Small Business Management Entrepreneurship and Beyond 5th Edition by by Timothy S. Hatten – Test Bank

Small Business Management Entrepreneurship and Beyond 5th Edition by by Timothy S. Hatten – Test Bank

chapter 9

Small Business Finance

True/False Questions

1. T F Since many businesses are not profitable in their first year, having a cash reserve with which to pay bills can help the business avoid insolvency.

Ans: True LO: 1 Page: 215 AACSB: Analytic

2. T F Each business must have its assets in place, which are all those things it needs to operate, before it ever opens its doors.

Ans: True LO: 1 Page: 215 AACSB: Analytic

3. T F Capital is a function of the applicant’s personal financial strength.

Ans: True LO: 1 Page: 216 AACSB: Analytic

4. T F Figure 9.1 is a pie chart that shows that about 30 percent of the companies listed on the Inc. 500 were started with less than $10,000.

Ans: True LO: 3 Page: 217 AACSB: Analytic

5. T F Assets owned by a loan applicant that can be pledged as security for the repayment of the loan constitute collateral.

Ans: True LO: 1 Page: 217 AACSB: Analytic

6. T F The applicant’s character is not a consideration when being evaluated by a lender.

Ans: False LO: 1 Page: 217 AACSB: Analytic

7. T F Simply having a good idea will not be enough to convince investors to risk their capital. A small business owner must also be able to show that he/she is a competent manager with previous business success.

Ans: True LO: 1 Page: 219 AACSB: Analytic

8. T F Two types of funds are available to the entrepreneur: debt and equity.

Ans: True LO: 2 Page: 219 AACSB: Analytic

9. T F Leverage can enable a small business owner to magnify the potential returns expected.

Ans: True LO: 2 Page: 219 AACSB: Analytic

10. T F In most cases, the sheer strength of a business idea can win full funding for a venture.

Ans: False LO: 1 Page: 219 AACSB: Analytic

11. T F The decision to seek outside funds, either through debt or equity, is relatively unimportant and simple.

Ans: False LO: 2 Page: 220 AACSB: Analytic

12. T F Until the debt is repaid, the creditor has a legal claim on a portion of the cash flows of the business.

Ans: True LO: 2 Page: 220 AACSB: Analytic

13. T F A lender may require a compensating balance, which means that the amount of funds is reduced, causing the rate of interest to increase, since the same amount of interest is paid and fewer funds are available.

Ans: True LO: 2 Page: 221 AACSB: Analytic

14. T F The prime rate is defined as the rate of interest banks charge their “best” customers.

Ans: True LO: 2 Page: 221 AACSB: Analytic

15. T F A fixed-rate loan typically has a higher interest rate than the initial rate on a variable-rate loan.

Ans: True LO: 2 Page: 221 AACSB: Analytic

16. T F Ordinarily, the longer the maturity of the loan, the higher the rate of interest.

Ans: True LO: 2 Page: 222 AACSB: Analytic

17. T F Most lenders are hesitant to make loans to startup businesses unless a wealthy friend or relative will cosign the loan.

Ans: True LO: 3 Page: 223 AACSB: Analytic

18. T F Today, a credit score of 580-690 is necessary for an individual to obtain a business loan.

Ans: False LO: 3 Page: 223 AACSB: Analytic

19. T F A positive covenant spells out what a borrower cannot do when signing a loan agreement.

Ans: False LO: 3 Page: 223 AACSB: Analytic

20. T F Commercial banks are the backbone of the credit market.

Ans: True LO: 3 Page: 224 AACSB: Analytic

21. T F A demand note allows the business to borrow and repay funds up to the maximum amount specified in the agreement throughout the year.

Ans: False LO: 3 Page: 224 AACSB: Analytic

22. T F Floor planning is a special type of a loan used for financing high-priced inventory like new cars and trucks.

Ans: True LO: 3 Page: 225 AACSB: Analytic

23. T F If a small business uses its receivables as collateral for a loan in the process known as pledging, the finance company will collect the accounts receivable.

