Test 2 - T/F

A firm's maximum sustainable sales growth rate occurs at a retention ratio of 100%

True

A nominal interest rate is an observed or stated interest rate

True

A private placement, or transactions by an issuer not involving any public offering, is exempt from registering the security.

True

A venture's "riskiness" in terms of poor performance or failure is usually high to moderate during the rapid-growth stage of its life cycle

True

A venture's "riskiness" in terms of the likelihood of poor performance or failure decreases as it moves from its development stage through to its rapid-growth stage

True

According to the Investment Advisers Act of 1940, a bank would not be classified as an "investment advisor".

True

An early stage venture that is not an investment company and has written compensation agreements can structure compensation-related securities issues so they are exempt from SEC registration requirements.

True

An increase in accounts receivable will require additional financing unless the increase is offset by an equal decrease in another asset account.

True

Commercial banks provide liquidity-stage financing for ventures in the rapid-growth stage of their life cycles

True

First-round financing during a venture's survival stage comes primarily from venture capitalists and investment banks

True

Forecasting for firms with operating histories is generally much easier than forecasting for early-stage ventures

True

Formal historical accounting procedures include explicit records of debt (interest and principal) and dividend capital costs.

True

In a typical venture's life cycle, the rapid-growth stage involves creating and building value, obtaining additional financing, and examining exit opportunities

True

Increases in accounts receivable and accounts payable that accompany sales increases are called "spontaneously generated funds".

True

Investment risk is the chance or probability of financial loss on one's venture investment, and can be assumed by debt, equity, and founding investors

True

Investor liability in a limited liability company (LLC) is limited to the owners' investments

True

Market cap is determined by multiplying a firm's current stock price by the number of shares outstanding

True

Offerings and sales of securities are regulated under the Securities Act of 1933 and state blue-sky laws

True

Organized exchanges have physical locations where trading takes place, while the over-the-counter market is comprised of a network of brokers and dealers that interact electronically.

True

Over the past 90 or so years in the U.S., average annual rates of return have been higher for small-company stocks relative to large-company stocks

True

Regulation A issuers are allowed to "test the waters" before preparing the offering circular (unlike almost all other security offerings).

True

Regulation A, while technically considered an exemption from registration, is a public offering rather than a private placement

True

Regulation of investment companies (including professional venture capital firms) is carried out under the Investment Company Act of 1940

True

SEC Rule 147 provides guidance on the issuer's diligent responsibilities in assuring that offerees are in-state and that securities don't move across state lines.

True

Sales forecasting accuracy is usually lowest during a venture's development stage in its life cycle

True

Sales forecasts usually are based on either a single specific scenario or weighted averages of several possible realizations

True

The "real interest rate" (RR) is the interest one would face in the absence of inflation, risk, illiquidity, and any other factors determining the appropriate interest rate.

True

The Investment Company Act of 1940 defines investment companies and excludes them from using some of the registration exemptions originating in the 1933 Act.

True

The Securities Act of 1933 is the main body of federal law governing the creation and sale of securities in the U.S.

True

The coefficient of variation measures the standard deviation of a venture's return relative to its expected return.

True

The cost of obtaining additional funds, such as additional interest expenses from borrowing funds, may be explicit and impact AFN

True

The graph of the term structure of interest rates, which plots interest rates to time to maturity is called the yield curve

True

The life of a proprietorship is determined by the owner

True

The objective of the Jumpstart Our Business Startups (JOBS) Act of 2012 is to stimulate the initiation, growth, and development of small business companies

True

The rate at which a firm can grow sales based on the retention of business profits is known as sustainable sales growth rate

True

The securities Exchange act of 1934 provides for the regulation of securities exchanges and over-the-counter markets.

True

The two basic types of exemptions from having to register securities with the SEC are security and transaction exemptions.

True

The weighted average cost of capital is simply the blended, or weighted cost of raising equity and debt capital

True

The weighted average of a set of possible outcomes or scenarios is known as expected values

True

Title II of the JOBS Act of 2012 eliminates the general solicitation and advertising restriction for Regulation D 506 offerings.

True

Title III of the JOBS Act of 2012 establishes a small offering registration exemption and calls for SEC rules relating to the sales of securities to an Internet "crowd" (securities crowdfunding).

True

Traditional accounting does not focus on the implicit cost of equity that is the required capital gains to complement dividends. However, evaluation methods exist to determine this value by financial managers.

True

Typically, the stocks of closely held corporations aren't publicly traded

True

Venture capital holding period returns (all stages) for the 20-year period ending in 2014 were more than three times the returns on the S&P 500 stocks

True

Venture capital holding period returns (all stages) for the 5-year and 10-year periods ending in 2014 were about the same as the returns on the S&P 500 stocks

True

When using the beginning of period equity base, the sustainable sales growth rate is equal to ROE times the retention ratio

True

"First-round financing" usually occurs during a venture's rapid-growth life cycle stage.

