Practice Quiz- Test Bank
Assume that you can sell a new product at $5.00 per unit. Variable costs are $3.00 per unit, and fixed costs are $20,000. What will be the profit before taxes if you sell 12,000 units next year?
$4,000
You have the opportunity of making a $5,000 investment. The outcomes one year from now will be either $4,500 or $6,000, with an equal chance of either outcome occurring. What is the expected outcome?
$5,250
Venture capitalists invest in approximately what percent of business plans presented to them?
1%-3%
Which of the following numbers of shareholders is allowed in a subchapter S (or S) corporation business form?
100
Based on 2018 tax schedules, the highest marginal tax rate on personal taxable income is:
37%
A SWOT analysis should consider as potential strengths or opportunities the extent of existing competition and the likelihood of substitute products or services.
False
Entrepreneurial opportunities can occur only when there are societal changes in the world.
False
Entrepreneurial ventures emphasize survival and providing an acceptable living for their owners, with growth being a secondary goal.
False
Financial distress occurs when cash flow is insufficient to meet current debt obligations.
False
Free cash flow to equity is the cash flow from producing and selling a product or providing a service.
False
Lifestyle firms are growth driven in terms of revenues, profits, and cash flows and also performance oriented as reflected in rapid value creation over time.
False
Mark Twain once said, "I was always able to see an opportunity before it became one."
False
Mark Twain said, "Like I tell anybody, if you fail to plan, you're planning to fail."
False
Which of the following are sources of entrepreneurial opportunities?
a. societal, demographic, and technological trends; crises and "bubbles"; and emerging
You are considering investing in two independent projects: A and B. Project A requires an initial investment of $12,000. In one year, there is a 30% chance of a $10,500 return; a 50% chance of a $12,500 return; and a 20% chance of a $14,500 return. Project B requires an initial investment of $1,000. In one year, there is a 25% chance of a $950 return; a 25% chance of a $1,000 return; and a 50% chance of a $1,200 return. If you require a 7% return on your investment after one year, you should:
accept Project B and reject Project A
In the venture life cycle, moving from the development stage to the startup stage frequently begins with the preparation of a business plan. The business plan is a written document that describes the proposed venture in all of the following terms except: a.current resources available to the venture b.the accounting data for the last five years c.the proposed product or service opportunity d.financial projections
b.the accounting data for the last five years
A written document that describes the proposed venture in terms of the product or service opportunity, current resources, and financial projections is called a(n):
business plan
The rules and procedures established to govern the corporation are called the:
corporate bylaws
An effective entrepreneurial management team should do all of the following except: a.provide expertise in the areas of marketing, finance, and operations b.have successful experience in the venture's industry and markets c.share the entrepreneurial spirit d.always work independently of each other
d.always work independently of each other
A typical business plan includes all of the following sections except: a.business description b.executive summary c.marketing plan and strategy d.disclosure of pending litigation
d.disclosure of pending litigation
It has been estimated that venture capitalists invest in about 10 to 30 percent of business plans presented to them.
false
Return on assets can be stated as:
net after-tax profit divided by total assets
Free cash flow to equity is the cash available to the entrepreneur and venture investors after all of the following except:
net cash flows
The dollar profit left after all expenses, including financing costs and taxes, have been deducted from the firm's revenues is called:
net profit
A firm's option to abandon a venture is an example of a:
real option
The compound rate of return that equates the present value of the cash inflows with the initial investment outlay is called the internal rate of return (IRR).
true
Use the following information to determine a firm's cash build: net sales = $150,000; net income = $15,000; beginning-of-period accounts receivable = $60,000; end-of-period accounts receivable = $90,000; and interest = $10,000.
$120,000
Determine the cost of goods sold for a venture with the following financial information: revenues = $50,000; net profit margin = 20%; and gross profit margin = 70%
$15,000
Find the survival revenues (SR), also known as the EBDAT breakeven, based on the following information: cash fixed costs = $60,000; variable costs = $70,000; and sales = $100,000.
$200,000
Acme Pest Control has sales of $13,500, cost of goods sold of $4,000, selling expenses of $3,500, depreciation of $2,000, interest expense of $2,000, and a tax rate of 34%. What is Acme's taxable income and tax expense?
$2000, $680
Determine the dollar amount of total assets for a venture with the following financial information: revenues = $500,000; net profit = $70,000; and asset turnover = 2.0 times.
$250,000
Using the following information, determine the average monthly net cash burn rate: annual net income = $20,000; annual interest = $10,000; annual cash build = $150,000; and annual cash burn = $186,000.
$3,000
Estimate the value of a privately held firm based on the following information: stock price of a comparable firm = $20; net income of a comparable firm = $20,000; number of shares outstanding for the comparable firm = 10,000; and earnings per share for the target firm = $3.
$30
Find the NOPAT breakeven revenues (NR) given the following information: total operating fixed costs = $75,000; variable costs = $150,000; and sales = $200,000.
