Deck 12: A Firms Sources of Financing

Question 1

The age of a company has little impact on the types of financing available to it.

Answer 1

False

Question 2

Lines of credit are legal obligations to provide capital.

Answer 2

False

Question 3

A small business should limit the amount of debt it takes on because debt can add to the firm's risk.

Answer 3

True

Question 4

Borrowing allows owners to retain voting control of the company.

Question 5

Assets such as the quality of a firm's employees are considered tangible in nature and thus have substantial value as collateral.

Question 6

Venture capitalists restrict their investment in startup companies.

Question 7

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.

Question 8

Small business owners sometimes accept higher levels of debt because doing so permits them to retain all of the stock and full ownership.

Question 9

Most startup investors limit their investing to firms that offer potentially high returns within a one-to-three-year period.

Question 10

Approximately one-half of the financing for startups comes from personal savings.

Question 11

To retain control and avoid accountability to those with a minority equity position in the firm, small business owners are often reluctant to give away any of the company's ownership.

Question 12

If a firm finances with equity rather than with debt, it will bear no interest expense and thus yield greater net income.

Question 13

Borrowing money rather than issuing common stock increases the potential for higher rates of return to owners.

Question 14

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.

Question 15

The five Cs of credit are character, capacity, capital, conditions, and collateral.

Question 16

One potential problem with acquiring funds from friends and relatives is that they might feel that they have the right to interfere in the management of the business.

Question 17

The basic factors that determine how a firm is financed include the following: the firm's past economic performance, the nature of its assets, the maturity of the firm, and the personal preferences of owner(s) with respect to the marketing mix.

Question 18

A firm with potential for large profits has many more possible sources of financing than does a firm that offer only unattractive returns, but high growth potential does not seem to have a similar effect on financing options.

Question 19

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.

Question 20

A chattel mortgage is a loan for which real property, such as land or a building, serves as collateral.

Question 21

Intangible assets are those that can be seen and touched.

Question 22

The main advantage of using credit cards for financing is the relatively low interest rate compared to bank loans.

Question 23

Return on equity is a better measure of performance than net income.

Question 24

Most of those who invest in startups limit their 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

Question 25

Small Business Administration loans include guaranty loans and loans directly from the SBA.

Question 26

When bankers look for evidence of whether a business will be able to repay a loan, they usually base their assessment of this on

A) what the firm has done in the past.
B) what the owner says the firm will do in the future.
C) the opinion of investment analysts.
D) the business plan of the enterprise.

Question 27

Both wholesalers and equipment manufacturers/suppliers can be used as sources of funds.

Question 28

Compared to firms that provide a good lifestyle for the owner but little in the way of attractive returns, a firm with potential for high growth and large profits has _____ possible sources of financing.

A) fewer
B) about the same number of
C) more
D) many more

Question 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.

Question 30

Private placement is the selling of stock only to selected individuals.

Question 31

The public sale of a firm's common stock is regulated by the Securities and Exchange Commission.

Question 32

Asset-based lending is a type of financing secured by assets such as receivables, inventory, or both.

Question 33

When it comes to financing a company, a banker looks at two kinds of assets:

A) direct and indirect.
B) tangible and intangible.
C) those founded upon past performance and those depending on future performance.
D) industry-specific and firm-specific.

Question 34

Around 5% of the business plans reviewed by venture capitalists are funded.

Question 35

When entrepreneurs "bootstrap" their financing, this means that they are

A) enhancing the "corporate image" of their enterprise by the way they raise capital.
B) depending on their own initiative to come up with 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 their capital.

Question 36

As long as a firm's rate of return is greater than the cost of the debt (interest rate) the owner's rate of return on equity will _____ as the firm uses more debt.

A) decrease
B) increase
C) remain the same
D) fluctuate

Question 37

Capital financing with no established marketplace is financing from commercial banks.

Question 38

State and local governments are becoming less involved in financing new businesses.

Question 39

Typical venture capitalists invest approximately _____ of their investment in later-stage businesses.

A) one-fourth
B) one-half
C) three-fourths
D) nearly all

Question 40

Commercial investors are sometimes called business angels.

Question 41

Louise Piper plans to sell stock in her company in order to raise capital. One of the benefits of issuing stock as a source of funds is

A) reduced risk to the enterprise.
B) sharing success potential.
C) confidentiality.
D) periodic reporting requirements.

Question 42

Prospective entrepreneurs will usually acquire their initial financing from

A) venture capitalists.
B) personal savings.
C) wealthy individuals.
D) the securities market.

Question 43

If a firm finances with equity rather than debt, net income will be greater because

A) equity financing almost always leads to better firm performance than debt financing.
B) the terms of equity financing are more stable than the terms of debt financing.
C) this impacts asset selection for the better.
D) there is no interest expense.

