Question 1

Pacific Automotive has a $250,000 compensating balance loan with its bank.The terms of the loan call for Pacific to keep 10% of the loan as a compensating balance and pay interest at an annual rate of 6.50% on the entire amount.If the firm borrows the maximum amount for one year,what is the EAR on this loan?

Accepted Answer

To calculate EAR, we need to take into account the effect of the compensating balance.

The amount of loan Pacific can receive is:
Loan amount = $250,000 / (1-0.10) = $277,778.

The interest payment for one year is:
Interest payment = $277,778 x 0.065 = $18,056.

So the effective loan amount is:
Effective loan amount = $277,778 - $18,056 = $259,722.

Therefore, the EAR is:
EAR = (1 + 0.065/0.9)^0.9 - 1 = 0.0722 or 7.22%.

Therefore, the answer is (C).

Question 2

"A company can borrow money at a preset rate from the bank at any time without seeking approval of the loan each time it needs funds" is a description of what type of loan?

Accepted Answer

This is a description of a line of credit, which allows a company to borrow funds at any time up to a preset limit without having to seek approval for each individual loan.

Question 3

Ventures that have low burn or bleed rates may require less ________ compared to a venture with a high bleed rate.

Accepted Answer

Ventures with low burn or bleed rates are generally more financially stable and less risky, thus requiring less time, monitoring, and stringent performance benchmarks from financiers or venture capitalists compared to ventures with high bleed rates.

Question 4

Your bank has agreed to grant you a discount loan with an APR of 5.25%.If you need $5,000 today,the loan is to be repaid in full in one year,and the total interest to be paid is $277,what is the EAR of the loan?

Accepted Answer

To calculate the EAR, we need to use the formula:

EAR = (1 + APR/m)^m - 1

where APR is the annual percentage rate, and m is the number of compounding periods per year.

In this case, APR = 5.25% and the loan is to be repaid in full in one year, so m = 1.

To find the discount loan's EAR, we need to solve for (1 + APR/m)^m:

(1 + APR/m)^m = 1 + EAR

(1 + 0.0525/1)^1 = 1 + EAR

1.0525 = 1 + EAR

EAR = 1.0525 - 1 = 0.0525 = 5.25%

However, the problem tells us that the total interest to be paid is $277. This means that the amount of the loan that will actually be received is $5,000 - $277 = $4,723.

Using this amount, we can calculate the true APR of the loan:

$4,723 = $5,000/(1 + APR/1)^1

(1 + 0.0525)^1 = $5,000/$4,723

1.0525 = 1.0634

APR = (1.0634 - 1) x 100% = 6.34%

Now we can use this true APR value to calculate the EAR:

EAR = (1 + 0.0634/1)^1 - 1 = 0.054 = 5.54%

Therefore, the best choice is B, with an EAR of 5.54%.

Question 5

Pacific Automotive has a $250,000 compensating balance loan with its bank.The terms of the loan call for Pacific to keep 10% of the loan as a compensating balance and pay interest at an annual rate of 6.50% on the entire amount.If the firm borrows the maximum amount for one year,how much interest is due at the end of the year?

Accepted Answer

The loan amount is $250,000, but 10% of it, which is $25,000, must be kept as a compensating balance. Therefore, Pacific Automotive can only use $225,000 of the loan amount. The interest due at the end of the year is calculated as follows:
$225,000 x 0.065 = $14,625
Therefore, the answer is B) $14,625.

Question 6

The venture capitalist's objective is to help small business owners qualify for loans when they may not be able to qualify through the normal lending policies of a commercial lender.

Accepted Answer

This statement is incorrect. While venture capitalists do invest in small businesses, their primary objective is to provide funding in exchange for an ownership stake in the company, with the expectation of a significant return on investment. They are not typically involved in helping small business owners qualify for loans.

Question 7

The most popular loan program provided by the Small Business Administration is the basic 7(a)Loan Guaranty program.What is the 7(a)Loan Guaranty program? In your answer please address the following points: who is eligible for the loans,how the loans are administered,typical requirements of the applicant,who is responsible for the repayment of the loan,and what happens if there is a loan default.

Accepted Answer

The answer of The most popular loan program provided by...

Question 8

A ________ type of loan is similar to a line of credit.However,even though only a portion of the loan is available to the borrower,interest is paid on the entire face value of the loan.

Accepted Answer

A compensating balance loan requires the borrower to keep a certain amount of money on deposit with the lender as collateral. Only a portion of the loan is available to the borrower, but interest is charged on the entire face value of the loan, making it similar to a line of credit.

