Question 1

Small business owners sometimes accept higher levels of debt because doing so permits them to retain all of the shares and full ownership.

Accepted Answer

Small business owners may choose to retain full ownership and control by accepting a higher level of debt instead of sharing ownership with investors. This is known as leverage, which allows them to use borrowed money to increase their returns without diluting ownership.

Question 2

For every business, there is a 'right' answer to the question of balancing debt and equity, and it is important that the small business owner finds that balance.

Accepted Answer

There is no universally 'right' answer for balancing debt and equity as it depends on various factors such as the business's industry, financial situation, risk tolerance, and growth objectives. Each business must assess its unique circumstances to determine the optimal balance.

Question 3

Borrowing money rather than issuing shares typically increases the potential for higher rates of return to owners.

Accepted Answer

When a company borrows money, they are typically expected to pay interest on the loan, but they do not have to share ownership or profits with the lender. This can increase the potential for higher rates of return to owners, as they do not have to dilute their ownership by issuing more shares or share their profits with more shareholders. However, it also increases the company's financial risk, as they will need to generate enough profits to cover the interest expense and repay the loan.

Question 4

Assets such as the quality of a business's employees are considered tangible in nature and thus have substantial value as collateral.

Accepted Answer

Assets such as the quality of a business's employees are intangible and cannot be used as collateral for loans. Tangible assets include things like property, equipment, and inventory.

Question 5

The age of a company has little impact on the types of financing available to it.

Accepted Answer

The age of a company can have an impact on the types of financing available to it. For example, a very young startup may be more likely to seek out seed funding or angel investments, while a more established company may have access to options such as lines of credit or public offerings.

Question 6

Venture capitalists restrict their investment in start-up companies.

Accepted Answer

Venture capitalists tend to be selective in their investments and typically focus on companies that have a high potential for growth and profitability. They often have specific criteria that a company must meet before they will consider investing, such as a strong management team, a viable business plan, and a clear path to market success. As a result, many start-up companies may not meet the requirements of venture capitalists, and may have difficulty securing the funding they need to get off the ground.

Question 7

A business with potential for large profits, as opposed to high growth potential, has many more possible sources of financing than does a business that offers only unattractive returns.

Accepted Answer

A business with potential for large profits may still struggle to find financing if it does not offer the potential for high growth. On the other hand, a business with unattractive returns is likely to have fewer financing options available.

Question 8

If a business finances with equity rather than with debt, it will bear no interest expense and thus yield greater net income.

Accepted Answer

When financing with equity, the business does not have any interest payments to make, reducing its expenses and increasing its net income. However, equity financing may result in dilution of ownership for existing shareholders if new equity is issued.

Question 9

Business loans are the primary source of financing for start-ups.

Accepted Answer

While business loans are one source of financing for start-ups, they are not the primary source. Other sources of financing include personal savings, investments from family and friends, venture capital, and crowdfunding.

Question 10

One potential problem with acquiring funds from friends and relatives is that they might feel they have the right to interfere in the management of the business.

Accepted Answer

Friends and relatives who have invested in the business might feel entitled to have a say in its management, which can lead to conflicts and problems in decision-making.

Question 11

Use of debt financing increases potential returns when a company is performing well, but it also increases the possibility of lower - even negative - returns if the company does not attain its goals in a given year.

Accepted Answer

This statement is true because if a company takes on debt to finance its operations and investments, its interest payments increase. This can lead to lower profits or even losses if the company fails to generate sufficient revenues to cover its operating costs and debt service obligations. On the other hand, if the company is successful in achieving its objectives, the additional debt can amplify the returns earned by shareholders or owners.

Question 12

The main advantage of using credit cards for financing is the relatively low interest rate compared to bank loans.

Accepted Answer

The main advantage of using credit cards for financing is the convenience of access to credit, but the interest rates are generally higher than bank loans.

Question 13

The basic factors that determine how a business is financed are restricted to the business's past economic performance, the nature of its assets, and the personal preferences of owner(s) with respect to the marketing mix.

Accepted Answer

The basic factors that determine how a business is financed include the industry and market conditions, the size and growth potential of the business, the availability of financing options, and the owner's personal financial situation and credit history. The marketing mix is related to how a business promotes and sells its products or services, and is not directly related to its financing decisions.

Question 14

A chattel mortgage is a loan for which real property, such as land or a building, serves as collateral.

Accepted Answer

A chattel mortgage is a loan for which personal property, such as a car or equipment, serves as collateral, not real property like land or a building.

Question 15

The five Cs of credit are character, capacity, capital, conditions and collateral.

Accepted Answer

The five Cs of credit are character, capacity, capital, conditions, and collateral.

Question 16

Generally, as long as a business's operating income return on its assets is greater than the cost of debt, the owners' return on equity investment will decrease as the business uses more debt.

Accepted Answer

When a business's operating income return on its assets is greater than the cost of debt, using more debt can increase the return on equity due to the leverage effect, not decrease it.

Question 17

Goodwill is considered an intangible asset and is highly valued when securing a loan.

Accepted Answer

Goodwill is an intangible asset that represents the excess value of a purchased company over its tangible assets and liabilities. However, it is not typically considered as collateral or highly valued by lenders when securing a loan because it is not a physical asset that can be easily liquidated or valued in case of default.

Question 18

Lines of credit are legal obligations to provide capital.

Accepted Answer

The answer of Lines of credit are legal obligations to...

Question 19

Debt financing as opposed to equity financing allows owners to retain voting control of the company.

Accepted Answer

Debt financing involves taking on loans or bonds, which do not dilute ownership or voting control of the company. Equity financing, on the other hand, involves selling shares of the company to investors, which can result in the loss of voting control.

Question 20

Most start-up investors limit their investing to businesses that offer potentially high returns within a one- to three-year period.

Accepted Answer

Most start-up investors typically look for high returns over a longer period, often five to ten years, as start-ups usually take time to grow and become profitable.

Quiz 12: A Firms Sources of Financing