BUSE 129 Ch 11-12

A(n) Blank______ includes materials submitted to the Securities Exchange Commission for approval to sell stock to the public.

registration statement

Debt to equity ratio provides a measure of

risk to creditors by considering the funds invested by creditors (debt) and investors (equity)

Small companies with some government funds that invest in other companies are known as

small-business investment companies

In the context of the types of investors, a similarity of Rule 504, Rule 505, and Rule 506, which are part of Regulation D, is that

they do not permit general advertising or solicitation through public media

Identify a true statement about debt financing.

It is also termed asset-based financing.

Identify an accurate statement about the Small Business Technology Transfer (STTR) program.

It requires a small business to formally work together with a research institution.

Match the categories of equipment financing (in the left column) with their descriptions (in the right column). Instructions

Lease financing The company procures the use of the equipment through a small down payment amount and an assurance to make a specified number of payments over a period. Sale-leaseback financing The entrepreneur sells the equipment to a lender and then leases it again for the life of the equipment.

___ ___refer to control mechanisms to test the financial strength of a new venture. (Enter one word in each blank.)

financial ratios

The private equity market, also known as the Blank______, can be a source of capital for privately held ventures.

enterprise capital market

Match the types of financing based on their duration (in the left column) with their descriptions (in the right column). Instructions

Long-term financing It is often used to buy a specific asset, with part of the value of the asset being used as collateral. Short-term financing The money is generally used to provide working capital to finance inventory, accounts receivable, or the operation of business.

Which of the following are eligibility factors for all 7(a) loans offered by the Small Business Administration? (Check all that apply.)

Management capability Repayment ability from the cash flow of the business

Which of the following should an entrepreneur do to be successful in crowdfunding? (Check all that apply.)

The entrepreneur should include an emotional appeal in the crowdfunding video. The entrepreneur should structure some rewards that are appropriate for what he or she is trying to get funded.

Which of the following are categories of equipment financing? (Check all that apply.)

Financing the purchase of new equipment Financing used equipment already owned by the company Sale-leaseback financing

Identify the practices that help entrepreneurs achieve success in crowdfunding. (Check all that apply.)

They should determine which crowdfunding site is ideal to raise the capital needed. They should create a strong crowdfunding video that clearly explains the idea of their venture.

Which entities act as sources of funding for early-stage financing of a startup?

Angel investors Family

______ are most often the source of short-term funds commonly used by entrepreneurs when collateral is available.

Commercial banks

Which of the following are conventional bank loans? (Check all that apply.)

Lines of credit Character loans Straight commercial loans

Personal funds are also termed

blood equity

The objective of a venture-capital firm is to

create long-term capital appreciation through debt and equity investments

Commercial banks provide funds in the form of

debt financing

Which of the following are primary advantages of going public for a venture? (Check all that apply.)

Ability to obtain equity capital Enhanced ability to borrow

Which of the following helps minimize possible difficulties in funding from family and friends?

Restricting the business arrangements to strictly business

Unlike short-term debts, long-term debts

Unlike short-term debts, long-term debts

Long-term loans are usually available only to

strong, mature companies

What is the name given to individual investors who act alone and are known to make the largest number of investments in the private equity market?

Angel investors

______ indicates the average number of days required to convert accounts receivable into cash.

Average collection period

Which one of the following statements about the informal risk-capital market is true?

Business angels in the informal risk-capital market grant the funds needed in all stages of financing, especially in the start-up.

True or false: Bank lending decisions are solely based on quantifiable information.

False

True or false: The guidelines established by the Securities Exchange Commission regarding the information that can and cannot be released should be understood only by an entrepreneur in a company.

False

True or false: The venture capitalist necessarily seeks control of a company he or she invests in.

False

Match the forms that a company is required to file after going public (in the left column) with their uses (in the right column). Instructions

Form 10-K Used to file annual reports Form 10-Q Used to file quarterly reports Form 8-K Used to file specific transaction or event reports

The information in Blank______ on the business, management, and company assets is similar to that in Form S-1 of the registration statement.

