Deck 14: 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

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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 7

A company's goodwill is its best collateral.

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

When financing with debt,small businesses should first apply for a Small Business Administration guaranteed loan before approaching their own bank as the SBA loans have lower interest rates.

Question 13

The majority of small business start-ups are funded by bootstrapping.

Question 14

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

Question 15

Obtaining outside equity financing can only be done if your business is organized as: a partnership,a corporation,or a limited liability company.

Question 16

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

Question 17

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 18

Giving a gift has tax implications.

Question 19

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

Question 20

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

Question 21

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 22

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 23

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 24

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 25

Financial management requires that you have some method to measure and compare your financial position and financial results.Your financial position is reflected on your _______,your financial results on your _______.

A) master budget; return on investment
B) balance sheet; income statement
C) return on investment; master budget
D) income statement; balance sheet

Question 26

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 27

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 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

If financed using unsecured debt,which of the following is not one of the ways a lender can collect any unpaid loan payments?

A) By forcing you into bankruptcy
B) By using court actions
C) By filing a lawsuit against you
D) By seizing specific assets

Question 30

Which of the following is a drawback to financing with gift capital?

A) It can be very difficult and expensive to turn into a source of capital.
B) You will be selling ownership in your business.
C) The amount of financing you can raise is limited by the amount of wealth you have personally,the amount of wealth your business owns,and your reputation.
D) No foundations exist to specifically provide start-up or working capital funding.

Question 31

Which of the following statements concerning financial management is correct?

A) The details of financial management are standard across businesses in different industries.
B) Obtaining money for your start-up is only the beginning of financing a small business.
C) Financial management needs remain the same through the life of the company.
D) Once a financial management system is in place it only requires periodic review.

Question 32

Which of the following is a drawback to financing with debt?

A) You will be required to make periodic reports detailing how the money is being used.
B) You will be selling a portion of your business.
C) Payment is expected even if you have no money to make the payment.
D) Your business must be organized as one of three legal forms of business.

Question 33

Which of the following is an example of debt financing?

A) Incubators
B) Crowdfunding
C) Tax abatement
D) Angels

Question 34

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

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

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

________ provides a lender with the right to seize specific assets if the loan is not paid back as specified in the loan contract.

A) Secured debt
B) Collateral
C) Debt capital
D) Cost of capital

Question 37

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

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

Question 38

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

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

Question 39

_____ 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 40

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 41

An organization 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 42

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 43

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 44

Which of the following is a form of personal gift?

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

Question 45

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 46

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 47

Which of the following ratios is better when it is a lower number?

A) Gross margin ratio
B) Asset turnover ratio
C) Debt to assets ratio
D) Current ratio

Question 48

_____ 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 49

_____ 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 50

_____ 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 51

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 52

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 53

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

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

Question 54

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 55

_______ is a set of theories and techniques used to optimize the receipt and use of capital assets.

A) Financial management
B) Bootstrapping
C) Profitability
D) Cost of capital

Question 56

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 57

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 58

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 59

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 60

_____ 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 61

_____ 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 62

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

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

Question 63

Which of the following ratios is determined by dividing total liabilities by total owners' equity?

A) The acid test
B) Debt to equity ratio
C) The quick ratio
D) Return on equity

Question 64

When debt increases as a percentage of total investment,returns on equity:

A) increase at a decreasing rate.
B) decrease at an accelerated rate.
C) increase at an accelerated rate.
D) decrease at a decreasing rate.

Question 65

_____ refers to the percentage expense of obtaining future funds.

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

Question 66

_____ 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 67

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 68

_____ 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 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

_____ 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 71

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

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

Question 72

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 73

_____ 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 74

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

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

Question 75

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

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

Question 76

Which of the following ratios measures the percentage of sales revenue available to pay operating costs and to provide profits after paying for inventory?

A) Gross margin ratio
B) Profit margin ratio
C) Quick ratio
D) Debt to assets ratio

Question 77

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 78

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 79

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 80

Which of the following ratios is determined by dividing total liabilities by total assets?

A) Debt to assets ratio
B) Debt to equity ratio
C) Return on assets ratio
D) Gross margin ratio