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CHAPTER 1
INTRODUCTION TO FINANCE FOR ENTREPRENEURS
True-False Questions
and act to convert ideas into commercial opportunities and create
opportunities.
opportunities and creating value.
convert ideas into commercial opportunities and to create value.
it became one.”
percent of all employers, and account for about one-half of the gross
domestic product in the United States.
firms provide 20 to 30 percent of net new jobs.
innovations per employee and obtain more patents per sales dollar than
large high-technology firms.
percent of new firms were still in existence after two years of operation.
inadequate sales, insufficient profits, and industry weakness.
venture are large, there is always room for one more success.
38%-40% of new firms survived six years of operation.
about 88 percent of founders feel their firms’ successes are due to
Chapter 1: Introduction to Finance for Entrepreneurs
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extraordinary ideas, while the remaining 12 percent feel their firms’
successes are due to exceptional execution of ordinary ideas.
changes that are slow in forming but once in place continue for many years.
changes.
or changes, demographic trends or changes, and technological trends or
changes.
F. 16. In 1982, Harry Dent identified several major or megatrends shaping
U.S. society and the world.
United States during the 1946-1964 time period.
society to an information society is the computer chip.
electronic means to conduct business online.
documents that “employer firm births” have exceeded 700,000 annually in
recent years.
family) business started each year at less than 100,000.
ceased to be one.”
that about three-fourths of new firms were still in existence after two years
of operation.
of new firms or new employers were still in existence after four years of
operation.
this entrepreneurial finance textbook,
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pays for using someone else’s financial capital.
securities are traded on organized security exchanges with restrictions on
how they can be transferred.
owners over time.
used to calculate the value of a venture.
creditors, and invest in assets.
self-interest and that of the owners who hired the manager.
lenders’ self–interest as the firm gets close to going “public.”
developing positive character and reputation.
tools and techniques to the planning, funding, operations, and valuation of an
entrepreneurial venture.
debt obligations.
survival live cycle stages.
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investors, who provide venture financing for small businesses.
afloat until the next offering.
considered to be sources of entrepreneurial opportunities.
entrepreneurial opportunities.
changes in the world.
go hand in hand.
Multiple-Choice Questions
a. recognize and seize commercial opportunities
b. economic pessimism
c. tend to be doggedly optimistic
d. both a and b
e. both a and c
entrepreneurial traits or characteristics, which one of the following
characteristics would not normally be associated with successful
entrepreneurs?
a. being able to see and seize a commercial opportunity
b. planning for the venture’s future
c. only being able to see an opportunity after it ceases to be one
d. being optimistic about the venture’s success
or cease operations within how many years after being started?
a. two years
b. four years
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c. six years
d. eight years
dissolved or cease operations within how many years after being started?
a. two years
b. four years
c. six years
d. eight years
a. not predictable
b. have short lives
c. do not involve macro changes
d. all of the above
during the twentieth century in:
a. 1972
b. 1982
c. 1993
d. 2003
a. environmental commerce
b. electronic commerce
c. economic commerce
d. exploratory commerce
number of sources, this textbook focuses on:
a. societal changes
b. demographic changes
c. technological changes
d. crises and bubbles
e. emerging economies and global changes
f. all of the above
emphasized in this textbook:
a. one
b. three
c. five
d. seven
e. nine
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financial goal of which of the following?
a. the entrepreneur
b. the debtholders
c. the venture equity investors
d. both a and b
e. both a and c
a. owner-manager conflict
b. stockholder-manager conflict
c. stockholder-debtholder conflict
d. manager-debtholder conflict
minimized through the use of equity incentives?
a. owner-manager conflicts
b. owner-employee conflicts
c. manager-employee conflicts
d. manager-debtholder conflicts
divergence at venture gets close to bankruptcy?
a. owner-manager conflict
b. owner-employee conflict
c. manager-employee conflict
d. manager-debtholder conflict
a. development stage
b. startup stage
c. survival stage
d. cash cow stage
e. early-maturity stage
life cycle startup stage?
a. venture’s organization
b. venture’s development
c. operating cash flows are generated
d. initial revenue model is put in place
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the period when revenues start to grow and when cash flows from operations
begin covering cash outflows?
a. survival stage
b. startup stage
c. rapid growth stage
d. early-maturity stage
stage?
a. entrepreneur’s assets
b. business operations
c. family and friends
d. business angels
e. venture capitalists
of which type of financing during the venture’s life cycle?
a. seed financing
b. second round financing
c. mezzanine financing
d. seasoned financing
e. liquidity stage financing
marketing expenditures, working capital, and product or service
improvements is obtained through?
a. seed financing
b. second round financing
c. mezzanine financing
d. seasoned financing
e. liquidity stage financing
initial offering to the public is called?
a. secondary market transaction
b. secondary stock offering
c. venture offering
d. bridge loan
timing, and costs of issuing new debt and equity securities and facilitate the
sale of firms?
