Kuratko 8e Chapter 08
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Intro to Entrepreneurship Chapter 8 by Kuratko...
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CHAPTER 8: SOURCES OF CAPITAL FOR ENTREPRENEURS TRUE/FALSE 1. Use of debt to finance a new venture involves a payback of funds plus an interest fee for the use of the money. ANS: T KEY: pg 210
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2. The most common sources of debt financing are commercial banks. ANS: T KEY: pg 211
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3. Sources of debt financing include trade credit, accounts receivables, factoring, and finance companies. ANS: T KEY: pg 213
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4. Equity financing is money invested in the venture with legal obligations to repay the principal amount of interest or interest rate on it. ANS: F KEY: pg 214
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5. Public offerings is a term used to refer to corporations taking public donations to raise capital. ANS: F KEY: pg 215
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6. Because the advantages of going public outweigh the disadvantages, it is in a corporation’s best interest to go public. ANS: F KEY: pg 215
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7. History and nature of the company, capital structure, and description of any material contracts are just a few examples of the specific detailed information that must be presented about a firm that is going public. ANS: T KEY: pg 215
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8. Private placement is a method of raising capital through the private placement of securities. ANS: T KEY: pg 216
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9. Regulation D strengthened the regulations for reports and statements required for selling stock to private parties, friends, employees, customers, relatives, local professionals. ANS: F KEY: pg 216
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10. Sophisticated investors are wealthy individuals who invest more or less regularly in new and/or earlyand late-stage ventures. ANS: T KEY: pg 217
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11. Venture capitalists are a valuable source of equity funding for new ventures. ANS: T KEY: pg 218
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12. The venture capital pool is rapidly declining due to overfunding. ANS: F KEY: pg 219
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13. Venture capitalists are quick to invest. ANS: F KEY: pg 220
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14. Venture capitalists need little information before they make an investment. ANS: F KEY: pg 221
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15. The business plan is a critical element in the new-venture proposal. ANS: T KEY: pg 224
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16. There is no way for the venture capitalist to evaluate the new venture. ANS: F KEY: pg 222
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17. To find the right venture capitalist, it is important for the entrepreneur to know what working on his or her venture will be like. ANS: T KEY: pg 224
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18. Venture capital firms want to own control of the firms in which they invest. ANS: F KEY: pg 220
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19. Venture capitalists are usually satisfied with a reasonable return on investments. ANS: F KEY: pg 220
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20. Venture capitalists are slow to invest. ANS: T KEY: pg 220
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21. Venture capitalists need only basic summary information before they make a decision. ANS: F KEY: pg 221
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22. One of the most frequently used criterion in evaluating new ventures, is the ability of the entrepreneur to sustain intense effort. ANS: T KEY: pg 225
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23. There is a small number of informal risk capitalists in the market today. ANS: F KEY: pg 228
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24. Informal risk capitalists are those who have already made their money and now seek to help new ventures. ANS: T KEY: pg 228
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25. Informal risk capitalists are often referred to as “business angels.” ANS: T KEY: pg 228
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MULTIPLE CHOICE 1. At start-up time, forms of financing includes all but which of the following. a. equity c. equitable payback b. private equity d. bank loans ANS: C KEY: pg 214
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2. Which of the following is (are) sources of capital for entrepreneurs: a. equity c. auto leasing b. debit d. credit cards ANS: A
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KEY: pg 214 3. Many new ventures find that debt financing is a. necessary. c. not an important consideration. b. a waste of time. d. their major source of funds. ANS: A KEY: pg 211
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4. Approximately how many commercial banks are there in this country? a. 40,000 c. l7,000 b. 8,000 d. 20,000 ANS: B KEY: pg 211
