Entrepreneurial Finance Test #2
The SBA approves the standard 7(a) loan and guarantees up to 85% of the loan value. T/F
T
The deal flow reflects the flow of business plans and term sheets involved in the venture capital investing process. T/F
T
The establishment of the Small Business Administration was the first major government foray into venture investing. T/F
T
The value of a warrant can be directly derived from the value of a call option. T/F
T
Two typical issues addressed in a term sheet are valuation and the size and staging of financing. T/F
T
Unlike traditional commercial banks, venture banks typically provide debt to start-ups that have already received equity financing from professional venture capital firms. T/F
T
With venture leasing, one component of the return to the lessor is the opportunity to take an equity interest in the venture. T/F
T
The right, not the obligation, to purchase a specified asset at a specified price is called a: a. call option b. put option c. American-Style option d. European-Style option e. Bermuda-Style option
A
A summary of the investment terms and conditions accompanying an investment is referred to as a: a. term sheet b. business plan c. fund created by professional venture capitalists d. due diligence in venture investing e. capital call
A
When assessing the creditworthiness of new entrepreneurs, lending institutions review the "Five C's". The ability of the entrepreneur to repay borrowed funds is known as? a. capacity b. capital c. collateral d. conditions e. character
A
When consistent assumptions are used, we a. get the same value for equity under the enterprise and equity methods of valuation b. we get a higher value of equity under the equity method of valuation c. we get a lower value of equity under the equity method of valuation d. we get equity values that cannot be compared across the equity and enterprise methods of valuation
A
When screening possible investments, a venture capital firm might issue an SLOR which stands for: a. standard letter of rejection b. standing letter of reconciliation c. standard letter of reassessment d. senior letter of reference
A
Which of the following has been the largest source of venture capital funds since 1979 when it was clarified that "portfolio diversification was a legitimate consideration in determining the prudence of an individual investment"? a. pension funds b. individuals and families c. endowments and foundations d. corporate venture capital e. finance and insurance
A
Which of the following have the least senior claim on a venture's asset? a. common Stock b. preferred stock c. convertible preferred stock d. convertible debt e. American-style option
A
Which of the following is an example of a put option which is out of the money? a. The option to sell at $11, the stock is worth $12. b. The option to buy at $13, the stock is worth $12. c. The option to buy at $12, the stock is worth $12. d. The option to sell at $13, the stock is worth $12. e. The option to buy at $11, the stock is worth $12.
A
Which of the following offers the option where the dividend obligation can be satisfied in cash or by issuing additional par amounts of the preferred security? a. paid in kind preferred stock b. cumulative preferred stock c. participating preferred stock d. convertible preferred stock e. non-cumulative preferred stock
A
Which one of the following sources has been the second largest supplier of venture capital over the past 25 or so years? a. Finance and insurance companies b. Endowments and foundations c. Individuals and families d. pension funds e. corporate venture capital
A
"Carried interest" refers to the: a. interest paid by professional venture capitalists to help entrepreneurs finance with borrowed funds b. portion of profits paid to the professional venture capitalist as incentive compensation c. annual management fee charged on assets d. portion of exit value paid to the professional venture capitalist
B
After a new professional venture capital fund is organized, the fund managers: a. conduct due diligence and actively invest b. solicit investments and obtain commitments c. arrange harvest or liquidation d. identify prospective venture investments and then solicit investments
B
After determining the next fund's objectives and policies, the "professional venture investing cycle's" next step is: a. solicit investments in new fund b. organize the new fund c. obtain commitments for a series of capital calls d. conduct due diligence and actively invest e. arrange harvest or liquidation
B
Convertible debt has all of the following except: a. bankruptcy rights b. regular dividend payments c. it can be structured to provide senior interest in specific assets d. a tax shield due to interest expense e. a security interest in the firms' assets
B
In a Venture Capital Fund Placement Memorandum, all of the following are included in the summary of terms except? a. indemnification b. objective c. liquidation d. valuation e. expenses
B
In a Venture Capital Fund Placement Memorandum, which of the following is not a front matter declarations? a. description of limited manner of the offering b. targeted fund size c. imposition of confidentiality d. notice of lack of SEC registration e. declaration of the highly risky nature of investment
B