Ans: False LO: 3 Page: 226 AACSB: Analytic

24. T F Factoring has historically been viewed as one of the most desirable approaches to financing.

Ans: False LO: 3 Page: 226 AACSB: Analytic

25. T F Term insurance policies have no borrowing capacity.

Ans: True LO: 3 Page: 227 AACSB: Analytic

26. T F The most active government lender is the Small Business Administration.

Ans: True LO: 3 Page: 227 AACSB: Analytic

27. T F Government lending programs exist to stimulate small businesses.

Ans: True LO: 3 Page: 227 AACSB: Analytic

28. T F The 504 Loan Program provides small businesses with funding for fixed assets through a certified development company when conventional loans are not possible.

Ans: True LO: 3 Page: 228 AACSB: Analytic

29. T F Through the LowDoc loan program, a business needing a loan may borrow up to $25,000.

Ans: False LO: 3 Page: 228 AACSB: Analytic

30. T F Most lenders will expect entrepreneurs to provide equity funds in an amount of at least 35 percent of the business before approving the loan.

Ans: False LO: 3 Page: 229 AACSB: Analytic

31. T F Most new businesses are originally financed with the personal funds of the small business owner.

Ans: True LO: 3 Page: 229 AACSB: Analytic

32. T F If a lender says no to a small business loan application, it is acceptable to ask whether the bank can rework the application so that it meets the lending criteria.

Ans: True LO: 3 Page: 229 AACSB: Analytic

33. T F About 40 percent of the plans submitted to venture capital firms are ultimately funded.

Ans: False LO: 3 Page: 231 AACSB: Analytic

34. T F Venture capital firms rarely invest in high-tech industries.

Ans: False LO: 3 Page: 231 AACSB: Analytic

35. T F Micromanagement angels own and operate their own business and are looking for ways to diversify their portfolios.

Ans: False LO: 3 Page: 232 AACSB: Analytic

Multiple-Choice Questions

36. According to a recent Wall Street Journal article, about one in 500 business owners will receive money from
37. a) Banks
38. b) The Small Business Administration
39. c) Angels
40. d) Venture capitalists

Ans: d LO: 1 Page: 214 AACSB: Analytic

37. The process of determining initial capital requirements for a business begins with identifying
38. a) Long-term liabilities
39. b) Short-term and long-term equity
40. c) Short-term and long-term assets as well as expenses
41. d) Financing requirements

Ans: c LO: 1 Page: 215 AACSB: Analytic

38. The fundamental financial building blocks for an entrepreneur are knowing what assets are required to open the business and how those assets will be financed. This is known as
39. a) Financial management
40. b) Initial capital requirements
41. c) Managerial accounting
42. d) Open book management

Ans: b LO: 1 Page: 215 AACSB: Analytic

39. Assets that will be converted into cash within one year are called
40. a) Short-term assets
41. b) Long-term assets
42. c) Capital assets
43. d) Financial assets

Ans: a LO: 1 Page: 215 AACSB: Analytic

40. Assets that will not be converted into cash within one year are called
41. a) Short-term assets
42. b) Long-term assets
43. c) Capital assets
44. d) Financial assets

Ans: b LO: 1 Page: 215 AACSB: Analytic

41. Cash, inventory, and prepaid expenses are which of the following?
42. a) Short-term assets
43. b) Long-term assets
44. c) Capital assets
45. d) Financial assets

Ans: a LO: 1 Page: 215 AACSB: Analytic

42. Building, equipment, land, and patents are which of the following?
43. a) Short-term assets
44. b) Long-term assets
45. c) Capital assets
46. d) Financial assets

Ans: b LO: 1 Page: 215 AACSB: Analytic

43. If a small business owner needs to obtain a loan for purchasing inventory that is expected to sell within one year, the maturity of the loan should be
44. a) Short-term
45. b) Intermediate-term
46. c) Long-term
47. d) Perpetuity

Ans: a LO: 2 Page: 215 AACSB: Analytic

44. The final step in defining required assets before opening a business involves
45. a) Evaluating fixed costs and other expenses
46. b) Subtracting the dollar value of the owner’s equity from the total dollar value of the required assets
47. c) Evaluating the situation to determine exactly what has to be in place for the business to operate effectively
48. d) Determine financing requirements

