Question 1

What is the most frequent source of financing?
A) asset-based lenders
B) personal savings
C) wealthy individuals
D) venture capitalists

Accepted Answer

Personal savings is often the most frequent source of financing for small businesses as it does not involve taking on debt or giving up ownership stake in the company. This is especially true for startups where other sources of financing may not be available yet.

Question 2

Because of the high risk and relatively small amount of cash required to start his business,Graham is turned down by traditional creditors.However,a wealthy individual believing in Graham and the business agrees to finance the start-up.What is this wealthy individual called?
A) venture capitalist
B) business angel
C) private bank
D) credit specialist

Accepted Answer

A wealthy individual who invests money in a start-up is commonly referred to as a business angel or angel investor. They provide financing when traditional creditors like banks or credit specialists decline to lend money due to the high risk involved in the business. They typically provide capital in exchange for ownership equity or other forms of compensation.

Question 3

Camilla calls a meeting with the other major stock holders of the company who make up the board of directors.Camilla wants to finance a marketing strategy by securing a long-term note with the company's bank as opposed to selling more shares.What will this do to the financial risk of the company?
A) The financial risk will be lower.
B) The financial risk will be higher.
C) The financial risk won't change.
D) Only the minority shareholders will bear the risk.

Accepted Answer

Securing a long-term note increases the company's debt, which in turn raises the financial risk. This is because the company is obligated to make interest payments regardless of its financial situation, and failure to do so can lead to bankruptcy. Selling shares, on the other hand, does not require repayment and does not increase financial risk in the same way.

Question 4

Sybil is always promoting her company.She can clearly and succinctly describe her company,the products,the target market,and the potential all within 30 seconds.What is this an example of?
A) elevator pitch
B) executive summary
C) sales deck
D) market call

Accepted Answer

This is an example of an elevator pitch, which is a brief and compelling introduction to a product, service, or company that can be delivered in the time it takes to ride an elevator (typically 30 seconds to two minutes).

Question 5

Maurizio's wants to import authentic olive oil from Italy for his world food venture.He creates a website to raise the required capital through crowdfunding.If the money raised is sufficient each contributor would receive a bottle of the authentic olive oil.What approach to crowdfunding did Maurizio use?
A) donation
B) rewards
C) pre-purchases
D) equity investing

Accepted Answer

The answer of Maurizio's wants to import authentic olive oil...

Question 6

The owners of a company change their decision to finance by issuing more shares.Instead,they take out a long-term note with their bank.What will be the repercussions of this change in decision?
A) return on assets will increase
B) return on assets will be unaffected
C) financial risk will be lower
D) financial risk will be unaffected

Accepted Answer

The return on assets (ROA) is calculated as net income divided by total assets. Changing the financing method from equity to debt does not directly affect the net income or total assets, so ROA remains unaffected.

Question 7

The owner of a newsprint business would like to approach her bank to finance the purchase of a high speed cutting machine.What type of arrangement should make with her bank?
A) line of credit
B) mortgage
C) term loan
D) credit card increase

Accepted Answer

A term loan would be the best choice for financing the purchase of a high speed cutting machine as it provides a specific amount of money that is to be repaid over a fixed period of time with a predetermined interest rate. This type of loan is typically used for major purchases and investments in business equipment or property.

Question 8

Every business owner wants to be profitable but what is it about profit that the business owner really wants to know?
A) how the profits will be distributed
B) the number of years before making a profit
C) the currency of the profit
D) rate of return on the investment

Accepted Answer

The business owner wants to know the rate of return on their investment, which is directly related to profit. Knowing the rate of return on their investment will help them understand the financial viability of their business and make informed decisions on future investments. The other options (A, B, and C) may also be important for the business owner but are not directly related to understanding profit.

Question 9

Jasper needs $1,000 quickly to pay for booth space at a very prestigious trade show.Her friends and family have already loaned her money and she has no business assets.How should Jasper pay for the trade show?
A) line of credit
B) mortgage
C) term loan
D) credit card

Accepted Answer

Since Jasper needs the money quickly and has no business assets, applying for a line of credit or term loan may take too long or may not be approved. Similarly, a mortgage would not be feasible as it involves putting up property as collateral. The best option for Jasper would be to use a credit card, which allows for quick and easy access to funds. However, she should be aware of the high interest rates and fees associated with credit card usage and make a plan to pay off the debt as soon as possible.

