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Indicate whether the statement is true or false.
1. Both wholesalers and equipment manufacturers/suppliers can be used as sources of funds.
a. True
b. False
2. Use of debt financing increases potential returns when a company is performing well, but it also increases the
possibility of lower—even negative—returns if the company does not attain its goals in a given year.
a. True
b. False
3. Around 5 percent of the business plans reviewed by venture capitalists are funded.
a. True
b. False
4. A company that has over 100 employees with locations in several states is typically the type of company in which
business angels make an investment.
a. True
b. False
5. The age of a company has little impact on the types of financing available to it.
a. True
b. False
6. Business loans are the primary source of financing for startups.
a. True
b. False
7. Private placement is the selling of stock to select venture capitalists.
a. True
b. False
8. A chattel mortgage is a loan for which real property, such as land or a building, serves as collateral.
a. True
b. False
9. For entrepreneurial ventures with the potential for becoming significant businesses, initial public offerings have been
the fastest-growing source of financing over the past two decades.
a. True
b. False
10. A firm with potential for large profits, as opposed to high growth potential, has many more possible sources of
financing than does a firm that offers only unattractive returns.
a. True
b. False
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11. Small Business Administration loans include guaranty loans and loans directly from the SBA.
a. True
b. False
12. The five C’s of credit are character, capacity, capital, conditions, and collateral.
a. True
b. False
13. The basic factors that determine how a firm is financed are restricted to the firm’s past economic performance, the
nature of its assets, and the personal preferences of owner(s) with respect to the marketing mix.
a. True
b. False
14. Goodwill is considered a intangible asset and is highly valued when securing a loan.
a. True
b. False
15. Venture capitalists restrict their investment in startup companies.
a. True
b. False
16. One potential problem with acquiring funds from friends and relatives is that they might feel they have the right to
interfere in the management of the business.
a. True
b. False
17. If a firm finances with equity rather than with debt, it will bear no interest expense and thus yield greater net income.
a. True
b. False
18. A small business that needs to purchase real estate could apply for a 7(a) guaranty loan.
a. True
b. False
19. The main advantage of using credit cards for financing is the relatively low interest rate compared to bank loans.
a. True
b. False
20. The private sale of a firm’s common stock is regulated by the Securities and Exchange Commission.
a. True
b. False
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21. State and local governments are becoming less involved in financing new businesses.
a. True
b. False
22. Small business owners sometimes accept higher levels of debt because doing so permits them to retain all of the stock
and full ownership.
a. True
b. False
23. Debt financing as opposed to equity financing allows owners to retain voting control of the company.
a. True
b. False
24. Crowdfunding works strictly with individual donations made over the Internet.
a. True
b. False
25. The amount of trade credit available to a new company is dependent on the supplier’s confidence in the firm and not
the type of business.
a. True
b. False
26. Most startup investors limit their investing to firms that offer potentially high returns within a one to three year period.
a. True
b. False
27. Companies that have business dealings with a new firm are possible sources of funds for financing inventory and
equipment.
a. True
b. False
28. Asset-based lending is a type of financing secured by assets such as equipment and inventory.
a. True
b. False
29. Qualified small businesses that cannot obtain business loans through normal lending channels can get loans directly
from the SBA through its 7(a) Loan Guaranty Program.
a. True
b. False
30. Borrowing money rather than issuing common stock typically increases the potential for higher rates of return to
owners.
a. True
b. False
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31. For every firm, there is a “right” answer to the question of balancing debt and equity, and it is important that the small
business owner find that balance.
a. True
b. False
32. When a stock sale is restricted to private placement, an entrepreneur can avoid many of the demanding requirements
of the securities laws.
a. True
b. False
33. Assets such as the quality of a firm’s employees are considered tangible in nature and thus have substantial value as
collateral.
a. True
b. False
34. If a company has a signed purchase order from a creditworthy customer and the gross profit margin on the order is
anticipated to be 36 percent, purchase-order financing is likely.