$300,000
An average score using the VOS Indicator™ would fall in the range:
1.67-2.33
Offerings exempted from registration under Rule 504 of Regulation D may raise up to $5 million in a:
12-month period
Venture investors generally use which of the following target rate ranges to discount the projected cash flows of ventures in the development stage of their life cycles:
40%-60%
Following is financial statement information for Rogex Corporation: net sales = $2,768; cost of goods sold = $1,210; depreciation = $360; interest expense = $160; taxes = $312; addition to retained earnings = $508; and dividends paid = $218. What is the gross profit margin for Rogex?
56.3%
An option that can be exercised at any time until its expiration is called a(n)
American-style option
Which of the following is the equation for EBDAT?
EBDAT = Revenues - Variable Costs - Cash Fixed Costs
To calculate the enterprise valuation cash flow, one begins with which of the following items from the income statement?
Earnings Before Interest and Taxes) × (1 - Enterprise Tax Rate)
In a typical business plan, the section covering the management team does not need to disclose the management team's expertise and experience.
False
Nine principles of entrepreneurial finance are identified and explored in this textbook.
False
SEC Regulation D took effect in 1932 and provides the basis for safe harbor as a private placement.
False
The owner-debtholder conflict is the divergence of the owners' and lenders' self-interests as the firm gets close to going "public."
False
Ventures that reach the survival stage of their life cycles and seek first-round financing are typically organized as:
LLCs or corporations
In which of the following credit programs is the SBA's role in the loan one of providing a direct loan to a community organization, which reloans the funds in small amounts?
Mircoloan
Which of the following SEC registration exemptions has no financing limit and permits a maximum of 35 unaccredited investors?
Regulation D: Rule 506
What does SBA stand for in the context of new ventures?
Small Business Administration
Which title of the JOBS Act of 2012 established a small offering registration exemption involving the sales of securities to an Internet "crowd"?
Title III
A SWOT analysis is an examination of the strengths, weaknesses, opportunities, and threats to determine the business opportunity viability of an idea.
True
A high asset intensity implies a large investment in fixed assets and/or net working capital is needed to support revenue growth
True
Democratic capitalism exists where a country or state organized as a democracy adopts a capitalistic economic system.
True
The time value of money is an important component of the rent one pays for using someone else's financial capital.
True
Venture opportunity screening involves assessment of an idea's commercial potential to produce revenue growth, financial performance, and value.
True
The returning of all funds to equity investors as a common remedy for a fouled-up securities offering is called:
a rescission
Fads:
are not predictable, have short lives, and do not involve macro changes
Successful entrepreneurs do not exhibit which of the following traits?
are pessimistic about the future
The purpose of the stepping-stone year is to
assure that there is sufficient required cash
Which of the following is not a kind of patent? a.utility b.mark c.design d.business method
b. mark
A viable venture opportunity is characterized by all of the following except: a.providing an initial competitive advantage b.having perceived attraction to prospective investors c.creating or meeting a customer need d.being timely in terms of time-to-market
b.having perceived attraction to prospective investors
Which of the following is not a standard component of a sound business model? a.generate revenues b.produce low-cost products c.produce free cash flows d.make profits
b.produce low-cost products
A sound business model provides a plan to do all of the following except: a.produce free cash flows b.retain all its earnings c.make profits d.generate revenues
b.retain all its earnings
Which of the following is not a basic ratio technique used to conduct financial analysis? a.industry comparable analysis b.cross-sectional analysis c.sensitivity analysis d.trend analysis
c.sensitivity analysis
A SWOT analysis focuses on which of the following components or areas?
c.threats, opportunities, weaknesses, and strengths
Which of the following is not one of the likely outcomes of the venture firm's screening process?
close the capital fund
Which of the following has the least senior claim on a venture's asset?
common equity
Intellectual property rights to writings in printed and electronically stored forms are protected by:
copyrights
Which of the following requires that all previously unpaid preferred dividends must be paid prior to any common dividend?
cumulative preferred stock
Which of the following "premiums" is not typically included in the rate on U.S. Treasury securities?
default risk premium
Which of the following is not an input to the Black and Scholes model?
earning per share
E-commerce refers to:
electronic commerce
A basic C corporation is also known as an S corporation.
false
A color mark is considered to be one of four types of marks used to try to protect intellectual property.
false
A copyright must be registered with the U.S. Copyright Office in order for a work to be protected
false
First-round financing usually occurs during a venture's rapid-growth life cycle stage
false
NOPAT equals net sales multiplied by one minus the tax rate.
false
Net operating working capital is current assets other than surplus cash less interest-bearing long-term liabilities.
false
Options generally have no effect on the value of a venture capital investment.
false
Pay-after-delivery is a common model for obtaining funds from customers to help finance startups.
false
Post-money valuation is the pre-money valuation of a venture plus all monies previously contributed by the venture's founders.
false
Preferred stock is the equity claim senior to common stock and providing preference on dividends but not liquidation proceeds.
false
Reasonable estimates place nonemployer (e.g., single person or small family) businesses started each year at less than 100,000.
false
Receivables lending is the use of receivables as collateral for an equity issue.
false
The constant ratio forecasting method makes projections based on the assumption that certain costs and some balance sheet items are best expressed as a percentage of sales.
false
The constant-ratio forecasting method is a variant of the percent-of-sales forecasting method.