Ans: b LO: 1 Page: 216 AACSB: Analytic

45. When reviewing loan applications, Jessica, a loan officer at A+ Credit Union, always examines the amount of cash and marketable securities that applicants have on hand. She reviews historical, current, and projected cash flows of a business to gauge whether applicants are able to repay the loan. These activities best describe which of the five “Cs” of credit?
46. a) Capacity
47. b) Capital
48. c) Collateral
49. d) Character

Ans: a LO: 1 Page: 216 AACSB: Reflective Thinking

46. All but which of the following are elements of the five Cs of credit?
47. a) Capacity
48. b) Capital
49. c) Competency
50. d) Character

Ans: c LO: 1 Page: 216 AACSB: Analytic

47. Determining the applicant’s ability to repay a loan by examining the amount of cash and marketable securities and the projected cash flows is which of following five Cs?
48. a) Capacity
49. b) Capital
50. c) Competency
51. d) Character

Ans: a LO: 1 Page: 216 AACSB: Analytic

48. The general economic climate at the time of the loan application is which of the following five Cs of credit?
49. a) Capacity
50. b) Capital
51. c) Conditions
52. d) Character

Ans: c LO: 1 Page: 218 AACSB: Analytic

49. The ability to finance an investment through borrowed funds is known as
50. a) Equity
51. b) Leverage
52. c) Capital
53. d) Liabilities

Ans: b LO: 2 Page: 219 AACSB: Analytic

50. Debt creates the risk of becoming ___________ if the entrepreneur is unable to make each debt payment on time.
51. a) Profitable
52. b) Insolvent
53. c) Overextended
54. d) Successful

Ans: b LO: 2 Page: 219 AACSB: Analytic

51. Providers of equity funds forego the opportunity to receive periodic repayments in order to share in
52. a) Sales
53. b) Profits
54. c) Revenues
55. d) Expenses

Ans: b LO: 2 Page: 219 AACSB: Analytic

52. Equity funds never need to
53. a) Be repaid
54. b) Be accounted for
55. c) Be stated on the income statement
56. d) Be stated on the balance sheet

Ans: a LO: 2 Page: 219 AACSB: Analytic

53. Two kinds of funds are potentially available to the entrepreneur:
54. a) Debit and credit
55. b) Financing and borrowing
56. c) Debt and equity
57. d) Liability and asset

Ans: c LO: 2 Page: 219 AACSB: Analytic

54. All but which of the following determines the size and extent of the obligation to the creditor?
55. a) Amount of principal borrowed
56. b) The loan’s interest rate
57. c) The market interest rate
58. d) The loan’s length of maturity

Ans: c LO: 2 Page: 220 AACSB: Analytic

55. An amount of money borrowed from a lender is known as the
56. a) Interest rate
57. b) Principal
58. c) Maturity length
59. d) Prime interest rate

Ans: b LO: 2 Page: 220 AACSB: Analytic

56. The amount of money that a small business owner needs to borrow is the difference between the pro forma assets and
57. a) Projected sales
58. b) Projected expenses
59. c) Owner’s equity
60. d) Project liabilities

Ans: c LO: 2 Page: 220 AACSB: Analytic

57. The amount of money paid for the use of borrowed funds is known as
58. a) Interest
59. b) Principal
60. c) Maturity length
61. d) Debt

Ans: a LO: 2 Page: 221 AACSB: Analytic

58. Interest rates for small business owners are normally made up of the ___________ plus an additional percentage.
59. a) Discount rate
60. b) Federal funds rate
61. c) Prime interest rate
62. d) Annual percentage rates

Ans: c LO: 2 Page: 221 AACSB: Analytic

59. The more compounding periods, the __________ the effective rate of interest.
60. a) Lower
61. b) No effect on
62. c) Higher
63. d) Better

Ans: c LO: 2 Page: 221 AACSB: Analytic

60. A loan with an interest rate that changes over the life of the loan is known as a
61. a) Fixed rate loan
62. b) Variable rate loan
63. c) Balloon payment loan
64. d) Revolving loan