Of the total venture capital supplied over the past 25 or so years, what approximate percentage has been supplied by individuals and families? a. 2% b. 10% c. 21% d. 25%
B
The right, not the obligation, to sell a specified asset at a specified price is called a: a. call option b. put option c. American-Style option d. European-Style option e. Bermuda-Style option
B
When assessing the creditworthiness of new entrepreneurs, lending institutions review the "Five C's". The money the entrepreneur has invested in the business, which is an indication how much is at risk if the business should fail is known as? a. capacity b. capital c. collateral d. conditions e. character
B
When screening prospective new ventures, venture capital firms must consider the nature of the proposed industry. Which of the following is not part of the screening of the proposed industry? a. market attractiveness b. managerial references c. potential size d. technology e. threat resistance
B
Which of the following is an example of a call option which is out of the money? a. The option to sell at $11, the stock is worth $12. b. The option to buy at $13, the stock is worth $12. c. The option to buy at $12, the stock is worth $12. d. The option to sell at $13, the stock is worth $12. e. The option to buy at $11, the stock is worth $12.
B
Which of the following requires that all previously unpaid preferred dividends must be paid prior to any common dividend? a. paid in kind preferred stock b. cumulative preferred stock c. participating preferred stock d. convertible preferred stock e. non-cumulative preferred stock
B
An option that can be exercised at any time until expiration is called a: a. call option b. put option c. American-Style option d. European-Style option e. Bermuda-Style option
C
Professional venture investing usually involves setting up a venture capital firm as a: a. proprietorship b. corporation c. partnership d. S corporation
C
The right for existing owners to maintain their ownership share by purchasing sufficient shares to keep their percentage share of the firm is called? a. stock option b. stock warrant c. preemptive right d. participating stock e. paid-in-kind preferred stock
C
To calculate the enterprise valuation cash flow, one begins with which of the following information from the income statement? a. net sales b. operating profit c. earnings before interest and taxes times one minus the enterprise tax rate d. net income e. net income times the enterprise tax rate
C
Which of the following is not one of the four likely outcomes of the venture firm's screening process? a. seek the lead investor position b. seek a non-lead investor position c. close the capital fund d. refer the venture to more appropriate financial market participants e. standard letter of rejection
C
Which of the following stock can be structured to assure the shareholder that they will share in the payment of any dividends to common stockholders? a. paid in kind preferred stock b. cumulative preferred stock c. participating preferred stock d. convertible preferred stock e. non-cumulative preferred stock
C
All of the following are typical issues addressed in a term sheet except? a. valuation b. board structure c. registration rights d. management fees e. employment contracts
D
All of the following are typically part of a venture fund's typical compensation and incentive structure except? a. some percent annual fee on invested capital b. a percent share of any profits to the managing general partner c. carried interest d. salary for the general partners
D
An option that can be exercised only at the expiration date is called a: a. call option b. put option c. American-Style option d. European-Style option e. Bermuda-Style option
D
The term "carried interest" refers to: a. interest not currently paid but which must be paid in the future by a professional venture capitalist b. interest transported directly to a bank c. interest owed on a loan in default d. portion of profits paid to the professional venture capitalist as incentive compensation
D
Venture Capital firms tend to specialize in publicly identified niches because of the potential for value-added investing by venture capitalists. Which is not one of these niches? a. industry type b. venture stage c. size of investment d. management style e. geographic area
D
When evaluating the prospects of a new venture, venture capital firms consider the characteristics of the entrepreneur and its team. Which of the following is not part of review of the entrepreneur/team? a. its background and experience b. its managerial capabilities c. management's stake in the firm d. the VC firms' ability to cash out e. the capability to sustain an effort
D
When screening prospective new ventures, venture capital firms first consider its own firm requirement. Which of the following is not part of its own firm requirements reviewed? a. investor control b. rate of return c. size of investment d. expertise of new ventures management e. financial provisions for investors
D
Which of the following is an example of a put option which is in the money? a. The option to sell at $11, the stock is worth $12. b. The option to buy at $13, the stock is worth $12. c. The option to buy at $12, the stock is worth $12. d. The option to sell at $13, the stock is worth $12. e. The option to buy at $11, the stock is worth $12.