a. True
b. False
35. Generally, as long as a firm’s operating income return on its assets in greater than the cost of debt, the owners’ return
on equity investment will decrease as the firm uses more debt.
a. True
b. False
36. Lines of credit are legal obligations to provide capital.
a. True
b. False
37. Common stock can be sold to underwriters, but they do not guarantee the sale of securities.
a. True
b. False
38. A source of early-stage capital financing for a company is financing from commercial banks.
a. True
b. False
39. Commercial investors are sometimes called business angels.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
40. Renata has asked her family members to help her launch her new business. She must consider that:
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a. along with their financial futures, she may be putting the relationships at risk.
b. family members are not always the best business analysts.
c. some family members are unable to offer financial assistance.
d. getting their support does not guarantee the success of her business.
41. A source of short-term funds for many small companies with inventories is
a. trade credit.
b. long-term bank loans.
c. mortgages.
d. asset-based notes.
42. In his presentation to his banker when he applies for a business loan to purchase additional equipment, Alan should
emphasize:
a. how much profit the new equipment will, generate.
b. how he will be able to repay the principal of the loan.
c. how energy-efficient the new equipment is.
d. how much income he will generate for the bank.
43. Galen runs an Greek restaurant and is currently considering leasing or purchasing some updated equipment. What
statement is correct?
a. Because the equipment he is buying will become outdated in two years, leasing would be a better option than
purchasing.
b. Because the restaurant is new and he wants to protect his cash flow, purchasing would be better since purchasing
costs less than leasing.
c. If the equipment is leased, the restaurant’s lines of credit will be increased.
d. Leasing is always more expensive than purchasing over the term of the lease
44. Even though Evan’s company is a corporation, the bank imposed a loan covenant that required Evan to:
a. make a balloon payment after three years.
b. pay a loan origination fee.
c. make quarterly rather than monthly payments.
d. personally guarantee the loan.
45. Fans set up a crowdfunding account to produce new, not-for-profit episodes of Star Trek. This type of crowdfunding
uses the ___________ approach.
a. donations
b. rewards
c. pre-purchases
d. equity investing
46. If Joan is applying for a loan for a shelving system to improve her retail sales where the system will serve as collateral,
what type of loan would be the most appropriate?
a.
chattel mortgage
b. line of credit
c. real estate mortgage
d. term loan
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47. Miracle Fund LLC is a venture capitalist. In exchange for providing venture capital, Miracle Fund:
a. expects the entrepreneur to pay interest to the Fund.
b. receives the right to own a percentage of the entrepreneur’s business.
c. takes a percentage of the annual earnings.
d. becomes a general partner of the entrepreneur.
48. Ralph owns a lumber yard and has a $500,000 purchase order from a construction company. His cost of goods sold
for this order is $300,000 Because his company needs working capital, the most logical loan for the lumberyard would be
to use ________.
a. an equipment-based loan.
b. factoring.
c. purchase order financing.
d. asset-based financing.
49. Small firms frequently run into problems when:
a. they offer equipment as collateral for a term loan.
b. they under-utilized the equipment purchased with the loan.
c. they overestimate the cash inflows from the equipment purchased with the loan.
d. they faiil to match a term loan’s payment terms with the expected cash inflows from the equipment purchased
with the loan.
50. Williams Alternative Power, Inc., a company developing solar panels, has done considerable research and limited
production during its two year life. It is about ready for its IPO. At this stage of its life cycle, its ability to attract venture
capital is:
a. greater. b. lessened.
c. optimal. d. limited.
51. David is trying to decide whether to add capital through investing more of his own money or through borrowing
money from the bank. To help him decide, you remind him that ss long as his firm’s rate of return on its assets is greater
than the cost of the debt, his rate of return on equity will _____ as the firm uses more debt.
a. decrease
b. increase
c. remain the same
d. fluctuate
52. It’s been George’s “baby” from the beginning and he really doesn’t want to be accountable to any outsider for the
decisions he makes in his business. In George’s case, he should seek initially to secure _____ financing.
a. debt
b. equity
c. internal
d. asset
53. In groups of business angels,
a. all angels must agree to invest or the deal is off.
b. a majority of angels favoring investment obligates all angels to the deal.
c. individual angels make personal decisions about whether or not to invest.
d. no angel can invest unless all angels invest.
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54. The type of financing Evangeline received from a business angel is known as:
a. formal venture capital.
b. informal venture capital.
c. a formal business loan.
d. an informal investment.
55. Andrew is a venture capitalist who would like to find a good new business in which to invest. He’s done this before
so he has learned to limit his investing to firms with potentially high returns in a _____ period.
a. 6-12 month
b. 1-2 year
c. 3-5 year
d. 5-10 year
56. Florence wants to obtain a loan for a large color laser printer for her copy shop. Since the printer will last
approximately 8 years, the ideal loan would be a _____ loan.
a. mortgage
b. trade credit
c. asset-based
d. term
57. Novelty Shirts is a manufacturing company needing to expand its production facilities. Which SBA program would be
best to acquire real estate valued at $150,000?
a. 7(a) Loan Guaranty
b. Certified Development Company 504 Loan
c. 7(m) Microloan
d. Small Business Innovative Research
58. Lyman’s business has grown to 400 employees with annual revenues of $15 million. He would like to expand further
but needs another $5 million. He should consider:
a. a 7(a) guaranty loan.
b. a CDC 504 loan.
c. the SBIR program.
d. an SBIC loan.
59. Business angels, as opposed to venture capitalists, provide
a. asset-based loans.
b. factoring.
c. informal venture capital.
d. trade credit.
60. Carla is a loan analyst at the bank. When Cameron applied for a loan, Carla looked at his balance sheet for ________
assets to evaluate a possible loan for his company’s financing.
a. direct and indirect
b. tangible and intangible
c. those founded upon past performance and those depending on future performance
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d. industry-specific and firm-specific
61. Harlan’s customers have been a little slow in paying their invoices, and he is short on cash to pay his quarterly
taxes. Harlan should consider:
a. sending the late payers to a collection agency.
b. factoring.
c. putting his late payers on credit hold until they pay up.
d. taking out a personal loan to pay the taxes.
62. Isaac is looking for a business angel. His best chance of finding one is through:
a. contact with business associates, accountants and lawyers.
b. his banker.
c. advertisements in magazines.
d. contact with friends and relatives.
63. Many venture capitalists:
a. prefer common stock in exchange for their investment.
b. manage the liquidation of failed ventures.
c. intend to cash out after five to seven years.
d. insist on voting rights during stockholder meetings.
64. Sondra is a business angel who is looking for a start-up company in which to invest. Which company would she most
likely invest in based on current research?
a. A company that currently has fewer than 20 employees and has plans to grow
b. A business out of her home state to diversify her risk
c. A business in an industry in which she has no experience
d. A company formed by a group of experts in the industry
65. LIBOR is _____ the prime rate.
a. approximately equal to
b. considerably higher than
c. considerably lower than
d. a lagging indicator of
66. A balloon payment
a. is an up front payment to obtain a loan.
b. may be required by the bank at about midway in the loan term.
c. may be due at any time during the term of a loan.
d. is used to lift (remove) a loan covenant.
67. Joann is buying an existing convenience store. When she considers which bank to use, her best choice would be:
a. a national bank that processes credit card payments.
b. the credit union where she is already a member.
c. a bank close to her store.
d. the largest one in her town, which is located on the other side of town from her store.
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68. Penelope is planning to launch her first business. She will most likely acquire her initial financing from:
a. venture capitalists.
b. personal savings.
c. wealthy individuals.
d. the securities market.