Ans: b LO: 2 Page: 221 AACSB: Analytic

61. The rate of interest charged to a banks “best” customers is referred to as
62. a) Fixed rate
63. b) Dividend rate
64. c) Grade A rate
65. d) Prime rate

Ans: d LO: 2 Page: 221 AACSB: Analytic

62. Upon obtaining a $100,000 business loan from his local bank, Arthur was informed that he must keep at least $10,000 on deposit with the bank. This is referred to as a/an
63. a) Effective rate of interest
64. b) Compensating balance
65. c) Required dividend
66. d) Maturity requirement

Ans: b LO: 2 Page: 221 AACSB: Reflective Thinking

63. _________ refers to the intervals at which interest is paid.
64. a) Collateral
65. b) Liquidity
66. c) Compounding
67. d) Securing

Ans: c LO: 2 Page: 221 AACSB: Analytic

64. Wilma is ecstatic about the purchase of her first house. She has taken out a 30-year mortgage at a 5.25 percent interest rate, and her mortgage broker has informed her that the interest rate will not change for the life of the loan. What type of loan did Wilma take out?
65. a) Fixed-rate loan
66. b) Variable-rate loan
67. c) Equity loan
68. d) Long loan

Ans: a LO: 2 Page: 221 AACSB: Reflective Thinking

65. Each year, Alexandra receives a payment for the stock she owns within the company where she is employed. The amount of the annual payment fluctuates based on the company’s net profits. This is referred to as
66. a) An asset
67. b) A liability
68. c) A dividend
69. d) Equity

Ans: c LO: 2 Page: 222 AACSB: Reflective Thinking

66. The length of time in which a loan must be repaid is called the
67. a) Principal
68. b) Interest rates
69. c) Maturity
70. d) Collateral

Ans: c LO: 2 Page: 222 AACSB: Analytic

67. All but which of the following are the three primary factors that providers of equity financing are interested in?
68. a) Dividends
69. b) Voice in the management of the business
70. c) Increased value of the business
71. d) Payroll expense

Ans: d LO: 2 Page: 222 AACSB: Analytic

68. The sale of common stock or the use of retained earnings to provide long-term financing is known as
69. a) Debt financing
70. b) Creative financing
71. c) Equity financing
72. d) Long-term financing

Ans: c LO: 2 Page: 222 AACSB: Analytic

69. A clause that requires the borrower to maintain a minimum level of working capital until the loan is repaid is known as
70. a) Covenants
71. b) Assurances
72. c) Endorsements
73. d) Guarantors

Ans: a LO: 2 Page: 223 AACSB: Analytic

70. __________ security refers to the borrower’s assurance to lenders that loans will be repaid.
71. a) Loan
72. b) Note
73. c) Debt
74. d) Equity

Ans: a LO: 3 Page: 223 AACSB: Analytic

71. The two types of loan endorsers are
72. a) Borrowers and guarantors
73. b) Guarantors and comakers
74. c) Borrowers and lenders
75. d) Comakers and borrowers

Ans: b LO: 3 Page: 223 AACSB: Analytic

72. Ralph just received a loan from his local bank, where he must make periodic payments that include accrued interest and part of the outstanding principal balance. Ralph’s loan is known as a/an
73. a) Lateral loan
74. b) Unsecured loan
75. c) Secured loan
76. d) Installment loan

Ans: d LO: 3 Page: 224 AACSB: Reflective Thinking

73. _____________ are the backbone of the credit market, offering the widest assortment of loans to creditworthy small businesses.
74. a) Credit unions
75. b) Savings and loans
76. c) Commercial banks
77. d) Venture capitalists

Ans: c LO: 3 Page: 224 AACSB: Analytic

74. A short-term loan where collateral is not required is called a/an
75. a) Unsecured loan
76. b) Secured loan
77. c) Line of credit
78. d) Demand note

Ans: a LO: 3 Page: 224 AACSB: Analytic

75. An agreement that makes a specific amount of short-term funding available to a business as it is needed is called a/an
76. a) Unsecured loan
77. b) Secured loan
78. c) Line of credit
79. d) Demand note