Question 44

Drawbacks of selling stock as a source of funds include

A) enhanced corporate image.
B) loss of voting control of the company.
C) future financing.
D) estate planning.

Question 45

One of the major sources of early financing is

A) family members.
B) commercial banks.
C) business suppliers.
D) asset-based lenders.

Question 46

Term loans are generally used to finance equipment with a useful life _____ the loan's term.

A) equal to
B) longer than
C) less than one-half
D) greater than one-half

Question 47

A _____ mortgage would likely be used to secure financing for mobile construction office.

A) chattel
B) real estate
C) revolving
D) term

Question 48

The financing source which has the greatest advantage of speed is

A) local bank
B) credit card
C) angel investor
D) venture capitalist

Question 49

Though not as common as using personal savings, one of the more often used sources of financing is

A) asset-based lenders.
B) personal charge card accounts.
C) wealthy individuals.
D) venture capitalists.

Question 50

Equity investors 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.

Question 51

The return on the owner's investment (equity) 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.

Question 52

Pro forma statements required by bankers include all of the following EXCEPT

A) balance sheets.
B) cash flow statements.
C) income statements.
D) personal financial statements.

Question 53

The following are key terms included in all bank loan agreements except

A) interest rate
B) maturity date
C) repayment schedules
D) insurance coverage

Question 54

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

Question 55

One of the factors 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.

Question 56

LIBOR is _____ the prime rate.

A) approximately equal to
B) considerably higher than
C) considerably lower than
D) a lagging indicator of

Question 57

A loan covenant is very unlikely to require

A) provision of timely and complete information.
B) salary limitations.
C) a personal guarantee.
D) a fixed business strategy.

Question 58

To retain control over his business, an entrepreneur should seek initially to secure _____ financing.

A) debt
B) equity
C) internal
D) asset

Question 59

The tradeoffs that must be understood between debt or equity financing include the following except

A) potential profitability.
B) financial risk.
C) voting control.
D) return on assets.

Question 60

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) greater, increase, less
B) greater, decrease, more
C) greater, increase, more
D) less, increase, more

Question 61

What are the tradeoffs between profitability, risk, and control that should be considered when choosing between debt and equity?

Question 62

Based on an operating income of $30,000 and total assets of $200,000 what would be the percent return on assets?

A) 12
B) 30
C) 15
D) 6

Question 63

How likely is the typical startup to succeed in getting funded by a venture capitalist?

A) Very unlikely (1-2 percent)
B) Unlikely (10-20 percent)
C) Likely (60-75 percent)
D) Very likely (90 percent)

Question 64

What are the four basic factors that determine how a firm is financed?

Question 65

Return on equity is equal to

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.

Question 66

A balloon payment

A) is an upfront payment to obtain a loan.
B) is due when a loan comes due.
C) may be due at any time during the term of a loan.
D) is used to lift (remove) a loan covenant.

Question 67

The traditional way to locate business angels is through

A) contact with business associates, accountants, and lawyers.
B) formal angel networks or clubs.
C) advertisements in magazines.
D) contact with friends and relatives.

Question 68

Research for developing a new method of manufacturing would be a(n) _____ asset.

A) collateral
B) tangible
C) intangible
D) revolving

Question 69

Venture capital companies

A) provide investment support to young businesses.
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.

Question 70

Instead of borrowing money from suppliers to purchase equipment, an increasing number of small businesses are

A) obtaining trade credit instead.
B) making these purchases outright.
C) choosing to lease the equipment.
D) opting to streamline assembly processes to reduce expenditures.

Question 71

What sources of funds are available to businesses?

Question 72

If an owner is looking to take out a loan for equipment that will last approximately 8 years the ideal loan would be

A) mortgage.
B) trade credit.
C) asset-based.
D) term.

Question 73

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.

Question 74

The assets most commonly used for security by asset-based lending companies are

A) land and buildings.
B) accounts receivable and inventory.
C) equipment and buildings.
D) inventory and equipment.

Question 75

A primary source of financing for most smaller companies is

A) trade credit.
B) long-term bank loans.
C) mortgages.
D) asset-based notes.

Question 76

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.

Question 77

The federal government provides funds to small businesses through

A) venture capital companies.
B) the Small Business Administration.
C) business angels.
D) the Securities and Exchange Commission.

Question 78

If Bill Bailey, owner of Cherokee Communications, had violated the covenants of his loan agreement,

A) the loan payments would have been automatically rescheduled.
B) the loan interest rate would have increased to maximum legal rate.
C) the borrower's liability would have become unlimited.
D) the lender could have declared the loan due in full immediately.

Question 79

Business angels provide

A) asset-based loans.
B) factoring.
C) informal venture capital.
D) trade credit.

Question 80

Guaranty loans are

A) made by private lenders.
B) guaranteed up to 50 percent by the SBA.
C) made through foreign banks.
D) limited to $100,000.