false
The utopia discount process allows the venture investors to value their investment using only the business plan's explicit forecasts, discounting it at a bank loan interest factor.
false
The valuation approach involving discounting present value cash flows for risk and delay is called discounted cash flow (DCF).
false
The financial funds needed to acquire assets necessary to support a firm's sales growth is called:
financial capital needed
The type of financing that occurs during the survival stage of a venture's life cycle is typically referred to as:
first-round financing
A venture's value is determined by its:
future free cash flows (to equity)
What is the present value of the venture's expected future cash flows called?
going-concern value
Net sales minus cost of goods sold when divided by sales is called:
gross profit margin
A score in the range of 2.34-3.00 using the VOS Indicator™ would be considered a(n):
high score
In a venture capital fund placement memorandum, all of the following are part of the executive summary except:
imposition of confidentiality
A financial statement that reports the revenues generated and expenses incurred over an accounting period is called the:
income statement
All else held constant, a higher asset turnover:
increases ROA
Which of the following types of "premiums" would not be associated with corporate bonds?
investment risk premium
While Section 4(a)2 does not limit the dollar amount of an offering, the interpretation of the law has stipulated that the:
investors must be sophisticated
Which of the following statements about registering securities with the SEC is not true?
it is an inexpensive process
In a general partnership, legal action that treats all partners equally as a group is called:
joint liability
All of the following are common loan restrictions except
limits on total equity
Which of the following is depreciated?
machinery
In a venture capital fund placement memorandum, which of the following is not part of the offering summary?
management fee
Venture capital firms tend to specialize in publicly identified niches because of the potential for value-added investing by venture capitalists. Which of the following is not one of these niches?
management style
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?
managerial references
Which of the following components is not used when estimating the cost of risky debt capital?
market risk premium
During a venture's rapid-growth stage, funds for plant expansion, marketing expenditures, working capital, and product or service improvements is obtained through:
mezzanine financing
Net income divided by net sales is the calculation for:
net operating profit after taxes margin
Which of the following forms of protecting intellectual property had its protection limit increased from 17 to 20 years?
patents
Which of the following is not a source of entrepreneurial opportunities referred to in this textbook?
political changes
Which of the following markets involve direct two-party negotiations over illiquid, nonstandardized contracts such as bank loans and direct placement of debt?
private financial market
The valuation approach involving maximum dividends suggests:
projecting dividends that exhaust any surplus cash
Which of the following is not a duty of the Small Business Administration?
provide equity financing for startups
Investment bankers often play an important role in which of the following life cycle stages?
rapid-growth stage
When conducting a SWOT analysis, which of the following areas would not be considered as a potential opportunity or threat? a.recent or potential regulatory changes b.reputation value c.possibility of new technologies d.existing competition
reputation value
What is the present value of the terminal value called?
reversion value
Which of the following describes the interest rate on debt that is virtually free of default risk?
risk-free rate
During which round of financing is a venture typically most accurate in forecasting sales?
seasoned financing
Security exemptions from registration with the SEC do not include which of the following?
securities issued by large, high-quality corporations
None of the following create any securities registration responsibilities except:
securities issued by publicly held companies
An organization that usually provides both an equity investment and a mentoring and educational program to help startup firms succeed is called a(n):
seed accelator
The type of financing that occurs during the development stage of a venture's life cycle is typically referred to as:
seed financing
A venture's value to its owners is determined by the:
size and timing of its future free cash flows (to equity)
When conducting a SWOT analysis, assessing unfilled customer needs is examined in terms of:
strengths or weaknesses
In which form of business organization is the taxation effects characterized by the income flowing to shareholders taxed at personal tax rates?
subchapter S corporation
Which form of business organization is characterized as having unlimited life?
subchapter S corporation
An individual's work-related, nonfinancially compensated contribution to the enhancement of a venture's value is referred to as:
sweat equity
For American and Bermudan embedded options, the exercise price can change over time as specified in the security agreement.
t
The value of the venture at the end of the explicit forecast period is called the:
terminal value
Which of the following equity valuation methods records surplus cash on the balance sheet but assumes that the surplus cash is paid out over time for valuation purposes?
the calibration of pseudo dividends
Which of the following is not part of the operating cycle?
time it takes to pay suppliers
A price-earnings ratio is related to the level and growth of earnings.
true
Business method patents protect a specific way of doing business and the underlying computer codes, programs, and technology.
true
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.
true
Certification marks provide indications of quality.
true
Convertible notes are debt allowing for conversion into stock at a price set by a future financing round.