Ans: c LO: 3 Page: 224 AACSB: Analytic

76. A short-term loan where both principal and interest must be repaid in a lump sum at maturity is known as a/an
77. a) Unsecured loan
78. b) Secured loan
79. c) Line of credit
80. d) Demand note

Ans: d LO: 3 Page: 224 AACSB: Analytic

77. A loan that requires the borrower to make small monthly payments that are usually enough to cover the interest, with the balance due at maturity is called a
78. a) Balloon note
79. b) Floor planning
80. c) Line of credit
81. d) Demand note

Ans: a LO: 3 Page: 224 AACSB: Analytic

78. All but which of the following are the most common types of loans provided by commercial finance companies?
79. a) Leasing
80. b) Floor planning
81. c) Balloon notes
82. d) Factoring accounts receivable

Ans: c LO: 3 Page: 224 AACSB: Analytic

79. A type of business loan that is generally made for high-priced items like new automobiles or trucks, where the business holds the item in inventory and pays interest, and where the asset is still owned by the lender until it is sold, is known as which of the following?
80. a) An unsecured loan
81. b) Floor planning
82. c) A line of credit
83. d) A demand note

Ans: b LO: 3 Page: 225 AACSB: Analytic

80. Which type of loans are made to established businesses that have demonstrated a strong overall credit profile and have shown excellent creditworthiness and an extreme probability of repayment?
81. a) Balloon note
82. b) Floor planning
83. c) Installment loans
84. d) Unsecured term loans

Ans: d LO: 3 Page: 225 AACSB: Analytic

81. Commercial finance companies extend short- and intermediate-term credit to small businesses at an interest rate that is ___________ commercial banks.
82. a) Lower than
83. b) The same as
84. c) Higher than
85. d) The prime interest given by

Ans: c LO: 3 Page: 225 AACSB: Analytic

82. In the Manager’s Notes “Banker Talk”, when should you tell your banker that your business is having financial trouble?
83. a) On a Tuesday
84. b) When the business plan is finished
85. c) Before you are in dire need
86. d) As soon as you know an exact amount you need

Ans: c LO: 3 Page: 225 AACSB: Analytic

83. What type of loan requires collateral as security for the lender?
84. a) Lateral loan
85. b) Unsecured loan
86. c) Secured loan
87. d) Installment loan

Ans: c LO: 3 Page: 225 AACSB: Analytic

84. At Lou’s Landscaping Services, a number of customers were not paying up on time, and Lou needed cash for a large purchase. As a result, Lou sold the company’s accounts receivable to a finance company for 70 percent of the total collection amount. This method of raising funds is referred to as
85. a) Floor planning
86. b) Bartering
87. c) Crediting
88. d) Factoring

Ans: d LO: 3 Page: 226 AACSB: Reflective Thinking

85. Which type of loans are provided by commercial finance companies and allow small businesses to have use of state-of-the-art equipment at a fraction of the cost?
86. a) Leasing
87. b) Floor planning
88. c) Balloon notes
89. d) Factoring accounts receivable

Ans: a LO: 3 Page: 226 AACSB: Analytic

86. The practice of raising funds for a business through the sale of accounts receivable is known as which of the following?
87. a) Leasing
88. b) Floor planning
89. c) Balloon notes
90. d) Factoring accounts receivable

Ans: d LO: 3 Page: 226 AACSB: Analytic

87. A finance company will generally purchase the accounts receivable or lend small businesses somewhere between ____________ percent of the face value of the accounts receivable being factored.
88. a) 40 and 60
89. b) 45 and 70
90. c) 55 and 80
91. d) 70 and 90

Ans: c LO: 3 Page: 226 AACSB: Analytic

88. ____________ are made to small business owners based on the amount of money paid in premiums on an insurance policy that has a cash surrender value.
89. a) Floor planning loans
90. b) Leases
91. c) Installment loans
92. d) Policy loans

