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Entrepreneurship and Effective Small Business Management, 11e, Global Edition
(Scarborough)
Chapter 16 Sources of Equity Financing
1) The credit crunch has hit those entrepreneurs seeking between $100,000 and ________.
A) $3 million
B) $500,000
C) $1 million
D) $750,000
2) Unlike entrepreneurs of the past, today's entrepreneurs:
A) are finding more government interest and funding for business start-ups than ever before.
B) find fewer closed doors as small business start-ups have become less risky.
C) have to piece their capital together from several sources.
D) are spending nearly 75% of their time raising capital.
3) ________ is any form of wealth used to produce more wealth.
A) Debt
B) Equity
C) Capital
D) Capacity
4) Tien is looking for capital to purchase new buildings and equipment for her small
manufacturing company. Tien is looking for ________ capital.
A) working
B) fixed
C) growth
D) asset-based
5) ________ capital is the pool of temporary funds of the business used to support the normal
operation of the business on a short-term basis.
A) Growth
B) Fixed
C) Equity
D) Working
6) The money Bert uses to build inventory for the upcoming Christmas season would be
classified as ________ capital.
A) growth
B) working
C) fixed
D) efficiency
7) ________ financing includes the personal investment of the owners and is often called "risk
capital."
A) Equity
B) Asset-based
C) Debt
D) Growth
8) The most common source of equity funds used to start a small business is:
A) private investors or "angels."
B) loans from commercial banks.
C) the entrepreneur's pool of personal savings.
D) public stock issues.
9) An advantage of using friends and relatives as investors is that:
A) they tend to be more patient.
B) they take a lower return.
C) they don't want controlling interest in the company.
D) they don't tend to have unrealistic expectations.
10) When receiving investment money from friends and relatives entrepreneurs should:
A) use a clear verbal contract to ensure no misunderstandings.
B) only borrow from close friends and relatives who won't cause them trouble.
C) discuss all the details of the investment up front.
D) not borrow more than 30% of the necessary capital from them.
11) A disadvantage of using friends and relatives as investors is:
A) they tend to demand more stock options.
B) familial seniority often conflicts with the "chain of command."
C) they require more leniency with benefits and pay.
D) unrealistic expectations or misunderstood risks destroy friendships or family relationships.
12) Private investors, or "angels," are often:
A) wealthy individuals.
B) entrepreneurs.
C) persons who invest in business startups in exchange for equity stakes in the companies.
D) All of the above
13) The largest single source of external equity capital for small businesses is:
A) angels.
B) venture capitalists.
C) Small Business Administration loans.
D) commercial bankers.
14) Most "angel" investments:
A) are for growth or fixed capital.
B) are for between $10,000 and $2,000,000.
C) come from international or foreign investors.
D) are seeking a high and quick return on their investment.
15) "Angels":
A) are hard investors to please. Nearly 70% are dissatisfied with their investment.
B) tend to be easy to get money from as they accept nearly 60% of the opportunities presented.
C) have an average of $150,000 invested in 3.5 firms at any given time.
D) only finance deals requiring over $1 million in capital.
16) When looking for an angel, the key is:
A) networking.
B) using the SBA as a contact point.
C) searching the web.
D) using business incubators' computer matching services.
17) When structuring a deal with an "angel," an entrepreneur should remember that:
A) "angels" tend to prefer a controlling interest in the business.
B) the deal needs an annual return of 60–75%.
C) "angel" money is patient, often waiting seven or more years to cash out.
D) they prefer to earn their returns through dividends and interest.
18) Private "angel" investors tend to:
A) take 80% ownership by the time the company goes public.
B) provide seed money and less than $500,000.
C) look for returns of 60-75%.
D) only finance projects within their local area or region.
19) One important intangible yet highly important advantage an investment from a large
corporate partner gives a start-up is:
A) credibility.
B) success.
C) power.
D) None of the above
20) A(n) ________ is a private, for-profit organization that purchases equity positions in young
businesses that will potentially produce returns of 300 to 500 percent over five to seven years.
A) commercial bank
B) venture capital company
C) "angel"
D) SB-1 filing
21) Most venture capitalists purchase ownership in a small business through:
A) a common stock or convertible preferred stock.
B) an ESOP.
C) loans with an option to buy stock.
D) a general partnership.
22) The two factors that make a deal attractive to venture capitalists are:
A) effective marketing strategies and networking opportunities.
B) high returns and a convenient (and profitable) exit strategy.
C) high returns and networking opportunities.
D) a convenient and (profitable) exit strategy and effective marketing strategies.
23) Venture capitalists look for all of the following except:
A) competent management.
B) industry stagnation.
C) viable exit strategy.
D) competitive edge.
24) Venture capitalists look for ________ as the most important ingredient in the success of any
business.
A) innovation
B) a growth industry
C) a competitive edge
D) competent management
25) When taking a company public, investment bankers look for:
A) a leading position in a stable market.
B) 3 to 5 years of audited financial statements.
C) a strong record of revenues.
D) a moderate growth rate.
26) One of the biggest advantages of going public is:
A) the ability to attract low cost equity funding.
B) the ability to retain control while gaining maximum funding.
C) better employee morale and productivity.
D) enhanced credibility and improved corporate image.
27) Probably the biggest disadvantage of "going public" to the entrepreneur is the:
A) dilution of ownership interest.
B) diminished corporate image.
C) future threat of being acquired through the use of stock.
D) loss of key employees.
28) One of the things that underwriters look for in a company that wants to go public is:
A) presence in a mature industry.
B) filing fees with the SEC.
C) strong bankers.
D) a clear organizational structure.
29) The single most important ingredient in making a successful public offering is:
A) choosing a capable underwriter.