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
Market cap is determined by multiplying a firm's current stock price by the number of shares outstanding.
true
Microloans in the SBA credit program are intended for very small businesses with a maximum amount of $50,000 to be used for general business needs.
true
Patents, trade secrets, trademarks, and copyrights are intangible assets.
true
Pre-money valuation is the present value of a venture prior to a new money investment.
true
Preparing a projected statement of cash flows serves as check on the projected income statement and projected balance sheet.
true
Public pension funds supply about 20 percent of venture capital funds.
true
Rewards-based crowdfunding involves soliciting nonequity funds to finance specific business products and services or to request donations for a specific purpose.
true
The concept of an enterprise value is that it is the combined value of all of venture's financing, typically equity plus all of the debt.
true
The difference between a limited partnership and a general partnership is that a limited partnership has partners who actively manage the day-to-day operations but also has passive investors.
true
The discount rate applied in an expected PV approach should be the same rate across scenarios.
true
The extent to which a venture is in debt and in its ability to repay its debt obligations is indicated by leverage ratios.
true
Trade secrets are intellectual property rights in the form of inventions and information not generally known to others that convey economic advantages to the holders.
true
Patents are intellectual property rights granted for inventions that are:
useful, novel, nonobvious
The risk-free interest rate is the sum of:
a real rate of interest and an inflation premium
When moving from entrepreneurial opportunities to new businesses, products, or services, which of the following is not considered a component? a.feasibility b.harvest of venture c.ideas d.business plan
b.harvest of venture
Which of the following is not a major source of startup financing for a venture's startup stage?
business operations
The word "risk" developed from the early Italian word "risicare" and means:
"to dare"
A VOS Indicator™ stands for:
"venture opportunity screening" indicator
Following is a partial personal taxable income schedule for a single filer: Over— But NotOver— Difference MarginalTax Rate $ 0 $ 9,525 $ 9,525 0.10 9,525 38,700 29,175 0.12 38,70082,500 43,800 0.22 What would be the cumulative dollar amount of income taxes paid by a single filer who has taxable income of $38,700?
$4,453
Determine the total operating fixed costs (TOFC) based on the following: administrative expenses = $200,000; marketing expenses = $180,000; depreciation expenses = $100,000; and interest expenses = $20,000.
$480,000
Determine the net profit for a venture with the following financial information: revenues = $500,000; return on assets = 20%; and asset turnover = 2.0 times.
$50,000
Your firm recorded sales for the most recent year of $10 million generated from an asset base of $7 million, producing a $500,000 net income. Sales are projected to grow at 20%, causing spontaneous liabilities to increase by $200,000. In the most recent year, $200,000 was paid out as dividends, and the current payout ratio will continue in the upcoming years. What is your firm's AFN?
$840,000
Following is a partial personal taxable income schedule for a single filer: Over— But NotOver— Difference MarginalTax Rate $ 0 $ 9,525 $ 9,525 0.10 9,525 38,700 29,175 0.12 38,70082,500 43,800 0.22 What would be the maximum dollar amount of income taxes in the $38,700-$82,500 bracket paid by a single filer with taxable income of $82,500?
$9,636.00
Following is a partial personal taxable income schedule for a single filer: Over— But NotOver— Difference MarginalTax Rate $ 0 $ 9,525 $ 9,525 0.10 9,525 38,700 29,175 0.12 38,70082,500 43,800 0.22 What would be the dollar amount of income taxes paid by a single filer who has taxable income of $9,525? a.$1,143.00b.$952.50c.$4,453.00d.$3,501.00
$952.50
A firm has the following balance sheet information: total assets = $100,000; current assets = $30,000; inventories = $10,000; cash = $5,000; total liabilities = $30,000; current liabilities = $15,000; and notes payable = $2,000. What is the firm's net-working-capital-to-total-assets ratio?
0.15
Following is financial statement information for Rogex Corporation: cash = $242; accounts receivable = $850; inventory = $820; net fixed assets = $3,408; accounts payable = $700; short-term notes payable = $740; long-term liabilities = $1,100; common stock = $1,160; retained earnings = $1,620; net sales = $2,768; cost of goods sold = $1,210; depreciation = $360; interest expense = $160; taxes = $312; addition to retained earnings = $508; and dividends paid, $218. What is Rogex's sales-to-total-assets ratio?
0.52
Determine the asset intensity of a venture with the following financial information: net profit = $22,000; revenues = $132,000; and return on assets 30%.
0.6
Following is financial statement information for Rogex Corporation: cash = $242; accounts receivable = $850; inventory = $820; net fixed assets = $3,408; accounts payable = $700; short-term notes payable = $740; long-term liabilities = $1,100; common stock = $1,160; and retained earnings = $1,620. What is the debt-to-equity ratio for Rogex?
0.91
Determine a firm's financial policy multiplier based on the following information: sustainable growth rate = 20%; net profit margin = 10%; and asset turnover = 2.0 times.
1
When evaluating the prospects of a new venture, venture capital firms consider which of the following?
characteristics of the proposal, characteristics of the entrepreneur/team, and nature of the proposed industry
Which of the following is not considered to be a major emphasis during the rapid-growth stage in a successful venture's life cycle?
choose organizational form
Which of the following is not a type of mark?
design mark
The first three stages of a successful venture's life cycle occur in the following order:
development, startup, survival
An innovation that creates a new market or network that displaces an existing market or network is called a:
disruptive innovation
Venture capital holding period returns (all stages) for the 10-year period ending in 2018 were approximately:
13%
When estimating the terminal value of a venture using an equity valuation method, a perpetuity growth equation that uses the capitalization (cap) rate for discounting purposes is often applied. This cap rate is measured as the __________ rate __________ the perpetuity growth rate.
