68) The formal underwriting agreement between the company and the underwriter is signed
________.
A) on the last day before the registration statement becomes effective
B) when the statement of registration is filed
C) during the road show
D) at the time of the letter of intent
69) Typically, the entire process of going public takes ________, but it can take much longer if
the issuing company is not properly prepared for the process.
A) 30 days
B) 6 months
C) 120 to 180 days
D) one year
70) The goal of the SEC’s Regulation D is ________.
A) to discourage small companies from trying to “go public”
B) to make it easier for the SEC to detect companies whose stock would be bad investments for
consumers
C) to minimize the expense and time required to raise equity capital for small businesses
D) to make the standards for making a public stock offering more stringent
71) Rule ________ of the Regulation D exemptions is the most popular.
A) 202
B) 314
C) 426
D) 504
72) In a Regulation D stock offering, the company ________.
A) sells its shares directly to private investors
B) makes a private placement without actually “going public”
C) does not have to register its shares with the SEC
D) All of the above
73) Most companies that make Rule 506 offerings raise between ________ and ________ in
capital.
A) $200,000; $1 million
B) $100,000; $500,000
C) $100 million; $200 million
D) $1 million; $50 million
74) In an initial public offering, a company raises capital by selling shares of its stock to the
general public for the first time.
75) A public stock sale is an effective method of raising large amounts of capital, but it can be an
expensive and time-consuming process filled with regulatory nightmares.
76) Few companies with less than $25 million in annual sales manage to go public successfully.
77) Only about half of the companies that attempt a public stock offering ever complete the
process.
78) It is extremely difficult for a startup company with no track record of success to raise money
with a public stock offering.
79) Publicly-held companies must file periodic reports with the Securities and Exchange
Commission.
80) Since their stock offerings are small, most entrepreneurs are able to take their companies
public without the assistance of accountants, attorneys, and underwriters.
81) The single most important ingredient in making a successful initial public offering is
selecting a capable underwriter to manage the process.
82) Your text describes a variety of common sources of equity capital. Outline and briefly
describe five.
83) What is an IPO? What type of companies should go public? Outline the advantages and
disadvantages of an IPO. Also, outline the steps a company should follow in taking a company
public.
84) Because of the risk/return tradeoff, small businesses that borrow money repay it with interest
at the ________.
A) prime interest rate
B) prime interest rate minus a few percentage points
C) prime interest rate plus a few percentage points
D) lender’s cost of capital
85) For small businesses, ________ are the very heart of the financial market, providing the
greatest number and variety of loans to small companies.
A) commercial banks
B) factors
C) commercial finance companies
D) credit unions
86) The recent turbulence in the financial markets has caused banks to ________ their lending
standards, making it ________ for small businesses to qualify for loans.
A) tighten; easier
B) tighten; more difficult
C) relax; easier
D) relax; more difficult
87) Commercial banks provide ________ of loans to small business.
A) very few
B) about 50 percent
C) the greatest number and variety
D) more than 89 percent
88) Before making a loan to a business startup, banks prefer to see ________.
A) sufficient cash flow generated by the business
B) ample collateral for the loan amount
C) a SBA guarantee to insure the loan
D) All of the above
89) The most common type of commercial bank loan granted to small businesses is ________.
A) the short-term loan
B) the line of credit agreement
C) floor planning
D) the unsecured term loan
90) Entrepreneurs basically “borrow from themselves” by pledging their ________ as collateral
for the loans they receive in a ________.
A) business; commercial loan
B) business assets; home equity loan
C) home; home equity loan
D) big ticket items; floor loan
91) A ________ is an agreement with a bank that allows a small business to borrow up to a
predetermined specified amount during the year without making an application each time.
A) term loan
B) factor
C) line of credit
D) floor plan
92) The Tanning Parlor is in the middle of the busy season. Owner Sunny Bright has hired extra
help and encountered some unexpected repairs that have left her short of operating capital. What
type of financing would Sunny most likely use in this situation?
A) A line of credit
B) Floor planning
C) A discounted installment contract
D) Trade credit
93) ________ is/are a method of financing frequently used by retailers of “big ticket items” such
as autos.
A) Discounted installment contracts
B) Trade credit
C) Installment loans
D) Floor planning
94) The Boat and Ski Shop, a small retail boat shop, would most likely rely on which of the
following methods to finance its inventory?
A) Discounted installment contracts
B) Floor planning
C) Installment loans
D) Trade credit
95) A bank loan that imposes restrictions or covenants on the business decisions an entrepreneur
makes concerning the company’s operations is called a ________.
A) home equity loan
B) floor plan
C) term loan
D) line of credit
96) A term loan ________.
A) is typically unsecured
B) may contain restrictions or covenants
C) is based on past operating history and a firm’s high probability of repayment
D) All of the above
97) The most common method used by commercial finance companies to provide credit to small
businesses is ________.
A) asset based
B) insurance based
C) unsecured lines of credit or “character loans”
D) profitability based
98) Asset-based borrowing permits small businesses ________.
