ICS 392: Chapter 11 + 12

Business angels typically invest what amount in the businesses they finance? A. $50,000-$100,000 B. $100,000-$500,000 C. $500,000-$1,000,000 D. $1,000,000-$5,000,000

B. $100,000-$500,000

. In a factoring arrangement, the bank lends the business money using inventory as collateral.

FALSE

Blue-sky laws may speed up the process and lessen costs to the company going public.

FALSE

Long-term debt financing is normally used to provide working capital to finance inventory, accounts receivable, and operation of the business.

FALSE

The five C's of credit are character, capacity, collateral, capital and competence.

FALSE

A short-term, internal source of funds can be obtained by reducing short-term assets such as inventory, cash, and other working-capital items.

TRUE

A venture capitalist would rather invest in a first-rate product and a second-rate management team than the reverse.

FALSE

The valuation approach that gives the lowest value of the business is the earnings approach.

FALSE

The most frequently used source of funds for start-ups is: A. the entrepreneur's personal funds. B. bank loans. C. credit cards. D. SBA loans.

A. the entrepreneur's personal funds.

All owners of ____ or more are required to personally guarantee an SBA loan A. 20% B. 30% C. 35% D. 40%

A. 20%

All owners of ____ or more are required to personally guarantee an SBA loan. A. 20% B. 30% C. 35% D. 40%

A. 20%

The informal risk-capital market is made up of: A. angels. B. stockbrokers. C. venture capitalists. D. commercial banks.

A. angels.

______ financing entails obtaining funds for the company in exchange for ownership. A. Bootstrap B. Equity C. Debt D. Commercial

B. Equity

Venture capitalists: A. usually don't know one another. B. tend to put more time and effort into business plans that were referred to them. C. tend to invest in any area that has a good rate of return. D. like entreprenuers to bring in an accountant to verify financials.

B. tend to put more time and effort into business plans that were referred to them.

Venture capitalists are typically located in all of the following areas except: A. Los Angeles B. New York C. Virginia D. Chicago

C. Virginia

Going public: A. is often viewed negatively by risk-averse venture capitalists. B. ensures that the company gains control in decision making. C. increases flexibility for the company. D. enhances the company's ability to obtain future funds.

D. enhances the company's ability to obtain future funds.

In most cases, the venture capitalist: A. seeks control of the company. B. would prefer to not be a part of the board of directors. C. is not involved in developing strategic plans. D. expects the management team to run the daily operations.

D. expects the management team to run the daily operations.

Venture capitalists tend to avoid investment proposals that are referred from lawyers and accountants.

FALSE

Bootstrap financing helps avoid some of the problems of external capital like decreases in flexibility and increased impulse to spend.

TRUE

Bootstrap financing involves using any possible method, such as discounts for volume purchasing, to conserve cash.

TRUE

Debt financing requires the entrepreneur to repay the amount borrowed plus interest.

TRUE

To improve the chances of being approved for a bank loan, the entrepreneur should prepare a "mini" business plan for the loan committee.

TRUE

Two major disadvantages of going public are the increased reporting requirements and potential loss of control.

TRUE

Under the Small Business Technology transfer (STTR) program, federal agencies with budgets over $1 billion are required to set aside 0.3 percent for small businesses.

TRUE

When a bank grants a line of credit, a "commitment fee" is assessed at the start of the loan.

TRUE

C's of lending

condition, character, collateral, capacity, capital

Business angels usually find their deals through: A. the internet. B. referral sources. C. venture capitalists. D. cold calling.

A. the internet.

A bank may finance up to ______ of a company's accounts receivable. A. 50% B. 60% C. 70% D. 80%

D. 80%

Which of the following is not an example of internal financing? A. Profits B. Accounts receivable C. Credit from suppliers D. Equity financing

D. Equity financing

Any patent rights on technology developed in SBIR grants are the property of the federal government.

FALSE

For a company to go public, larger underwriting firms have more stringent criteria, such as sales as high as $50 million to $100 million, and a 40 to 70 percent annual growth rate.

FALSE

For the venture capitalist, the executive summary is an important part of the business plan.

TRUE

Banks will lend a company up to 50% of their account receivable value.

FALSE

If the amount of money provided by family members or friends is small and in the form of equity financing, they do not have an ownership position in the venture.

FALSE

In a factoring arrangement, the bank lends the business money using inventory as collateral.

FALSE

Under Rule 504 of Regulation D, a company can sell up to $1,000,000 of securities to any number of investors, regardless of their sophistication, in any 12-month period.

FALSE

Extending payments to suppliers is an example of generating funds internally.

TRUE

External investors generally require the entrepreneur to commit a large percentage of his or her personal assets.

TRUE

Outside capital should be sought only after all possible internal sources of funds have been explored.

TRUE

Replacement value is used only by insurance companies and in very unique circumstances.

TRUE

Research and development limited partnerships provide small businesses funds from investors looking for tax shelters.

TRUE

Rule 506 goes one step further than Rule 505 by allowing an issuing company to sell an unlimited number of securities to 35 investors and an unlimited number of accredited investors and relatives of issuers.

TRUE

. When the bank advances a large percentage of the invoice price of goods and is paid on a pro-rata basis when inventory is sold this is called: A. a trust receipt. B. a factoring arrangement. C. an accounts payable loan. D. a sale-leaseback arrangement.

A. a trust receipt.

What makes you an accredited invetor?

-You must have earned an individual income of more than $200,000 per year, or a joint income of $300,000, in each of the past two years and expect to reasonably maintain the same level of income. -You must have a net worth exceeding $1 million, either individually or jointly with a spouse. This figure excludes the equity in your primary residence. -You must be a general partner, executive officer, director, or a related combination thereof for the issuer of a security being offered.

Most established R&D limited partnerships: A. allow a minimum amount of equity dilution. B. are successful. C. increase, to some extent, the risks involved in the venture. D. have weak financial statements due to lack of outside capital.

A. allow a minimum amount of equity dilution.

Under the SBA Microloan program, the entrepreneur can borrow up to: A. $25,000. B. $50,000. C. $100,000. D. $1,000,000.

B. $50,000.

In general the SBA usually guarantees ____ of loans up to $150,000 and ____ of loans up to $5,000,000. A. 60%, 50% B. 85%, 95% C. 85%, 75% D. 100%, 95%

B. 85%, 95%

Which of the methods of valuation of a company provides the potential investor with the best estimate of the probable return on investment? A. Book value B. Earnings approach C. Present value of future cash flows D. Liquidation value

B. Earnings approach

The valuation approach that gives the lowest value of the business is: A. book value. B. liquidation value. C. present value of future cash flows. D. earnings approach.

B. liquidation value.

________ financing does not require any collateral. A. Commercial bank loan B. Line of credit C. Equity D. Character loan

C. Equity

The SBA's primary business loan program is: A. the Microloan. B. the SBIR. C. the 7(a) loan. D. the 504.

C. the 7(a) loan.

In the valuation of Internet companies: A. the book value approach is of primary importance. B. the replacement value approach plays a significant role. C. the qualitative portion of due diligence carries much more weight. D. the factor approach is used the overall value.

C. the qualitative portion of due diligence carries much more weight.

The maximum amount that can be borrowed under an SBA 7(a) loan is: A. $750,000 B. $1,000,000 C. $1,500,000 D. $5,000,000

D. $5,000,000

A "commitment fee" is used in arranging for a: A. commercial loan. B. character loan. C. installment loan. D. line of credit.

D. line of credit.

Typically, debt financing requires: A. an asset as collateral. B. a degree of ownership in the firm. C. reduction of short-term assets. D. reduction of working capital.

A. an asset as collateral.

Using the __________ method of evaluating the firm, cash flow is adjusted for the time value of money. A. present value of future cash flow B. replacement value C. book value D. earnings approach

A. present value of future cash flow

Funds obtained from ____ are the least expensive in terms of cost and control. A. the entrepreneur's personal resources B. friends and family C. commercial banks D. private placement

A. the entrepreneur's personal resources

In regards to a public offering, once the registration statement has been filed, the SEC generally takes _________ to declare IPO registration effective: A. 1-2 weeks B. 3-4 weeks C. 6-12 weeks D. 15-20 weeks

C. 6-12 weeks

After the completion of the preliminary preparation, the first public offering normally requires three to six months to prepare, print, and file the registration statement with the SEC.

FALSE

In most of the significant public offerings, the company technically sells the shares to the underwriters, who then resell the shares to the public investors.

TRUE

Making long-term decisions can be difficult in publicly traded companies where sales and profit evaluations indicate the capability of management via stock values.

TRUE

__________ financing involves using any possible methods for conserving cash. A. Bootstrapping B. SBIR C. Private placement D. Floor planning

A. Bootstrapping

Which of the following types of credit does not require the pledging of an individual's collateral or a cosigner? A. Line of credit B. Character loan C. Trust receipts D. Mortgage loan

A. Line of credit

About 90 percent of the value of finished goods inventory can be used as collateral for a commercial bank loan.