Question 9

Which of the following characteristics of angel financiers are not important considerations for a firm or entrepreneur seeking financing?

Accepted Answer

All of the characteristics listed (financial strength, contacts, and exit strategy) are important considerations for a firm or entrepreneur seeking financing from an angel or venture capitalist. Each of these characteristics can impact the potential success of the partnership between the investor and the entrepreneur/firm.

Question 10

With a line of credit,the bank is compensated ________.

Accepted Answer

With a line of credit, the bank is compensated based on the outstanding balance of the loan, not a fixed interest rate or annual payment. The bank earns interest on the amount of funds the borrower has drawn from the line of credit, not the total amount available. Therefore, the compensation is directly tied to the outstanding balance of the loan.

Question 11

You have agreed to a $50,000 fixed-rate loan from First National Bank today and promise to repay the loan with 36 equal monthly payments at an APR of 6.50%.What is the EAR of this loan?

Accepted Answer

To find the EAR, we need to first calculate the monthly interest rate using the formula:
i = (APR/12) = (6.50%/12) = 0.5417%
Next, we can use the formula for EAR:
EAR = (1 + i)^12 - 1 = (1 + 0.005417)^12 - 1 = 0.0670 or 6.70%
Therefore, the best choice is B.

Question 12

If you go to your bank and it grants you a lump sum loan today that requires monthly payments for a fixed period of time to repay the borrowed money,you have most likely received a ________.

Accepted Answer

A straight loan with a preset payment schedule is a type of loan where the borrower receives a lump sum of money and is required to make regular monthly payments for a fixed period of time until the loan is fully repaid. This type of loan is different from a line of credit, which allows borrowers to access funds as needed up to a certain limit. Discount loans and compensating balance loans are not relevant to the situation described in the question.

Question 13

Loans to start-ups without sufficient outside resources for collateral are the exception for commercial banks.This type of lending is usually left to the SBA.

Accepted Answer

Commercial banks typically require collateral as security for loans, and without sufficient outside resources, start-ups may not be able to provide such collateral. Therefore, the Small Business Administration (SBA) may offer loans with relaxed collateral requirements for start-ups.

Question 14

SBA loans are delivered directly to the small business and bypass the need for a commercial bank.

Accepted Answer

SBA loans are guaranteed by the Small Business Administration, but they are still provided through commercial banks and other lending institutions. The SBA guarantees a portion of the loan, which reduces the risk to the lender and increases the likelihood that the loan will be approved.

Question 15

Your bank has agreed to grant you a discount loan with an APR of 5.25%.If you need $5,000 today,how large is the face value of the loan?

Accepted Answer

The formula for calculating the face value of a discount loan is:
Face Value = Amount / (1 - APR * Days / 360)
In this case, we have:
Amount = $5,000
APR = 5.25%
Days = 0 (since we are assuming the loan is due today)
Plugging in these values, we get:
Face Value = $5,000 / (1 - 0.0525 * 0 / 360) = $5,277.78, which rounded to the nearest dollar is $5,277. Therefore, the correct answer is D.

Question 16

Your bank grants you a lump sum loan today equal to the face value of the loan less the interest.Further you must repay the face value of the loan amount in a single lump sum at the end of one year.These terms most closely resemble which of the following types of bank loan?

Accepted Answer

The terms of the loan, where the borrower receives a lump sum loan equal to the face value less the interest and must repay the face value at the end of one year, closely resemble a discount loan. In a discount loan, the borrower receives less than the face value of the loan upfront, with the difference between the loan amount and the face value representing the interest. The borrower then repays the face value in a lump sum at the end of the loan term.

Question 17

You have agreed to a $25,000 fixed-rate loan from Valley State today and promise to repay the loan with 24 equal monthly payments at an APR of 7.50%.How large are your monthly payments? Use a financial calculator to determine your answer.

Accepted Answer

The correct answer is A because the monthly payment for a $25,000 loan at 7.50% APR for 24 months is $1,124.99.

Question 18

The terms angel investors and venture capitalists are often used interchangeably in the popular and financial press,but the textbook highlights some differences between them.What are these differences?

Accepted Answer

The answer of The terms angel investors and venture capitalists...

Question 19

You have agreed to a $50,000 fixed-rate loan from First National Bank today and promise to repay the loan with 36 equal monthly payments at an APR of 6.50%.How large are your monthly payments? Use a financial calculator to determine your answer.

Accepted Answer

The answer of You have agreed to a $50,000 fixed-rate...

Question 20

Financing through angel investors is a fairly common way for funding a start-up.

Accepted Answer

The answer of Financing through angel investors is a fairly...

Quiz 15: Raising Capital