Verified Test Bank Chapter 8 Gupta Small Business Financing

Chapter 8- Small Business Financing

True/False

1. The seed stage of a company is when the business is just an idea, but there is no formal venture yet

Response: See 8.1

Level: Easy

Learning Objective: Explain the meaning of small business finance

1. The ultimate objective of corporate finance is to increase shareholder value

Response: See 8.1

Level: Easy

Learning Objective: Explain the meaning of small business finance

1. Corporate finance theories are largely based on an assumption that investors are most of the time emotional

Response: See 8.1

Level: Easy

Learning Objective: Explain the meaning of small business finance

1. The capital structure is the particular combination of debt and equity used to make up the financing of a company

Response: See 8.2

Level: Medium

Learning Objective: Identify different types of financing

1. Leverage is defined as the ratio of a business equity to the debt

Response: See 8.2.1

Level: Medium

Learning Objective: Identify different types of financing

1. If the payment is not made on time to creditors, the business risks becoming financially solvent

Response: See 8.2.1

Level: Easy

Learning Objective: Identify different types of financing

1. Under debt financing, lenders typically receive a portion of ownership

Response: See 8.2.1

Level: Easy

Learning Objective: Identify different types of financing

1. Equity funding places a cost on the future earnings of the business in the form of interest payments

Response: See 8.2.2

Level: Medium

Learning Objective: Identify different types of financing

1. Equity investors have claims on the firm’s profits

Response: See 8.2.2

Level: Easy

Learning Objective: Identify different types of financing

1. According to The Pecking Order Theory (POT), equity funding is the cheapest because of the low information asymmetry

Response: See 8.2.2

Level: Easy

Learning Objective: Identify different types of financing

1. Equity financing is always cheaper than the debt financing

Response: See 8.2.2

Level: Easy

Learning Objective: Identify different types of financing

1. Small business owners who want to start a successful business must always reach out to venture capitalists for funding

Response: See 8.3

Level: Easy

Learning Objective: Recognize personal sources of financing

1. The number one source of funds for most new firms is the owners themselves or their family and friends

Response: See 8.3

Level: Easy

Learning Objective: Recognize personal sources of financing

1. Venture capitalists are those people who provide money in exchange for equity and loans

Response: See 8.3

Level: Easy

Learning Objective: Recognize personal sources of financing

1. An entrepreneur’s own investment in business reflects his or her commitment to the business

Response: See 8.3

Level: Easy

Learning Objective: Recognize personal sources of financing

1. Venture capitalists are the most common source of external capital for established small businesses

Response: See 8.4

Level: Easy

Learning Objective: Distinguish between various formal funding sources

1. The interest that a business pays to the creditor is usually lower than the stated rate of interest

Response: See 8.4.1

Level: Easy

Learning Objective: Distinguish between various formal funding sources

1. Generally, the longer the maturity period of the loan, the lower the rate of interest

Response: See 8.4.1

Level: Easy

Learning Objective: Distinguish between various formal funding sources

1. Unsecured term loans are made to failed businesses that struggle to get loans from anywhere else

Response: See 8.4.1.2

Level: Medium

Learning Objective: Distinguish between various formal funding sources

1. The profitability of the business has no impact on the dividend amount given to equity investors

Response: See 8.4.2

Level: Medium

Learning Objective: Distinguish between various formal funding sources

1. Engaged investors contribute knowledge and skills to the firms in which they invest

Response: See 8.4.2

Level: Medium

Learning Objective: Distinguish between various formal funding sources

1. Analytical angel investors are willing to commit themselves to substantial investment activity in the informal capital market

Response: See 8.4.2

Level: Medium

Learning Objective: Distinguish between various formal funding sources

1. The Securities and Exchange commission regulates the public stock offerings

Response: See 8.4.3

Level: Easy

Learning Objective: Distinguish between various formal funding sources

1. For public stock offerings, it is mandatory that companies make financial disclosures to the public

Response: See 8.4.3

Level: Easy

Learning Objective: Distinguish between various formal funding sources

1. One advantage of crowdfunding is that ALL projects that apply to crowdfunding platforms are able to get huge funding from the ordinary crowd

Response: See 8.5

Level: Easy

Learning Objective: Describe crowdfunding and its appeal as a source of financing

Multiple Choice Questions

1. Personal finance involves having funding for:
2. Employees’ salaries
3. Assets acquisition
4. Pay money to suppliers
5. All of the above

Response: See 8.1

Level: Easy

Learning Objective: Explain the meaning of small business finance

1. Which of the following is a disadvantage of a debt financing?
2. No influence of lenders on management
3. Lenders have no claim in the business profit
4. Debt payments reduce the cash available to the firm
5. Managers can make financial plans well in advance

Response: See 8.2.1

Level: Easy

Learning Objective: Identify different types of financing

1. Which of the following is an advantage of debt financing?
2. Depending on the contract, a lender may claim on the owner’s personal possessions
3. If loan payments are not paid in time, a business can be forced to go bankrupt
4. Debt payments reduce the cash available to the firm
5. Managers can make financial plans well in advance

Response: See 8.2.1

Level: Easy

Learning Objective: Identify different types of financing

1. Which of the following is NOT included in equity financing?
2. Venture capitalist
3. Angel investors
4. Bank loans
5. Crowdfunding

Response: See 8.2.1

Level: Medium

Learning Objective: Identify different types of financing

1. Which of the following is a drawback of equity financing?
2. Investors get paid only when the business makes a profit
3. Equity investors have claim on the firm’s profit
4. No principal or interest is to be made to investors
5. Equity investors may offer helpful advice and mentoring