Form 10-k

When strong creditworthy customers are involved in an accounts receivable loan, an entrepreneur can develop a factoring arrangement. Which of the following statements is true about this arrangement?

In the event that any of the receivables is not collectible, the factor (the bank) sustains the loss, not the business.

Identify a true statement about the Small Business Innovation Research (SBIR) program that was created as part of the Small Business Innovation Development Act.

It offers research and development funds to small businesses from all federal agencies with budgets in excess of $100 million.

Which of the following are disadvantages of using outside capital for funding a startup? (Check all that apply.)

It often decreases the venture's drive for sales and profits. It can reduce the venture's flexibility and impact the direction, drive, and creativity of the entrepreneur.

______ includes (1) broad provisions created to simplify private offerings, (2) general definitions of what constitutes a private offering, and (3) specific operating rules—Rule 504, Rule 505, and Rule 506.

Regulation D

Which of the following are the disadvantages of going public for an entrepreneur? (Check all that apply.)

Significant loss of control over decision making in the entrepreneur's company Increased expenses Increased responsibilities to public stockholders

Identify a true statement about current ratios used by entrepreneurs for valuation.

The current liabilities must be covered from cash or its equivalent.

Identify a true statement about the relationship that an entrepreneur should maintain with the financial community after his or her company goes public.

The entrepreneur should release public disclosures through formal press releases.

Identify a guideline that should be followed by an entrepreneur when approaching a venture capitalist.

The entrepreneur should take care in selecting the right venture capitalist to approach based on the venture capitalist's area of specialization.

Identify the factors that need to be considered when deciding the timing of a company going public. (Check all that apply.)

The finances that the company requires for fulfilling its needs The size of the company The amount of the company's earnings

Which of the following bases need to be evaluated by an entrepreneur for choosing alternative sources of external funding for his or her venture? (Check all that apply.)

The length of time the funds are available The terms of the contract The costs involved

Identify a true statement about lines of credit financing.

The loan must be repaid or reduced to a certain agreed-upon level on a periodic basis.

Identify a true statement about long-term loans.

The principal can sometimes start being repaid in the second or third year of the loan, with only interest paid the first year.

Identify a true statement about the sponsoring company in a research and development partnership.

The sponsoring company provides the base technology to the partnership in exchange for money.

Identify a true statement about self-liquidating loans.

They are often used for seasonal financing and for building up inventories.

Identify a true statement about personal funds.

They are vital in attracting outside funding.

Identify a true statement about financial ratios of ventures.

They should be used with caution since they are only one control measure for interpreting the financial success of a venture.

True or false: A company that has gone public should designate an information officer to respond in a timely manner to information requests.

True

Which of the following is used to determine the share of the company a venture capitalist will want for a given amount of investment? [VC= venture capital, n= number of years]

Venture-capitalist ownership % = (VC investment × VC investment multiple desired) / (Company's projected profits in year 5 × Price−earnings multiple of comparable company)

Actions of underwriters to help support the price of stock after the public offering are referred to as

aftermarket support

In the process of locating venture capitalists, an entrepreneur should

approach only those venture capitalists who may have an interest in their investment opportunity

The securities of certain smaller companies going public must be qualified under the Blank______ of each state in which the securities of the company will be offered.

blue-sky laws

The informal risk-capital market usually consists of a virtually invisible group of wealthy investors, often called Blank______, who are searching for equity-type investment opportunities in a wide variety of entrepreneurial ventures. Multiple choice question. equity managers

business angels

To stabilize the market and prevent the price from going below the initial public offering price, an underwriter will usually

enter bids to buy the stock in the early stages after the initial offering

______ is created from the resources of wealthy individuals or institutions who are limited partners.

equity pool

True or false: Market conditions need not be considered by an entrepreneur when deciding the timing of his or her company going public.

false

True or false: Regulation D fails to provide rules governing the notices of sale and the payment of any commissions involved.

false

A disadvantage of going public for a venture is that it can

lead to potential loss of control

The average collection period helps an entrepreneur assess the

liquidity of accounts receivable

Generally, the application format for a bank loan is a

mini business plan that consists of an executive summary and business description

