Financial Management: Core Concepts, 4e (Brooks)
Chapter 15 Raising Capital
1) ________ employer businesses (businesses that employ others besides the owners) will close
within the first six years.
A) Two out of every five
B) One out of every two
C) Three out of every five
D) Seven out of every ten
2) In the life cycle of a business, a stable life cycle stage is most closely identified with
________.
A) old age
B) youth
C) maturity
D) infancy
3) In the life cycle of a business, a business that has peaked and is now in decline is most closely
identified with ________.
A) old age
B) youth
C) maturity
D) infancy
4) Firms move in an orderly fashion through each stage of the business life cycle without
skipping any of the steps.
5) List the five active phases of a business life cycle as identified by the textbook. Do all
business go through these five phases?
1) Starting a business with ________ is by far the most common start-up financing.
A) bonds and equity
B) personal and family funds
C) bank loans
D) venture capital
2) Which of the following statements is FALSE about sole proprietorships?
A) They mix the assets of the company with the personal assets of the owner.
B) The owner receives some, but not all, of the profits.
C) The limitation of capital may constrain growth.
D) The owner makes all decisions.
3) Banks and other lending institutions ________.
A) frown upon family funding for start-up businesses
B) have lending models better fitted for start-up businesses compared with established businesses
C) are in competition with the Small Business Administration (SBA) for start-up loans
D) are often next sources of financing for businesses after personal and family contributions
4) Which of the following is NOT typically involved when a start-up business applies for a loan
at a commercial bank?
A) Collateral and owner’s contribution
B) Evidence of management capability
C) A contract for partial ownership by the bank of the proposed firm
D) Evidence of good character
5) Which of the following is NOT typically involved when a start-up business applies for a loan
at a commercial bank?
A) A viable business plan
B) Evidence of at least two months of projected sales already in inventory
C) A personal financial statement
D) Business financial statements, including projected cash flows
6) The 7(a) Loan Guaranty Program of the Small Business Administration (SBA) delivers loans
through ________ that are guaranteed by ________.
A) the SBA; commercial lenders
B) banks; the Federal Reserve System
C) commercial lenders; state government
D) commercial lenders; the SBA
7) SBA guarantee loans have an interest rate that is on average ________.
A) the same as current market rates on business loans
B) lower than current market rates on business loans
C) higher than current market rates on business loans
D) the same as mortgage loans
8) If the SBA makes a loan guarantee, the guarantee is only ________. If the original borrower
defaults, the government will repay the obligation up to the ________.
A) to the borrower; loan balance
B) to the public at large; percentage of the SBA guarantee
C) to the lending institution; percentage of the SBA guarantee
D) to the lending institution; loan balance
9) The SBA only aids ________ when their applications would not be approved through normal
processes.
A) banks
B) the FRS
C) creditors
D) small business owners
10) Typical SBA guaranty loans carry an interest rate equal to ________.
A) the prime rate
B) current market rates
C) the prime rate plus a 1.00% default risk premium
D) the prime rate less 1.00% due to the SBA guarantee
11) Angel financing is ________.
A) rare
B) usually for medium-term loans
C) usually limited to the early development of a business
D) all of the above
12) ________ is a general term applied to lenders who provide funding for new, high-risk ideas.
A) Angel investing
B) SBA loan agreement
C) Investment banking
D) None of the above
13) Financing that will take ________ ten years for repayment is ________ to angel investors.
A) less than; not attractive
B) more than; attractive
C) more than; not attractive
D) None of the answer choices is accurate.
14) Which of the following answer choices is more characteristic of a venture capitalist than an
angel investor?
A) Usually individuals or groups; invest own money; early stages of the business
B) Usually corporate entities; often tied to individual or group expertise; early stages of the
business
C) Usually individuals or groups; pooled money from range of investors; all stages of the
business
D) Usually corporate entities; pooled money from range of investors; all stages of the business
15) A major issue with venture capitalists and angel investors is the rate at which their funds will
be used up. This is called the ________.
A) consumption or constriction rate
B) burn rate or bleed rate
C) IV rate
D) depreciation rate
16) Ventures that have low burn or bleed rates may require less ________ compared to a venture
with a high bleed rate.
A) time from the financier
B) monitoring by the venture capitalist
C) performance benchmarks
D) All of the above
17) Which of the following characteristics of angel financiers are NOT important considerations
for a firm or entrepreneur seeking financing?
A) The financial strength of the angel or venture capitalist
B) Contacts of the angel or venture capitalist
C) The exit strategy of the angel or venture capitalist
D) All of the above are important considerations regarding an angel or venture capitalist.
18) SBA loans are delivered directly to the small business and bypass the need for a commercial
bank.
19) Financing through angel investors is a fairly common way for funding a start-up.
20) 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.
21) 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.
22) 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.
23) 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?
1) 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 ________.
A) discount loan
B) line of credit
C) straight loan with a preset payment schedule
D) compensating balance loan
2) You have agreed to a $40,000 fixed-rate loan from Chase Bank today and promise to repay
the loan with 36 equal monthly payments at an APR of 5.50%. How large are your monthly
payments? Use a financial calculator to determine your answer.
A) $1,207.84
B) $1,358.21
C) $1,532.45
D) $1,690.71
3) You have agreed to a $35,000 fixed-rate loan from Wells Fargo Bank today and promise to
repay the loan with 24 equal monthly payments at an APR of 5.75%. How large are your
monthly payments? Use a financial calculator to determine your answer.
A) $1,547.28
B) $1,718.17
C) $1,532.45
D) $1,602.71
4) You have agreed to a $40,000 fixed-rate loan from Chase Bank today and promise to repay
the loan with 36 equal monthly payments at an APR of 5.50%. What is the EAR of this loan?