equity discount; minus
A copyright must be registered with the U.S. Copyright Office in order for a work to be protected.
false
A direct application of the earnings-per-share ratio to venture earnings is known as the direct comparison valuation method.
false
A limited liability company (LLC) is owned by shareholders with limited liability, and its earnings are taxed at the corporate rate
false
A post-money valuation differs from a pre-money valuation by the cost of financial capital.
false
A pseudo dividend involves excess cash that does not need to be invested in a venture's assets or operations, and may be invested elsewhere for a period of time.
false
A venture with a low score on the VOS Indicator™ should always be abandoned.
false
All of the scenarios in a multiple scenario analysis must have exit cash flows in the same year.
false
Asset intensity is the net after-tax profit divided by total assets.
false
Because investors and commercial lenders both seek returns on the funds given to startup firms, entrepreneurs can obtain financing as easily from either source.
false
Bond ratings reflect the inflation risk of a firm's bonds.
false
Capitalism is a market-oriented system that prohibits private ownership of physical and financial assets.
false
Certification marks are intellectual property rights in the form of inventions and information (e.g., formulas, processes, customer lists, etc.) not generally known to others.
false
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.
false
Convertible debt is debt that converts into preferred stock
false
Convertible debt is debt with the option to exchange it into nonconvertible or straight debt
false
Credit cards issued to startups have proven to be an alternative source of startup financing.
false
Design patents cover most inventions pertaining to new products, services, and processes.
false
Early-stage ventures tend to have large amounts of senior debt relative to more mature ventures.
false
Entrepreneurs provide the financing to individuals who think, reason, and act to convert ideas into commercial opportunities and create opportunities.
false
Factoring is the sale of payables to a third party at a discount from their face value.
false
For a venture with inventories, the quick ratio will always be greater than the current ratio.
false
For preferred noncumulative stock, all previously unpaid preferred dividends must be paid before any common stock dividend is paid.
false
Historically, large-company stocks have averaged higher long-term returns than small-company stocks.
false
How efficiently a venture controls its expenses and uses its assets and debt is evaluated with profitability and efficiency ratios.
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
In staged financing, the expected effect of future dilution is borne by both founders and the investors currently seeking to invest.
false
Increases in accounts payable and notes payable are examples of spontaneously generated funds.
false
Indirect public offerings have recently become a serious challenge to traditional venture capital firms.
false
Inflation premium is the rising prices not offset by increasing quality of goods being purchased.
false
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 startups.
false
Limited liability in the corporate business structure means creditors can seize only some of the corporation's assets.
false
Following is financial statement information for Rogex Corporation: cash = $242; accounts receivable = $850; inventory = $820; net fixed assets = $3,408; accounts payable = $700; short-term notes payable = $740; long-term liabilities = $1,100; common stock = $1,160; retained earnings = $1,620; net sales = $2,768; cost of goods sold = $1,210; depreciation = $360; interest expense = $160; taxes = $312; addition to retained earnings = $508; and dividends paid = $218.What is Rogex's return on total assets?
13.6%
Long-term financial planning begins with a forecast of annual working capital needs.
false
Patent trolls are firms authorized by the U.S. Congress to help reduce the number of patent-related lawsuits.
false
Patents are intellectual property rights granted for inventions that are useful, novel, and obvious.
false
Rule 503 dictates that for all Regulation D exemptions, a Form D should be filed within how many days after the first sale of securities?
15 days
Private financial markets are a place where standardized contracts or securities are traded on organized securities exchanges with restrictions on how they can be transferred.
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
Rule 503 of Regulation D states that a Form D should be filed with the SEC within six months after the first sale of securities.
false
Sales forecasting accuracy is usually highest during a venture's startup stage in its life cycle.
false
Securities crowdfunding occurs when a large number of investors try to buy stocks at the same time
false
Subordinated debt is secured by a venture's assets, while senior debt has an inferior claim to a venture's assets.
false
Surplus cash is the amount of cash required to pay scheduled dividends for the next quarter.
false
The Black and Scholes model requires the inflation rate as an input.
false
The SBA's venture capital credit program works through Community Development Financial Institutions (CDFIs).
false
The accounting emphasis on accrued revenue and expenses and depreciation is the same emphasis as that of finance managers.
false
The excess average return of long-term government bonds over common stock is called the market risk premium.
false
The first major government foray into venture investing came with the formation of the Small Business Administration (SBA) in 1947.
false
The highest federal marginal income tax rate for personal taxable income is 40 percent.
false
The internal rate of return is the simple (noncompounded) interest rate that equates the present value of the cash inflows received with the initial investment.
false
The me-first economy reflects the willingness of individuals to share their assets with others to provide a new way of distributing goods and services
false
In a wildly successful first year in business that started and ended with no required cash, your firm has operating income of $989,000, net income of $637,000, current assets of $900,000, and current liabilities of $659,000. Net capital expenditures were $690,000, and depreciation was $460,000. The firm has never financed itself with debt. What is your equity valuation cash flow?
