Entrepreneurship and Effective Small Business Management, 11e (Scarborough)
Chapter 16 Sources of Equity Financing
1) The credit crunch has hit those entrepreneurs seeking between $100,000 and ________.
A) $3 million
B) $500,000
C) $1 million
D) $750,000
Topic: Introduction
AACSB: Analytic Skills
2) Unlike entrepreneurs of the past, today’s entrepreneurs:
A) are finding more government interest and funding for business start-ups than ever before.
B) find fewer closed doors as small business start-ups have become less risky.
C) have to piece their capital together from several sources.
D) are spending nearly 75% of their time raising capital.
Topic: Introduction
AACSB: Analytic Skills
3) ________ is any form of wealth used to produce more wealth.
A) Debt
B) Equity
C) Capital
D) Capacity
Topic: Planning for Capital Needs
AACSB: Analytic Skills
4) Tien is looking for capital to purchase new buildings and equipment for her small
manufacturing company. Tien is looking for ________ capital.
A) working
B) fixed
C) growth
D) asset-based
Topic: Planning for Capital Needs
AACSB: Reflective Thinking
1
5) ________ capital is the pool of temporary funds of the business used to support the normal
operation of the business on a short-term basis.
A) Growth
B) Fixed
C) Equity
D) Working
Topic: Planning for Capital Needs
AACSB: Analytic Skills
6) The money Bert uses to build inventory for the upcoming Christmas season would be
classified as ________ capital.
A) growth
B) working
C) fixed
D) efficiency
Topic: Planning for Capital Needs
AACSB: Reflective Thinking
7) ________ financing includes the personal investment of the owners and is often called “risk
capital.”
A) Equity
B) Asset-based
C) Debt
D) Growth
Topic: Sources of Equity Financing
AACSB: Analytic Skills
8) The most common source of equity funds used to start a small business is:
A) private investors or “angels.”
B) loans from commercial banks.
C) the entrepreneur’s pool of personal savings.
D) public stock issues.
Topic: Personal Savings
AACSB: Analytic Skills
2
9) An advantage of using friends and relatives as investors is that:
A) they tend to be more patient.
B) they take a lower return.
C) they don’t want controlling interest in the company.
D) they don’t tend to have unrealistic expectations.
Topic: Friends and Family Members
AACSB: Analytic Skills
10) When receiving investment money from friends and relatives entrepreneurs should:
A) use a clear verbal contract to ensure no misunderstandings.
B) only borrow from close friends and relatives who won’t cause them trouble.
C) discuss all the details of the investment up front.
D) not borrow more than 30% of the necessary capital from them.
Topic: Friends and Family Members
AACSB: Analytic Skills
11) A disadvantage of using friends and relatives as investors is:
A) they tend to demand more stock options.
B) familial seniority often conflicts with the “chain of command.”
C) they require more leniency with benefits and pay.
D) unrealistic expectations or misunderstood risks destroy friendships or family relationships.
Topic: Friends and Family Members
AACSB: Analytic Skills
12) Private investors, or “angels,” are often:
A) wealthy individuals.
B) entrepreneurs.
C) persons who invest in business startups in exchange for equity stakes in the companies.
D) All of the above
Topic: Angels
AACSB: Analytic Skills
3
13) The largest single source of external equity capital for small businesses is:
A) angels.
B) venture capitalists.
C) Small Business Administration loans.
D) commercial bankers.
Topic: Angels
AACSB: Analytic Skills
14) Most “angel” investments:
A) are for growth or fixed capital.
B) are for between $10,000 and $2,000,000.
C) come from international or foreign investors.
D) are seeking a high and quick return on their investment.
Topic: Angels
AACSB: Analytic Skills
15) “Angels”:
A) are hard investors to please. Nearly 70% are dissatisfied with their investment.
B) tend to be easy to get money from as they accept nearly 60% of the opportunities presented.
C) have an average of $150,000 invested in 3.5 firms at any given time.
D) only finance deals requiring over $1 million in capital.
Topic: Angels
AACSB: Analytic Skills
16) When looking for an angel, the key is:
A) networking.
B) using the SBA as a contact point.
C) searching the web.
D) using business incubators’ computer matching services.
Topic: Angels
AACSB: Analytic Skills
4
17) When structuring a deal with an “angel,” an entrepreneur should remember that:
A) “angels” tend to prefer a controlling interest in the business.
B) the deal needs an annual return of 60–75%.
C) “angel” money is patient, often waiting seven or more years to cash out.
D) they prefer to earn their returns through dividends and interest.
Topic: Angels
AACSB: Analytic Skills
18) Private “angel” investors tend to:
A) take 80% ownership by the time the company goes public.
B) provide seed money and less than $500,000.
C) look for returns of 60-75%.
D) only finance projects within their local area or region.
Topic: Angels
AACSB: Analytic Skills
19) One important intangible yet highly important advantage an investment from a large
corporate partner gives a start-up is:
A) credibility.
B) success.
C) power.
D) None of the above
Topic: Corporate Venture Capital
AACSB: Analytic Skills
20) A(n) ________ is a private, for-profit organization that purchases equity positions in young
businesses that will potentially produce returns of 300 to 500 percent over five to seven years.