FALSE

An entrepreneur contributing his or her own capital would be an example of internally generated funds.

FALSE

An extension of the earnings approach is the book value method.

FALSE

Angel investors typically invest between $500,000-$1,000,000.

FALSE

Long-term loans from commercial banks are usually readily available to small startup firms.

FALSE

All ventures have some equity.

TRUE

Angel investors have a longer investment horizon than venture capitalists do.

TRUE

Angel investors typically finance firms that are close to their homes.

TRUE

Angel investors usually expect to play an active role in the businesses they invest in.

TRUE

SBA 7(a) loans can be used for such things as equipment and land.

TRUE

The SBA 7(a) loan program has a maximum loan amount of $5 million

TRUE

The SBA's 7(a) Loan Guarantee program helps qualified small businesses obtain financing when they can't get a business loan through regular lending channels.

TRUE

The public equity market is available only for high-potential ventures.

TRUE

Which of the following statement is (are) true? A. Rule 505 permits the sale of $10 million of unregistered securities in the private offering in any 12-month period. B. Rule 504 and 505 permit no general advertising or solicitation through public media. C. Rule 506 provides the first exemption to a company seeking to raise a small amount of capital from numerous investors. D. The entrepreneur issuing the private offering is spared the burden of proving that the exemptions granted have been met.

B. Rule 504 and 505 permit no general advertising or solicitation through public media.

All owners, regardless of percentage of ownership, are required to personally guarantee SBA loans.

FALSE

Balance sheet items are carried at cost, a good indicator of fair market value in valuing a company.

FALSE

Bootstrap financing decreases the company's flexibility and drive for sales.

FALSE

Equity financing requires collateral.

FALSE

Most angel investors are individuals who accumulated their wealth through inheritance.

FALSE

SBA guaranteed loans are guaranteed for 100 percent of the loan amount.

FALSE

Small Business Innovation Research grants are funded by federal agencies which provide a portion of their R&D funds to small businesses.

TRUE

The present value of future cash flow method of valuation considers the firm's cash flow in relation to the time value of money.

TRUE

The three main advantages of going public are obtaining new capital, realizing an enhanced valuation, and enhancing the company's ability to obtain future funds.

TRUE

The SBA's Microloan program is their primary business loan program.

FALSE

The SBA's Microloan program provides short-term loans of up to $100,000 to small businesses for working capital or purchase of inventory.

FALSE

The funds for a SBA guaranteed loan are provided by the federal government.

FALSE

The personal funds of the entrepreneur are the most expensive.

FALSE

The quiet period is a 90-day period in going public when company information that will help increase stock price should and can be released.

FALSE

The shorter the time before a company goes public, given that profits and sales growth occur, the less percentage of equity the entrepreneur will have to give up per dollar invested.

FALSE

Venture capitalists view going public a highly disadvantageous step since the level of risks involved substantially increase.

FALSE

Identify the main advantages of going public.

Advantages - ability to obtain equity capital, enhanced ability to borrow, enhanced ability to raise equity, liquidity and valuation, prestige, personal wealth.

In a factoring arrangement, the factor: A. takes no risk and sustains no losses. B. "buys" the accounts receivables of a firm. C. receives no interest payment. D. pays a premium for the firm's assets.

B. "buys" the accounts receivables of a firm.

Equity partnerships, royalty partnerships, and joint ventures are used in the ___________ stage of limited partnerships to reap the benefits of the effort. A. funding B. development C. exit D. all of the above.

C. exit

Research and development limited partnerships provide funds for entrepreneurs in high-tech fields through: A. debt from lenders. B. equity from present owners. C. investors looking for tax shelters. D. cash from internal operations.

C. investors looking for tax shelters.

When using equity financing from family and friends: A. business arrangements should be in good faith. B. details such as terms of the investment and rights of the investor need not be in writing. C. they can be more patient than other investors in when they expect a return on investment. D. since the amount of money is usually small, they do have an ownership position in the venture.

C. they can be more patient than other investors in when they expect a return on investment.

Which grant program requires partners at universities or other non-profit institutions? A. The 504 program B. Small Business Innovation Research C. The SBA 7(a) D. Small Business Technology Transfer

D. Small Business Technology Transfer

The most frequently used source of short-term funds when collateral is available is: A. SBA Microloans. B. SBA 7(a) loans. C. R&D limited partnerships. D. commercial bank loans.

D. commercial bank loans.

Identify the main disadvantages of going public.

Disadvantages - Increased risk of liability, expense, regulation of corporate governance policies and procedures, disclosure of information, pressures to maintain growth pattern, loss of control.