Question 1

Elyse wants to calculate her return on equity but has forgotten the formula.  You tell her that return on equity equals
A) net income divided by owners equity.
B) owners equity divided by net income.
C) total assets divided by owners equity.
D) owners equity divided by total assets.

Accepted Answer

Return on equity is calculated by dividing net income by owners equity. Owners equity is the residual interest in the assets of an entity after deducting liabilities, and net income is the difference between revenues and expenses. This formula measures how much profit a company generates per dollar of equity invested by its owners.

Question 2

If a Eugenie finances her firm with equity rather than debt, her net income could potentially be greater because
A) equity financing almost always leads to better firm performance than debt financing.
B) the terms of equity financing are more stable than the terms of debt financing.
C) equity financing has a positive impact on asset selection.
D) there is no interest expense.

Accepted Answer

If Eugenie finances her firm with equity rather than debt, there is no interest expense. This means that her net income could potentially be higher, as she is not required to make regular interest payments on the financing she obtains.

Question 3

If the firm's rate of return on its assets is _____ than the cost of borrowing, then the owners' rate of return on equity will _____ as the firm uses _____ debt.
A) less, decrease, less
B) greater, decrease, more
C) greater, increase, more
D) less, increase, more

Accepted Answer

When the firm's rate of return on its assets is greater than the cost of borrowing, using more debt amplifies the owners' rate of return on equity through financial leverage.

Question 4

Andrew is a venture capitalist who would like to find a good new business in which to invest.  He's done this before so he has learned to limit his investing to firms with potentially high returns in a _____ period.
A) 6-12 month
B) 1-2 year
C) 3-5 year
D) 5-10 year

Accepted Answer

The answer of Andrew is a venture capitalist who would...

Question 5

Floyd's income statement showed for the current year his company had an operating income of $45,000 and his balance sheet showed total assets of $300,000.  His return on assets is _________ percent.
A) 30
B) 15
C) 12
D) 6

Accepted Answer

Return on assets (ROA) is calculated as operating income divided by total assets. 
ROA = Operating income / Total assets
ROA = $45,000 / $300,000
ROA = 0.15 or 15% 
Therefore, the correct answer is B) 15.

Question 6

Ben left the corporate rat race to start his own business that will allow him to earn a small income while providing plenty of time to pursue his love of pottery making.  He does not expect either growth or high profits.  Ben's prospects for attracting outside financing are:
A) plentiful.
B) limited.
C) moderate.
D) nonexistent.

Accepted Answer

Ben's business does not have growth potential or high profits, which makes it an unattractive investment option for most outside investors. Thus, his prospects for attracting outside financing are limited.

Question 7

David is trying to decide whether to add capital through investing more of his own money or through borrowing money from the bank.  To help him decide, you remind him that ss long as his firm's rate of return on its assets is greater than the cost of the debt, his rate of return on equity will _____ as the firm uses more debt.
A) decrease
B) increase
C) remain the same
D) fluctuate

Accepted Answer

This is known as the "leverage effect." In simpler terms, using debt to finance a portion of a company's assets can amplify the return on equity, as long as the return on assets is greater than the cost of borrowing. This is because the return on equity is calculated by dividing net income by equity, and when there is debt in the equation, the equity portion becomes smaller, resulting in a higher return on equity. However, it's important to note that using too much debt can also increase the risk and volatility of a company's earnings.

Question 8

Carla is a loan analyst at the bank.  When Cameron applied for a loan, Carla looked at his balance sheet for  ________ assets to evaluate a possible loan for his company's financing.
A) direct and indirect
B) tangible and intangible
C) those founded upon past performance and those depending on future performance
D) industry-specific and firm-specific

Accepted Answer

Carla needs to evaluate Cameron's tangible assets (such as property, equipment, and inventory) and intangible assets (such as intellectual property, goodwill, and patents) to determine the collateral available for the loan and assess the overall financial health of the company. Direct and indirect assets, those founded upon past performance, and industry-specific or firm-specific assets may also be considered, but the most relevant for this question are tangible and intangible assets.

Question 9

One factor that influences the choice between debt and equity is the
A) returns anticipated from the enterprise.
B) risk of nationalization.
C) degree of control the owners hope to retain.
D) state of the owners' estate plan.

Accepted Answer

The answer of One factor that influences the choice between...

Question 10

Glenda is trying to decide between the use of debt and the use of equity to finance her young business.  She should remember that:
A) her return on assets will be less if she uses debt financing.
B) using other people's money to finance one's business is seldom a good idea.
C) the lender will have partial control of the business.
D) debt must be repaid even if the company does not make a profit.

Accepted Answer

Debt financing requires repayment regardless of a company's profit levels, distinguishing it from equity financing where investors share in the profits and losses.

Question 11

People like Ben who "bootstrap" company financing are
A) enhancing the "corporate image" of the enterprise by the way they raise capital.
B) depending on their own initiative to obtain the capital necessary to start up and grow.
C) subordinating future capital formation to short-term financial performance.
D) waiting to establish a reputation in the marketplace before raising the bulk of the needed capital.

Accepted Answer

"Bootstrapping" refers to entrepreneurs relying on their own resources and creativity to finance their ventures, rather than seeking outside investors or borrowing large amounts of money. This means that they are depending on their own initiative to obtain the capital necessary to start up and grow.