The first factor and the starting point that an entrepreneur should consider when valuing a venture is the

nature and history of the business

A venture going public occurs when the entrepreneur and other equity owners of the venture

offer and sell some part of the company to the public by registering with the Securities Exchange Commission

Lending crowdfunding sites allow borrowers (usually companies) to

raise funds for items such as short-term inventory

A preliminary prospectus that is filled as a part of the registration process by a company is called a(n) ____ ____, because a statement printed in red ink appears on the front cover.

red herring

The preliminary prospectus of a potential public offering is referred to as

red herring

An accurate statement about installment loans is that these

short-term funds are frequently used to cover working capital needs for a period of time

A hybrid of the installment loan is the Blank______, by which funds are advanced to the company for 30 to 90 days.

straight commercial loan

Which of the following is true about accounts receivable loans?

Accounts receivable act as a good basis for a loan when the customer is well known and creditworthy.

Which of the following are traditional areas of concentration of venture capitalists in the United States? (Check all that apply.)

Los Angeles New York

Which of the following guidelines should be followed by an entrepreneur when approaching a venture capitalist? (Check all that apply.)

The entrepreneur should avoid selling the project on the basis that other venture capitalists have committed themselves. The entrepreneur should disclose any significant problems or negative situations in the initial meetings with the venture capitalist.

In the context of investment in ventures by venture capitalists, the return on investment measures the

ability of a venture to manage its total investment in assets

In the context of valuation of a venture, return on equity indicates the

ability of the venture in generating a return to the stockholders

The ______ refers to the tangible collateral valued higher than the amount of money borrowed.

asset base for loans

The form of the transaction when money is obtained by a company is referred to as

deal structure

A difficulty for entrepreneurs to raise funds from family and friends is that these kinds of investors

feel they always have a right to interfere in the venture's operations

Unlike traditional companies, Internet companies often have

their real value in the form of their human capital

Installment loans can be obtained by a venture

with a track record of sales and profits

To ensure repayment, bank loans are based on the

assets or the cash flow of the venture

______ evaluates a firm's capital structure.

Debt to equity ratio

Which of the following is the need of the investors providing funds to companies?

The required rate of return

True or false: Crowdfunding brings together different individuals who contribute money to projects and firms they want to support.

True

The ______ is the Small Business Administration's primary business loan program.

Basic 7(a) Loan Guaranty

Which of the following are conventional bank loans? (Check all that apply.)

Straight commercial loans Character loans Lines of credit

Why do ventures avoid an initial public offering (IPO)? (Check all that apply.)

Because of the need for increased reporting for a publicly traded company Because of the potential loss of control that can occur in a publicly traded company

Which of the following is true about agreements in a joint venture in a research and development partnership?

Companies can buy out the partnership interest at a specified time or when a specified volume of sales and profit has been achieved.

______ is frequently used to assess the short-term solvency of a venture or its ability to meet its short-term debts.

Current ratio

Which of the following are the major factors that are used to determine the value of a company using the factor approach? (Check all that apply.)

Earnings Dividend-paying capacity Book value

True or false: Unlike the Small Business Technology Transfer (STTR) program, the Small Business Innovation Research (SBIR) program requires that a principal investigator (PI) must spend a minimum of 10 percent effort on a project and have a formal appointment with or commitment to a small-business concern (SBC).

False

Match the stages in a research and development limited partnership (in the left column) with their descriptions (in the right column). Instructions

Funding stage Money is invested for the proposed research effort by the sponsoring company and the limited partners. Development stage The research is conducted by the sponsoring company utilizing funds from the limited partners. Exit stage The sponsoring company and the limited partners financially enjoy the benefits of the effort.

Identify a feature of inventory loans.

Inventory can usually act as the basis of a loan, when the inventory is more liquid and can be easily sold.

Which of the following are true about using outside capital for funding a startup? (Check all that apply.)

It generally takes around two to six months to raise outside capital or to conclude that there is no outside capital available. Outside capital is not provided without the expectation of getting a good return.