D
Which of the following provides the option to exchange into common stock? a. paid in kind preferred stock b. cumulative preferred stock c. participating preferred stock d. convertible preferred stock e. non-cumulative preferred stock
D
Which one of the following sources has been the largest supplier of venture capital over the past 25 or so years? a. Finance and insurance companies b. Endowments and foundations c. Individuals and families d. pension funds e. corporate venture capital
D
An option that can be exercised only at a specific set of dates is called a: a. call option b. put option c. American-Style option d. European-Style option e. Bermuda-Style option
E
As venture firms attract money from investors, it is placed in a fund. Important issues that must be put in place with the establishment of the fund include all of the following except? a. determine the general partners b. establishing a fee structure c. a profit sharing arrangement d. establish its governance e. the management team assigned to each borrower
E
When evaluating the prospects of a new venture, venture capital firms consider which of the following? a. characteristics of the proposal b. characteristics of the entrepreneur/team c. nature of the proposed industry d. both b and c e. all of the above
E
Which of the following is an example of a call option which is in the money? a. The option to sell at $11, the stock is worth $12. b. The option to buy at $13, the stock is worth $12. c. The option to buy at $12, the stock is worth $12. d. The option to sell at $13, the stock is worth $12. e. The option to buy at $11, the stock is worth $12.
E
Which one of the following sources has been the smallest supplier of venture capital over the past 25 or so years? a. Finance and insurance companies b. Endowments and foundations c. Individuals and families d. pension funds e. corporate venture capital
E
n a Venture Capital Fund Placement Memorandum, all of the following are part of the executive summary except? a. special limited partners b. general partners' capital contributions c. limitation of liability d. allocation of gains and losses e. imposition of confidentiality
E
A warrant is a call option issued by a company granting the holder the right to buy common stock at a specific price at a specific time. T/F
F
As the underlying stock price increases in value, a put option to sell it becomes more valuable. T/F
F
Because investors and commercial lenders both seek returns on the funds given to start-up firms, entrepreneurs can obtain financing as easily from either source. T/F
F
Collateral plays an important role in determining the willingness to lend and the amount and terms of the loan, making it the most important factor in the lending process. T/F
F
Commercial banks receive a portion of their returns from warrants in addition to the receipt of interest and the repayment of the principal that was lent. T/F
F
Commercial loan officers have the expertise to project new venture's business successes, and thus are as willing to make funds available to entrepreneurs on the same basis as other businesses. T/F
F
Convertible debt is debt that converts into preferred stock. T/F
F
Convertible preferred stockholders have the right to convert a preferred share into a specified number of common shares at any time after the expiration date. T/F
F
Credit cards issued to start-ups have proven to be an alternative source of start-up financing. T/F
F
Factoring is the sale of payables to a third party at a discount to their face value. T/F
F
For preferred noncumulative stock, all previously unpaid preferred dividends must be paid before any common stock dividend is paid. T/F
F
Individuals and families are more important suppliers of venture capital relative to finance and insurance firms. T/F
F
Initially, Small business Investment Companies access to borrowed funds appeared attractive. This was because venture investing and debt service commitments are an ideal mixture of financing for start-ups. T/F
F
Owning a put option on a stock is the same as selling a call option on that same stock. T/F
F
Preferred stock is the equity claim senior to common stock providing preference on dividends but not liquidation proceeds. T/F
F
Receivables lending is the use of receivables as collateral for an equity issue. T/F
F
SBA 7(a) loans are made usually for 1 to 3 years in amounts up to $5,000,000, require collateral, and can be used for most business purposes. T/F