A) commercial bank
B) venture capital company
C) “angel”
D) SB-1 filing
Topic: Venture Capital Companies
AACSB: Analytic Skills
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21) Most venture capitalists purchase ownership in a small business through:
A) a common stock or convertible preferred stock.
B) an ESOP.
C) loans with an option to buy stock.
D) a general partnership.
Topic: Policies and Investment Strategies
AACSB: Analytic Skills
22) The two factors that make a deal attractive to venture capitalists are:
A) effective marketing strategies and networking opportunities.
B) high returns and a convenient (and profitable) exit strategy.
C) high returns and networking opportunities.
D) a convenient and (profitable) exit strategy and effective marketing strategies.
Topic: What Venture Capitalists Look For
AACSB: Analytic Skills
23) Venture capitalists look for all of the following except:
A) competent management.
B) industry stagnation.
C) viable exit strategy.
D) competitive edge.
Topic: What Venture Capitalists Look For
AACSB: Analytic Skills
24) Venture capitalists look for ________ as the most important ingredient in the success of any
business.
A) innovation
B) a growth industry
C) a competitive edge
D) competent management
Topic: What Venture Capitalists Look For
AACSB: Analytic Skills
6
25) When taking a company public, investment bankers look for:
A) a leading position in a stable market.
B) 3 to 5 years of audited financial statements.
C) a strong record of revenues.
D) a moderate growth rate.
Topic: Public Stock Sale
AACSB: Analytic Skills
26) One of the biggest advantages of going public is:
A) the ability to attract low cost equity funding.
B) the ability to retain control while gaining maximum funding.
C) better employee morale and productivity.
D) enhanced credibility and improved corporate image.
Topic: Public Stock Sale
AACSB: Analytic Skills
27) Probably the biggest disadvantage of “going public” to the entrepreneur is the:
A) dilution of ownership interest.
B) diminished corporate image.
C) future threat of being acquired through the use of stock.
D) loss of key employees.
Topic: Public Stock Sale
AACSB: Analytic Skills
28) One of the things that underwriters look for in a company that wants to go public is:
A) presence in a mature industry.
B) filing fees with the SEC.
C) strong bankers.
D) a clear organizational structure.
Topic: Public Stock Sale
AACSB: Analytic Skills
7
29) The single most important ingredient in making a successful public offering is:
A) choosing a capable underwriter.
B) negotiating a favorable letter of intent.
C) preparing a suitable registration statement.
D) filing Regulation D with the SEC.
Topic: Public Stock Sale
AACSB: Analytic Skills
30) In a public offering, the underwriter:
A) advises the owner as to the best structure of the business going into the sale.
B) serves as an adviser and consultant to the small business in preparing the registration
statement for the SEC.
C) is bound to the offering until it is executed.
D) is listed as one of the officers of the company.
Topic: Public Stock Sale
AACSB: Analytic Skills
31) The document outlining the details of the agreement between the entrepreneur and the stock
underwriter is called:
A) Regulation D.
B) a filing.
C) the letter of intent.
D) the registration statement.
Topic: Public Stock Sale
AACSB: Reflective Thinking
32) Under a ________ agreement, the underwriter agrees to purchase all of the shares in a
company’s public offering and then resells them to investors.
A) best effort
B) lock-up
C) final price
D) firm commitment
Topic: Public Stock Sale
AACSB: Analytic Skills
8
33) A ________ outlines the details of the deal in an IPO.
A) roadshow
B) lock-up agreement
C) letter of intent
D) registration statement
Topic: Public Stock Sale
AACSB: Analytic Skills
34) A lock-up agreement:
A) prevents the sale of “insider” shares for a specific period of time—often 12 to 36 months—
after an initial public offering (IPO).
B) prevents a small company from signing on with other underwriters to make an IPO.
C) prevents a company about to make an IPO from signing a union contract.
D) establishes the final price of the IPO so that it cannot fluctuate before the stock offering is
actually made.
Topic: Public Stock Sale
AACSB: Analytic Skills
35) When filing with the SEC, the initial registration statement:
A) prohibits a “road show.”
B) is filed without share price, proceeds, or commissions listed.
C) signals the time to sign the formal underwriting agreement.
D) is generally accepted without corrections by the SEC.
Topic: Public Stock Sale
AACSB: Analytic Skills
36) The “wait to go effective” is the time period when:
A) the SEC registration statement is being prepared.
B) the underwriter decides what regulation to file under.
C) the firm prices the stock for the offering.
D) the company is waiting for SEC approval after filing the registration statement.
Topic: Public Stock Sale
AACSB: Analytic Skills
9
37) A ________ agreement prevents the sale of insider shares for a specific time period.
A) lock-up
B) pre-nuptial
C) road show
D) registration
Topic: Public Stock Sale
AACSB: Analytic Skills
38) In an IPO, who signs the best efforts agreement?
A) Management
B) Angel
C) Underwriter
D) Board of directors
Topic: Public Stock Sale
AACSB: Analytic Skills
39) The purpose of the ________ is to promote interest among potential underwriters in the IPO.
A) road show
B) registration
C) best efforts agreement
D) filing Regulation A
Topic: Public Stock Sale
AACSB: Analytic Skills
40) The first step in the IPO process is:
A) negotiating a letter of intent.
B) preparing the registration statement.
C) choosing the underwriter.
D) doing the road show.
Topic: Public Stock Sale
AACSB: Analytic Skills
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