69. Elena plans to open a non-profit child-care center in her depressed neighborhood. She may qualify for an SBA loan
program that provides loans of up to $50,000 known as the:
a. 7(a) Loan Guaranty Program.
b. 7(m) Microloan Program.
c. Certified Development Company 504 Loan Program.
d. Small Business Investment Program.
70. A drawback to “going public” is
a. large profit potential resulting in increased taxation.
b. numerous SEC requirements.
c. national recognition causing increased exposure.
d. additional working capital.
71. Irwin has applied for a loan from an asset-based lending company. As security he will offer:
a. land and buildings.
b. accounts receivable and inventory.
c. equipment and buildings.
d. inventory and equipment.
72. Small business investment companies (SBICs)
a. are licensed and regulated by the Federal Trade Commission.
b. may lend funds or supply equity funds.
c. obtain part of their capital from local governments at attractive interest rates.
d. provide only short-term financing.
73. A loan covenant is very likely to require
a. a bank officer on the board of advisors.
b. salary limitations.
c. voting rights.
d. a fixed business strategy.
74. Granville owns a construction company and would like to purchase a mobile construction office. The bank would
likely offer him a _____ mortgage.
a. chattel
b. real estate
c. revolving
d. term
75. Which financing source has the greatest advantage of speed?
a. local bank
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b. credit card
c. angel investor
d. venture capitalist
76. People like Ben who “bootstrap” company financing are
a. enhancing the “corporate image” of the enterprise by the way they raise capital.
b. depending on their own initiative to obtain the capital necessary to start up and grow.
c. subordinating future capital formation to short-term financial performance.
d. waiting to establish a reputation in the marketplace before raising the bulk of the needed capital.
77. In the beginning, some entrepreneurs use ____________ as a source of financing.
a. asset-based lenders.
b. personal credit cards
c. wealthy individuals.
d. venture capitalists.
78. When considering a loan application, bankers will consider:
a. the credit score of the applicant.
b. the four Cs of credit
c. the five Cs of credit.
d. the applicant’s character only.
79. If the firm’s rate of return on its assets is _____ than the cost of borrowing, then the owners’ rate of return on equity
will _____ as the firm uses _____ debt.
a. less, decrease, less
b. greater, decrease, more
c. greater, increase, more
d. less, increase, more
80. Cameron has applied for a loan to expand his young business. When bankers look for evidence of whether he will be
able to repay a loan, they usually base their assessment on
a. what Cameron’s firm has done in the past.
b. what Cameron says the firm will do in the future.
c. the opinion of investment analysts.
d. the business plan of the enterprise.
81. Chuck, Marie and Tommy are a group of friends who have formed a LLC to raise capital for an investment in 20
franchises of Rigby’s, a new sports bar concept. Tommy will be the general partner; Chuck and Marie will be limited
partners. These three are:
a. business angels.
b. formal venture capitalists.
c. creditors.
d. informal venture capitalists.
82. Floyd’s income statement showed for the current year his company had an operating income of $45,000 and his
balance sheet showed total assets of $300,000. His return on assets is _________ percent.
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a. 30
b. 15
c. 12
d. 6
83. Williams Alternative Power, Inc. a company developing solar panels, is applying for a loan. The research the
company has done for the manufacturing process would be a(n) _____ asset for the loan evaluation.
a. collateral
b. intangible
c. revolving
d. tangible
84. Venture capital companies
a. are often limited partnerships that raise capital from other investors.
b. provide for the financing needs of large companies only.
c. are corporations or partnerships that operate as liquidation groups.
d. no longer operate in the U.S. market.
85. Althouth not the primary source of financing for most small business startups, another source of early financing is:
a. family members.
b. commercial banks.
c. business suppliers.
d. asset-based lenders.