Identify a benefit of a research and development (R&D) limited partnership for companies.

It supplies the required funds with a minimum amount of equity dilution while reducing the risks involved.

Match the types of partners in a research and development partnership (in the left column) with their descriptions (in the right column).

Limited partner The party that generally provides money in a partnership agreement and has a less responsibilities General partner The overall coordinating party in a partnership agreement

Identify the factors that an entrepreneur should consider when valuing a venture. (Check all that apply.)

Market price of equity of companies engaged in the same or similar lines of business Book value (net value) of the stock of the company

Match the phases of the Small Business Innovation Research program (in the left column) with their descriptions (in the right column). Instructions

Phase I The purpose in this phase is to decide the technical feasibility of the research effort and evaluate the quality of the company's performance through a considerably small monetary commitment. Phase II The money granted is to be utilized to develop prototype products or services in this phase. Phase III Funds from the private sector or regular government procurement contracts are required to commercialize the developed technologies in this phase.

Match the general valuation approaches (in the left column) with their definitions (in the right column). Instructions

Present value of future cash flow The value of the cash flow of the business for the time value of money and the business and economic risks Replacement value The cost of replacing all assets of a company Book value The indicated worth of the assets of a company

A(n) ___ is a formalized approach for obtaining funds from private investors.

Private offering

In the context of the types of investors, match the rules that are included in Regulation D (in the left column) with their features (in the right column). Instructions

Rule 504 It permits a company to sell up to $500,000 of securities to any number of investors, irrespective of their sophistication, in any 12-month period. Rule 505 It permits the sale of $5 million of unregistered securities in the private offering in any 12-month period to any 35 investors and to an unlimited number of accredited investors. Rule 506 It permits an issuing company to sell an unlimited number of securities to 35 investors and an unlimited number of accredited investors and relatives of issuers.

Identify the true statements about small-business investment companies (SBIC firms). (Check all that apply.)

SBIC firms were the beginning of the formal venture capital industry. The Small Business Investment Act of 1958 led to the formation of SBIC firms.

Match the types of early-stage financing for startups (in the left column) with their features (in the right column).

Seed capital It is generally a relatively small amount of capital required for proof of concept and market feasibility studies. Startup capital It is used for developing and selling some initial products of a venture to determine if commercial sales are feasible.

Which of the following statements are true about internal funding of new ventures? (Check all that apply.)

Short-term, internal funds can be used to fund short-term assets. Collecting bills more quickly is a method of internally generating funds.

Which of the following are true about lending crowdfunding sites? (Check all that apply.)

Small loans are provided to local entrepreneurs to fund items such as short-term inventory. Individuals who want to lend money to entrepreneurs can create their own loan portfolios.

Which of the following statements are true about an equity pool? (Check all that apply.)

The pool is managed in exchange for a percentage of the gain generated on the investment and a fee. The pool is managed by a general partner.

Which of the following statements are true about research and development (R&D) limited partnerships? (Check all that apply.)

The restrictions placed on the technology developed as a by-product of the R&D effort can be substantial. An R&D limited partnership typically takes a minimum of six months to establish.

True or false: The risk in a venture increases with the increase in the amount of leverage.

True

______ are a specific type of inventory loan that is utilized to finance floor plans of retailers, such as automobile and appliance dealers.

Trust receipts

______ is referred to as leveraging the firm.

Using debt as a financing instrument

A social analytics Internet startup is being analyzed for acquisition by WIN Systech Inc., a well-established Internet company. Which of the following factors should WIN Systech Inc. consider when evaluating the startup?

WIN Systech Inc. should value the startup based on the number of users they have and the data generated.

Unlike public offerings, private offerings

are faster and less costly when a limited number of sophisticated investors are involved who also have the ability to absorb risk

The Jump Start Our Business Act (JOBS Act) of 2010 has effectively allowed companies to be more active in their intent to raise money in what is often referred to as

crowdfunding

The financing method that involves an interest-bearing instrument, usually a loan, the payment of which is not directly related to the sales and profits of the venture is referred to as Blank______.

debt financing