Question 1

The downside of being able to raise equity capital from other people is that the entrepreneur must inevitably share control with other investors.

Accepted Answer

When an entrepreneur raises equity capital from other investors, they are essentially selling ownership in their business. As a result, they must share control with these investors and may need to make decisions that are in the best interest of the company as a whole, rather than solely their own vision.

Question 2

The founder of a company has to make many critical decisions but not any related to strategies to sell the firm's products.

Accepted Answer

The founder of a company is responsible for making critical decisions, including those related to strategies for selling the firm's products.

Question 3

Limited partnerships are no more costly to form than sole proprietorships.

Accepted Answer

Limited partnerships are typically more costly to form than sole proprietorships because they require formal registration with the state and the preparation of a partnership agreement.

Question 4

The cash flow break-even analysis helps identify how much money will be needed to launch a new product or business.

Accepted Answer

The cash flow break-even analysis is a tool used to determine the point at which revenues will equal expenses and the business will begin to generate a profit. By calculating the break-even point, it is easier to determine the amount of funding needed to launch a new product or business.

Question 5

Starting a business is less risky than buying and growing a business that someone else has already established.

Accepted Answer

Buying and growing a business that someone else has already established may come with additional benefits such as an established customer base, pre-existing systems and processes, and possibly even some revenue. Starting a business from scratch may require more time, effort, and money to establish a customer base and create effective systems and processes.

Question 6

An LLC leads to unlimited liability for the people who make the business decisions in the firm while enabling all investors to retain the tax advantages of a limited partnership.

Accepted Answer

An LLC (Limited Liability Company) is designed to provide its owners (called members) with personal liability protection, meaning they are not personally responsible for the company's debts or obligations. Therefore, the statement is incorrect as LLCs do not lead to unlimited liability for the people who make the business decisions. Additionally, an LLC is taxed as a partnership by default, retaining the tax advantages of a partnership while providing personal liability protection, which is not the same as a limited partnership.

Question 7

A business plan includes a detailed discussion of the marketing and sales activities that will enable the business to achieve the sales and margin levels reflected in the financial forecasts.

Accepted Answer

A business plan typically includes a section dedicated to marketing and sales strategies that will help the business achieve its revenue goals. This section may include information on target markets, marketing tactics, sales channels, pricing strategies, and more.

Question 8

A strategic investor is interested in buying the firm and not just its financial performance.

Accepted Answer

A strategic investor is interested in the long-term growth and development of the company beyond just its financial performance. They may also bring industry expertise and connections to the table, and are often willing to pay a premium for the company due to its strategic value.

Question 9

The two tools that are particularly useful in understanding the cash requirements of a business and in estimating how much financing a new business will require are cash flow break-even analysis and the cash budget.

Accepted Answer

Cash flow break-even analysis helps in determining the point at which revenues will cover all expenses and cash inflows will equal cash outflows. This information is essential in understanding the cash requirements of a business. On the other hand, a cash budget is a financial plan that outlines a company's expected cash inflows and outflows over a specific period. By estimating the timing and amount of cash inflows and outflows, a cash budget helps in determining the cash needs of a business and the amount of financing required to meet them. Therefore, both cash flow break-even analysis and cash budgeting are crucial tools in understanding the cash requirements of a business and estimating its financing needs.

Question 10

A business has a better chance to succeed if one doesn't overanalyze opportunities to the point where you are just convincing yourself not to proceed.

Accepted Answer

Overanalyzing can lead to indecision and missed opportunities. It's important to make informed decisions, but also to avoid getting stuck in analysis paralysis.

Question 11

Limited partnerships are more costly to form than sole proprietorships because the partners must hire an attorney to draw up and maintain the partnership agreement.

Accepted Answer

Limited partnerships require a formal agreement that outlines the responsibilities, liabilities, and profit-sharing arrangements among partners. This agreement must be drafted by an attorney, which adds to the costs of forming the partnership. Additionally, maintaining the partnership agreement may require legal assistance in the future, further increasing the overall cost compared to sole proprietorships.

Question 12

Businesses do not fail because of management's inability to estimate correctly how much money it will take to get their businesses up and running.

Accepted Answer

Estimating the amount of money needed to start and sustain a business is a crucial aspect of management's responsibility. Failure to accurately estimate and allocate funds can lead to financial difficulties and ultimately business failure.

Question 13

An S-corporation can have no more than 50 stockholders.

Accepted Answer

An S-corporation is limited to 100 shareholders, not 50.

Question 14

The business plan presents the results from a strategic planning process that focuses on how the business will be developed over time.

Accepted Answer

A business plan is a document that outlines the strategy and roadmap for how a business will be developed and operated over time. It includes information on the company's products and services, target market, competitors, marketing and sales strategies, financial projections, and more. The plan serves as a guide for management and stakeholders to understand the business's direction and goals.

Question 15

The cash budget summarizes the cash flows into and out of a firm over a period of time.

Accepted Answer

The cash budget is a tool used by financial managers to estimate and track the cash flows of a firm over a period of time. It summarizes the inflows and outflows of cash and is an important tool for managing a firm's liquidity and financial stability.

Question 16

An S-corporation allows the stockholders to avoid double taxation but places limits on the ownership of the firm's stock.

Accepted Answer

An S-corporation allows pass-through taxation like a partnership or sole proprietorship, meaning the profits or losses are passed through to the shareholders to be reported on their individual tax returns. This helps avoid double taxation on the corporate level. However, there are restrictions on the number and type of shareholders, as well as limitations on stock ownership by individuals and entities.

Question 17

An important thing to remember in valuing a business is that the value of a business changes over time.

Accepted Answer

The value of a business is affected by various factors that change over time such as economic conditions, industry trends, competition, and internal developments within the business. Thus, the value of a business is not a fixed amount and can fluctuate over time.

Question 18

A business has a better chance to succeed if one takes calculated risks.

Accepted Answer

Taking calculated risks can lead to opportunities for growth, innovation, and competitive advantage, all of which can contribute to the success of a business. However, taking reckless or uncalculated risks can lead to failure. Therefore, taking calculated risks is important for a business to succeed.

Question 19

Corporations, which are "legal persons" under state law, automatically have a finite life.

Accepted Answer

Corporations, as legal entities, do not automatically have a finite life; they can be structured to exist perpetually, unless specifically designed to dissolve after a certain period or upon the occurrence of a specific event.

Question 20

A financial investor is one who is interested in the financial performance of the firm.

Accepted Answer

A financial investor is someone who invests money with the expectation of earning a financial return. Therefore, they are interested in the financial performance of the firm they are investing in.

Quiz 18: Business Formation, Growth and Valuation