Chapter 14 Entrepreneurship

Which of the following statements regarding cost of capital is true?

The lower the cost of capital of a business, the more profits the owner can keep for himself of herself.

True or false: An advantage of borrowing money for capital investment is that borrowing permits the owners to keep a higher level of control of the business.

True

Debt

a legal obligation to pay money in the future

financial leverage

a measure of the amount of debt relative to total investment.

A small business investment company is

a private business a private business that is authorized to make SBA-insured loans to start-ups and small businesses.

Microlender

an SBA-approved partner that offers SBA-guaranteed loans under $50,000 to eligible small businesses

accelerator

an organization that supports start-up with a financial investment, free or inexpensive space, mentoring, and other services

Wealthy individuals who invest in companies in relatively early stages of their development are called ______.

angel investors

Using low-cost or free techniques to minimize the cost of doing business is called

bootstrapping

A(n) ______ is an organization authorized by the SBA to make insured loans to small businesses that are expected to increase economic activity within a specific geographic area.

community development organization

A business that collects, organizes, and details data concerning an entity's use of debt is referred to as a _____.

credit reporting agency (CRA)

A corporation is a:

legal "artificial" entity that is formed by filling specific documents with a state government

Financial leverage

measure of the amount of debt relative to total investment

Outside Equity

money from selling part of your business to people who are not and will not be involved in the management of the business

Harvest

recover value through a sale of a firm or its assets

A method of obtaining capital in which investors give money to a business in return for a guaranteed percentage of revenues is referred to as _____.

royalty financing

Loans that provide the lender with the legal right to seize specific assets in the event of nonpayment is called ______ debt.

secured

A ______ is a direct reduction in the amount of taxes that must be paid, dependent on meeting some legal criteria.

tax credit

profit

the amount that revenues exceed expenses

An equity investor's primary concern is:

the firm's growth potential

financial risk

the uncertainty of returns and the probability of losing money

Identify a strategy for maximizing the value of a business's employees.

use of contractors

A partnership business form is:

when two or more people cooperating to conduct a business enterprise

True or false: Dividends are a charge for the use of money and is usually calculated as a percentage of the principal.

False

True or false: Gift capital earned its name due to the lender giving the business a loan without any collateral, charging no interest, and not specifying a payment schedule.

False

Identify an advantage of borrowing money for capital investment.

It improves the potential for greater rates of return for business owners.

Which of the following is true of royalty financing?

It involves the issuance of equity to a business by an investor and the placing of a loan.

Which of the following is a benefit of using outside equity?

Outside investors often bring new ideas, processes, and procedures to existing businesses.

Gift Capital

Capital resources that neither provide any ownership nor require any repayment to the giver.

Which of the following is a reason that bootstrapping is common among small business start-ups?

banks do not lend money to start-up businesses

Risk

the level of probability that an investment will not produce expected gains

grant

a gift of money made to a business for a specific purpose

Identify an important consideration when giving a gift to help someone start or continue their business.

consider nonvoting stock, if the gift is an equity investment

Identify a suggestion for businesses to succeed in crowdfunding.

Create a snappy, professional-looking video about the business.

Cost of Capital

the percentage cost of obtaining future funds

Something of value given or pledged as security for payment of a loan is called ______.

collateral

______ debt are loans that do not allow a lender to seize specific assets in the event of nonpayment.

unsecured