Ans: d LO: 3 Page: 227 AACSB: Analytic

89. An insurance company will frequently lend up to _____ of a policy’s cash surrender value.
90. a) 10 percent
91. b) 30 percent
92. c) 59 percent
93. d) 95 percent

Ans: d LO: 3 Page: 227 AACSB: Analytic

90. A small business may qualify for loans through a commercial bank where a portion of the loan is guaranteed by the Small Business Administration. This loan is known as
91. a) An SBA loan
92. b) A government loan
93. c) A direct loan
94. d) A 504 loan

Ans: a LO: 3 Page: 227 AACSB: Analytic

91. Loans that are granted by commercial banks to entrepreneurs that are then guaranteed at up to 90 percent of the loan value by the SBA as part of the 7(a) program are called which of the following?
92. a) SBA loans
93. b) Guaranteed loans
94. c) Direct loans
95. d) 504 loans

Ans: b LO: 3 Page: 227 AACSB: Analytic

92. In the bar chart Figure 9.3 “Who Gets SBA Loans?” which industry sector receives the largest percentage of SBA 7(a) loans?
93. a) Service
94. b) Manufacturing
95. c) Construction
96. d) Agriculture

Ans: a LO: 3 Page: 227 AACSB: Analytic

93. A relatively new loan program available through the SBA that simplifies the paperwork and reduces the time required for a loan answer that has historically been required is the
94. a) SBA loan
95. b) Guaranteed loan
96. c) Direct loan
97. d) SBA express program

Ans: d LO: 3 Page: 228 AACSB: Analytic

94. Under the SBA express program, up to ____________ can be borrowed by a small business with a one-page application.
95. a) $10,000
96. b) $150,000
97. c) $75,000
98. d) $350,000

Ans: d LO: 3 Page: 228 AACSB: Analytic

95. Which of the following is an appropriate follow-up action if a potential lender initially says “no”?
96. a) Ask for advice
97. b) Avoid further communication
98. c) Submit the same application again
99. d) Show resentment

Ans: a LO: 3 Page: 229 AACSB: Analytic

96. The first place most entrepreneurs find equity capital is
97. a) Partners
98. b) Community investors
99. c) Venture capital firms
100. d) In their personal assets

Ans: d LO: 3 Page: 229 AACSB: Analytic

97. Most state and local government programs usually have _____ interest rates than conventional loans, often with ________ maturities.
98. a) Higher, longer
99. b) Higher, shorter
100. c) Lower, longer
101. d) Lower, shorter

Ans: c LO: 3 Page: 229 AACSB: Analytic

98. The purchase of goods from suppliers who do not demand payment immediately is called which of the following?
99. a) Trade credit
100. b) Guaranteed loans
101. c) Direct loans
102. d) LowDoc program

Ans: a LO: 3 Page: 229 AACSB: Analytic

99. Most lenders will expect entrepreneurs to provide equity funds in an amount of at least ____ percent of the business before approving a loan.
100. a) 10
101. b) 20
102. c) 35
103. d) 50

Ans: b LO: 3 Page: 229 AACSB: Analytic

100. The Department of Commerce estimates that nearly _______ of all startups begin without borrowed funds.
101. a) 10 percent
102. b) 30 percent
103. c) 66 percent
104. d) 75 percent

Ans: c LO: 3 Page: 229 AACSB: Analytic

101. In the Reality Check box titled “Credit Card Start-up Funding – Really?” which of the following was not cited as a way to tell if you are overextended?
102. a) You are unaware of your bills.
103. b) You are paying the minimum.
104. c) You are maxed out.
105. d) You keep getting credit card applications in the mail.

