Chapter 12 Small Business Management by Justin Longenecker
Floyd's income statement showed for the current year his company had an operating income of $45,000 and his balance sheet showed total assets of $300,000. His return on assets is _________ percent.
15
Galen runs an Greek restaurant and is currently considering leasing or purchasing some updated equipment. What statement is correct?
Because the equipment he is buying will become outdated in two years, leasing would be a better option than purchasing.
Joann is buying an existing convenience store. When she considers which bank to use, her best choice would be:
a bank close to her store.
Barry needs financing to start his inner-city venture. His goal is to provide part-time employment for at-risk youths to keep them off the streets and engaged in learning marketable skills. Barry may find some assistance from:
a community-based financial institution.
Andrew is a venture capitalist who would like to find a good new business in which to invest. He's done this before so he has learned to limit his investing to firms with potentially high returns in a _____ period.
5-10 year
Sandy is using a governmental program to help finance her new business. Her company is not eligible for a loan through a normal lending channel and is receiving $120,000 with the SBA guaranteeing 85 percent of the loan. She also had to submit a loan application to the lender. Ellie is participating in the
7(a) Loan Guaranty Program.
Elena plans to open a non-profit child-care center in her depressed neighborhood. She may qualify for an SBA loan program that provides loans of up to $50,000 known as the:
7(m) Microloan Program.
Novelty Shirts is a manufacturing company needing to expand its production facilities. Which SBA program would be best to acquire real estate valued at $150,000?
Certified Development Company 504 Loan
Martina wants to expand her business. She will need to buy a larger facility and equip it with additional machinery. She should look into the SBA loan program that provides long-term financing for small businesses to acquire real estate or machinery and equipment called the:
Certified Development Company 504 Loan Program.
A chattel mortgage is a loan for which real property, such as land or a building, serves as collateral.
False
A company that has over 100 employees with locations in several states is typically the type of company in which business angels make an investment.
False
A firm with potential for large profits, as opposed to high growth potential, has many more possible sources of financing than does a firm that offers only unattractive returns.
False
A source of early-stage capital financing for a company is financing from commercial banks.
False
Around 5 percent of the business plans reviewed by venture capitalists are funded.
False
Asset-based lending is a type of financing secured by assets such as equipment and inventory.
False
Assets such as the quality of a firm's employees are considered tangible in nature and thus have substantial value as collateral.
False
Business loans are the primary source of financing for startups.
False
Common stock can be sold to underwriters, but they do not guarantee the sale of securities.
False
Crowdfunding works strictly with individual donations made over the Internet.
False
For entrepreneurial ventures with the potential for becoming significant businesses, initial public offerings have been the fastest-growing source of financing over the past two decades.
False
For every firm, there is a "right" answer to the question of balancing debt and equity, and it is important that the small business owner find that balance.
False
Goodwill is considered a intangible asset and is highly valued when securing a loan.
False
Lines of credit are legal obligations to provide capital.
False
Most startup investors limit their investing to firms that offer potentially high returns within a one to three year period.
False
Private placement is the selling of stock to select venture capitalists.
False
Qualified small businesses that cannot obtain business loans through normal lending channels can get loans directly from the SBA through its 7(a) Loan Guaranty Program.
False
Small Business Administration loans include guaranty loans and loans directly from the SBA.
False
The age of a company has little impact on the types of financing available to it.
False
The main advantage of using credit cards for financing is the relatively low interest rate compared to bank loans.
False
Connie owns a small but growing company that produces gorilla glass for smartphones. One possible source of funding might be:
Samsung, who sells smartphones.
A small business that needs to purchase real estate could apply for a 7(a) guaranty loan.
True
Borrowing money rather than issuing common stock typically increases the potential for higher rates of return to owners.
True
Both wholesalers and equipment manufacturers/suppliers can be used as sources of funds.
True
Companies that have business dealings with a new firm are possible sources of funds for financing inventory and equipment.
True
Debt financing as opposed to equity financing allows owners to retain voting control of the company.
True
If a company has a signed purchase order from a creditworthy customer and the gross profit margin on the order is anticipated to be 36 percent, purchase-order financing is likely.
True
If a firm finances with equity rather than with debt, it will bear no interest expense and thus yield greater net income.
True
One potential problem with acquiring funds from friends and relatives is that they might feel they have the right to interfere in the management of the business.
True
Small business owners sometimes accept higher levels of debt because doing so permits them to retain all of the stock and full ownership.
True
The five C's of credit are character, capacity, capital, conditions, and collateral.
True
Use of debt financing increases potential returns when a company is performing well, but it also increases the possibility of lower--even negative--returns if the company does not attain its goals in a given year.
True
Venture capitalists restrict their investment in startup companies.
True
Which type of equity-based crowdfunding will, with SEC approval, allow unaccredited investors to invest?
Type 3
Irwin has applied for a loan from an asset-based lending company. As security he will offer:
accounts receivable and inventory.
Renata has asked her family members to help her launch her new business. She must consider that:
along with their financial futures, she may be putting the relationships at risk.
Lyman's business has grown to 400 employees with annual revenues of $15 million. He would like to expand further but needs another $5 million. He should consider:
an SBIC loan.
Small business investment companies (SBICs)
are licensed and regulated by the Federal Trade Commission. obtain part of their capital from local governments at attractive interest rates. may lend funds or supply equity funds.
Venture capital companies
are often limited partnerships that raise capital from other investors.
When Ben left the corporate rat race to start his own pottery business, he used some of his retirement savings to finance the business. This practice is known as:
bootstrapping.
Will has decided to invest $10,000 into his neighbor's new company. The money will be used in the early stages of development. Will is considered a
business angel.