Question 10

At start-up Karen had to find unique ways to finance her business.She used her credit cards,talked to friends,sold personal assets,and used initial company profits to be re-invested in the business.What is this kind of financing called?
A) bootstrapping
B) equity financing
C) debt financing
D) love money

Accepted Answer

This kind of financing is called bootstrapping, which is a process of self-funding a startup using personal resources like credit cards, savings, and selling personal assets. It is a common way for entrepreneurs to fund their businesses, especially in the early stages when external funding is hard to come by. It allows entrepreneurs to retain control over their business and avoid the complications of debt or equity financing.

Question 11

Camilla purchases a drying machine for her floral designs and arranges an equipment loan with the supplier.The drying machine is priced at $4,000.How much down payment will be required from Camilla?
A) $700-$800
B) $800-$920
C) $920-$1,000
D) $1,000-$1,400

Accepted Answer

The down payment is typically a percentage of the purchase price. Assuming a common down payment rate of 25%, Camilla would need to pay $1,000 (25% of $4,000), which falls within the range of $1,000-$1,400.

Question 12

The owner of a new wholesale company knows he will need to use as much cash as possible to market his company and build a sales team.Which loan payment schedule would he prefer?
A) equal monthly payments
B) decreasing monthly payments
C) straight-line payments
D) amortized payments

Accepted Answer

Equal monthly payments would allow the owner to use as much cash as possible to market his company and build a sales team.

Question 13

Bill and his wife decided to raise capital for their pet sitting service through crowdfunding.Everyone that contributed received a pet photo frame.What approach to crowdfunding did Bill and his wife use?
A) donation
B) rewards
C) pre-purchases
D) equity investing

Accepted Answer

Bill and his wife used the rewards approach to crowdfunding as they offered a pet photo frame to everyone that contributed to raising capital for their pet sitting service.

Question 14

Which margin formula do banks generally apply to loans on the basis of a line of credit?
A) 10 percent of the value of accounts receivable plus 60 percent of inventory
B) 50 to 80 percent of the value of accounts receivable plus 50 percent of inventory
C) 20 percent of the value of accountants receivable plus 20 percent of inventory
D) 30 percent of the value of accounts receivable plus 15 percent of inventory

Accepted Answer

Banks generally apply a margin formula of 50 to 80 percent of the value of accounts receivable plus 50 percent of inventory for loans on the basis of a line of credit. This means that the maximum loan amount will be calculated based on these percentages, and the borrower can draw from the line of credit up to that amount.

Question 15

What is required of a firm to be eligible for IRAP funding?
A) It assists them in marketing their products within Canada.
B) It assists them in financing commercial start-ups in less-developed areas of Canada.
C) It assists them in marketing their products abroad through financial assistance to visit foreign markets or attend international trade shows.
D) It assists them by providing insurance for Canadian exporters.

Accepted Answer

To be eligible for IRAP funding, a firm must be engaged in research and development activities and require financial assistance to market their products internationally. IRAP provides financial support to firms for attending international trade shows or for visiting foreign markets to help them expand their business internationally. Option A, B, and D do not specify the eligibility criteria for IRAP funding.

Question 16

What is the traditional way to locate business angels?
A) through business associates,accountants,and lawyers
B) through formal angel networks or clubs
C) through advertisements in magazines
D) through friends and relatives

Accepted Answer

The traditional way to locate business angels is through personal networks of business associates, accountants, and lawyers. They often know and can introduce potential investors who are looking for investment opportunities. Friends and family members can also be a good source for investment, but it is not always feasible to rely on them for larger investments. Angel networks and clubs can also be a great option, but they are relatively new compared to the traditional way of networking. Advertising in magazines can be effective for reaching a larger audience, but it can be costly and may not reach the right investors.

Question 17

Tracee receives a large order from a customer.Her company does not have the cash to purchase the products from her supplier so she enters into a purchase-order financing agreement with a lender.The sale is for $75,000.The cost of the products is $40,000.What fee will the lender charge?
A) $1,200-$3,200
B) $3,200-$4,000
C) $4,000-$6,000
D) $6500-$10,000

Accepted Answer

The lender will charge a fee of 2-5% of the sale price, which is $1,500-$3,750.