a. brokerage firms
b. venture law firms
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c. specialist firms
d. investment banking firms
building value, obtaining additional financing, and examining opportunities?
a. survival stage
b. startup stage
c. rapid growth stage
d. early-maturity stage
a. The development stage occurs between the startup and survival
stages of a venture’s life cycle
b. The early-maturity stage is the final stage of a new venture’s
lifecycle
c. Firms typically begin to cover all expenses with internally-
generated funds during the survival stage
d. During the startup stage, revenues grow much more rapidly than
cash expenditures
e. None of the above
following order:
a. startup, development, rapid growth
b. startup, survival, rapid growth
c. survival, rapid growth, early-maturity
d. development, startup, survival
cycle is called the:
a. rapid growth stage
b. early-maturity stage
c. development stage
d. survival stage
e. startup stage
e. 26. During the maturity stage of a venture’s life cycle, the primary source of
funds is in the form of:
a. mezzanine financing
b. seed financing
c. startup financing
d. first round financing
e. seasoned financing
venture’s life cycle is typically referred to as:
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a. seed financing
b. startup financing
c. first round financing
d. second round financing
e. mezzanine financing
cycle stages:
a. development stage
b. startup stage
c. survival stage
d. rapid growth stage
e. early-maturity stage
tools and techniques to an entrepreneurial venture. Entrepreneurial finance
involves:
a. planning
b. funding
c. operations
d. valuation
e. a and d above
f. all of the above
following order:
a. development, rapid growth, survival
b. startup, development, rapid growth
c. startup, survival, rapid growth
d. survival, rapid growth, early-maturity
e. development, startup, survival
a. rapid growth stage
b. early-maturity stage
c. development stage
d. survival stage
e. startup stage
life cycle is typically referred to as the:
a. seed financing
b. startup financing
c. first round financing
d. second round financing
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e. mezzanine financing
financing?
a. seed financing
b. startup financing
c. mezzanine financing
d. liquidity-stage financing
e. seasoned financing
the most important factor in the long-term success of their ventures was:
a. being greedy
b. having high ethical standards
c. working hard
d. taking frequent vacations
negotiated, created, and held with restrictions on how they can be transferred
are called:
a. private financial markets
b. public financial markets
c. domestic financial markets
d. international financial markets
e. all of the above
following principles of entrepreneurial finance:
a. real, human, and financial capital must be rented from owners
b. risk and expected reward go hand in hand
c. while accounting is the language of business, cash is the
currency
d. it is dangerous to assume that people act against their own self-
interests
a. develop opportunities
b. gather resources
c. manage and build operations
d. create value
textbook?
a. societal, demographic, and technological changes
b. crises and bubbles
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c. fads
d. emerging economies and global changes
Supplementary Questions (may require basic knowledge of probability and/or
prior introductory accounting and business concepts)
one year from now will be either $4,500 or $6,000 with an equal chance of
either outcome occurring. What is the expected outcome?
a. $4,500
b. $6,000
c. $5,250
d. $5,750
e. $5,000
one year from now will be either $5,000 or $6,000 with an equal chance of
either outcome occurring. What is the expected rate of return?
a. 10%
b. 15%
c. 20%
d. 25%
e. 30%
a 40% chance of a $950,000 return; a 50% chance of a $1,200,000 return; and
a 10% chance of a $2,000,000 return. What is the project’s expected return
one year from now?
a. 12.8%
b. 15.5%
c. 18.0%
d. 38.3%
requires an investment of $3,000. There is a 35% chance of a $2,900 return; a
40% chance of a $3,400 return; and a 25% chance of a $4,500 return one year
from now. Lindsey requires a 15% return on the project after the first year,
but Tobias requires a return of only 12%. Using the expected rate of return:
a. Lindsey and Tobias should both invest in the project
b. Only Tobias should invest in the project
c. Only Lindsey should invest in the project
d. Lindsey and Tobias should both reject the project
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Project A requires an initial investment of $12,000. In one year, there is a
30% chance of a $10,500 return; a 50% chance of a $12,500 return; and a
20% chance of a $14,500 return. Project B requires an initial investment of
$1,000. In one year, there is a 25% chance of a $950 return; a 25% chance of
a $1,000 return; and a 50% chance of a $1,200 return. If you require a 7%
return on your investment after one year, you should:
a. Accept A and reject B
b. Accept B and reject A
c. Accept both projects
d. Reject both projects
costs are $3.00 per unit and you fixed costs are $20,000. What is your
breakeven point in sales units?
a. 5,000
b. 7,500
c. 10,000
d. 12,500
e. 15,000
costs are $3.00 per unit and you fixed costs are $20,000. What will be your
profit before taxes if you sell 12,000 units next year?
a. $0
b. $1,000
c. $2,000
d. $4,000
e. $8,000