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5. Which of the following is not a question commonly asked by banks of entrepreneurs? a. What do you plan to do with the money? c. What interest rate did you have in mind? b. How much do you need? d. How will you repay the loan? ANS: C KEY: pg 211
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6. When starting a business, which of the following sources of financing are least likely to be used? a. trade credit c. leasing companies b. factors d. insurance companies ANS: D KEY: pg 214
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7. When starting a business, which of the following sources of financing are most likely to be used? a. trade credit c. leasing companies b. factors d. insurance companies ANS: A KEY: pg 213
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8. Which of the following would be most commonly used for short-term financing? a. insurance companies c. finance companies b. trade credit d. leasing companies ANS: B KEY: pg 214
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9. Which of the following would be most commonly used for medium-term financing? a. insurance companies c. finance companies b. trade credit d. leasing companies ANS: C KEY: pg 213
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10. Which of the following would be most commonly used for long-term financing? a. insurance companies c. finance companies b. trade credit d. leasing companies
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ANS: A KEY: pg 213
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11. When accounts receivable are bought from a company for capital funding it is called a. trade credit. c. leasing. b. financing. d. factoring. ANS: D KEY: pg 214
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12. Which of the following is not a type of debt financing? a. private placement c. finance companies b. trade credits d. accounts receivables ANS: A KEY: pg 214
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13. A disadvantage of debt financing is a. regular interest payments. b. possible cash flow enhancement. c. inhibition of growth and development due to equity investments. d. relinquishment of ownership. ANS: A KEY: pg 212
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14. Short-term debt is a. paid back in six months. b. paid back in one year. c. paid back after sales. d. paid back over an indefinite period of time. ANS: B KEY: pg 211
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15. Which of the following is a type of equity financing? a. convertible debentures c. loan with warrants b. common stock d. loan without warrants ANS: B KEY: pg 215 16.
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a. trade credit. b. factoring. ANS: C KEY: pg 211
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most common source of debt financing is c. commercial banks. d. finance companies. NAT: AACSB Analytic | Environmental Influence
17. Advantages of debt financing include all of the following except: a. low interest rates can justify the opportunity cost. b. regular interest payments. c. allows potential greater return on equity. d. no relinquishment of ownership.
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ANS: B KEY: pg 212
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18. Long-term debt is used for a. start-up capital. b. funding for purchase of property or equipment. c. payment of payroll. d. both a and b. ANS: D KEY: pg 211
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19. When securing a bank loan an entrepreneur should be prepared to ANS which of the following questions except? a. When do you need it? c. What do you need it for? b. How do you need it? d. What price is the price of your product? ANS: D KEY: pg 211
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20. SEC stands for the a. Stock Exchange Corporation. b. Security and Exchange Commission. ANS: B KEY: pg 215
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c. Standard Equity Commission. d. Source of Equity Company. NAT: AACSB Analytic | Environmental Influence
21. When going public with public offerings an advantage might be a. size of the company’s capital amount. c. the company’s market share. b. the company’s size. d. the product price. ANS: A KEY: pg 215
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22. SBIC stands for the a. Small Business in Capital. b. Securities Bonds, Investment Co. ANS: C KEY: pg 217
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23. Equity capital is a. paid back within one year. b. paid back after five years. ANS: C KEY: pg 215
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c. Small Business Investment Co. d. Sources Business Investment Co. NAT: AACSB Analytic | Environmental Influence
c. not a loan but a form of stock. d. loans from family. NAT: AACSB Analytic | Environmental Influence
24. Evaluation of new-venture proposals includes what processes except a. oral presentation c. evaluation of the business plan b. initial screening d. a product prototype ANS: D KEY: pg 226
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25. One of the advantages of public offerings is a. liquidity. b. disclosure. ANS: A KEY: pg 215
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c. requirements. d. cost. NAT: AACSB Analytic | Environmental Influence
26. Which of these forms are not required by SEC? a. proxy statements c. form 4-V b. form 8-K d. form 10-Q ANS: C
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27. The SEC regulation D exemptions include all of the following except: a. placements of up to $5 million. c. placements in excess of $5 million. b. placements of less than $500,000. d. placements in excess of $l0 million. ANS: D KEY: pg 216
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28. The main objective of regulation D is to a. increase the investment in private placement. b. regulate new small business investment. c. make it easier and less expensive for small ventures to sell stock. d. reduce debt financing by small enterprises. ANS: C KEY: pg 217
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29. Which of the following is not one of the most common questions typically required to be answered by entrepreneurs? a. What do you plan to do with the money? b. How much money do you need? c. When do you need the money? d. What exact date will you repay the money? ANS: D KEY: pg 228
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30. Equity capital is often raised through: a. public stock offerings. b. option sales. ANS: A KEY: pg 215
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c. donations. d. preferred issues. NAT: AACSB Analytic | Environmental Influence
31. When going public some specific detailed information that must be presented includes a. a 20 year plan. c. any financial conflicts of interest. b. the capital structure of the company. d. any previous business failures. ANS: B
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32. Regulation D defines three separate exemptions that are based on the amount of money being raised. Which is not a rule that accompanies these exemptions? a. rule 503 c. rule 505 b. rule 504 d. rule 506 ANS: A KEY: pg 216
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33. Regulation D replaces the term “sophisticated investor” with the term “accredited purchaser.” Included in this second category is/are a. anyone buying at least $100,000 of the offered security. b. institutional investors. c. all tax-exempt organizations with at least $100,000 in assets. d. general partners of any company. ANS: B KEY: pg 217
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34. Venture capitalists are experienced professionals who provide a full range of service for new ventures including a. supplying labor for start-up. c. management consulting. b. market research and strategy for pricing. d. R & D knowledge. ANS: C KEY: pg 218
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35. Which of the following statements is true of the recent developments in the venture capital market? a. in 1994 VC firms invested 20.9 billion dollars. b. in 1999 the total pool of venture capital was $3 billion. c. the venture capital market is currently experiencing a downturn. d. the venture capital market peaked in 2001. ANS: A KEY: pg 219
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36. There are four major trends in the venture capital field today. They include all of the following except a. funds are less specialized and more homogenous. b. emerging feeder funds. c. a decrease in smaller start-up investment. d. a new legal environment. ANS: A KEY: pg 219
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37. Which of the following statements is not true about venture capitalists? a. They want the entrepreneur and the management to run the company. b. They expect high return on investments. c. They are more interested in trying to manage the firm themselves than in as or products. d. They take a long time to raise venture capital. ANS: C KEY: pg 220
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38. Criteria that venture capitalists use in evaluating new venture proposals include:
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a. b. c. d.
the entrepreneur’s education. the entrepreneur’s travel expenses. the characteristics of the product or service. when they will be paid back in full.
ANS: C KEY: pg 223
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39. Venture proposals are often rejected due to significant deficiencies in a. the size of the proposal. c. available funds. b. financial projection. d. both a and b. ANS: D KEY: pg 225
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40. Which is not a stage of the evaluation process? a. initial screening c. group discussion b. evaluation of the business plan d. management integration ANS: B KEY: pg 226
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41. Which is an important question for the entrepreneur to ask when evaluating the venture capitalist? a. Is the person someone with whom the entrepreneur can work? b. Is the person a close relative? c. Is the person wealthy? d. Is the person a college graduate? ANS: A KEY: pg 228
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42. The entrepreneur should ask the venture capitalist questions. a. at most ten c. an unlimited number of b. exactly twenty d. no ANS: C KEY: pg 228
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43. Which is one of the seven most important questions for entrepreneurs regarding venture capitalists? a. What is it like to work with his firm? b. Is he or she a good communicator? c. Is he or she wealthy? d. is he or she good at financial computation? ANS: A KEY: pg 228
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44. Criteria for evaluating new-venture proposals include all of the following except a. the entrepreneur’s personality. c. the entrepreneur’s experience. b. the entrepreneur’s age. d. financial considerations. ANS: B KEY: pg 223
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45. Which of the following is a true statement about raising capital? a. All capital is raised through formal sources. b. All capital is raised through debt sources. c. Capital is easy to get. d. It often takes a great deal of time. ANS: D KEY: pg 215
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46. How many people in America have net worth in excess of $1 million? a. 100,000 c. 500,000 b. 200,000 d. l,000,000 ANS: C KEY: pg 229
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47. If 40 percent of the individuals with a net worth in excess of $l million were interested in venture financing, how many millionaires would be available? a. 120,000 c. 200,000 b. 150,000 d. 400,000 ANS: C KEY: 229
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48. An informal risk capitalist is referred to as: a. your neighbor. b. a business angel. c. a retiree. d. someone with extra money to invest but who is not interested becoming an entrepreneur. ANS: B KEY: pg 228
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49. Informal investors find projects through a. newspapers. b. a network of friends. ANS: B KEY: pg 229
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c. commercials. d. banks. NAT: AACSB Analytic | Environmental Influence
50. What percentage of “angel capital” is devoted to seed a startup venture versus growth financing? a. 60 percent c. 5 percent b. 25 percent d. 100 percent ANS: C KEY: pg 230
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SHORT ANSWER 1. What are the major types and uses of debt financing? ANS:
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Commercial bank loans are the most common source of debt. Banks typically loan for short to intermediate terms and require security or collateral for the loan. Banks generally prefer to loan to already existing firms rather than new start-up firms. Trade credit is given by the firm’s suppliers and seen in the form of accounts payable. It is usually granted easily and is very short-term. Accounts receivable financing uses the firm’s receivables as either collateral or as a product for sale, factoring. It is short-term and offered mainly to existing firms. Finance companies make short- to intermediateterm asset guaranteed loans. They deal mainly with existing firms and often make loans that a bank would not. They also charge a hefty premium for this by having interest rates that are at least 2 percent over bank rates. PTS: 1
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2. How does a public offering differ from a private placement? ANS: A public offering involves entering the stock exchange. Once the stock is publicly offered, anyone can buy shares and, in turn, ownership. Public offerings are very expensive and highly regulated. These disadvantages are offset by the large amounts of capital and liquidity the offerings can provide. A private placement is used more often by small ventures. It allows the sale of the stock to private, personally selected individuals. The Securities and Exchange Commission has enacted special rules to make private placement easier and less expensive for small businesses. Both of these equity financing plans differ from debt financing. They require a relinquishment of ownership, but don’t demand a fixed payback of the invested principal. PTS: 1
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3. As the venture capital market has experienced rapid growth, several market trends have emerged. What are the major trends of today? ANS: One trend is specialized funds. As more firms are founded, their interests and focus become more specialized. Another market trend concerns the emergence of feeder funds. These are funds that are usually focused on seed-stage and start-ups. As these businesses grow, their business is fed back to the large firms. There are also fewer start-up investments. Those partners with start-up knowledge are spending their time trying to fix the numerous troubled ventures they already have. This doesn’t allow them to devote the time needed in start-ups. The final trend concerns legal issues. Competition and our “lawsuit” culture have forced highly legalized agreements. PTS: 1
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4. Should entrepreneurs accept proposals from the first venture capitalist that offers? ANS: Entrepreneurs must evaluate their capitalist just as their capitalist evaluates them. Not every capitalist is right for every entrepreneur, even if he or she does have the money needed. The entrepreneur must look at the capitalist’s skills and knowledge, and decide how well they can work together, while keeping in mind that venture capital is hard to come by. PTS: 1
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5. Are formal firms the only source of venture capital?
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ANS: There are many individuals willing to invest where venture capitalists will not. These are usually wealthy people looking for investments and are referred to as “business angels.” These people are generally well off. They don’t need the high, immediate rate of return required by the venture capital firms. They often seek social rather than purely financial returns on their investments. PTS: 1
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