Question 18

Jaspreet is requesting a loan from his company's bank.The bank manager is very happy when Jaspreet needs financing.Her bank has been helping her grow her business for the past 11 years and Jaspreet has never missed a loan payment.What interest rate will the manager offer Jaspreet?
A) commercial rate
B) term rate
C) prime rate
D) secondary rate

Accepted Answer

The bank has a long-standing relationship with Jaspreet and he has a good track record of never missing a loan payment. Therefore, the bank can offer him the prime rate, which is the lowest interest rate offered to the bank's most creditworthy customers.

Question 19

Leonard needs cash right away to take advantage of a discount his supplier is offering.He sells his accounts receivable to another company to get the cash he needs.What is the sale of his accounts receivable for cash called?
A) kiting
B) declining
C) liquidating
D) factoring

Accepted Answer

The sale of accounts receivable for cash is known as factoring. This allows the company to receive immediate cash in exchange for their outstanding invoices, which can be beneficial for companies looking to meet immediate cash needs.

Question 20

Why do some lenders require a firm to "clean up" their line of credit one month each year?
A) because such a loan can only be outstanding for a maximum of 11 months
B) because each year a new rate of interest is applied to the outstanding balance
C) to help the firm develop a good credit history so it can borrow larger amounts in the future
D) to ensure the loan is being used for business purposes only

Accepted Answer

Requiring a firm to "clean up" their line of credit one month each year ensures that the loan is not outstanding for a maximum of 12 months, as is typical for a revolving line of credit. This protects the lender from potential default and keeps the borrower accountable for their debt.

Quiz 14: Sources of Financing

What is the most frequent source of financing?

Because of the high risk and relatively small amount of cash required to start his business,Graham is turned down by traditional creditors.However,a wealthy individual believing in Graham and the business agrees to finance the start-up.What is this wealthy individual called?

Camilla calls a meeting with the other major stock holders of the company who make up the board of directors.Camilla wants to finance a marketing strategy by securing a long-term note with the company's bank as opposed to selling more shares.What will this do to the financial risk of the company?

Sybil is always promoting her company.She can clearly and succinctly describe her company,the products,the target market,and the potential all within 30 seconds.What is this an example of?

The owners of a company change their decision to finance by issuing more shares.Instead,they take out a long-term note with their bank.What will be the repercussions of this change in decision?

The owner of a newsprint business would like to approach her bank to finance the purchase of a high speed cutting machine.What type of arrangement should make with her bank?

Every business owner wants to be profitable but what is it about profit that the business owner really wants to know?

Jasper needs $1,000 quickly to pay for booth space at a very prestigious trade show.Her friends and family have already loaned her money and she has no business assets.How should Jasper pay for the trade show?

At start-up Karen had to find unique ways to finance her business.She used her credit cards,talked to friends,sold personal assets,and used initial company profits to be re-invested in the business.What is this kind of financing called?

Camilla purchases a drying machine for her floral designs and arranges an equipment loan with the supplier.The drying machine is priced at $4,000.How much down payment will be required from Camilla?

The owner of a new wholesale company knows he will need to use as much cash as possible to market his company and build a sales team.Which loan payment schedule would he prefer?

Bill and his wife decided to raise capital for their pet sitting service through crowdfunding.Everyone that contributed received a pet photo frame.What approach to crowdfunding did Bill and his wife use?

Which margin formula do banks generally apply to loans on the basis of a line of credit?

What is required of a firm to be eligible for IRAP funding?

What is the traditional way to locate business angels?

Tracee receives a large order from a customer.Her company does not have the cash to purchase the products from her supplier so she enters into a purchase-order financing agreement with a lender.The sale is for $75,000.The cost of the products is $40,000.What fee will the lender charge?

Jaspreet is requesting a loan from his company's bank.The bank manager is very happy when Jaspreet needs financing.Her bank has been helping her grow her business for the past 11 years and Jaspreet has never missed a loan payment.What interest rate will the manager offer Jaspreet?

Leonard needs cash right away to take advantage of a discount his supplier is offering.He sells his accounts receivable to another company to get the cash he needs.What is the sale of his accounts receivable for cash called?

Why do some lenders require a firm to "clean up" their line of credit one month each year?