Ans: d LO: 1 Page: 230 AACSB: Analytic

102. More than _________ of new businesses are at least partially funded by family and friends of the entrepreneur.
103. a) 10 percent
104. b) 20 percent
105. c) 33 percent
106. d) 50 percent

Ans: c LO: 3 Page: 231 AACSB: Analytic

103. Groups or individuals who invest in specific high-potential new or expanding firms are called which of the following?
104. a) Venture capitalists
105. b) Small business investment companies
106. c) Angels
107. d) Private placements

Ans: a LO: 3 Page: 231 AACSB: Analytic

104. Approximately what percentage of U.S. businesses are partnerships?
105. a) 2
106. b) 10
107. c) 20
108. d) 30

Ans: b LO: 3 Page: 231 AACSB: Analytic

105. Walter is a retired CEO of a Fortune 500 company. He now focuses much of his energy on loaning money to new business owners who have innovative ideas but limited funds. Walter can best be described as what type of angel?
106. a) Professional angel
107. b) Micromanagement angel
108. c) Corporate angel
109. d) White angel

Ans: c LO: 3 Page: 232 AACSB: Reflective Thinking

106. Doctors, lawyers, and accountants make up what category of angels?
107. a) Professional angels
108. b) Micromanagement angels
109. c) Entrepreneurial angels
110. d) Enthusiast angels

Ans: a LO: 3 Page: 232 AACSB: Analytic

107. An investor who is typically a successful entrepreneur who has a desire to assist startups or emerging businesses by investing $20,000 to $50,000 is known as a/an
108. a) Venture capitalist
109. b) Small business investment company
110. c) Angel
111. d) Private placement

Ans: c LO: 3 Page: 232 AACSB: Analytic

108. Which of the following involves the sale of stock to a selected group of individuals where the stock cannot be purchased by the general public?
109. a) Venture capitalists
110. b) Small business investment companies
111. c) Angels
112. d) Private placement

Ans: d LO: 3 Page: 233 AACSB: Analytic

109. The first sale of the stock of a business that is made available to public investors is known as which of the following?
110. a) An IPO
111. b) A small business investment company
112. c) An angel
113. d) A private placement

Ans: a LO: 3 Page: 233 AACSB: Analytic

110. All but which of the following are important factors to consider when selecting a lender for business financing?
111. a) The size of the lending firm should be small.
112. b) The lender should have a desire to work with new businesses.
113. c) The lender should have industry experience.
114. d) The lender should be easy to approach with problems.

Ans: a LO: 3 Page: 235 AACSB: Analytic

Scenario Questions

Use the following to answer questions 111-115:

Scenario 9-1. Jim is interested in beginning his own small business dealing with the repair and maintenance of household appliances. He has a talent for fixing these types of appliances and has been doing so as a sideline business for several years. He has acquired some of the needed tools; however, a sizeable investment will need to be made in tools and equipment in order for him to repair the appliances that will be brought to his shop for service. He would like part of his competitive advantage to be the capability to fix all appliances, not just one type. Jim has just one small problem—a lack of funds. He comes to you for advice.

111. In Scenario 9-1 above, Jim has two basic choices when looking for funds. They are which of the following?
112. a) Assets and liabilities
113. b) Debt and assets
114. c) Debt and equity
115. d) Equity and assets

Ans: c LO: 1 Page: 219 AACSB: Reflective Thinking

112. In Scenario 9-1 above, the primary disadvantages of using debt financing are all but which of the following?
113. a) It increases risk due to the possibility of insolvency.
114. b) It allows a voice in management of the business.
115. c) It has to be repaid.
116. d) Leverage can enable returns to be lessened.

Ans: b LO: 1 Page: 220 AACSB: Reflective Thinking

113. In Scenario 9-1 above, the primary disadvantages of using equity financing are all but which of the following?
114. a) It allows a voice in the management of the business.
115. b) It provides for a sharing of the profits.
116. c) It does not constrain cash flow.
117. d) It shares ownership in the business.

Ans: c LO: 1 Page: 222 AACSB: Reflective Thinking

114. In Scenario 9-1 above, all but which of the following are choices Jim could use if he chooses debt financing?
115. a) Commercial banks
116. b) Factoring accounts receivable
117. c) Insurance companies
118. d) Venture capital

Ans: d LO: 1 Page: 231 AACSB: Reflective Thinking

115. In Reference 9-1 above, all but which of the following are choices Jim could use if he chooses equity financing?
116. a) Family and friends
117. b) Angels
118. c) Public offerings
119. d) Commercial finance companies

Ans: d LO: 1 Page: 231 AACSB: Reflective Thinking

Use the following to answer questions 116-120:

Scenario 9-2. Ryan has just graduated from college with a business degree. He has a wonderful idea for a new business called Ryan’s Road Machines. He would like to sell a variety of all terrain vehicles (ATVs) for the personal use of his selected clientele. Outstanding customer service will be his competitive advantage as he provides individual service to each of his customers. He has just one small problem, no capital. He knows that he must meet the five Cs of credit when looking at external funding in order to prove his creditworthiness.

