and market the bond.

Question 54

With a line of credit, a company can borrow money at a preset rate from the bank at any time, without seeking additional approval of the loan each time funds are needed.

Question 55

Your bank offers discount loans at a discount rate of 7.50%. If you borrowed $50,000 as a discount loan from the bank today at this rate (you receive less than the face value today and repay the face value in one year), how much money would you receive today? What is the EAR of this loan?

Question 56

A letter of credit or line of credit is a preapproved borrowing amount that works much like a ________.

A) premium loan
B) discount loan
C) syndicated loan
D) credit card

Question 57

Worldwide Chemical Corp. plans to sell 20,000 bonds each with a face value of $1,000. If all of the bonds eventually sell for $950 each and the firm's investment banker receives a commission of 2.00% for every bond sold, what are the net proceeds to the firm from the sale of the bond issue?

A) $19,600,000
B) $19,000,000
C) $18,780,000
D) $18,620,000

Question 58

Citizens' Bank of Business commercial loans are currently posted as having an 8.50% APR, with monthly payments due over a three-year period. If your firm takes out a $25,000 loan, what is the monthly payment, and what is the EAR? Use a financial calculator to determine your answer.

Question 59

Syndicated loans are generally reserved for large and mature businesses, and are for the long term rather than the short term.

Question 60

Bonds may be issued through either a ________ or a ________.

A) private auction; federal auction
B) state agency; federal agency
C) public auction; private placement
D) None of the above

Question 61

Skiffertons , an investment banking firm has proposed two types of payment plans for the IPO being considered by Dakota Drilling, a manufacturer of oil drilling equipment. The first is a firm commitment of $5,000,000. The second is a best effort in which Skiffertons will receive $4.00 for every share sold up to a maximum of $2,000,000 for the 500,000 shares being offered. How much money will BB earn under the best efforts method if it is able to sell only 80% of the offering at a price of $30.00 per share?

A) $2,000,000
B) $1,800,000
C) $1,600,000
D) $1,400,000

Question 62

The Bull Bows (BB) investment banking firm has proposed two types of payment plans for the IPO being considered by Johnson JerryRig, a manufacturer of oil drilling equipment. The first is a firm commitment of $10,000,000. The second is a best effort in which BB will receive $3.00 for every share sold up to a maximum of $1,200,000 for the 400,000 shares being offered. How much money will BB earn under the firm commitment method if it is able to sell only 90% of the offering at a price of $30.00 per share?

A) $800,000
B) $1,080,000
C) $1,200,000
D) $2,000,000

Question 63

The firm commitment method of compensation for investment bankers is always more risky financially for issuing firms than the best-effort method.

Question 64

During the so-called cooling-off period while an issuing company is waiting for SEC approval of its IPO, advertising and promotion of the stock usually begins.

Question 65

By making a ________ the investment banker agrees to buy an entire issue of new securities from a firm and then attempt to sell the securities to the public.

A) firm commitment
B) best-efforts
C) IPO
D) due diligence

Question 66

Wilderness Adventure Vacation Company will issue 20-year, semiannual bonds with a 9.0% coupon rate and a $1,000 par value. Bonds of similar risk and maturity are currently selling to yield 10.0% in the marketplace. What is the market price of one of the firm's new bonds? If the investment banking firm working with the firm receives a best-efforts commission of 2.0% per bond sold, how much money will it make if the issue sells only 80% of the 5,000 bonds offered? Use a financial calculator to determine your answer.

Question 67

Extreme Adventures Inc. needs to raise capital and has hired Solomon Sisters to be its investment banker (IB). The Sisters recommend a sale of common stock and estimate the firm could raise a gross amount of $7,500,000 if they could sell 300,000 shares of stock at $25 per share. Solomon has offered two compensation methods for its work on the sale of these securities. The first is a best-efforts arrangement where Extreme will pay Solomon $1.00 for every share issued. The second is a firm-commitment of $7,000,000. If Solomon is able to sell the entire issue at the recommended price, how much money will it make under each arrangement? What is the break-even point in sales percent between firm commitment and best efforts for Extreme Adventures?

Question 68

Regulation A is an exemption from filing with the SEC for an IPO issue of less than $5 million; instead, it requires only a brief offering statement.

Question 69

The Bull Bows (BB) investment banking firm has proposed two types of payment plans for the IPO being considered by Johnson JerryRig, a manufacturer of oil drilling equipment. The first is a firm commitment of $10,000,000. The second is a best effort in which BB will receive $3.00 for every share sold up to a maximum of $1,200,000 for the 400,000 shares being offered. How much money will BB earn under the best efforts method if it is able to sell only 90% of the offering at a price of $30.00 per share?

A) $800,000
B) $1,080,000
C) $1,200,000
D) $2,000,000

Question 70

A ________ requires that the original owners of the firm maintain ownership of their stock for at least 180 days following an IPO.

A) green-shoe provision
B) lock-up agreement
C) letter of commitment
D) red herring

Question 71

Pro-rata shares are allocated if a general bid is oversubscribed at the auction of an IPO.

Question 72

A preliminary prospectus is called a/an ________.

A) indenture.
B) tombstone.
C) red herring.
D) letter of comment.

Question 73

If there is missing information in the prospectus, the investment banker issues a letter of comment to the company and the public.

Question 74

A ________ allows an investment banker to purchase up to 15% of additional shares in an equity offering beyond what is offered to the public.

A) green-shoe provision
B) lock-up agreement
C) letter of commitment
D) red herring

Question 75

The process to register an equity security with the SEC, provide a prospectus for the sale, and advertise for the sale takes, on average, ________.

A) 15-20 days
B) 30-60 days
C) 61-120 days
D) 121-180 days

Question 76

Investment bankers are commonly compensated for their services through a best-effort or a firm-commitment method. Explain how the two compensation methods work.

Question 77

For your firm's initial public offering of stock, your investment banker has guaranteed a specific amount of funds your firm will receive. This is an example of what type of investment banker compensation?

A) Due diligence
B) Firm commitment
C) IPO
D) Best-efforts

Question 78

The process for selling stock for the very first time is known as a/an ________.

A) an initial public offering
B) primary market
C) first refusal rights
D) rookie offering

Question 79

What is the street name for the advertisement issued during the period of time when a firm is waiting for approval from the SEC to issue new securities? This advertisement typically contains the name of the issuing firm and the list of investment bankers involved in underwriting and marketing the new issue.

A) Indenture
B) Tombstone
C) Red herring
D) Letter of comment

Question 80

In a best efforts arrangement, the investment bank pledges to use its best efforts to sell all the authorized shares and takes a cut on each individual share that it sells, but provides no guarantee as to how many shares it will sell.