Deck 13: Sources of Financing: Debt and Equity

Question 1

Rather than relying primarily on a single source of funds as they have in the past, entrepreneurs today must piece together their capital from multiple sources, a method known as layered financing.

Answer 1

True

Question 2

Explain the difference between equity and debt capital. What advantages and disadvantages characterize each?

Answer 2

∙ Equity Financing
Represents the personal investment of the owner(s) of the business. The primary advantage of this type of financing is that it does not have to be repaid with interest. The primary disadvantage is that an owner has to share ownership and may lose a great deal of control of the venture, especially if equity capital is being raised in early start-up stages.
∙ Debt Financing
Involves the funds that the small business owner borrows and must repay with interest. Lenders of debt capital are more numerous than investors of equity capital however, loans may be more difficult to obtain. The primary advantage of debt capital is that it does not normally remove ownership from the small business owner. Its primary disadvantages are that the debt must be carried as a liability on the balance sheet, and must be repaid with very costly interest payments at some point in the future.

Question 3

While equity capital represents the personal investment of the owner(s) of a business and does not have to be repaid, debt capital is a liability that must be repaid with interest in the future.

Answer 3

True

Question 4

Entrepreneurs are most likely to give up more equity in their businesses in the ________ phase of their companies than in any other.

A) startup
B) product development
C) product testing
D) product shipping

Question 5

The primary disadvantage of equity capital is that the entrepreneur ________.

A) must repay it at some point with interest
B) must give up some (perhaps most) of the ownership in the business to outsiders
C) experiences the disadvantage of the risk/return tradeoff in the form of higher interest rates
D) B and C above

Question 6

Entrepreneurs needing between $100,000 and $3 million in the current financial environment will likely find acquiring financing to be ________.

A) challenging
B) confusing
C) attainable
D) easy

Question 7

A company that is experiencing rapid expansion has similar capital requirements as those of a fledgling business.

Question 8

Entrepreneurs are most likely to give up more equity in their businesses in the startup phase than in any other.

Question 9

Equity capital is also called risk capital because these investors assume the primary risk of losing their funds if the business fails.

Question 10

A small company needs fixed capital to purchase its permanent assets.

Question 11

The Global Entrepreneurship Monitor reports that the average amount of capital that entrepreneurs use to start small businesses is about ________.

A) $25,000
B) $50,000
C) $15,000
D) $100,000

Question 12

The primary advantage of equity capital is ________.

A) its lower interest rate
B) that it is readily available to a large number of entrepreneurs from a variety of lenders
C) that it does not have to be repaid like a loan does
D) that it does not appear on a company's balance sheet

Question 13

Most entrepreneurs seeking money to launch their businesses need more than $1,000,000 in startup capital.

Question 14

Unlike entrepreneurs of the past, today's entrepreneurs ________.

A) are finding more government interest and funding for business start-ups than in the past decade
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 a smaller percentage of their time raising capital for their businesses

Question 15

Capital is any form of wealth employed to produce more wealth.

Question 16

When searching for capital to launch their companies, entrepreneurs should remember several "secrets" to successful financing. Which of the following is not one of those secrets?

A) Choosing the right sources of capital can be just as important as choosing the right form of ownership or the right location.
B) The money is out there, but the key is knowing where to look.
C) Creativity counts when searching for financing.
D) Raising money should not take very long therefore, if it does not come quickly, it probably will not come at all.

Question 17

In startup companies, raising capital can easily consume as much as one-half of the entrepreneur's time and take many months to complete.

Question 18

Which of the following represents capital?

A) Inventory
B) Equipment and machinery
C) Cash
D) All of the above

Question 19

Rather than piecing together their startup capital from multiple sources as they have in the past, entrepreneurs now are relying on a single source of funding.

Question 20

Unlike equity financing, debt financing does not require an entrepreneur to dilute her/his ownership interest in the company.

Question 21

After an entrepreneur invests his own money for startup, she/he will typically seek additional financing from friends and family next.

Question 22

Crowd funding is a method of raising capital that taps the power of social networking and allows entrepreneurs to post their elevator pitches and proposed investment terms on specialized Web sites and raise money from ordinary people who invest as little as $100.

Question 23

A method of raising capital that taps the power of social networking and allows entrepreneurs to post their elevator pitches and proposed investment terms on specialized Web sites and raise money from ordinary people who invest as little as $100 is called ________.

A) crowd funding
B) angel financing
C) venture capital
D) bootstrapping

Question 24

Bootstrapping is a process in which entrepreneurs tap their personal savings and use creative, low-cost start-up methods to launch their businesses.

Question 25

Angels are an excellent source of ________ money, often willing to wait ________ years or longer to cash out their investment.

A) immediate; 5
B) patient; 7
C) long-term; 10
D) passive; 20

Question 26

Approximately ________ percent of all venture capital invested comes from corporations.

A) 2
B) 8
C) 17
D) 24

Question 27

Which of the following is not a characteristic of a typical angel investor?

A) Investing money locally.
B) Purchasing majority ownership in the company.
C) Investing in the startup phase of the company.
D) Willing to wait seven years or more to cash out an investment.

Question 28

A/An ________ 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

Question 29

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

Question 30

Crowd funding is a process in which entrepreneurs tap their personal savings and use creative, low-cost start-up methods to launch their businesses.

Question 31

Before entering into any partnership arrangement, entrepreneurs must consider ________.

A) the partnership will only have an impact on sharing profits
B) what interest rate the partner is expecting
C) the impact of giving up some personal control and sharing profits with others
D) the ramifications of having another person on the payroll

Question 32

When evaluating a company as a potential investment target, venture capitalists look for all but which of the following?

