Entrepreneurship and Small Business Management, 2e (Mariotti)
Chapter 15 Financing Strategy: Debt, Equity, or Both?
1) Financing with earnings is an option under what circumstances?
A) A company is profitable and has positive cash flow from operations.
B) A company is profitable and has negative cash flow from operations.
C) A company has no debt and is growing.
D) A company needs debt to survive.
E) None of the above
Learning Obj.: LO 2
AACSB: Analytical thinking
2) Raising money for a business is an aspect of ________, which is the use and manipulation of
money.
A) Financing
B) Surety sequencing
C) Equity analysis
D) Comparative advantage
E) Acquisition
Learning Obj.: LO 1
AACSB: Analytical thinking
3) Business failure is defined by Dun and Bradstreet as “business termination ________.”
A) With losses to creditors
B) With no notice
C) Because of owner illness
D) Due to retirement
E) Exit strategy
Learning Obj.: LO 1
AACSB: Analytical thinking
4) ________ is when the borrower fails to meet the repayment agreement.
A) Default
B) Bankruptcy
C) Liquidation
D) Stock swap
E) Debt swap
Learning Obj.: LO 3
AACSB: Analytical thinking
1
5) Corporations sell equity in the form of ________.
A) Stock
B) Ownership
C) Debt
D) Bonds
E) Notes
Learning Obj.: LO 5
AACSB: Analytical thinking
6) ________ are forms of gifts or grants to businesses.
A) Tax credits
B) Tax abatements
C) Unpaid labor by friends and family
D) All of the above
E) None of the above
Learning Obj.: LO 2
AACSB: Analytical thinking
7) The equity investor’s risk is ________ that of the debt lender.
A) Higher than
B) Much lower than
C) The same as
D) Lower than
E) None of the above
Learning Obj.: LO 3
AACSB: Analytical thinking
8) Statistics indicate that more than half of all small businesses ________.
A) Survive eight or more years
B) Survive ten-plus years
C) Fail after three years
D) Never start up
E) Go bankrupt
Learning Obj.: LO 1
AACSB: Analytical thinking
2
9) The amount of risk or threat of loss that an entrepreneur is willing to sustain is ________.
A) Risk tolerance
B) Risk aversion
C) Risk acceptance
D) Risk reception
E) Risk recognition
Learning Obj.: LO 2
AACSB: Analytical thinking
10) ________ is the act of providing or raising funds for a purpose.
A) Financing
B) Capitalizing
C) Fundraising
D) Initializing
E) Equity raising
Learning Obj.: LO 1
AACSB: Analytical thinking
11) Which of the following is not a type of community development loan fund?
A) Venture capital
B) Small business
C) Microenterprise
D) All of the above
E) None of the above
Learning Obj.: LO 4
AACSB: Analytical thinking
12) If you are a small business owner looking for a loan, a bank will expect you to ________.
A) Personally guarantee that you will be responsible for the business loan
B) Incorporate in order to maximize cash flow
C) Find equity investors to spread the bank’s risk
D) Incorporate in order to avoid taxation
E) All of the above
Learning Obj.: LO 4
AACSB: Analytical thinking
3
13) What do you have to do before you can sell stock in your business?
A) Incorporate
B) Hold an initial public offering
C) Register
D) Get a partner
E) Ask permission
Learning Obj.: LO 5
AACSB: Analytical thinking
14) A ________ is a loan made against an insurance policy with cash value
A) Policy loan
B) Microloan
C) Venture capital fund
D) All of the above
E) None of the above
Learning Obj.: LO 4
AACSB: Analytical thinking
15) Venture capitalists can make their money by ________.
A) Waiting until the company “goes public” and converting their shares into stock, which can
then be traded on the stock market
B) Selling their percentage share of the business to another investor
C) Either of the above
D) Neither of the above
Learning Obj.: LO 4
AACSB: Analytical thinking
16) If $5,000 is borrowed at 9 percent to be paid back over one year, the interest on the loan is
________.
A) $450
B) $590
C) $500
D) $490
E) None of the above
Learning Obj.: LO 3
AACSB: Application of knowledge
4
17) Relying primarily on debt financing is very dangerous for a company because ________.
A) Creditors can force a company into bankruptcy or take over company property
B) Creditors can sabotage the business by refusing to lend it money
C) Creditors can gain a majority share of the company and take it over
D) All of the above
E) None of the above
Learning Obj.: LO 3
AACSB: Analytical thinking
18) Bonds are a form of ________.
A) Debt financing
B) Equity financing
C) Ownership financing
D) Partnership
E) None of the above
Learning Obj.: LO 5
AACSB: Analytical thinking
19) Land or buildings that are bought and sold represent a class of investment called ________.
A) Real estate
B) Mutual funds
C) Stock
D) Bonds
E) Money market accounts
Learning Obj.: LO 5
AACSB: Analytical thinking
20) Some federal agencies provide grants, loans, and/or loan guarantees for businesses that meet
specific criteria. One of these is the United States ________.
A) Small Business Administration (SBA)
B) Department of Agriculture (USDA)
C) Both of the above
D) Neither of the above
Learning Obj.: LO 4
AACSB: Analytical thinking
5
21) No matter what way you approach raising money for your business, you will need a
________.
A) Written business plan
B) Family investment
C) Bank loan
D) Winning lottery ticket
E) Bit of luck
Learning Obj.: LO 4
AACSB: Analytical thinking
22) The greater the potential reward, ________.
A) The riskier the investment is likely to be
B) The more the investment is likely to cost
C) The less risky the investment is likely to be
D) The more it will cost
E) The more established the investment is likely to be
Learning Obj.: LO 3
AACSB: Analytical thinking
23) Methods of bootstrap financing include ________.
A) Getting suppliers to extend you credit terms
B) Using temporary help rather than permanent employees
C) Working from home or borrowing office space
D) All of above
E) None of the above
Learning Obj.: LO 4
AACSB: Analytical thinking
24) If you take out a loan for $2,000 at an annual interest rate of 10%, how much interest will
you pay each year?
A) $200.00
B) $20.00
C) $100.00
D) $10.00
E) None of the above
Learning Obj.: LO 3
AACSB: Application of knowledge
6