166,000
The owner-debtholder conflict is the divergence of the owners' and lenders' self-interests as the firm gets close to going "public."
false
The percent of sales forecasting method must project all cost and balance sheet items at the same growth rate as sales.
false
Suppose the real risk-free rate of interest is 4%, the maturity risk premium is 2%, the inflation premium is 6%, the default risk on similar debt is 3%, and the liquidity premium is 2%. What is the nominal interest rate on this venture's debt capital?
17%
The prime rate is the interest rate charged by banks to their highest default-risk business customers.
false
The professional venture investing cycle begins with the obtaining of commitments for a series of capital calls.
false
The beginning of professional venture capitalists is considered to have occurred:
1946
Harry Dent documented major generation waves in the United States during the twentieth century in
1993
The returns to venture bank lenders are generated solely from interest payments made by borrowers plus the return of the loan principal.
false
A venture's common equity was $50,000 at the end of last year. If the venture's common equity at the end of this year was $60,000, what was its sustainable sales growth rate?
20%
The sharing economy refers to the cross-referencing of innovations for record-keeping purposes.
false
The terminal value is the value of the venture at the beginning of the explicit forecast period.
false
The unadjusted Black and Scholes model is a model for determining the value of a warrant to buy a new share
false
Determine a firm's return on assets percentage based on the following information: sustainable growth rate = 20%; total assets = $500,000; beginning-of-year common equity = $200,000; and dividend payout percentage = 60%.
20%
The value of the venture's equity is equal to the value the financing contributed in the first venture capital round.
false
The "dot.com" or Internet bubble burst in:
2000
Based on 2018 tax schedules, the first dollar of corporate income is taxed at which of the following tax rates?
21%
Based on 2018 tax schedules, the highest tax rate on corporate taxable income is
21%
Venture capital holding period returns (all stages) for the 20-year period ending in 2018 were approximately:
21%
Calculate the after-tax WACC based on the following information: nominal interest rate on debt = 16%; cost of common equity = 30%; equity to value = 60%; debt to value = 40%; and tax rate = 25%.
22.8%
A venture's common equity account increased by $100,000 the past year and ended the year at $500,000. What was its sustainable sales growth rate?
25%
Determine the return on assets (ROA) for a venture with the following financial information: revenues = $500,000; net profit = $70,000; and asset turnover = 2.0 times.
28%
The wider the capitalization (cap) rate (i.e., the discount rate minus the growth rate in the terminal period), the higher the terminal value.
false
Variable expenses are costs that are expected to remain constant over a range of revenues for a specific time period.
false
Venture capital holding period returns (multistages) for the 20-year period ending in 2018 were more than three times the returns on the Dow Jones Industrial Average Index.
false
The process involving minimizing the need for financial capital and finding unique sources for financing a new venture is referred to as:
financial bootstrapping
Venture investors generally use which of the following target rate ranges to discount the projected cash flows of ventures in the startup stage of their life cycles:
30%-50%
Commercial banks, credit unions, and/or financial services firms are lenders in which of the following SBA credit programs?
7(a) loan
The cost of equity for a firm is 20%. If the real interest rate is 5%, the inflation premium is 3%, and the market risk premium is 2%, what is the investment risk premium for the firm?
8%
Following is financial statement information for Rogex Corporation: net sales = $2,768; cost of goods sold = $1,210; depreciation = $360; interest expense = $160; taxes = $312; addition to retained earnings = $508; and dividends paid = $218. The interest coverage ratio for Rogex is:
9.7 times
The first two requirements of a sound business model are:
generate profits and make revenues
Certification marks are typically used to:
indicate quality
Which of the following is a requirement of natural persons to be accredited investors under Rule 501 of Regulation D?
individual (single) annual income greater than $200,000
typical business plan includes all of the following sections except: a.risk and opportunities b.initial public offering information c.financial plans and projections d.management team
initial public offering information
Which of the following advise and assist corporations on the type, timing, and costs of issuing new debt and equity securities?
investment banking firms
The difference between average annual returns on common stocks and returns on long-term government bonds is called a
market risk premium
The difference between average annual returns on common stocks and returns on long-term government bonds is called a:
market risk premium
Developing new and delivering high-quality products or services that command higher prices and margins best describes strong:
marketing practices
The added interest rate charged due to the inherent increased risk in long-term debt is called a(n):
maturity premium
The return on assets (ROA) model measures:
net profit margin multiplied by the asset turnover
Free cash flow, which can be paid back to investors, occurs when cash generated from operations exceeds all of the following except: a.taxes b.borrowing costs c.investment in assets d.noncash depreciation
noncash depreciation
N(h) in the Black and Scholes model involves the use of the
normal distribution cumulative density function
Which of the following can be structured to assure shareholders that they will share in the payment of any dividends to common stockholders?
paid in kind preferred stock
Which of the following are intellectual property rights granted for inventions that are useful, novel, and nonobvious?
patents
Which of the following forms of protecting intellectual property currently has a protection limit of 20 years?
patents
Which stage in the venture life cycle is characterized by creating and building value, obtaining additional financing, and examining opportunities?
rapid-growth stage
Obtaining bank loans, issuing bonds, and issuing stock is characteristic of which type of financing during a venture's life cycle?
seasoned financing
Founder and venture investor shares that are sold to the public after the initial public offering to the public is called a:
secondary stock offering
A market-oriented economic system provides an environment that fosters the formation, development, and transformation of ideas into useful products and services.