A) A competent management team
B) Potential for high returns
C) Convenient and profitable exit strategy
D) Stable industry

Question 33

Bootstrap financing describes using internal, and often creative, methods of financing a company's need for capital.

Question 34

The first place an entrepreneur should look for startup capital is ________.

A) a bank
B) a venture capitalist
C) the Small Business Administration
D) his own savings

Question 35

Although there is no limit on the amount of stock it can buy, a typical venture capital firm will purchase less than ________ percent of the ownership in a small firm.

A) 21
B) 50
C) 70
D) 80

Question 36

When looking for an angel, the key is ________.

A) networking
B) waiting until you need the money
C) looking across industries
D) using computer matches

Question 37

The general trend of angel financing is that it has ________ as a source of capital for entrepreneurs over the past few years.

A) increased
B) stabilized
C) decreased
D) disappeared

Question 38

Bootstrapping is a method of raising capital that taps the power of social networking and allows entrepreneurs to post their elevator pitches and proposed investment terms on specialized Web sites and raise money from ordinary people who invest as little as $100.

Question 39

The largest single source of external equity capital for small businesses is ________.

A) angels
B) venture capitalists
C) Small Business Administration loans
D) the stock market (i.e., "going public")

Question 40

The average venture capital firm screens about ________ investment proposals each year and ultimately invests in ________ of them.

A) 10,000; 12
B) 1,000; 1
C) 5,000; 13
D) 5,000; 80

Question 41

Venture capital companies reject 90 percent of the proposals they receive because they don't meet the firms' investment criteria.

Question 42

The most important ingredient that venture capitalists look for in judging the potential success of a small business is a competent management team.

Question 43

One of the disadvantages of angels is that they are typically not willing to wait more than three years to cash out their investments.

Question 44

Networking through personal contacts and the Internet is one of the best ways to find angels, who usually prefer to invest in local businesses operating in industries they know something about.

Question 45

Venture capital companies invest only in companies in the startup phase.

Question 46

An option for acquiring equity capital is for the entrepreneur to take on partner(s) however, it is important that she/he consider the impact of giving up some personal control over operations and sharing profits with others.

Question 47

A(n) ________ is when a company raises capital by selling shares of its stock to the general public for the first time.

A) venture capital offering
B) partnership
C) debt equity arrangement
D) initial public offering

Question 48

Unlike venture capital firms and most other institutional investors, angels typically invest in businesses in their earliest phases, providing the seed capital needed to get the business going.

Question 49

A typical venture capital firm seeks investments in the $20,000 to $50,000 range and annual returns of 35-50 percent over three to five years.

Question 50

Sarah's aunt and cousin have offered to provide some financial assistance for her new business. Should an entrepreneur turn to friends and family members for money to launch a company? Why or why not? If so, under what conditions?

Question 51

Venture capital firms rarely take an active role in managing the business in which they invest.

Question 52

Two factors that make a deal attractive to venture capitalists include high returns and a convenient and profitable exit strategy.

Question 53

Angels are not a good source of financing for entrepreneurs seeking relatively small amounts of money, as they typically do not make investments of less than $1 million.

Question 54

Angels fill an important role in equity financing of a small business. Discuss their role, their typical profile, and how to find an angel.

Question 55

If an entrepreneur needs a relatively small amount of money to launch a company, angels are a primary source of funds.

Question 56

Corporate venture capital accounts for approximately 17 percent of all venture capital.

Question 57

Private investors look to earn the return on their investments in a business through the increased value of the business, not through dividends and interest.

Question 58

Angels fill a significant gap in the seed capital market.

Question 59

Venture capital companies are an important source of equity funding for small businesses. Discuss their policies, ownership control, and investment preferences regarding funding small businesses.

Question 60

Private investors, or angels, seek 60 to 75 percent annual return on investment, which is much higher than those of professional venture capitalists, and tend to take a 51+ percent share of the business.

Question 61

The biggest benefit of a public stock offering is ________.

A) the capital infusion the company receives
B) the ability to use its stock to acquire other companies
C) a listing on a stock exchange
D) the ability to use its stock to attract and retain key managers and employees

Question 62

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.

Question 63

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

Question 64

The document outlining the details of the agreement between the entrepreneur and the stock underwriter is called ________.

A) Regulation D
B) a "blue sky" agreement
C) the letter of intent
D) the registration statement

Question 65

Only about half of the companies that attempt a public stock offering ever complete the process.

Question 66

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

Question 67

Publicly-held companies must file periodic reports with the Securities and Exchange Commission.

Question 68

Investment bankers who underwrite public stock offerings typically look for all but which of the following characteristics in a small company?

A) A strong record of earnings.
B) A solid position in a stable market.
C) Consistently high growth rates.
D) A sound management team with experience and a strong board of directors.

Question 69

Since their stock offerings are small, most entrepreneurs are able to take their companies public without the assistance of accountants, attorneys, and underwriters.

Question 70

Rule ________ of the Regulation D exemptions is the most popular.

A) 202
B) 314
C) 426
D) 504

Question 71

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

Question 72

It is extremely difficult for a startup company with no track record of success to raise money with a public stock offering.

Question 73

Few companies with less than $25 million in annual sales manage to go public successfully.

Question 74

In an initial public offering, a company raises capital by selling shares of its stock to the general public for the first time.

Question 75

Less than ________ percent of all U.S. companies are publicly-held corporations.

A) 1
B) 5
C) 10
D) 12

Question 76

In an initial public offering, the underwriter, or investment banker, serves to ________.

A) advise and help prepare the company's registration statement for the SEC
B) determine the price of the shares issued in the offering
C) sell the company's stock through an underwriting syndicate of other investment bankers it develops
D) All of the above

Question 77

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

Question 78

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

Question 79

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

Question 80

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