Question 12

If he holds true to the average, Donald Trump likely invests approximately _____ of his investment in later-stage businesses.
A) one-fourth
B) one-half
C) three-fourths
D) nearly all

Accepted Answer

The answer of If he holds true to the average,...

Question 13

It's been George's "baby" from the beginning and he really doesn't want to be accountable to any outsider for the decisions he makes in his business. In George's case, he should seek initially to secure _____ financing.
A) debt
B) equity
C) internal
D) asset

Accepted Answer

The answer of It's been George's "baby" from the beginning...

Question 14

Cameron has applied for a loan to expand his young business.  When bankers look for evidence of whether he will be able to repay a loan, they usually base their assessment on
A) what Cameron's firm has done in the past.
B) what Cameron says the firm will do in the future.
C) the opinion of investment analysts.
D) the business plan of the enterprise.

Accepted Answer

The answer of Cameron has applied for a loan to...

Question 15

When Ben left the corporate rat race to start his own pottery business, he used some of his retirement savings to finance the business.  This practice is known as:
A) self-starting.
B) cashing out.
C) bootstrapping.
D) folly.

Accepted Answer

The practice of using personal savings or resources to start a business is known as bootstrapping.

Question 16

To determine how well her business is doing, Darlene should monitor the return on her investment (equity) because it is a better measure of performance than
A) the return on assets ratio.
B) the current ratio.
C) the quick ratio.
D) the absolute dollar amount of income.

Accepted Answer

The answer of To determine how well her business is...

Question 17

Williams Alternative Power, Inc. a company developing solar panels, is applying for a loan.  The research the company has done for the manufacturing process would be a(n) _____ asset for the loan evaluation.
A) collateral
B) intangible
C) revolving
D) tangible

Accepted Answer

The research for the manufacturing process is an intangible asset as it cannot be physically touched or seen but holds value for the loan evaluation.

Question 18

Maguire was considering selling stock as a source of funds but was concerned about:
A) damaging his corporate image.
B) the loss of voting control of the company.
C) the effect that might have on future financing.
D) estate planning.

Accepted Answer

The answer of Maguire was considering selling stock as a...

Question 19

Williams Alternative Power, Inc., a company developing solar panels, has done considerable research and limited production during its two year life.  It is about ready for its IPO.  At this stage of its life cycle, its ability to attract venture capital is:
A) greater.
B) lessened.
C) optimal.
D) limited.

Accepted Answer

At this stage of its life cycle, with considerable research and limited production, Williams Alternative Power, Inc. has likely gained attention and demonstrated potential to investors. As a result, the ability to attract venture capital is greater.

Question 20

Even with all his billions and influence, Donald Trump, as an equity investor, cannot demand more than
A) those who have invested debt in the enterprise.
B) what is earned.
C) anticipated future financing.
D) established cash flows.

Accepted Answer

As an equity investor, Donald Trump's returns are based on what is earned by the enterprise. He is not entitled to demand more than the profits generated by the enterprise. The other options listed (invested debt, anticipated future financing, and established cash flows) do not apply to equity investors like Trump.

Quiz 12: A Firm S Sources of Financing

Elyse wants to calculate her return on equity but has forgotten the formula. You tell her that return on equity equals

If a Eugenie finances her firm with equity rather than debt, her net income could potentially be greater because

If the firm's rate of return on its assets is ___ than the cost of borrowing, then the owners' rate of return on equity will _ as the firm uses ___ debt.

Andrew is a venture capitalist who would like to find a good new business in which to invest. He's done this before so he has learned to limit his investing to firms with potentially high returns in a _____ period.

Floyd's income statement showed for the current year his company had an operating income of $45,000 and his balance sheet showed total assets of $300,000. His return on assets is _________ percent.

Ben left the corporate rat race to start his own business that will allow him to earn a small income while providing plenty of time to pursue his love of pottery making. He does not expect either growth or high profits. Ben's prospects for attracting outside financing are:

Carla is a loan analyst at the bank. When Cameron applied for a loan, Carla looked at his balance sheet for ________ assets to evaluate a possible loan for his company's financing.

One factor that influences the choice between debt and equity is the

Glenda is trying to decide between the use of debt and the use of equity to finance her young business. She should remember that:

People like Ben who "bootstrap" company financing are

If he holds true to the average, Donald Trump likely invests approximately _____ of his investment in later-stage businesses.

It's been George's "baby" from the beginning and he really doesn't want to be accountable to any outsider for the decisions he makes in his business. In George's case, he should seek initially to secure _____ financing.

Cameron has applied for a loan to expand his young business. When bankers look for evidence of whether he will be able to repay a loan, they usually base their assessment on

When Ben left the corporate rat race to start his own pottery business, he used some of his retirement savings to finance the business. This practice is known as:

To determine how well her business is doing, Darlene should monitor the return on her investment (equity) because it is a better measure of performance than

Williams Alternative Power, Inc. a company developing solar panels, is applying for a loan. The research the company has done for the manufacturing process would be a(n) _____ asset for the loan evaluation.

Maguire was considering selling stock as a source of funds but was concerned about:

Williams Alternative Power, Inc., a company developing solar panels, has done considerable research and limited production during its two year life. It is about ready for its IPO. At this stage of its life cycle, its ability to attract venture capital is:

Even with all his billions and influence, Donald Trump, as an equity investor, cannot demand more than