F
The SBA's role in its microloan credit program is to approve the loans and guarantee up to 85% of the loan value. T/F
F
The Small Business Administration was created by an Act of Congress in 1968. T/F
F
The returns to venture bank lenders are generated solely from interest payments made by borrowers plus the return of the loan principal. T/F
F
The summary of the investment terms and conditions accompanying an investment proposed by the venture capitalist is known as the statement of strengths and weaknesses. T/F
F
The term "capital call" refers to the flow of business plans and term sheets involved in the venture capital investing process. T/F
F
Two and twenty shops refers to investment management firms having a contract that gives them two percent carried interest and 20 percent of assets annual management fee. T/F
F
When the venture fund calls upon the investors to deliver their investment funds, it reflects the deal flow. T/F
F
"Carried interest" is the portion of profits paid to the professional venture capitalist as incentive compensation T/F
T
"Due diligence," in venture investing context, is the process of ascertaining the viability of a business plan. T/F
T
A "term sheet" is a summary of the investment terms and conditions accompanying an investment by venture capitalists. T/F
T
A preemptive right is a right for existing owners to buy sufficient shares to preserve their ownership share. T/F
T
Among start-ups, it is widely understood that bank debt (outside of Small Business Administration loans), is not a very realistic source of financing for ventures with less than two years operating results. T/F
T
An option is a right to buy or sell additional shares of stock. T/F
T
An option not currently worth exercising is said to be an out of the money option. T/F
T
Because of loan restrictions, obtaining funding from commercial lenders is prohibitive for entrepreneurs. T/F
T
By an act of Congress, the Small Business Administration (SBA) was created for the purpose of fostering the initiation and growth of small businesses. T/F
T
By issuing preferred stock, and thus forfeiting bankruptcy rights from the use of debt, the venture and its investors can benefit by committing to an internal reorganization as opposed to bankruptcy reorganization. T/F
T
Created by the Small Business Administration, Small Business Investment Companies possess important tax advantages and were eligible to borrow amounts up to four times their equity base from the government. T/F
T
Despite the high risk and costs of using a facilitator or up-front fee solicitor to obtain financing, many start-ups never-the-less seek them as a source of funds due to the length of time it takes to raise new funds. T/F
T
Endowments and foundations are more important suppliers of venture capital relative to individuals and families. T/F
T
Factoring is the selling of receivables to a third party at a discount from their face value. T/F
T
If a call option can be bought for $12 and the stock's market value is $12, it's said to be "at the money". T/F
T
If a share of preferred stock has a $10 par value, and the stock has a 2:1 conversion ratio, then the conversion price would be $5. T/F
T
In a factoring arrangement, the third party makes its money by purchasing the receivables at a discount from the total amount due on the receivables. T/F
T
In addition to having personal financial stakes in their portfolio of investments, professional venture capitalists have raised funds from other investors to invest in the portfolio. T/F
T
In the venture investing context, due diligence describes the process of investigating a potentially worthy concept or plan. T/F
T
Internet financing led the record level of venture investing in the 1999-2000 time period. T/F
T
Microloans in the SBA credit program are intended for very small businesses with a maximum amount of $35,000 to be used for general purposes. T/F
T
Microloans in the SBA credit program are made by not-for-profit or government-affiliated Community Development Financial Institutions (CDFIs). T/F
T
Once the venture capital firm has received exit proceeds from a venture in the form of cash or securities, some method of returning the proceeds (less the carried interest) must be determined. T/F
T
Pension funds are the dominant source of funds for venture investing. T/F
T
The 7(a) loan traditionally has been the SBA's primary loan program T/F
T