Response: See 8.2.2

Level: Easy

Learning Objective: Identify different types of financing

1. Which of the following is an advantage of equity financing?
2. Requires giving up a portion of ownership
3. Equity investors have claim on the firm’s profit
4. Investors expect high rate of returns
5. Equity investors may offer helpful advice and mentoring

Response: See 8.2.2

Level: Easy

Learning Objective: Identify different types of financing

1. The Pecking Order Theory (POT) is based on an assumption that:
2. Business owners always act in the best interest of the firm
3. Business owners always act in the self interest
4. Outside investors are better informed about the issues faced by firms than are business owners
5. Outside investors serve in the best interest of the firm

Response: See 8.2.2

Level: Easy

Learning Objective: Identify different types of financing

1. Which factor must be considered in deciding which funding to be used for financing one’s venture?
2. Owner’s willingness to take financial risk
3. The voting control the owner wishes to retain
4. Potential profitability of the business
5. All of the above

Response: See 8.2.3

Level: Easy

Learning Objective: Identify different types of financing

1. Which of the following is a form of internal financing for small firms?
2. Bank loans
3. Equity financing
4. Retain earning and owner’s personal savings
5. Government grants

Response: See 8.3

Level: Medium

Learning Objective: Recognize personal sources of financing

1. Which of the following is a form of external financing for small firms?
2. Bank loans and Equity financing
3. Retain earning
4. Owner’s personal savings
5. None of the above

Response: See 8.3

Level: Medium

Learning Objective: Recognize personal sources of financing

1. George has a business idea and he is expecting to get support from his family and friends to get funding for his business. His grandmother loves him very much and George is hoping that his grandmother would help him finance his dream. However, when he approaches his grandmother, she refuses to help him. Which of the following statement STRENGTHENS the argument that his grandmother took a right decision?
2. George and his grandmother mutually accepted the payback strategy
3. George offers his grandmother a written formal agreement to which she agreed
4. George has asked for the minimum amount that his grandmother could easily give
5. George is unwilling to invest his own savings

Response: See 8.3

Level: Medium

Learning Objective: Recognize personal sources of financing

1. According to the text, The Panel Study of Income Dynamics found about one-third of the small businesses reported receiving ________ from family members
2. Unpaid labor
3. Paid labor
4. Equity
5. None of the above

Response: See 8.3

Level: Medium

Learning Objective: Recognize personal sources of financing

1. According to the results of research conducted by the Kauffman Foundation on the funding sources of the fastest growing firms in the U.S, about two-thirds of Inc. magazine’s fastest growing firms took ________to finance their business
2. Government grants
3. Venture capitalist
4. Business acquaintances
5. Personal savings

Response: See 8.3

Level: Easy

Learning Objective: Recognize personal sources of financing

1. ________ is an asset that a bank can claim if the loan is not repaid as per schedule
2. Income statement
3. Credit history
4. Collateral
5. None of the above

Response: See 8.4.1

Level: Easy

Learning Objective: Distinguish between various formal funding sources

1. Interest rates for small business loans are:
2. Set by the Small business Administration
3. Not affected by the prime rates
4. Prime rate plus some additional percentage points
5. Lower than the standard rates

Response: See 8.4.1

Level: Medium

Learning Objective: Distinguish between various formal funding sources

1. Which of the following is NOT a source of debt capital?
2. Commercial banks
3. Commercial Finance companies
4. Insurance companies
5. Angel investors

Response: See 8.4.1.1

Level: Easy

Learning Objective: Distinguish between various formal funding sources

1. Which of the following is NOT a form of debt capital?
2. Installment loans
3. Equity
4. Balloon notes
5. Demand note

Response: See 8.4.1.2

Level: Medium

Learning Objective: Identify different types of financing

1. ___________ are for businesses to purchase fixed assets such as real estate and equipment
2. Demand notes
3. Balloon loans
4. Installment loans
5. Leasing

Response: See 8.4.1.2

Level: Medium

Learning Objective: Identify different types of financing

1. Venture capitalists are willing to provide capital to companies:
2. With high growth potential
3. With low growth
4. In return of prime rate of interest
5. All of the above

Response: See 8.4.2

Level: Medium

Learning Objective: Distinguish between various formal funding sources

1. ________are venture capitalist firms licensed by SBA to invest in small firms
2. Angel investors
3. Balloon firms
4. Small Business Investment Companies
5. Demand notes

Response: See 8.4.2

Level: Medium

Learning Objective: Distinguish between various formal funding sources

1. Which of the following characteristic is that of lotto angel investors?
2. A high investment activity level and low competence
3. A low investment activity level and high competence
4. A high investment activity level and high competence
5. A low investment activity level and low competence

Response: See 8.4.2

Level: Medium

Learning Objective: Distinguish between various formal funding sources

1. ______________ have a low investment activity level and fairly high competence
2. Lotto angel investors
3. Engaged angel investors
4. Analytical investors
5. Traders

Response: See 8.4.2

Level: Easy

Learning Objective: Distinguish between various formal funding sources

1. When the company selling the stock is located and does business in only one state, and the stock is also sold within the same state, it is considered an _______
2. Intrastate stock sale
3. Interstate stock sale
4. Public offerings
5. None of the above

Response: See 8.4.3

Level: Medium

Learning Objective: Distinguish between various formal funding sources

1. The first time a firm sells its stock to the general public, it is called the ______
2. Private placements
3. Initial public offering
4. Stock sale
5. Cross-border stock sale

Response: See 8.4.3

Level: Easy

Learning Objective: Distinguish between various formal funding sources

1. Which of the following is a drawback of crowdfunding?
2. A fast way to raise money with no upfront fees
3. A good way to test the public’s reaction to the product
4. Others may copy the idea
5. Helps in marketing a product

Response: See 8.5

Level: Medium

Learning Objective: Describe crowdfunding and its appeal as a source of financing