B) negotiating a favorable letter of intent.
C) preparing a suitable registration statement.
D) filing Regulation D with the SEC.
30) In a public offering, the underwriter:
A) advises the owner as to the best structure of the business going into the sale.
B) serves as an adviser and consultant to the small business in preparing the registration
statement for the SEC.
C) is bound to the offering until it is executed.
D) is listed as one of the officers of the company.
31) The document outlining the details of the agreement between the entrepreneur and the stock
underwriter is called:
A) Regulation D.
B) a filing.
C) the letter of intent.
D) the registration statement.
32) Under a ________ agreement, the underwriter agrees to purchase all of the shares in a
company's public offering and then resells them to investors.
A) best effort
B) lock-up
C) final price
D) firm commitment
33) A ________ outlines the details of the deal in an IPO.
A) roadshow
B) lock-up agreement
C) letter of intent
D) registration statement
34) A lock-up agreement:
A) prevents the sale of "insider" shares for a specific period of time—often 12 to 36 months—
after an initial public offering (IPO).
B) prevents a small company from signing on with other underwriters to make an IPO.
C) prevents a company about to make an IPO from signing a union contract.
D) establishes the final price of the IPO so that it cannot fluctuate before the stock offering is
actually made.
35) When filing with the SEC, the initial registration statement:
A) prohibits a "road show."
B) is filed without share price, proceeds, or commissions listed.
C) signals the time to sign the formal underwriting agreement.
D) is generally accepted without corrections by the SEC.
36) The "wait to go effective" is the time period when:
A) the SEC registration statement is being prepared.
B) the underwriter decides what regulation to file under.
C) the firm prices the stock for the offering.
D) the company is waiting for SEC approval after filing the registration statement.
37) A ________ agreement prevents the sale of insider shares for a specific time period.
A) lock-up
B) pre-nuptial
C) road show
D) registration
38) In an IPO, who signs the best efforts agreement?
A) Management
B) Angel
C) Underwriter
D) Board of directors
39) The purpose of the ________ is to promote interest among potential underwriters in the IPO.
A) road show
B) registration
C) best efforts agreement
D) filing Regulation A
40) The first step in the IPO process is:
A) negotiating a letter of intent.
B) preparing the registration statement.
C) choosing the underwriter.
D) doing the road show.
41) One of the reasons for the significant drop in the number of public offerings since 2001 is:
A) the dot-com crash of 2000.
B) the U.S. economic crisis.
C) the global economic meltdown.
D) lack of available float.
42) One of the reasons for the significant drop in the number of public offerings since 2001 is:
A) the U.S. economic crisis.
B) the global economic meltdown.
C) the Quattrone Act, 2002.
D) the Sarbanes-Oxley Act, 2002.
43) Since 2001 there has been a ________ in the number of public offerings.
A) significant drop
B) significant increase
C) slight drop
D) slight increase
44) In a(n) ________, a company raises capital by selling shares of its stock to the general public
for the first time.
A) angel offering
B) secondary offering
C) venture capital sale
D) IPO
45) Since 2001, the average IPO has raised ________ for the issuing company.
A) $310 million
B) $218 million
C) $478 million
D) $118 million
46) Typically, ________ is needed to purchase the business's permanent or fixed assets.
A) working capital
B) growth capital
C) fixed capital
D) None of the above
47) Working capital can be calculated by:
A) Current Asset - Current Liabilities.
B) Total Asset - Current Liabilities.
C) Total Liabilities - Total Asset.
D) Total Asset - Total Liabilities.
48) Equity capital is also called:
A) equity money.
B) stock money.
C) risk capital.
D) None of the above
49) A highly possible source of funding for a start-up and early business is:
A) venture capital and private placement.
B) personal savings and retained earnings.
C) personal savings and partners.
D) IPO and Regulation A.
50) ________ are typically wealthy individuals or entrepreneurs themselves.
A) Venture capitalists
B) Seed funders
C) Venture funders
D) Angels
51) Angels fill a significant gap in the ________ capital market.
A) working
B) fixed
C) seed
D) later stage
52) The angel market is:
A) fragmented.
B) concentrated.
C) formalized.
D) centralized.
53) These ________ are wealthy individuals, often entrepreneurs themselves, who invest in
business start-ups in exchange for equity stakes in the companies.
A) venture capitalists
B) rich family members
C) angels
D) public investors
54) Some suggestions for maintaining family relationships and friendships when borrowing for a
business are:
A) keep the arrangement strictly family.
B) borrow as much as you can.
C) an oral contract is as good as a written contract.
D) treat the money as "bridge financing."
55) ________ are private, for-profit organizations that purchase equity positions in young
businesses they believe have high-growth and high-profit potential, producing annual returns of
300 to 500 percent over five to seven years.
A) Angel investors
B) Venture capital companies
C) Government bonding investors
D) Corporate venture investors
56) Most venture capitalists look for:
A) competent management.
B) competitive edge.
C) companies in growth industries.
D) All of the above
57) ________ is a key criteria that most venture capitalists look for.
A) Intangible factor
B) High working capital
C) Fair ROI
D) None of the above
58) ________ is when a company raises capital by selling shares of its stock to the general public
for the first time.
A) Preferred stock selling
B) Rule 157 Offerings
C) IPO
D) All of the above
59) For an IPO, most investment bankers look for:
A) consistently high growth rates & strong record of earnings.
B) three to five years of audited financial statements & a solid position in rapidly growing
markets.
C) a sound management team and a strong board of directors.
D) All of the above
60) Choosing the right source of capital is as important as choosing the right form of ownership
for the small business owner.
61) The problem with the lack of funding for start-ups is that the seed capital and funding
sources just aren't there.