False

"Internally generated funds" is the cash produced from operating a firm over a specified time period.

False

"Public or seasoned financing" typically occurs during the survival stage of a venture's life cycle.

False

"Securities crowdfunding" occurs when a large number of investors try to buy stocks at the same time

False

"Spontaneously generated funds" are increases in accounts receivable and accounts payable that accompany sales increases

False

A Regulation D Rule 505 offering is limited to 35 accredited investors.

False

A customer-driven or "bottom-up" approach to forecasting sales is used primarily to forecast industry sales growth rates

False

A firm with a positive growth rate in sales will require some additional funds, assuming the existing ratios will not be changed

False

A venture with a higher expected return relative to other ventures will necessarily have a higher standard deviation or returns

False

A venture's "riskiness" in terms of poor performance or failure is usually very high during the maturity stage of its life cycle.

False

Accredited investors are specifically protected by the Securities Act of 1933 from investing in unregistered securities issues

False

Blue-sky laws are federal laws designed to protect individuals from investing in fraudulent security offerings.

False

Bond ratings reflect the inflation risk of a firm's bonds.

False

Closely held corporations are those companies whose stock is traded over-the-counter.

False

Early-stage ventures tend to have large amounts of senior debt relative to more mature ventures.

False

Historically, large-company stocks have averaged higher long-term returns than small-company stocks

False

In SEC v. Ralston Purina (1953), the U.S. Supreme Court took an important step toward defining a public offering for the purposes of Section 4(2) of the Securities Act of 1933.

False

Increases in accounts payable and notes payable are examples of spontaneously generated funds

False

Inflation premium is the rising prices not offset by increasing quality of goods being purchased.

False

Investor liability in a proprietorship or corporation is unlimited

False

It is usually easier to transfer ownership in a proprietorship relative to a corporation.

False

Liquidity premiums reflect the risk associated with firms that possess few liquid assets

False

Long-term financial planning begins with a forecast of annual working capital needs

False

Over the past 90 or so years in the U.S., average annual rates of return have been higher for government bonds than for corporate common stocks

False

Public financial markets are markets for the creation, sale and trade of illiquid securities having less standardized negotiated features

False

Regulation A allows for registration exemptions on private security offerings so long as all investors are considered to be financially sophisticated

False

Regulation A offerings are allowed up $10 million and do not have limitations on the number or sophistication of offerees.

False

Rule 504 under Regulation D has a $2 million financing limit (i.e., applies to sales of securities not exceeding $2 million

False

SEC Regulation D requires the registration of securities with the SEC.

False

SEC Regulation D took effect in 1932 and provides the basis for "safe harbor" as a private placement.

False

Sales forecasting accuracy is usually highest during a venture's startup stage in its life cycle

False

Startup financing usually comes from entrepreneurs, business angels, and investment bankers.

False

State laws designed to protect high net-worth investors from investing in fraudulent security offerings are known as blue-sky laws

False

Subordinated debt is secured by a venture's assets, while senior debt has an inferior claim to a venture's assets

False

The "prime rate" is the interest rate charged by banks to their highest default risk business customers

False

The Investment Advisers Act of 1940 provides a definition of an investment company.

False

The Securities Act of 1933 provides a very narrow definition as to what constitutes a security

False

The Securities Exchange Act was passed in 1933 and the Securities Act was passed in 1934

False

The accounting emphasis on accrued revenue and expenses and depreciation is the same emphasis as that of finance managers.

False

The added costs associated with obtaining equity capital are based on investor expected rates of return and are explicit costs which affect AFN

False

The excess average return of long-term government bonds over common stock is called the market risk premium.

False

The percent of sales forecasting method must project all cost and balance sheet items at the same growth rate as sales

False

The relationship between real interest rates and time to maturity when default risk is constant is called the term structure of interest rates

False

The risk-free interest rate is the interest rate on debt that is virtually free of inflation risk

False

The sustainable sales growth rate is equal to ROA times the retention ratio

False

The trading of securities is regulated under the Securities and Exchange Act of 1954.

False

The typical business organization for a venture in its rapid-growth stage is a partnership or LLC.

False

The volatility of a firm's cash balance will steadily decreases as the firm progresses from the survival stage to the rapid-growth stage

False

"Additional funds needed" (AFN) is the gap remaining between the financial capital needed and that funded by spontaneously generated funds and retained earnings

True

"Default-risk" is the risk that a borrower will not pay the interest and/or the principal on a loan.

True

"Financial capital needed" (FCN) is the amount of funds needed to acquire assets necessary to support a firm's sales growth.

True

A Regulation D Rule 505 offering cannot exceed $5 million in a twelve-month period

True

A Regulation D Rule 506 offering has no limit in terms of the dollar amount of the offering but is limited to 35 unaccredited investors

True

A Rule 504 exemption under Regulation D has no limit in terms of the number and qualifications of investors.

True