True
A sound business model should provide a plan to generate revenues, make profits, and produce free cash flows.
True
A well-designed entrepreneurial venture begins with an idea that survives an analysis of its feasibility and results in a business plan.
True
Around two-thirds of new employers survive at least two years, and only about one-half survive for at least five years.
True
Best practices of high-growth, high-performance firms applied in the financial practices area include "preparing detailed monthly financial plans for the next year and annual financial plans for the next five years."
True
Best practices of high-growth, high-performance firms applied in the marketing practices area include "developing new products or services that are considered to be the best."
True
Business opportunities exist in real time, and most ideas have a relatively narrow window of opportunity to become successful business ventures.
True
Disruptive innovation is an innovation that creates a new market or network that disrupts and displaces an existing market or network.
True
During the development and startup stages of a venture's life cycle, important financial ratios and measures include cash burn rates and liquidity ratios.
True
Entrepreneurship is the process of changing ideas into commercial opportunities and creating value.
True
Fads are not predictable, have short lives, and do not involve macro changes.
True
For ventures that get to market first or create intellectual property rights, it is common to price new products or services at high markups or profit margins.
True
Free cash flows are adjusted for risk and the time value of money when used to calculate the value of a venture.
True
Investor liability in a limited liability company (LLC) is limited to the owners' investments.
True
Net cash build occurs when the sum of cash flows from operations and investing is positive.
True
Once conceptualized, a new idea should be examined for its business feasibility.
True
One must be cautious in stating whether a specific ratio is good or bad because "goodness" is frequently a matter of perspective or strategy.
True
One principle of entrepreneurial finance is "risk and expected reward go hand in hand."
True
Regulation A, while technically considered an exemption from registration, is a public offering rather than a private placement.
True
Rule 502 of Regulation D focuses, in part, on resale restrictions imposed on privately placed securities.
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 JOBS Act of 2012 created several important changes in Rule 506 of Regulation D and the expanded version of a Regulation A-like offering.
True
The Securities Exchange Act of 1934 provides for the regulation of securities exchanges and over-the-counter markets.
True
The VOS Indicator™ is useful in assessing the commercial potential of a venture, but should not be used as the sole tool to determine a venture's fate.
True
The VOS Indicator™ provides both qualitative and quantitative information about a venture's commercial potential.
True
The entrepreneurial process involves: developing opportunities, gathering resources, and managing and building operations, all with the goal of creating value.
True
The first component of a sound business model is the need to generate revenues.
True
The gig economy involves individuals working as independent contractors and accepting short-term jobs or assignments, rather than being full-time employees.
True
The increase in accounts payables and accruals that occur with a sales increase is called:
spontaneously generated funds
When screening possible investments, a venture capital firm might issue a SLOR, which stands for:
standard letter of rejection
During which of the following venture life cycle stages is the entrepreneur concerned with choosing the initial organizational form?
startup stage
In breakeven analysis, solving for when EBITDA is equal to zero gives breakeven in terms of:
survival revenues
Which stage of a venture's life cycle is best characterized by the period when revenues start to grow and when cash flows from operations begin covering cash outflows?
survival stage
The last three stages of a successful venture's life cycle occur in the following order:
survival, rapid-growth, early-maturity
Maximizing the value of the venture for its owners is the common financial goal of which of the following?
the entrepreneur and the venture equity investors
For early-stage ventures, which of the following is a strong reason for having an equity component in employee compensation?
the expected deferred and tax-preferred compensation allows the venture to pay a lower current compensation to employees
In a syndicate of venture investors, the investor who is responsible for governing the process of due diligence is:
the lead investor
When consistent assumptions are used, estimated equity values under the enterprise and equity methods should be:
the same
Asset intensity is:
total assets divided by total revenues
Which of the following are intellectual property rights in the form of inventions and information, such as formulas, processes, and customer lists, that are not generally known to others and that convey economic advantages to the holders?
trade secrets
A business method patent is one kind of patent.
true
A customer-driven or "bottom-up" approach to forecasting sales is used primarily to forecast industry sales growth rates.
true
A private placement, or a transaction by an issuer not involving any public offering, is exempt from registering securities.
true
A seed accelerator is an organization that usually provides both an equity investment and a mentoring and educational fixed-term, cohort program to help startup companies succeed.
true
A venture's cash, marketable securities, and receivables comprise its liquid assets.