A) to borrow up to 100 percent of the value of their inventory or their accounts receivable for the
money they need for long-term goals
B) to use normally unproductive assets such as accounts receivable and inventory
C) to obtain loans more easily but with less borrowing power than using unsecured lines of credit
D) access to a source of funds ideally suited for long-term financing needs
99) In asset-based borrowing, the ________ rate is the percentage of an asset’s value that a lender
will lend.
A) prime
B) margin
C) advance
D) discounted
100) Which of the following is not an asset-based financing technique?
A) Discounting accounts receivable
B) Inventory financing
C) Term loan
D) None of the above
101) A company pledging its inventory, accounts receivables, or fixtures as collateral for a loan
is using ________.
A) floor planning
B) asset-based financing
C) trade credit
D) margin loan
102) Term loans impose restrictions called ________.
A) conditions
B) limits
C) rules
D) covenants
103) ________ loans are typically unsecured.
A) Equity
B) Capital
C) Asset-based
D) Term
104) Explain the role that commercial banks play in financing small businesses. What kinds of
loans do banks offer small companies?
Mini-Case 15-1: “Where do I go now …?
Christine Hernandez is in the process of launching a restaurant. Christine has never owned her
own restaurant before, but she has worked for two of the best restaurants in town. Starting out as
a hostess, Christine developed a special knack for the business and quickly worked her way up to
the job of manager. Her 18 years of experience have given her a solid foundation for running her
own restaurant.
Christine has worked with a counselor at a nearby Small Business Development Center and a
counselor from the Service Corps of Retired Executives to prepare a business plan. She asked
two other consultants and an accountant to review the plan and incorporated their suggestions
into the finished product. When Christine took her plan to her bank however, the bank turned
down her loan request of $165,000 citing the venture as “too risky, given the failure rate of
restaurants.” The bank acknowledged her experience as “a major asset,” but said that it “could
not expose itself to such risks in its portfolio.” Christine heard the same story from three other
banks.
Christine is confident in her ability to manage her own restaurant successfully, and she is
determined to get the financing she needs to launch it.
105) What might Christine do to convince a bank to lend her the money she needs to launch her
company?
106) What other sources of capital would you suggest that Christine explore?
Mini-Case 15-2: Bowden Brake Service
Jim Bowden has been operating his business for some time now and thinks it is time to grow and
expand. To compute the cost of expanding his existing business, Jim Bowden makes the
following estimates:
Adjacent lot $40,000
Metal prefab building 25,000
Hydraulic lifts 15,000
Tools and equipment 9,000
Parts and inventory 5,000
Additional operating expenses 55,000
TOTAL $149,000
107) Explain to Jim the possible (and realistic) sources of capital for expansion. Where would
you recommend that he go for the funds he needs? Why?
108) When the SBA makes a loan guarantee, banks are willing to consider riskier deals that they
normally would refuse.
109) SBA Express loans typically are between five and ten years, but loan maturities for fixed
assets can be up to 25 years.
110) In most SBA loans, the SBA does not actually lend any money, it merely guarantees a bank
repayment of a portion of the loan the bank makes in case the borrower defaults.
111) The Community Advantage Loan Program provides loans to communities that have
suffered a natural disaster.
112) The SBA’s Section 504 Certified Development Company Program (CDC), which provides
long-term, fixed-asset financing, is designed to encourage small businesses to expand their
facilities and to create jobs.
113) The average loan in the SBA’s Microloan Program is $100,000.
114) The CAPLine Program makes short-term capital loans to growing companies needed to
finance seasonal buildups in inventory or accounts receivable.
115) Loans made under the SBA’s Disaster Loan Program carry below-market interest rates and
are designed to provide assistance to small businesses that have been the victims of a variety of
disasters, such as hurricanes, floods, earthquakes, and tornadoes.
116) Explain how a typical SBA loan guarantee works. What interest rates do these loans
normally carry?
Mini-Case 15-1: “Where do I go now …?
Christine Hernandez is in the process of launching a restaurant. Christine has never owned her
own restaurant before, but she has worked for two of the best restaurants in town. Starting out as
a hostess, Christine developed a special knack for the business and quickly worked her way up to
the job of manager. Her 18 years of experience have given her a solid foundation for running her
own restaurant.
Christine has worked with a counselor at a nearby Small Business Development Center and a
counselor from the Service Corps of Retired Executives to prepare a business plan. She asked
two other consultants and an accountant to review the plan and incorporated their suggestions
into the finished product. When Christine took her plan to her bank however, the bank turned
down her loan request of $165,000 citing the venture as “too risky, given the failure rate of
restaurants.” The bank acknowledged her experience as “a major asset,” but said that it “could
not expose itself to such risks in its portfolio.” Christine heard the same story from three other
banks.
Christine is confident in her ability to manage her own restaurant successfully, and she is
determined to get the financing she needs to launch it.
117) Review the various loan programs under the Small Business Administration designed to
help finance businesses like Christine’s. Which of these programs would most likely help
Christine get the capital she needs?