116. In Scenario 9-2 above, a major concern of any provider of funding will be Ryan’s ability to repay his loan. This refers to which of the five Cs?
117. a) Capacity
118. b) Capital
119. c) Collateral
120. d) Conditions

Ans: a LO: 2 Page: 216 AACSB: Reflective Thinking

117. In Scenario 9-2 above, in judging this C, the net worth of the business will be determined. The value of the assets minus the value of the liabilities will provide the determination for
118. a) Capacity
119. b) Capital
120. c) Collateral
121. d) Conditions

Ans: b LO: 2 Page: 216 AACSB: Reflective Thinking

118. In Reference 9-2 above, Ryan has never borrowed money before; however, he currently has a loan outstanding for his school expenses. Which of the five Cs is judged primarily on the applicant’s past repayment patterns?
119. a) Character
120. b) Capital
121. c) Collateral
122. d) Conditions

Ans: a LO: 2 Page: 217 AACSB: Reflective Thinking

119. In Scenario 9-2, Ryan’s inventory will provide a large part of this C. The machines themselves can be pledged as security in order to meet the C of
120. a) Capacity
121. b) Capital
122. c) Collateral
123. d) Conditions

Ans: c LO: 2 Page: 217 AACSB: Reflective Thinking

120. In Scenario 9-2 above, at the present, the economy is growing rapidly. In fact, it is growing so rapidly, there is a continuing discussion that interest rates may need to be raised in order to slow economic growth. These factors refer to which of the five Cs?
121. a) Capacity
122. b) Capital
123. c) Collateral
124. d) Conditions

Ans: d LO: 2 Page: 218 AACSB: Reflective Thinking

Short-Answer Questions

121. List and explain the five Cs of credit.

Ans: Capacity • Character • Capital • Conditions • Collateral LO: 2 Page: 216-218 AACSB: Analytic

122. Compare and contrast debt and equity financing.

Ans: Equity • Supplied by investors in exchange for an ownership position • Need not be repaid • Share in the profits • Allows others a voice in management Debt • Borrowed from a creditor • Must be repaid • Creates leverage that can allow for returns to be magnified • Creates risk of becoming insolvent • Can lead to bankruptcy LO: 1 Page: 220, 222 AACSB: Analytic

123. Describe three sources of debt financing for a small business owner.

Ans: Commercial banks • Commercial finance companies • Factoring accounts receivable Insurance companies • Federal loan programs • State and local government lenders • Trade credit LO: 1 Page: 223-229 AACSB: Analytic

124. If a potential lender says “no”, what are some actions that a small business manager should take?

Ans: Thank the lender and do not show resentment • Ask what specific information counted against you • Ask for specific recommendations or advice • Give the bank a reason to make a loan • Ask whether the bank can rework the application LO: 3 Page: 229 AACSB: Analytic

125. Describe three sources of equity financing.

Ans: Personal funds • Partners • Family and friends • Venture capital firms • Angels • Small business investment companies • Stock offerings • Private placements • Public offerings LO: 1 Page: 229-233 AACSB: Analytic

126. Explain why companies choose public offerings.

Ans: More funds can be raised through public offerings than through other venture capital methods without imposing the repayment burdens of debt. • Public offerings enhance image • Wealth can be magnified greatly when owner-held shares are subsequently sold on the market LO: 3 Page: 234 AACSB: Analytic

127. Explain three considerations a small business owner should keep in mind when choosing a lender or investor.

Ans: Size of the lender • Industry experience • Desire to support entrepreneurs • Supportive approach to problems • Opportunity cost • Being too anxious LO: 3 Page: 234-235 AACSB: Analytic