A) 5.50%
B) 5.64%
C) 5.88%
D) 6.00%
5) 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?
A) Straight loan with a pre-set payment schedule
B) Compensating balance loan
C) Line of credit
D) Discount loan
6) Your bank has agreed to grant you a discount loan with an APR of 4.25%. If you need $6,000
today, how large is the face value of the loan?
A) $5,277
B) $6,000
C) $6,222
D) $6,266
7) Your bank has agreed to grant you a discount loan with an APR of 5.00%. 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?
A) 5.00%
B) 5.54%
C) 5.73%
D) 5.91%
8) “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?
A) Discount loan
B) Compensating balance loan
C) Line of credit
D) Straight loan with preset payment schedule
9) With a line of credit, the bank is compensated ________.
A) based on the outstanding balance of the loan
B) based on the principal value of the credit line
C) exclusively with a fixed annual payment
D) based on a fixed interest rate tied to the T-bill rate
10) 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.
A) line of credit
B) compensating balance loan
C) straight loan with preset payment schedule
D) discount loan
11) The Atlantic Group has a $300,000 compensating balance loan with its bank. The terms of
the loan call for Atlantic to keep 8% of the loan as a compensating balance and pay interest at an
annual rate of 5.50% 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?
A) $14,625
B) $16,250
C) $16,500
D) $18,000
12) Pacific Automotive has a $150,000 compensating balance loan with its bank. The terms of
the loan call for Pacific to keep 8% of the loan as a compensating balance and pay interest at an
annual rate of 5.50% on the entire amount. If the firm borrows the maximum amount for one
year, what is the EAR on this loan?
A) 5.98%
B) 6.07%
C) 6.22%
D) 7.22%
13) Scan Bookkeeping has a $200,000 compensating balance loan with its bank. The terms of the
loan call for Scan to keep 5% 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?
A) $10,650
B) $11,250
C) $12,375
D) $13,000
14) Scan Bookkeeping has a $200,000 compensating balance loan with its bank. The terms of the
loan call for Scan to keep 5% 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?
A) 6.99%
B) 6.50%
C) 6.35%
D) 6.84%
15) A letter of credit or line of credit is a preapproved borrowing amount that works much like a
________.
A) premium loan
B) discount loan
C) syndicated loan
D) credit card
16) Syndicated loans are ________.
A) loans where multiple banks join together to make a loan to a single company
B) loans made to television stations to purchase re-runs
C) loans where one bank makes several loans to firms in the same industry as an effort to
diversify the bank’s loan portfolio
D) loans bought by other banks that have unused funds available for loans
17) You have agreed to a $60,000 fixed-rate loan from Wells Fargo Bank today and promise to
repay the loan with 48 equal monthly payments at an APR of 6.50%. How large are your
monthly payments? Use a financial calculator to determine your answer.
A) $1,124.99
B) $1,162.82
C) $1,422.90
D) $1,512.71
18) You have agreed to a $90,000 fixed-rate loan from Wells Fargo Bank today and promise to
repay the loan with 60 equal monthly payments at an APR of 7.00%. What is the EAR of this
loan?
A) 6.71%
B) 7.00%
C) 7.17%
D) 7.23%
19) Your bank has agreed to grant you a discount loan with an APR of 6.25%. If you need
$12,000 today, how large is the face value of the loan?
A) $12,200
B) $12,400
C) $12,600
D) $12,800
20) Your bank has agreed to grant you a discount loan with an APR of 3.25%. If you need
$15,000 today, the loan is to be repaid in full in one year, and the total interest to be paid is $555,
what is the EAR of the loan?
A) 3.25%
B) 3.45%
C) 3.59%
D) 3.70%
21) A discount loan features a series of repayments to the bank.
22) With a line of credit, a company can borrow money at a preset rate from the bank at any
time, without seeking additional approval of the loan each time funds are needed.
23) Syndicated loans are generally reserved for large and mature businesses, and are for the long
term rather than the short term.
24) Citizens’ Bank of Business commercial loans are currently posted as having an 8.50% APR,
with monthly payments due over a three-year period. If your firm takes out a $25,000 loan, what
is the monthly payment, and what is the EAR? Use a financial calculator to determine your
answer.
25) Your bank offers discount loans at a discount rate of 7.50%. If you borrowed $50,000 as a
discount loan from the bank today at this rate (you receive less than the face value today and
repay the face value in one year), how much money would you receive today? What is the EAR
of this loan?
1) Bonds may be issued through either a ________ or a ________.
A) private auction; federal auction
B) state agency; federal agency
C) public auction; private placement
D) None of the above
2) ________ is a government-authorized agency created to enforce the 1933 Securities Act.
A) The Securities and Exchange Commission (SEC)
B) The Federal Reserve System (FRS)
C) The Federal Deposit Insurance Corporation (FDIC)
D) The Stock Exchange Commission (SEC)
3) ________ provides financial advice, helps design bond terms, makes sure that new bonds
meet listing requirements, and then markets new bond issues.
A) The Securities and Exchange Commission
B) An investment banker
C) The Federal Reserve
D) A stock broker
4) The ________ is the formal contract for the bond between the issuing company and the buyer.
A) debenture
B) sinking fund
C) indenture
D) prospectus
5) The bond ________ contains much of the information filed in the bond registration and is
used to inform potential buyers about the bond.
A) debenture
B) sinking fund
C) indenture
D) prospectus
6) The bond indenture contains ALL BUT WHICH of the following?
A) The coupon rate
B) The yield-to-maturity
C) The maturity date
D) The par value