Granville owns a construction company and would like to purchase a mobile construction office. The bank would likely offer him a _____ mortgage.
chattel
Instead of borrowing money from suppliers to purchase equipment, an increasing number of small businesses are
choosing to lease the equipment.
LIBOR is _____ the prime rate.
considerably lower than
Which financing source has the greatest advantage of speed?
credit card
It's been George's "baby" from the beginning and he really doesn't want to be accountable to any outsider for the decisions he makes in his business. In George's case, he should seek initially to secure _____ financing.
debt
Glenda is trying to decide between the use of debt and the use of equity to finance her young business. She should remember that:
debt must be repaid even if the company does not make a profit.
One factor that influences the choice between debt and equity is the
degree of control the owners hope to retain.
People like Ben who "bootstrap" company financing are
depending on their own initiative to obtain the capital necessary to start up and grow.
Harlan's customers have been a little slow in paying their invoices, and he is short on cash to pay his quarterly taxes. Harlan should consider:
factoring.
Althouth not the primary source of financing for most small business startups, another source of early financing is:
family members.
Chuck, Marie and Tommy are a group of friends who have formed a LLC to raise capital for an investment in 20 franchises of Rigby's, a new sports bar concept. Tommy will be the general partner; Chuck and Marie will be limited partners. These three are:
formal venture capitalists.
If the firm's rate of return on its assets is _____ than the cost of borrowing, then the owners' rate of return on equity will _____ as the firm uses _____ debt.
greater, increase, more
Williams Alternative Power, Inc., a company developing solar panels, has done considerable research and limited production during its two year life. It is about ready for its IPO. At this stage of its life cycle, its ability to attract venture capital is:
greater.
In his presentation to his banker when he applies for a business loan to purchase additional equipment, Alan should emphasize:
how he will be able to repay the principal of the loan.
David is trying to decide whether to add capital through investing more of his own money or through borrowing money from the bank. To help him decide, you remind him that ss long as his firm's rate of return on its assets is greater than the cost of the debt, his rate of return on equity will _____ as the firm uses more debt.
increase
In groups of business angels,
individual angels make personal decisions about whether or not to invest.
Business angels, as opposed to venture capitalists, provide
informal venture capital.
The type of financing Evangeline received from a business angel is known as:
informal venture capital.
Williams Alternative Power, Inc. a company developing solar panels, is applying for a loan. The research the company has done for the manufacturing process would be a(n) _____ asset for the loan evaluation.
intangible
Many venture capitalists:
intend to cash out after five to seven years.
Private placement
is the sale of capital stock to selected individuals.
Ben left the corporate rat race to start his own business that will allow him to earn a small income while providing plenty of time to pursue his love of pottery making. He does not expect either growth or high profits. Ben's prospects for attracting outside financing are:
limited.
Guaranty loans are
made by private lenders.
Before accepting money from a business angel, the entrepreneur should:
make sure the business angel is accredited.
Anna's new business looks like it can grow quickly and become profitable in its first year. Anna will likely find _____ possible sources of financing than those with less potential for growth and profits.
many more
A line of credit is the _____ amount of credit a bank will provide a borrower at any one time.
maximum
A balloon payment
may be required by the bank at about midway in the loan term.
Elyse wants to calculate her return on equity but has forgotten the formula. You tell her that return on equity equals
net income divided by owners equity.
A drawback to "going public" is
numerous SEC requirements.
Even though Evan's company is a corporation, the bank imposed a loan covenant that required Evan to:
pay a loan origination fee. make quarterly rather than monthly payments. personally guarantee the loan.
In the beginning, some entrepreneurs use ____________ as a source of financing.
personal credit cards
Penelope is planning to launch her first business. She will most likely acquire her initial financing from:
personal savings.
Ralph owns a lumber yard and has a $500,000 purchase order from a construction company. His cost of goods sold for this order is $300,000 Because his company needs working capital, the most logical loan for the lumberyard would be to use ________.
purchase order financing.
Miracle Fund LLC is a venture capitalist. In exchange for providing venture capital, Miracle Fund:
receives the right to own a percentage of the entrepreneur's business.
A loan covenant is very likely to require
salary limitations.
Carla is a loan analyst at the bank. When Cameron applied for a loan, Carla looked at his balance sheet for ________ assets to evaluate a possible loan for his company's financing.
tangible and intangible
Florence wants to obtain a loan for a large color laser printer for her copy shop. Since the printer will last approximately 8 years, the ideal loan would be a _____ loan.
term
The federal government primarily provides funds to small businesses through
the Small Business Administration.
To determine how well her business is doing, Darlene should monitor the return on her investment (equity) because it is a better measure of performance than
the absolute dollar amount of income.
Cameron has applied for a loan to expand his young business. When bankers look for evidence of whether he will be able to repay a loan, they usually base their assessment on
the business plan of the enterprise. what Cameron's firm has done in the past.
When considering a loan application, bankers will consider:
the five Cs of credit.
Maguire was considering selling stock as a source of funds but was concerned about:
the loss of voting control of the company.
In addition to the interest rate on his business loan, Paul should also give attention to:
the maturity date.
If a Eugenie finances her firm with equity rather than debt, her net income could potentially be greater because
there is no interest expense.
Small firms frequently run into problems when:
they fail to match a term loan's payment terms with the expected cash inflows from the equipment purchased with the loan.
If he holds true to the average, Donald Trump likely invests approximately _____ of his investment in later-stage businesses.
three-fourths
A source of short-term funds for many small companies with inventories is
trade credit.
Even with all his billions and influence, Donald Trump, as an equity investor, cannot demand more than
what is earned.