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
Almost without exception, professional venture investors demand that some equity or deferred equity compensation be structured into any valuation.
true
Among startups, 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 of operating results.
true
An option granting the right to sell a stock at $10 when that stock currently has a market price of $8 is "in the money."
true
An option is a right to buy or sell additional shares of stock
true
Because of loan restrictions, obtaining funding from commercial lenders is prohibitive for entrepreneurs.
true
Best practices of high-growth, high-performance firms applied in the management practices area include "assembling a management team that is balanced in both functional area coverage and industry/market knowledge."
true
Business angels are wealthy individuals who invest in early-stage ventures in exchange for the excitement of launching the business, as well as a share of the firm's financial gains.
true
Default risk is the risk that a borrower will not pay the interest and/or the principal on a loan.
true
Despite the high risk and costs of using a facilitator or up-front fee solicitor to obtain financing, many startups nevertheless seek them as a source of funds due to the length of time it takes to raise new funds.
true
During the development and startup stages of a venture's life cycle, important users of financial ratios and measures include the entrepreneur, business angels, and venture capitalists (VCs).
true
EVA equals net operating profit after taxes minus after-tax dollar cost of financial capital used.
true
Early-stage ventures include firms in their development, startup, or survival life cycle stages.
true
Factoring is the selling of receivables to a third party at a discount from their face value.
true
Failure to account for any additional rounds of financing and its accompanying dilution in order to meet projected earnings will result in the investor not receiving an adequate number of shares to ensure the required percent ownership at the time of exit.
true
Financial capital needed (FCN) is the amount of funds needed to acquire assets necessary to support a firm's sales growth.
true
First-round financing during a venture's survival stage comes primarily from venture capitalists and investment banks.
true
For the CDC/504 loan, the SBA approves and guarantees the development company's portion of the debt but does not guarantee the debt of the participating commercial bank.
true
If a firm has positive net income, a decrease in a venture's asset intensity ratio will increase its ROE.
true
In Chapter 1, five megatrend categories are identified as sources of entrepreneurial opportunities.
true
The right to buy a specified asset at a specified price on a specified date is called a(n):
European-style call option
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.
true
Late- and expansion-stage U.S. venture capital for most holding periods have lower returns than early-stage U.S. venture capital.
true
Operating income, or earnings before interest and taxes, reflects the firm's profit after all operating expenses, excluding financing costs, have been deducted from net sales.
true
A study of the U.S. Census Bureau's Characteristics of Business Owners database suggests that about two-thirds of closed businesses were successful at closure.
False
A successful, sound business model does not have to ultimately produce free cash flows.
False
A venture opportunity screening is the same thing as preparing a business plan.
False
Asset intensity and asset turnover are calculated as revenues divided by total assets.
False
Cross-sectional analysis is used to examine a venture's performance over time.
False
EBDAT is "earnings before depreciation, assets, and taxes."
False
Regulation A offerings are limited to $10 million and do not have limitations on the number or sophistication of offerees.
False
The "dot.com" or Internet bubble burst in 2008.
False
The process of moving from entrepreneurial opportunities to new businesses, products, or services begins with ideas, then moves to the preparation of a business plan, and finally ends with a feasibility study.
False
The types of financing used during the survival life cycle stage is second-round, mezzanine, and liquidity-stage financing.
False
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
SLOR stands for "standard letter of rejection."
true
Salary-replacement firms provide their owners with income levels comparable to what they could have earned working for much larger firms.
true
Surplus cash is the cash remaining after required cash, all operating expenses, and reinvestments are made.
true
The 7(a) loan traditionally has been the SBA's primary loan program.
true
The Black and Scholes model requires the stock price as an input.
true
The DDA and VCSC methods give the same valuation.
true
The Leahy-Smith America Invents Act of 2011 was passed, in part, to alleviate the backlog of patent-related lawsuits.
true
The articles of incorporation are the basic legal declarations contained in the corporate charter.
true
The cash burn rate is the cash burn for a fixed period of time, typically a month.
true
The enterprise value includes the value of the debt, equity, and warrant pieces of a venture.
true
The income received by a proprietorship is taxed at personal tax rates.
true
The nonfinancial options available to managers as the venture progresses through its life cycle are known as real options.
true
The production and inventories schedules are two internal operating schedules needed to prepare a venture's financial statements.
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 reversion value of a venture is the present value of the venture's terminal value.
true
The type of financing available at a venture's survival stage in its life cycle is first-round financing
true
The valuation method calculating pseudo dividends involves zero explicitly forecasted dividends and an adjustment to working capital to strip surplus cash.
true
The value of a warrant can be directly derived from the value of a call option.
true
The weighted average of a set of possible outcomes or scenarios is known as the expected value.
true
There are four types of marks that can be used to try to protect intellectual property.
true
Two typical issues addressed in a term sheet are valuation and the size and staging of financing.
true
Unlike traditional commercial banks, venture banks typically provide debt to startups that have already received equity financing from professional venture capital firms.
true
Venture character and reputation can be assets or liabilities.
true
Venture investors' returns depend on the venture's ability to generate cash flows or to find an acquirer for the venture.
true
When projecting maximum dividends, changes in surplus cash will be paid out as dividends.
true
a warrant is a type of call option
true
About what percent of all new employers in the United States survive for at least two years?
two-thirds
Free cash flow to equity of an entrepreneurial firm includes cash flows to:
venture investors and the entrepreneur
The return to venture investors directly depends on the:
venture's ability to generate cash flows
Which of the following rules under Regulation D has a $5 million financing limit?
Rule 504
Which of the following business organizational forms provides the owners with limited investor liability and passes its income before taxes through to the owners?
S corporations and limited liability companies (LLCs)