86. Martina wants to expand her business. She will need to buy a larger facility and equip it with additional
machinery. She should look into the SBA loan program that provides long-term financing for small businesses to acquire
real estate or machinery and equipment called the:
a. 7(m) Microloan Program.
b. 7(a) Loan Guaranty Program.
c. Certified Development Company 504 Loan Program.
d. Small Business Investment Program.
87. Elyse wants to calculate her return on equity but has forgotten the formula. You tell her that return on equity equals
a. net income divided by owners equity.
b. owners equity divided by net income.
c. total assets divided by owners equity.
d. owners equity divided by total assets.
88. If he holds true to the average, Donald Trump likely invests approximately _____ of his investment in later-stage
businesses.
a. one-fourth
b. one-half
c. three-fourths
d. nearly all
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89. When Ben left the corporate rat race to start his own pottery business, he used some of his retirement savings to
finance the business. This practice is known as:
a. self-starting. b. cashing out.
c. bootstrapping. d. folly.
90. Even with all his billions and influence, Donald Trump, as an equity investor, cannot demand more than
a. those who have invested debt in the enterprise.
b. what is earned.
c. anticipated future financing.
d. established cash flows.
91. Before accepting money from a business angel, the entrepreneur should:
a. first make application for a bank loan.
b. use all available personal assets to finance the new venture.
c. request a loan from the angel instead of investment to prevent having to give up control.
d. make sure the business angel is accredited.
92. Ben left the corporate rat race to start his own business that will allow him to earn a small income while providing
plenty of time to pursue his love of pottery making. He does not expect either growth or high profits. Ben’s prospects for
attracting outside financing are:
a. plentiful. b. limited.
c. moderate. d. nonexistent.
93. A line of credit is the _____ amount of credit a bank will provide a borrower at any one time.
a. average
b. annual
c. maximum
d. minimum
94. Maguire was considering selling stock as a source of funds but was concerned about:
a. damaging his corporate image.
b. the loss of voting control of the company.
c. the effect that might have on future financing.
d. estate planning.
95. One factor that influences the choice between debt and equity is the
a. returns anticipated from the enterprise.
b. risk of nationalization.
c. degree of control the owners hope to retain.
d. state of the owners’ estate plan.
96. Anna’s new business looks like it can grow quickly and become profitable in its first year. Anna will likely
find _____ possible sources of financing than those with less potential for growth and profits.
a. fewer
b. about the same number of
c. more
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d. many more
97. The federal government primarily provides funds to small businesses through
a. venture capital companies.
b. the Small Business Administration.
c. business angels.
d. the Securities and Exchange Commission.
98. Barry needs financing to start his inner-city venture. His goal is to provide part-time employment for at-risk youths to
keep them off the streets and engaged in learning marketable skills. Barry may find some assistance from:
a. a community-based financial institution.
b. the Small Business Innovative Research Program.
c. a small business investment company.
d. a venture capital firm.
99. Will has decided to invest $10,000 into his neighbor’s new company. The money will be used in the early stages of
development. Will is considered a
a. venture capitalist.
b. business angel.
c. business contributor.
d. loan specialist.
100. Private placement
a. is the sale of capital stock to selected individuals.
b. is the sale of capital stock to investment bankers.
c. requires compliance with all securities laws.
d. maintains the ownership control of the original owners.
101. Sandy is using a governmental program to help finance her new business. Her company is not eligible for a loan
through a normal lending channel and is receiving $120,000 with the SBA guaranteeing 85 percent of the loan. She also
had to submit a loan application to the lender. Ellie is participating in the
a. 7(a) Loan Guaranty Program.
b. Certified Development Company 504 Loan Program.
c. Small Business Innovative Research Program.
d. 7(M) Microloan Program.
102. To determine how well her business is doing, Darlene should monitor the return on her investment (equity) because it
is a better measure of performance than
a. the return on assets ratio.
b. the current ratio.
c. the quick ratio.
d. the absolute dollar amount of income.
103. Glenda is trying to decide between the use of debt and the use of equity to finance her young business. She should
remember that: