MGMT 3850 CHAPTER 13 HOMEWORK QUESTIONS AND ANSWES

MGMT 3850 CHAPTER 13 HOMEWORK QUESTIONS AND ANSWES Essentials of Entrepreneurship & Small Business Mgmt., 7e (Scarborough) Chapter 13 Sources of Financing: Debt and Equity 1) 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. Answer: A Diff: 2 Page Ref: 469 AACSB: Reflective Thinking Learning Obj.: 1 2) 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. Answer: C Diff: 2 Page Ref: 439 AACSB: Analytic Skills Learning Obj.: 1 3) 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. Answer: D Diff: 1 Page Ref: 469-470 AACSB: Analytic Skills Learning Obj.: 1 2 4) The Kauffman Foundation reports that the average amount of capital that entrepreneurs use to start small businesses in the U.S. is nearly: A) $25,000. B) $50,000. C) $80,000. D) $100,000. Answer: C Diff: 3 Page Ref: 471 AACSB: Analytic Skills Learning Obj.: 1 5) Which of the following represents capital? A) Inventory B) Equipment and machinery C) Cash D) All of the above Answer: D Diff: 1 Page Ref: 471 AACSB: Analytic Skills Learning Obj.: 1 6) 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 Answer: B Diff: 3 Page Ref: 471 AACSB: Analytic Skills Learning Obj.: 1 7) 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. Answer: C Diff: 2 Page Ref: 471 AACSB: Analytic Skills Learning Obj.: 1 3 8) 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 Answer: A Diff: 2 Page Ref: 403-404 AACSB: Analytic Skills Learning Obj.: 1 9) 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. Answer: D Diff: 1 Page Ref: 472 AACSB: Analytic Skills Learning Obj.: 2 10) 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. Answer: A Diff: 1 Page Ref: 474 AACSB: Reflective Thinking Learning Obj.: 2 11) 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." Answer: A Diff: 2 Page Ref: 474 AACSB: Communication Learning Obj.: 2 4 12) 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. Answer: A Diff: 2 Page Ref: 476 AACSB: Communication Learning Obj.: 2 13) 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 Answer: B Diff: 2 Page Ref: 476 AACSB: Analytic Skills Learning Obj.: 2 14) The general trend of angel financing is that it has ________ as a source of capital for entrepreneurs over the past 9 years. A) increased B) stabilized C) decreased D) disappeared Answer: A Diff: 2 Page Ref: 476, Figure 13.2 AACSB: Analytic Skills Learning Obj.: 2 15) 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 Answer: B Diff: 2 Page Ref: 474-478 AACSB: Reflective Thinking Learning Obj.: 2 5 16) 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. Answer: C Diff: 2 Page Ref: 478-479 AACSB: Communication Learning Obj.: 2 17) 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 Answer: B Diff: 1 Page Ref: 479 AACSB: Analytic Skills Learning Obj.: 2 18) 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 Answer: B Diff: 3 Page Ref: 480 AACSB: Analytic Skills Learning Obj.: 2 19) 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 Answer: B Diff: 3 Page Ref: 481 AACSB: Analytic Skills Learning Obj.: 2 6 20) 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 Answer: D Diff: 2 Page Ref: 482 AACSB: Analytic Skills Learning Obj.: 2 21) 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 Answer: D Diff: 2 Page Ref: 480-482 AACSB: Reflective Thinking Learning Obj.: 2 22) Approximately ________ percent of all venture capital invested comes from corporations. A) 2 B) 8 C) 14 D) 24 Answer: C Diff: 3 Page Ref: 483 AACSB: Analytic Skills Learning Obj.: 2 23) 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 Answer: D Diff: 2 Page Ref: 483-484 AACSB: Analytic Skills Learning Obj.: 3 7 24) Less than ________ percent of all U.S. companies are publicly held corporations. A) 1 B) 5 C) 10 D) 12 Answer: A Diff: 3 Page Ref: 484 AACSB: Analytic Skills Learning Obj.: 3 25) 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. Answer: A Diff: 2 Page Ref: 484 AACSB: Analytic Skills Learning Obj.: 3 26) 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 Answer: B Diff: 2 Page Ref: 486 AACSB: Analytic Skills Learning Obj.: 3 27) 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 Answer: D Diff: 2 Page Ref: 486 AACSB: Analytic Skills Learning Obj.: 3 8 28) 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. Answer: A Diff: 2 Page Ref: 486 AACSB: Reflective Thinking Learning Obj.: 3 29) 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. Answer: C Diff: 1 Page Ref: 486 AACSB: Analytic Skills Learning Obj.: 3 30) 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. Answer: D Diff: 2 Page Ref: 487 AACSB: Analytic Skills Learning Obj.: 3 31) 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. Answer: A Diff: 2 Page Ref: 488 AACSB: Analytic Skills Learning Obj.: 3 9 32) 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 Answer: C Diff: 2 Page Ref: 487 AACSB: Analytic Skills Learning Obj.: 3 33) The goal of the SEC's Regulation S-B and S-K 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 open the doors to capital markets to smaller companies by cutting the paperwork and the costs normally required to make a public offering. D) to make the standards for making a public stock offering more stringent. Answer: C Diff: 2 Page Ref: 487 AACSB: Analytic Skills Learning Obj.: 3 34) To be eligible for the simplified registration process under Regulation S-B and S-K, a company must: A) be based in either the United States or Canada. B) have revenues of less than $25 million. C) have outstanding securities of less than $25 million. D) All of the above Answer: D Diff: 3 Page Ref: 487 AACSB: Analytic Skills Learning Obj.: 3 35) 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 Answer: D Diff: 2 Page Ref: 487-488 AACSB: Analytic Skills Learning Obj.: