Test Bank for Entrepreneurial Finance, 7th Edition J. Chris Leach Ronald W. Melicher

Test Bank for Entrepreneurial Finance, 7th Edition J. Chris Leach/Ronald W. Melicher

Test Bank for Entrepreneurial Finance, 7th Edition J. Chris Leach/Ronald W. Melicher

Name:

Class:

Date:

Chap 01_7e_Leach Indicate whether the statement is true or false.

1. In the early 1970s, Harry Dent recognized that the U.S. economy centered on the creation and distribution of information. a. True b. False 2. Nearly half of business failures are due to economic factors such as inadequate sales, insufficient profits, and industry weakness. a. True b. False 3. 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. a. True b. False 4. One principle of entrepreneurial finance is “risk and expected reward go hand in hand." a. True b. False 5. Entrepreneurs provide the financing to individuals who think, reason, and act to convert ideas into commercial opportunities and create opportunities. a. True b. False 6. Financial distress occurs when cash flow is insufficient to meet current debt obligations. a. True b. False 7. 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. a. True b. False 8. The sharing economy refers to the cross-referencing of innovations for record-keeping purposes. a. True b. False 9. Mezzanine financing is temporary financing needed to keep the venture afloat until the next offering. a. True b. False 10. Mark Twain once said, “I was always able to see an opportunity before it became one.” a. True b. False Test Bank for Entrepreneurial Finance, 7th Edition J. Chris Leach/Ronald W. Melicher

Name:

Class:

Date:

Chap 01_7e_Leach 11. Entrepreneurial finance is the application and adaptation of financial tools and techniques to the planning, funding, operations, and valuation of an entrepreneurial venture. a. True b. False 12. Although the risks associated with starting a new entrepreneurial venture are large, there is always room for one more success. a. True b. False 13. The millennials generation consists of people born in the United States after 1996. a. True b. False 14. While cash is the language of business, accounting is the currency. a. True b. False 15. Financial causes, such as excessive debt and insufficient financial capital, are not major contributors to business failures. a. True b. False 16. The housing asset bubble burst in 2006. a. True b. False 17. Nine principles of entrepreneurial finance are identified and explored in this textbook. a. True b. False 18. In Chapter 1, five megatrend categories are identified as sources of entrepreneurial opportunities. a. True b. False 19. Technological change may be the most important source of entrepreneurial opportunities. a. True b. False 20. Free cash is all of the cash available to cover operating expenses. a. True b. False

Test Bank for Entrepreneurial Finance, 7th Edition J. Chris Leach/Ronald W. Melicher

Name:

Class:

Date:

Chap 01_7e_Leach 21. Disruptive innovation is an innovation that creates a new market or network that disrupts and displaces an existing market or network. a. True b. False 22. The second stage in a successful venture's life cycle is the startup stage. a. True b. False 23. The owner–debtholder conflict is the divergence of the owners' and lenders' self-interests as the firm gets close to going “public.” a. True b. False 24. Venture character and reputation can be assets or liabilities. a. True b. False 25. The entrepreneurial process involves: developing opportunities, gathering resources, and managing and building operations, all with the goal of creating value. a. True b. False 26. An initial public offering provides a venture with a source of bridge financing. a. True b. False 27. Free cash flows are adjusted for risk and the time value of money when used to calculate the value of a venture. a. True b. False 28. Perhaps the most important invention in shuttling us from an industrial society to an information society was the computer chip. a. True b. False 29. Reasonable estimates place nonemployer (e.g., single person or small family) businesses started each year at less than 100,000. a. True b. False 30. Business angels are wealthy individuals, operating as informal or private investors, who provide venture financing for small businesses. a. True b. False Test Bank for Entrepreneurial Finance, 7th Edition J. Chris Leach/Ronald W. Melicher

Name:

Class:

Date:

Chap 01_7e_Leach 31. The financial objective of increasing value is inconsistent with developing positive character and reputation. a. True b. False 32. Free cash exists when cash exceeds that which is needed to operate, pay creditors, and invest in assets. a. True b. False 33. The rapid-growth stage directly follows the startup stage. a. True b. False 34. Democratic capitalism exists where a country or state organized as a democracy adopts a capitalistic economic system. a. True b. False 35. An entrepreneur is an individual who thinks, reasons, and acts to convert ideas into commercial opportunities and to create value. a. True b. False 36. The time value of money is an important component of the rent one pays for using someone else's financial capital. a. True b. False 37. The “dot.com” or Internet bubble burst in 2008. a. True b. False 38. Owner–manager (agency) conflicts are differences between a manager's self-interest and that of the owners who hired the manager. a. True b. False 39. In the broadest context, societal change reflects the evolution of humanity over time. a. True b. False 40. Fads are large societal, demographic, or technological trends or changes that are slow in forming but, once in place, continue for many years. a. True b. False

Test Bank for Entrepreneurial Finance, 7th Edition J. Chris Leach/Ronald W. Melicher

Name:

Class:

Date:

Chap 01_7e_Leach 41. Fads are not predictable, have short lives, and do not involve macro changes. a. True b. False 42. Free cash flow is the net income forecasted to be available to the venture's owners over time. a. True b. False 43. A market-oriented economic system provides an environment that fosters the formation, development, and transformation of ideas into useful products and services. a. True b. False 44. Capitalism is a market-oriented system that prohibits private ownership of physical and financial assets. a. True b. False 45. Entrepreneurship is the process of changing ideas into commercial opportunities and creating value. a. True b. False 46. The gig economy involves individuals working as independent contractors and accepting short-term jobs or assignments, rather than being full-time employees. a. True b. False 47. Three of the major megatrends discussed in Chapter 1 include: societal trends or changes, demographic trends or changes, and technological trends or changes. a. True b. False 48. A venture, if organized as a corporation, may desire to provide venture investor liquidity by establishing a public market for its equity. a. True b. False 49. “Crises and "'bubbles'” and “emerging economies and global change” are considered to be sources of entrepreneurial opportunities. a. True b. False 50. It is estimated that more than one million new businesses are started in the United States each year. a. True b. False

Name:

Class:

Date:

Chap 01_7e_Leach 51. Early-stage ventures include firms in their development, startup, or survival life cycle stages. a. True b. False 52. A study of the U.S. Census Bureau's Characteristics of Business Owners database suggests that about twothirds of closed businesses were successful at closure. a. True b. False 53. Around two-thirds of new employers survive at least two years, and only about one-half survive for at least five years. a. True b. False 54. The boomers generation applies to people born in the United States during the 1946–1964 time period. a. True b. False 55. A venture's financial objective is to survive. a. True b. False 56. Environmental commerce, or e-commerce, involves the use of electronic means to conduct business online. a. True b. False 57. Entrepreneurial opportunities can occur only when there are societal changes in the world. a. True b. False Indicate the answer choice that best completes the statement or answers the question.

58. The type of financing that occurs during the survival stage of a venture's life cycle is typically referred to as: a. seed financing b. startup financing c. first-round financing d. mezzanine financing

Name:

Class:

Date:

Chap 01_7e_Leach Supplementary Questions (may require basic knowledge of probability and/or prior introductory accounting and business concepts) 59. 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? a. $4,500 b. $6,000 c. $5,250 d. $5,750 60. Which of the following are sources of entrepreneurial opportunities? a. societal, demographic, and technological trends b. crises and "bubbles" c. emerging economies and global changes d. societal, demographic, and technological trends; crises and "bubbles"; and emerging e. economies and global changes 61. About what percent of all new employers in the United States survive for at least two years? a. one-fifth b. one-third c. one-half d. two-thirds 62. Which of the following generation classifications is associated with births in the 1965–1980 time period? a. boomers b. Generation X c. millennials d. Generation Z 63. During a venture's rapid-growth stage, funds for plant expansion, marketing expenditures, working capital, and product or service improvements is obtained through: a. seed financing b. second-round financing c. mezzanine financing d. liquidity-stage financing 64. The time value of money concept is associated with which of the following principles of entrepreneurial finance? a. real, human, and financial capital must be rented from owners b. risk and expected reward go hand in hand c. while accounting is the language of business, cash is the currency d. it is dangerous to assume that people act against their own self-interests

Name:

Class:

Date:

Chap 01_7e_Leach 65. Which of the following is not a life cycle stage of a successful venture? a. development stage b. startup stage c. survival stage d. declining stage 66. Which stage in the venture life cycle is characterized by creating and building value, obtaining additional financing, and examining opportunities? a. survival stage b. startup stage c. rapid-growth stage d. early-maturity stage 67. Which of the following statements is correct? a. the development stage occurs between the startup and survival stages of a venture's life cycle b. the early-maturity stage is the final stage of a new venture's life cycle c. firms typically begin to cover all expenses with internally generated funds during the survival stage d. during the startup stage, revenues grow much more rapidly than cash expenditures 68. What is the number of principles of entrepreneurial finance that are emphasized in this textbook? a. three b. five c. seven d. nine 69. 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? a. survival stage b. startup stage c. rapid-growth stage d. early-maturity stage Supplementary Questions (may require basic knowledge of probability and/or prior introductory accounting and business concepts) 70. A project requires an initial investment of $1,000,000. In one year, there is a 40% chance of a $950,000 return; a 50% chance of a $1,200,000 return; and a 10% chance of a $2,000,000 return. What is the project's expected return one year from now? a. 12.8% b. 15.5% c. 18.0% d. 38.3%

Name:

Class:

Date:

Chap 01_7e_Leach 71. An innovation that creates a new market or network that displaces an existing market or network is called a: a. crisis or "bubble" b. disruptive innovation c. fad d. negative innovation 72. About one-half of all new employers in the United States survive for at least how many years after being started? a. two years b. three years c. five years d. eight years 73. Which of the following is not considered to be a megatrend in this textbook? a. societal, demographic, and technological changes b. crises and "bubbles" c. fads d. emerging economies and global changes 74. Obtaining bank loans, issuing bonds, and issuing stock is characteristic of which type of financing during a venture's life cycle? a. seed financing b. second-round financing c. mezzanine financing d. seasoned financing 75. Which of the following possible conflicts of interest is usually minimized through the use of equity incentives? a. owner–manager conflict b. owner–employee conflict c. manager–employee conflict d. owner–debtholder conflict Supplementary Questions (may require basic knowledge of probability and/or prior introductory accounting and business concepts) 76. 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? a. $0 b. $2,000 c. $4,000 d. $8,000

Name:

Class:

Date:

Chap 01_7e_Leach 77. The stage that precedes the survival stage in a successful venture's life cycle is called the: a. rapid-growth stage b. early-maturity stage c. development stage d. startup stage 78. The “dot.com” or Internet bubble burst in: a. 1990 b. 2000 c. 2006 d. 2008 79. Fads: a. are not predictable b. have short lives c. do not involve macro changes d. are not predictable, have short lives, and do not involve macro changes Supplementary Questions (may require basic knowledge of probability and/or prior introductory accounting and business concepts) 80. 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: a. accept Project A and reject Project B b. accept Project B and reject Project A c. accept both projects d. reject both projects 81. Which of the following advise and assist corporations on the type, timing, and costs of issuing new debt and equity securities? a. brokerage firms b. venture law firms c. specialist firms d. investment banking firms 82. Successful entrepreneurs do not exhibit which of the following traits? a. recognize and seize commercial opportunities b. tend to be doggedly optimistic c. express conditional optimism d. are pessimistic about the future

Name:

Class:

Date:

Chap 01_7e_Leach 83. E-commerce refers to: a. environmental commerce b. electronic commerce c. economic commerce d. exploratory commerce 84. Which of the following is not a major source of startup financing for a venture's startup stage? a. the entrepreneur's assets b. business operations c. family and friends d. venture capitalists 85. Maximizing the value of the venture for its owners is the common financial goal of which of the following? a. the entrepreneur b. the debtholders c. the venture equity investors d. the entrepreneur and the venture equity investors 86. The last three stages of a successful venture's life cycle occur in the following order: a. startup, development, rapid-growth b. startup, survival, rapid-growth c. survival, rapid-growth, early-maturity d. development, startup, survival Supplementary Questions (may require basic knowledge of probability and/or prior introductory accounting and business concepts) 87. 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 is the breakeven point in sales units? a. 5,000 b. 7,500 c. 10,000 d. 12,500 88. The goal of the entrepreneurial process is to: a. develop opportunities b. gather resources c. manage and build operations d. create value

Name:

Class:

Date:

Chap 01_7e_Leach 89. Which of the following is considered to be an agency conflict? a. owner–manager conflict b. stockholder–manager conflict c. stockholder–debtholder conflict d. owner–debtholder conflict 90. Which of the following does not describe activity during the startup stage of a venture's life cycle? a. the venture's organization b. the venture's development c. operating cash flows are generated d. initial revenue model is put in place Supplementary Questions (may require basic knowledge of probability and/or prior introductory accounting and business concepts) 91. Lindsey and Tobias have the opportunity to invest in a project that requires an investment of $3,000. In one year, there is a 35% chance of a $2,900 return; a 40% chance of a $3,400 return; and a 25% chance of a $4,500 return. Lindsey requires a 15% return on the project after the first year, but Tobias requires a return of only 12%. Using the expected rate of return: a. Lindsey and Tobias should both invest in the project b. Only Tobias should invest in the project c. Only Lindsey should invest in the project d. Lindsey and Tobias should both reject the project 92. Where individuals accept short-term job assignments instead of having full-time employment is called the: a. sharing economy b. gig economy c. make-work economy d. declining economy 93. The type of financing that occurs during the development stage of a venture's life cycle is typically referred to as: a. seed financing b. startup financing c. second-round financing d. mezzanine financing 94. Founder and venture investor shares that are sold to the public after the initial public offering to the public is called a: a. secondary market transaction b. secondary stock offering c. venture offering d. bridge loan

Name:

Class:

Date:

Chap 01_7e_Leach 95. Which of the following would not be considered a type of venture financing? a. seed financing b. startup financing c. mezzanine financing d. seasoned financing 96. The sharing economy involves: a. the traditional distribution model b. peer-to-peer arrangements c. hierarchical arrangements involving a third intermediary party d. peer-to-peer and hierarchical arrangements 97. During the early-maturity stage of a venture's life cycle, the primary source of funds is in the form of: a. mezzanine financing b. seasoned financing c. seed financing d. first-round financing 98. The first three stages of a successful venture's life cycle occur in the following order: a. development, startup, survival b. development, rapid-growth, survival c. startup, development, rapid-growth d. survival, rapid-growth, early-maturity 99. Mezzanine financing is associated with which of the following life cycle stages? a. development stage b. startup stage c. survival stage d. rapid-growth stage 100. The entrepreneurial process involves: a. developing opportunities b. gathering resources c. managing and building operations d. developing opportunities, gathering resources, and managing and building operations 101. Which of the following countries engage in democratic capitalism? a. United States b. United States, France, and Germany c. France and Germany d. United States and France

Name:

Class:

Date:

Chap 01_7e_Leach 102. Entrepreneurial finance involves: a. planning b. planning and funding c. planning, funding, and operations d. planning, funding, operations, and valuation 103. The last stage in a successful venture's life cycle is called the: a. rapid-growth stage b. early-maturity stage c. development stage d. survival stage 104. The sharing economy is a(n): a. developing societal megatrend b. fad c. exchange of food at local restaurants d. demographic bubble 105. One study of successful entrepreneurs indicated that a majority felt that the most important factor in the longterm success of their ventures was: a. being greedy b. having high ethical standards c. working hard d. taking frequent vacations 106. Which of the following individuals once said, “I was seldom able to see an opportunity, until it ceased to be one.” a. Mark Twain b. Bill Gates c. Steve Jobs d. Jeff Bezos 107. Financial markets where customized contracts or securities are negotiated, created, and held with restrictions on how they can be transferred are called: a. private financial markets b. public financial markets c. domestic financial markets d. international financial markets 108. Which of the following is not a source of entrepreneurial opportunities referred to in this textbook? a. societal changes b. political changes c. demographic changes d. technological changes

Name:

Class:

Date:

Chap 01_7e_Leach 109. Which of the following possible conflicts of interest increases in divergence at venture gets close to bankruptcy? a. owner–manager conflict b. owner–employee conflict c. manager–employee conflict d. owner–debtholder conflict Supplementary Questions (may require basic knowledge of probability and/or prior introductory accounting and business concepts) 110. You have the opportunity of making a $5,000 investment. The outcomes one year from now will be either $5,000 or $6,000, with an equal chance of either outcome occurring. What is the expected rate of return? a. 10% b. 15% c. 20% d. 25% 111. Harry Dent documented major generation waves in the United States during the twentieth century in: a. 1972 b. 1982 c. 1993 d. 2003

Name:

Chap 01_7e_Leach Answer Key 1. False 2. True 3. False 4. True 5. False 6. False 7. False 8. False 9. False 10. False 11. True 12. True 13. False 14. False 15. False 16. True 17. False 18. True 19. True 20. False 21. True 22. True 23. False 24. True 25. True 26. False

Class:

Date:

Name:

Chap 01_7e_Leach 27. True 28. True 29. False 30. True 31. False 32. True 33. False 34. True 35. True 36. True 37. False 38. True 39. True 40. False 41. True 42. False 43. True 44. False 45. True 46. True 47. True 48. True 49. True 50. True 51. True 52. False 53. True 54. True

Class:

Date:

Name:

Chap 01_7e_Leach 55. False 56. False 57. False 58. c 59. c 60. d 61. d 62. b 63. c 64. a 65. d 66. c 67. b 68. c 69. a 70. c 71. b 72. c 73. c 74. d 75. a 76. c 77. d 78. b 79. d 80. b 81. d 82. d

Class:

Date:

Name:

Chap 01_7e_Leach 83. b 84. b 85. d 86. c 87. c 88. d 89. a 90. c 91. a 92. b 93. a 94. b 95. d 96. d 97. b 98. a 99. d 100. d 101. b 102. d 103. b 104. a 105. b 106. a 107. a 108. b 109. d 110. a

Class:

Date:

Name:

Chap 01_7e_Leach 111. c

Class:

Date:

Name:

Class:

Date:

Chap_02_7e_Leach Indicate whether the statement is true or false.

1. The nonfinancial options available to managers as the venture progresses through its life cycle are known as real options. a. True b. False 2. A high asset intensity implies a large investment in fixed assets and/or net working capital is needed to support revenue growth. a. True b. False 3. 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. a. True b. False 4. Mark Twain said, "Like I tell anybody, if you fail to plan, you're planning to fail." a. True b. False 5. A venture opportunity screening guide, called the VOS Indicator™, is used to screen venture opportunities for potential attractiveness. a. True b. False 6. A venture with a low score on the VOS Indicator™ should always be abandoned. a. True b. False 7. A SWOT analysis should consider as potential strengths or opportunities the extent of existing competition and the likelihood of substitute products or services. a. True b. False 8. 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). a. True b. False 9. It has been estimated that venture capitalists invest in about 10 to 30 percent of business plans presented to them. a. True b. False

Copyright Cengage Learning. Powered by Cognero.

Page 1

Name:

Class:

Date:

Chap_02_7e_Leach 10. Only a small number of new business ideas become viable business opportunities with funded business plans. a. True b. False 11. In a typical business plan, the section covering the management team does not need to disclose the management team's expertise and experience. a. True b. False 12. 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." a. True b. False 13. Best practices of high-growth, high-performance firms applied in the marketing practices area include "preparing detailed monthly financial plans for the next year and annual financial plans for the next five years." a. True b. False 14. Venture opportunity screening involves assessment of an idea's commercial potential to produce revenue growth, financial performance, and value. a. True b. False 15. A well-designed entrepreneurial venture begins with an idea that survives an analysis of its feasibility and results in a business plan. a. True b. False 16. 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." a. True b. False 17. The VOS Indicator™ provides both qualitative and quantitative information about a venture's commercial potential. a. True b. False 18. A sound business model should provide a plan to generate revenues, make profits, and produce free cash flows. a. True b. False

Copyright Cengage Learning. Powered by Cognero.

Page 2

Name:

Class:

Date:

Chap_02_7e_Leach 19. A successful, sound business model does not have to ultimately produce free cash flows. a. True b. False 20. 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. a. True b. False 21. The first component of a sound business model is the need to generate revenues. a. True b. False 22. Entrepreneurial ventures emphasize survival and providing an acceptable living for their owners, with growth being a secondary goal. a. True b. False 23. 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. a. True b. False 24. Business opportunities exist in real time, and most ideas have a relatively narrow window of opportunity to become successful business ventures. a. True b. False 25. Asset intensity is the net after-tax profit divided by total assets. a. True b. False 26. Free cash flow to equity is the cash flow from producing and selling a product or providing a service. a. True b. False 27. 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. a. True b. False 28. A venture opportunity screening is the same thing as preparing a business plan. a. True b. False

Name:

Class:

Date:

Chap_02_7e_Leach 29. Salary-replacement firms provide their owners with income levels comparable to what they could have earned working for much larger firms. a. True b. False 30. Once conceptualized, a new idea should be examined for its business feasibility. a. True b. False 31. A viable venture opportunity creates or meets a customer need, provides an initial competitive advantage, is timely in terms of time-to-market, and offers the expectation of added value to investors. a. True b. False 32. A SWOT analysis should consider as potential strengths or weaknesses whether there are unfilled customer needs and the extent to which intellectual property rights exist. a. True b. False 33. One way to describe asset intensity is the dollar investment in assets needed to generate a dollar in sales. a. True b. False 34. 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." a. True b. False 35. Being first to market does not guarantee success. a. True b. False 36. Financial bootstrapping refers to the process of minimizing resources such as the need for financial capital and finding unique sources for financing a new venture. a. True b. False 37. Ideas that are said to be ahead of their time are too late to become viable business opportunities for the inventor or innovator. a. True b. False 38. A SWOT analysis focuses on strengths (S), worries (W), opportunities (O), and threats (T). a. True b. False

Name:

Class:

Date:

Chap_02_7e_Leach 39. Business changes resulting in higher net profit always increases ROA. a. True b. False 40. Entrepreneurial ventures are firms that allow owners to pursue specific lifestyles while being paid for doing what they like to do. a. True b. False 41. A sound business model is a plan to generate investor interest, make profits, and grow asset investments. a. True b. False 42. A SWOT analysis is an examination of the strengths, weaknesses, opportunities, and threats to determine the business opportunity viability of an idea. a. True b. False 43. An entrepreneur may start a number of different types of businesses, including salary-replacement firms, lifestyle firms, and entrepreneurial firms or ventures. a. True b. False 44. Asset intensity and asset turnover are calculated as revenues divided by total assets. a. True b. False Indicate the answer choice that best completes the statement or answers the question.

45. Venture capitalists invest in approximately what percent of business plans presented to them? a. 1%–3% b. 10%–13% c. 20%–23% d. 30%–33% 46. Which of the following is not one of the factor categories of the VOS Indicator™? a. industry/market considerations b. pricing/profitability considerations c. financial/harvest considerations d. location/profitability considerations

Name:

Class:

Date:

Chap_02_7e_Leach 47. A venture's value is determined by its: a. future free cash flows (to equity) b. revenues c. profits d. assets 48. Some venture investors like to draw analogies between baseball terms and venture performance. The baseball term used to reflect a total loss of an investment is: a. "home run" b. "single" c. "strikeout" d. "double" 49. An average score using the VOS Indicator™ would fall in the range: a. 0.00–0.99 b. 1.00–1.66 c. 1.67–2.33 d. 2.34–3.00 50. A venture's value to its owners is determined by the: a. size and timing of its future free cash flows (to equity) b. level of its past revenues c. prior losses and expenses d. all of these choices 51. The dollar profit left after all expenses, including financing costs and taxes, have been deducted from the firm's revenues is called: a. gross profit b. gross profit margin c. net profit d. net profit margin 52. Asset intensity is: a. total assets divided by total revenues b. total revenues divided by total assets c. calculated the same as asset turnover d. one-half of the asset turnover

Name:

Class:

Date:

Chap_02_7e_Leach 53. When conducting a SWOT analysis, which of the following areas would not be considered as a potential opportunity or threat? a. existing competition b. reputation value c. possibility of new technologies d. recent or potential regulatory changes 54. In a study of high-growth, high-performance firms by the Kauffman Center for Entrepreneurial Leadership of best practices, which of the following practices was not included? a. marketing practices b. financial practices c. management practices d. production/operations practices 55. Free cash flow to equity is the cash available to the entrepreneur and venture investors after all of the following except: a. net cash flows b. net increases in debt capital c. financing and tax cash flows d. investment in assets needed to sustain the venture's growth 56. A viable venture opportunity is characterized by all of the following except: a. creating or meeting a customer need b. having perceived attraction to prospective investors c. providing an initial competitive advantage d. being timely in terms of time-to-market 57. Revenues minus the cost of goods sold is called: a. gross profit b. gross profit margin c. net profit d. net profit margin 58. U.S. small businesses are predominately: a. salary-replacement or entrepreneurial firms b. lifestyle or entrepreneurial firms c. entrepreneurial ventures d. salary-replacement or lifestyle firms

Name:

Class:

Date:

Chap_02_7e_Leach 59. Determine the asset intensity of a venture with the following financial information: net profit = $22,000; revenues = $132,000; and return on assets 30%. a. 0.1 b. 0.6 c. 1.8 d. 2.0 60. 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. a. 10% b. 14% c. 28% d. 34% 61. The first two requirements of a sound business model are: a. generate revenues and make profits b. make profits and produce free cash flows c. produce free cash flows for creditors and owners of the venture d. generate revenues and produce free cash flows 62. When moving from entrepreneurial opportunities to new businesses, products, or services, which of the following is not considered a component? a. ideas b. feasibility c. business plan d. harvest of venture 63. The direct costs of producing a product or providing a service is called: a. gross profit b. gross profit margin c. net profit margin d. cost of goods sold 64. Developing new and delivering high-quality products or services that command higher prices and margins best describes strong: a. marketing practices b. financial practices c. operating practices d. management practices

Name:

Class:

Date:

Chap_02_7e_Leach 65. 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. a. $100,000 b. $250,000 c. $375,000 d. $500,000 66. Free cash flow to equity of an entrepreneurial firm includes cash flows to: a. venture investors b. creditors c. the entrepreneur d. venture investors and the entrepreneur 67. All else held constant, a higher asset turnover: a. increases ROA b. decreases ROA c. has no effect on ROA d. may raise or lower ROA, depending on how it affects revenues.

68. Which of the following is not a standard component of a sound business model? a. produce low-cost products b. generate revenues c. make profits d. produce free cash flows 69. A sound business model provides a plan to do all of the following except: a. generate revenues b. make profits c. retain all its earnings d. produce free cash flows 70. A sound business model includes a plan to: a. generate revenues and make profits b. make profits and produce free cash flows c. produce free cash flows for the owners of the venture d. generate revenues, make profits, and produce free cash flows 71. The evaluation of entry barriers occurs under which of the factor categories of the VOS Indicator™? a. industry/market considerations b. pricing/profitability considerations c. financial/harvest considerations d. management team considerations

Name:

Class:

Date:

Chap_02_7e_Leach 72. A SWOT analysis does not focus on which of the following components or areas? a. strengths b. weaknesses c. new ideas d. opportunities 73. The factor categories in a VOS Indicator™ are: a. industry/market considerations b. industry/market and pricing/profitability considerations c. industry/market, pricing/profitability, and financial/harvest considerations d. industry/market, pricing/profitability, financial/harvest, and management team considerations 74. The process involving minimizing the need for financial capital and finding unique sources for financing a new venture is referred to as: a. mezzanine financing b. financial bootstrapping c. seed financing d. startup financing 75. 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. a. $10,000 b. $25,000 c. $50,000 d. $60,000 76. If the asset intensity is 0.80, the asset turnover would be: a. 0.80 times b. 1.00 times c. 1.25 times d. 1.50 times 77. Which of the following assessment categories is not used at the end of a qualitative-based venture opportunity screening exercise? a. natural commercial potential b. high commercial potential c. average commercial potential d. low commercial potential

Name:

Class:

Date:

Chap_02_7e_Leach 78. 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% a. $40,000 b. $35,000 c. $15,000 d. $10,000 79. A typical business plan includes all of the following sections except: a. management team b. financial plans and projections c. risk and opportunities d. initial public offering information 80. When conducting a SWOT analysis, assessing unfilled customer needs is examined in terms of: a. strengths or weaknesses b. weaknesses or threats c. opportunities or threats d. threats or strengths 81. A well-designed entrepreneurial venture typically includes: a. generating ideas b. analyzing the feasibility of ideas c. producing a business plan d. generating ideas, analyzing the feasibility of ideas, and producing a business plan 82. A typical business plan includes all of the following sections except: a. executive summary b. business description c. marketing plan and strategy d. disclosure of pending litigation 83. The return on assets (ROA) model measures: a. revenues divided by net profit multiplied by the asset turnover b. net profit margin multiplied by the equity multiplier c. net profit margin multiplied by the asset turnover d. net profit divided by total assets multiplied by the asset turnover 84. A VOS Indicator™ stands for: a. "venture opportunity screening" indicator b. "viable opportunity statement" indicator c. "venture only success" indicator d. "viable assessment screening" indicator

Name:

Class:

Date:

Chap_02_7e_Leach 85. 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. the proposed product or service opportunity b. the accounting data for the last five years c. current resources available to the venture d. financial projections 86. When composing the financial plans and projections section of a business plan, all of the following should be included except: a. income statements and balance sheets b. statements of cash flows c. past and present dividends per share information d. funding needs and sources 87. Determine the dollar amount of revenues for a venture with the following financial information: net profit = $60,000; assets turnover = 1.5 times; and return on assets 30%. a. $300,000 b. $500,000 c. $800,000 d. $1,200,000 88. Firms that allow owners to pursue specific lifestyles while being paid for doing what they like to do are referred to as: a. salary-replacement firms b. lifestyle firms c. entrepreneurial ventures d. rapid-value-creation firms 89. A score in the range of 2.34–3.00 using the VOS Indicator™ would be considered a(n): a. low score b. average score c. high score d. very high score 90. 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. always work independently of each other d. share the entrepreneurial spirit

Name:

Class:

Date:

Chap_02_7e_Leach 91. The definition of an entrepreneurial firm is: a. survival b. high growth c. high growth and high performance d. survival and average performance 92. 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): a. financial plan b. business plan c. entrepreneurial plan d. survival plan 93. A firm's option to abandon a venture is an example of a: a. bootstrapping option b. financial option c. survival option d. real option 94. Return on assets can be stated as: a. net after-tax profit divided by total assets b. total assets divided by net after-tax profit c. total assets divided by revenues d. revenues divided by total assets 95. A SWOT analysis focuses on which of the following components or areas? a. strengths and weaknesses b. weaknesses and opportunities c. strengths, opportunities, and threats d. threats, opportunities, weaknesses, and strengths 96. Free cash flow, which can be paid back to investors, occurs when cash generated from operations exceeds all of the following except: a. borrowing costs b. noncash depreciation c. taxes d. investment in assets

Name:

Chap_02_7e_Leach Answer Key 1. True 2. True 3. False 4. False 5. True 6. False 7. False 8. True 9. False 10. True 11. False 12. True 13. False 14. True 15. True 16. True 17. True 18. True 19. False 20. True 21. True 22. False 23. False 24. True 25. False 26. False

Class:

Date:

Name:

Chap_02_7e_Leach 27. True 28. False 29. True 30. True 31. True 32. True 33. True 34. True 35. True 36. True 37. False 38. False 39. False 40. False 41. False 42. True 43. True 44. False 45. a 46. d 47. a 48. c 49. c 50. a 51. c 52. c 53. b 54. d

Class:

Date:

Name:

Chap_02_7e_Leach 55. a 56. b 57. a 58. d 59. b 60. c 61. a 62. d 63. d 64. a 65. b 66. d 67. a 68. a 69. c 70. d 71. a 72. c 73. d 74. b 75. c 76. c 77. a 78. c 79. d 80. a 81. d 82. d

Class:

Date:

Name:

Chap_02_7e_Leach 83. c 84. a 85. b 86. c 87. a 88. b 89. c 90. c 91. b 92. b 93. d 94. a 95. d 96. b

Class:

Date:

Name:

Class:

Date:

Chap_03_7e_Leach Indicate whether the statement is true or false.

1. Design patents cover most inventions pertaining to new products, services, and processes. a. True b. False 2. Most trademarks take the form of names, words, or graphic designs. a. True b. False 3. A basic C corporation is also known as an S corporation. a. True b. False 4. The articles of incorporation are the basic legal declarations contained in the corporate charter. a. True b. False 5. Intellectual property refers to a venture's intangible assets and human capital. a. True b. False 6. The highest federal marginal income tax rate for personal taxable income is 40 percent. a. True b. False 7. Beginning in 2018, the income tax laws provided for a flat personal income tax rate. a. True b. False 8. A limited partnership limits certain partners' liabilities to pay the venture's obligations to the amount each paid for their partnership interests. a. True b. False 9. Business method patents protect a specific way of doing business and the underlying computer codes, programs, and technology. a. True b. False 10. An S corporation provides unlimited liability for its shareholders. a. True b. False

Name:

Class:

Date:

Chap_03_7e_Leach 11. The equity capital sources for a proprietorship are partners, families, and friends. a. True b. False 12. The marginal tax rate for the first dollar of personal taxable income is higher for "single filers" relative to "married, filing jointly." a. True b. False 13. The maximum number of owners in a subchapter S corporation is 150. a. True b. False 14. An idea is enough to be patented. a. True b. False 15. 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. a. True b. False 16. Copyrights are intellectual property rights to writings in printed and electronically stored forms. a. True b. False 17. 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. a. True b. False 18. A work does not need to be registered to receive copyright protection; the work's creation is enough to provide copyright protection. a. True b. False 19. An employment contract is an agreement between an employer and employee about the terms and conditions of employment, including the employee's agreement to keep confidential information secret and to assign ideas and inventions to the employer. a. True b. False 20. Service marks refer to services such as those provided by a sorority or a labor union. a. True b. False

Name:

Class:

Date:

Chap_03_7e_Leach 21. Certification marks cover memberships in groups (e.g., a sorority or a labor union). a. True b. False 22. Nondisclosure agreements prohibit the creator of an idea or other form of intellectual property from sharing it with others once it has been presented the first time. a. True b. False 23. Chapter 3 begins the focus on the startup and survival stages of a venture's life cycle. a. True b. False 24. The 2018 flat corporate tax rate was higher than the lowest personal marginal income tax rate. a. True b. False 25. The Leahy–Smith America Invents Act of 2011 was passed, in part, to alleviate the backlog of patent-related lawsuits. a. True b. False 26. Patents, trade secrets, trademarks, and copyrights are intangible assets. a. True b. False 27. Confidential disclosure agreements are used to protect intellectual property when disclosure must be made to an outside individual or organization. a. True b. False 28. Professional corporations (PCs) and service corporations (SCs) are corporate structures that states provide for professionals such as physicians, dentists, lawyers, and accountants. a. True b. False 29. There are four types of marks that can be used to try to protect intellectual property. a. True b. False 30. In a corporate legal entity, the personal assets of the owners are separate from the assets of the business. a. True b. False

Copyright Cengage Learning. Powered by Cognero.

Page 3

Name:

Class:

Date:

Chap_03_7e_Leach 31. An income tax law passed in 2017 provided for a 21% flat corporate income tax rate beginning in 2018. a. True b. False 32. A copyright must be registered with the U.S. Copyright Office in order for a work to be protected. a. True b. False 33. Collective marks cover memberships in groups (e.g., a sorority or a labor union). a. True b. False 34. 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. a. True b. False 35. The income received by a proprietorship is taxed at personal tax rates. a. True b. False 36. Patents are intellectual property rights granted for inventions that are useful, novel, and obvious. a. True b. False 37. The type of financing available at a venture's survival stage in its life cycle is first-round financing. a. True b. False 38. A limited liability company (LLC) is owned by shareholders with limited liability, and its earnings are taxed at the corporate rate. a. True b. False 39. Limited liability in the corporate business structure means creditors can seize only some of the corporation's assets. a. True b. False 40. There are four kinds of patents. a. True b. False 41. Financial bootstrapping maximizes the need for financial capital. a. True b. False Copyright Cengage Learning. Powered by Cognero.

Page 4

Name:

Class:

Date:

Chap_03_7e_Leach 42. Certification marks provide indications of quality. a. True b. False 43. Partnerships are treated with pass-through taxation. This means that profits and losses of the business pass directly through to investors on the basis specified in the partnership agreement. a. True b. False 44. Patent trolls are firms authorized by the U.S. Congress to help reduce the number of patent-related lawsuits. a. True b. False 45. Trademarks are intellectual property rights that allow firms to differentiate their products and services through the use of unique marks. a. True b. False 46. Based on the 2018 tax laws, the tax rate for corporations is less than the highest marginal tax rate for individuals. a. True b. False 47. If you are an inventor with a patent, the burden of enforcing the patent is yours. a. True b. False 48. A color mark is considered to be one of four types of marks used to try to protect intellectual property. a. True b. False 49. A trademark must be novel in order to receive protection. a. True b. False 50. 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. a. True b. False 51. A business method patent is one kind of patent. a. True b. False

Name:

Class:

Date:

Chap_03_7e_Leach Indicate the answer choice that best completes the statement or answers the question.

52. Which of the following is not a type of mark? a. trademark b. service mark c. collective mark d. design mark 53. Wealthy individuals who invest in early-stage ventures in exchange for the excitement of launching a business and a share in any financial rewards are known as: a. creditors b. white knights c. business angels d. stakeholders 54. The term that refers only to words, symbols, shapes, and similar items associated with products is: a. trademarks b. service marks c. collective marks d. certification marks 55. During the development stage, seed financing chiefly comprises: a. funds from business angels and venture capitalists b. the entrepreneur's personal assets and funds from family and friends c. venture capitalists and the entrepreneur's personal assets d. business angels and funds from family and friends 56. Which form of business organization is characterized by having the shortest startup time and lowest legal costs? a. proprietorship b. limited partnership c. corporation d. limited liability company (LLC)

Name:

Class:

Date:

Chap_03_7e_Leach 57. Following is a partial personal taxable income schedule for a single filer: Marginal But Not Difference Over— Over— Tax Rate $ 0 $ 9,525 $ 9,525 0.10 9,525 38,700 29,175 0.12 38,700 82,500 43,800 0.22 The average tax rate for a single filer with taxable income of $82,500 would be: a. 12.0% b. 17.1% c. 18.6% d. 22.0% 58. Based on 2018 tax schedules, the highest tax rate on corporate taxable income is: a. 15.0% b. 21.0% c. 35.0% d. 38.0% 59. Based on 2018 tax schedules, the highest marginal tax rate on personal taxable income is: a. 25.0% b. 28.0% c. 33.0% d. 37.0% 60. Following is a partial personal taxable income schedule for a single filer: Marginal But Not Difference Over— Over— Tax Rate $ 0 $ 9,525 $ 9,525 0.10 9,525 38,700 29,175 0.12 38,700 82,500 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? a. $922.50 b. $1,143.00 c. $3,501.00 d. $4,453.00

Name:

Class:

Date:

Chap_03_7e_Leach 61. Patents that cover most inventions pertaining to new products, services, and processes are referred to as: a. design patents b. plant patents c. utility patents d. mechanical patents 62. Following is a partial personal taxable income schedule for a single filer: Marginal But Not Difference Over— Over— Tax Rate $ 0 $ 9,525 $ 9,525 0.10 9,525 38,700 29,175 0.12 38,700 82,500 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. $952.50 b. $1,143.00 c. $3,501.00 d. $4,453.00 63. Which of the following are intellectual property rights granted for inventions that are useful, novel, and nonobvious? a. patents b. trademarks c. copyrights d. trade secrets 64. Which of the following are intellectual property rights to writings in printed and electronically stored forms? a. patents b. trademarks c. legal disclaimers d. copyrights 65. Business angels typically invest in: a. early-stage ventures b. rapid-growth stage ventures c. maturity-stage ventures d. going-public ventures 66. Intellectual property rights to writings in printed and electronically stored forms are protected by: a. patents b. copyrights c. trade secrets d. trademarks

Name:

Class:

Date:

Chap_03_7e_Leach 67. The rules and procedures established to govern the corporation are called the: a. corporate charter b. articles of incorporation c. corporate bylaws d. confidentiality disclosure agreements 68. Which of the following is not a right of general partners? a. participation in profits b. no participation in management c. veto right on new partners d. access to partnership books 69. Intellectual property can be protected by all of the following except: a. patents b. trademarks c. legal disclaimers d. copyrights 70. Which of the following business organizational forms provides the owners with limited investor liability and passes its income before taxes through to the owners? a. partnerships and S corporations b. S corporations and C corporations c. C corporations and limited liability companies (LLCs) d. S corporations and limited liability companies (LLCs) 71. The total dollar amount of federal income taxes paid by a corporation with taxable income of $50,000 under the 2018 tax law would be: a. $5,000 b. $7,500 c. $10,500 d. $12,500 72. In a general partnership, legal action that treats all partners equally as a group is called: a. general liability b. joint liability c. limited liability d. accrued liability 73. Certification marks are typically used to: a. indicate membership in a trade group b. indicate a certain brand of service c. indicate quality d. associate products to a specific brand

Name:

Class:

Date:

Chap_03_7e_Leach 74. Which form of business organization typically offers the easiest transfer of ownership? a. proprietorship b. general partnership c. corporation d. subchapter S corporation 75. Based on 2018 tax schedules, the first dollar of personal taxable income is taxed at which of the following marginal tax rates? a. 5.0% b. 10.0% c. 15.0% d. 20.0% 76. Which of the following forms of protecting intellectual property currently has a protection limit of 20 years? a. copyrights b. patents c. trade secrets d. trademarks 77. Following is a partial personal taxable income schedule for a single filer: Marginal But Not Difference Over— Over— Tax Rate $ 0 $ 9,525 $ 9,525 0.10 9,525 38,700

38,700 82,500

29,175 43,800

0.12 0.22

The average tax rate for a single filer with taxable income of $38,700 would be: a. 10.0% b. 11.5% c. 12.0% d. 17.1% 78. Which form of business organization is characterized as having unlimited life? a. proprietorship b. limited partnership c. limited liability company (LLC) d. subchapter S corporation

Name:

Class:

Date:

Chap_03_7e_Leach 79. 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? a. patents b. trademarks c. copyrights d. trade secrets 80. Based on 2018 tax schedules, the first dollar of corporate income is taxed at which of the following tax rates? a. 10.0% b. 15.0% c. 21.0% d. 25.0% 81. During which of the following venture life cycle stages is the entrepreneur concerned with choosing the initial organizational form? a. development stage b. startup stage c. survival stage d. rapid-growth stage 82. If you are an inventor with a patent, the: a. U.S. Patent Office will enforce your rights b. U.S. government will enforce your rights c. burden of enforcing your patent is yours d. Leahy–Smith America Invents Act provides patent protection 83. The Leahy–Smith America Invents Act of 2011 was the first major change since 1952 involving how: a. patent trolls can operate b. the U.S. patent system operates c. patents differ from trademarks d. trade secrets can be converted to patents 84. Which of the following is not a kind of patent? a. utility b. design c. mark d. business method

Name:

Class:

Date:

Chap_03_7e_Leach 85. The total dollar amount of federal income taxes paid by a corporation with taxable income of $75,000 under the 2018 tax law would be: a. $7,500 b. $10,500 c. $15,750 d. $18,750 86. In which form of business organization is the taxation effects characterized by the income flowing to shareholders taxed at personal tax rates? a. proprietorship b. limited partnership c. corporation d. subchapter S corporation 87. Which of the following forms of protecting intellectual property had its protection limit increased from 17 to 20 years? a. copyrights b. trademarks c. patents d. trade secrets 88. Which of the following are intellectual property rights that allow firms to differentiate their products and services through the use of unique marks which allow consumers to easily identify the source and quality of the products and services? a. patents b. trademarks c. copyrights d. trade secrets 89. Which of the following is not a likely source of first-round financing during the survival stage of a venture's life cycle? a. venture capitalists b. commercial banks c. family and friends d. suppliers and customers 90. In which form of business organization are the owners not offered the protection of limited liability? a. proprietorship b. limited partnership c. corporation d. subchapter S corporation

Name:

Class:

Date:

Chap_03_7e_Leach 91. Which of the following are not sources of seed and startup financing? a. family and friends b. the entrepreneur's physical and financial assets c. business angels and venture capitalists d. stock and bond markets 92. Following is a partial personal taxable income schedule for a single filer: Marginal But Not Difference Over— Over— Tax Rate $ 0 $ 9,525 $ 9,525 0.10 9,525 38,700 29,175 0.12 38,700 82,500 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? a. $952.50 b. $3,501.00 c. $4,453.50 d. $9,636.00 93. Patents are intellectual property rights granted for inventions that are: a. not useful, novel, and nonobvious b. not useful, not novel, and obvious c. useful, novel, and nonobvious d. useful, not novel, and obvious 94. Which of the following numbers of shareholders is allowed in a subchapter S (or S) corporation business form? a. 100 b. 125 c. 130 d. 500

Name:

Chap_03_7e_Leach Answer Key 1. False 2. True 3. False 4. True 5. True 6. False 7. False 8. True 9. True 10. False 11. False 12. False 13. False 14. False 15. True 16. True 17. False 18. True 19. True 20. False 21. False 22. False 23. True 24. True 25. True 26. True

Class:

Date:

Name:

Chap_03_7e_Leach 27. True 28. True 29. True 30. True 31. True 32. False 33. True 34. True 35. True 36. False 37. True 38. False 39. False 40. True 41. False 42. True 43. True 44. False 45. True 46. True 47. True 48. False 49. False 50. True 51. True 52. d 53. c 54. a

Class:

Date:

Name:

Chap_03_7e_Leach 55. b 56. a 57. b 58. b 59. d 60. d 61. c 62. a 63. a 64. d 65. a 66. b 67. c 68. b 69. c 70. d 71. c 72. b 73. c 74. c 75. b 76. b 77. b 78. d 79. d 80. c 81. b 82. c

Class:

Date:

Name:

Chap_03_7e_Leach 83. b 84. c 85. c 86. d 87. c 88. b 89. c 90. a 91. d 92. d 93. c 94. a

Class:

Date:

Name:

Class:

Date:

Chap_04_7e_Leach Indicate whether the statement is true or false.

1. During the development stage in a new venture's life cycle, the balance sheet reflects the acquisition of initial assets and the obtaining of seed financing. a. True b. False 2. EBIT is "equity before interest and taxes." a. True b. False 3. EBITDA is "earnings before interest, taxes, depreciation, and amortization." a. True b. False 4. Contribution profit margin is the portion of the sale of a product that contributes to covering the cash variable costs. a. True b. False 5. 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. a. True b. False 6. Cash fixed costs equals survival revenues minus variable cost revenue ratio multiplied by survival revenues. a. True b. False 7. GAAP stands for "general American accounting principles." a. True b. False 8. The reduction in value of a fixed asset over its expected life intended to reflect the usage or wearing out of the asset is called depreciation. a. True b. False 9. Net income, or profit, is the bottom-line measure of what's left from the firm's net sales after operating expenses, financing costs, and taxes have been deducted. a. True b. False 10. Gross earnings are net sales minus net income. a. True b. False

Name:

Class:

Date:

Chap_04_7e_Leach 11. The statement of cash flows is a financial statement that shows how cash, as reflected in accrual accounting, flowed into and out of a company during a specific period of operation. a. True b. False True/False Questions for Appendix A 12. When EBIT is zero, a firm's net operating profit after taxes (NOPAT) is also zero because no taxes are payable. a. True b. False 13. Variable expenses are costs or expenses that vary directly with revenues. a. True b. False 14. Net cash burn occurs when the sum of cash flows from operations and investing is positive. a. True b. False 15. Variable expenses are costs that are expected to remain constant over a range of revenues for a specific time period. a. True b. False 16. During the startup stage in a venture's life cycle, financing may be obtained from business angels and venture capitalists in addition to seed financing sources. a. True b. False 17. The production and inventories schedules are two internal operating schedules needed to prepare a venture's financial statements. a. True b. False True/False Questions for Appendix A 18. Economic value added (EVA) measures a firm's market value added over a specified time period. a. True b. False 19. The acquisition of production assets (e.g., inventories and equipment to produce products and give credit to customers) usually occurs during the development stage in a new venture's life cycle. a. True b. False

Name:

Class:

Date:

Chap_04_7e_Leach 20. The income statement is a financial statement that reports the revenues generated and expenses incurred over an accounting period. a. True b. False 21. Assets are financial and physical items controlled or owned by the business. a. True b. False 22. Amounts owed to another for purchases made on credit which come due in less than one year are known as receivables. a. True b. False 23. How quickly an asset can be converted into cash is called liability. a. True b. False 24. During the startup stage in a new venture's life cycle, the income statement typically shows no sales and shows expenses for the production and marketing of products or services. a. True b. False 25. The practice of recording economic activity when realized is known as accrual accounting. a. True b. False True/False Questions for Appendix A 26. Economic value added (EVA) is a measure of a firm's economic profit over a specified time period. a. True b. False 27. Cash or other assets that are expected to be converted into cash in less than one year are known as current liabilities. a. True b. False 28. On the balance sheet, total liabilities equals total assets minus owners' equity. a. True b. False 29. During the development stage in a new venture's life cycle, the income statement typically shows no sales and shows expenses such as rent, utilities, and a subsistence salary for the entrepreneur. a. True b. False

Name:

Class:

Date:

Chap_04_7e_Leach 30. Net cash build occurs when the sum of cash flows from operations and investing is positive. a. True b. False 31. Fixed expenses are costs that are expected to remain constant over a range of revenues for a specific time period. a. True b. False 32. Making sales usually begins during the development stage in a venture's life cycle. a. True b. False 33. GAAP stands for "generally accepted accounting principles." a. True b. False 34. Seed financing (e.g., financing from the entrepreneur's assets, family, and friends) usually occurs during the

development stage in a new venture's life cycle. a. True b. False 35. Survival revenues is the amount of revenues just offsetting variable and cash fixed costs. a. True b. False 36. Startup financing (e.g., financing from business angels and venture capitalists) usually occurs during the development stage in a new venture's life cycle. a. True b. False 37. Accrual accounting is the practice of recording economic activity when recognized rather than waiting until realized. a. True b. False 38. The balance sheet equation is: Total Assets = Total Liabilities + Net Income. a. True b. False 39. Cost of goods sold is the cost of materials, labor, and advertising incurred to produce the products that were sold. a. True b. False

Name:

Class:

Date:

Chap_04_7e_Leach 40. EBDAT is "earnings before depreciation, assets, and taxes." a. True b. False True/False Questions for Appendix A 41. NOPAT equals net sales multiplied by one minus the tax rate. a. True b. False 42. Long-term, noncancelable leases whereby the owner receives payments that cover the cost of the equipment plus a return on investment in the equipment are known as capital leases. a. True b. False Indicate the answer choice that best completes the statement or answers the question.

43. Which of the following is not considered to be an internal operating schedule? a. income statement b. cost of production schedule c. cost of goods sold schedule d. inventories schedule 44. Last year, Beth's Baked Goods exactly broke even with cash fixed costs of $63,000. If its breakeven survival revenues level was $94,000, what was its variable cost revenue ratio (VCRR)? a. 0.27 b. 0.30 c. 0.33 d. 0.67 45. Which of the following is a use of cash? a. a decrease in inventory b. an increase in accrued liabilities c. the sale of an asset for a gain d. a decrease in the amount owed on a bond 46. Which of the following is the computation for gross earnings? a. Gross Earnings = Revenue – After-Tax Cost of Financial Capital Used b. Gross Earnings = Net Income ÷ Sales c. Gross Earnings = (Net Sales – Cost of Production) × Tax Rate d. Gross Earnings = Net Sales – Cost of Production

Copyright Cengage Learning. Powered by Cognero.

Page 5

Name:

Class:

Date:

Chap_04_7e_Leach 47. Your venture has total assets of $690, net fixed assets of $500, long term debt of $80, and stockholders' equity of $400. What is the amount of your venture's current liabilities? a. –$120 b. $100 c. $210 d. $290 48. Expenses or costs that vary directly with revenues are said to be: a. fixed expenses b. semifixed expenses c. semivariable expenses d. variable expenses 49. A financial statement that reports the revenues generated and expenses incurred over an accounting period is called the: a. income statement b. balance sheet c. statement of retained earnings d. statement of cash flows 50. In breakeven analysis, solving for when EBITDA is equal to zero gives breakeven in terms of: a. economic revenues b. variable costs c. survival revenues d. fixed costs Multiple-Choice Questions for Appendix A 51. 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. a. $380,000 b. $400,000 c. $480,000 d. $500,000 52. 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 operating income? a. $4,000 b. $2,000 c. $9,500 d. $6,000

Name:

Class:

Date:

Chap_04_7e_Leach Multiple-Choice Questions for Appendix A 53. Find the NOPAT breakeven revenues (NR) given the following information: total operating fixed costs = $75,000; variable costs = $150,000; and sales = $200,000. a. $100,000 b. $240,000 c. $300,000 d. $400,000 54. Which of the following is a source of cash? a. an increase in accounts receivable b. the acquisition of land c. an increase in the amount owed on a note payable d. the repurchase of outstanding shares of stock 55. Which of the following is not a likely source of financing available during a venture's startup stage? a. the entrepreneur's assets, family, and friends b. business angels c. bank loans d. venture capitalists Multiple-Choice Questions for Appendix A 56. Which of the following is the correct formula for computing NOPAT? a. NOPAT = Revenues × (1 + Tax Rate) b. NOPAT = Revenues × (1 – Tax Rate) c. NOPAT = EBITDA × (1 – Tax Rate) d. NOPAT = EBIT × (1 – Tax Rate) 57. Which of the following is not considered to be a current asset? a. cash b. receivables c. inventories d. fixed assets Multiple-Choice Questions for Appendix A 58. Last year, a firm had sales of $200,000. Its cost of goods sold was $75,000; administrative expenses were $25,000; marketing expenses were $25,000; depreciation expense was $10,000; and interest expense was $15,000. If the tax rate is 30%, what was the firm's NOPAT last year? a. $19,500 b. $35,000 c. $45,500 d. $52,500

Name:

Class:

Date:

Chap_04_7e_Leach 59. A lease that provides maintenance in addition to financing and is also usually cancelable is called a(n): a. capital lease b. operating lease c. asset lease d. equity lease 60. The practice of recording economic activity when it is recognized rather than waiting until it is realized is called: a. GAAP accounting b. accrual accounting c. forward-looking accounting d. management accounting 61. 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. a. $100,000 b. $116,667 c. $200,000 d. $300,000 62. The balance sheet equation states that total assets equals: a. total liabilities plus depreciation b. total liabilities plus owners' equity c. owners' equity plus net income d. owners' equity plus current liabilities 63. Which of the following is depreciated? a. inventory b. machinery c. land d. cash 64. Which of the following is the equation for EBDAT? a. EBDAT = Revenues – Variable Costs – Cash Fixed Costs b. EBDAT = Revenues + Variable Costs + Cash Fixed Costs c. EBDAT = Revenues – Variable Costs – Total Fixed Costs d. EBDAT = Revenues + Variable Costs – Cash Fixed Costs Multiple-Choice Questions for Appendix A 65. How is a firm's net operating profit after taxes (NOPAT) calculated? a. NOPAT = Net Profit × EBIT b. NOPAT = EBIT × (1 – Tax Rate) c. NOPAT = EBT – Interest Paid d. NOPAT = EBIT × Tax Rate

Name:

Class:

Date:

Chap_04_7e_Leach 66. Cash includes all of the following except: a. coins b. currency c. checking accounts d. certificates of deposit 67. Net cash burn occurs when the sum of which of the following items is negative? a. cash flows from operations and financing b. cash flows from investing and financing c. cash flows from operations and investing d. cash flows from net income and depreciation 68. Which of the following is not a category on the statement of cash flows? a. cash flow from operating activities b. cash flow from equity activities c. cash flow from investing activities d. cash flow from financing activities 69. Use the following information to compute the survival revenues breakeven: cash fixed costs = $400,000 and a variable cost revenue ratio = 0.65. a. $460,500 b. $615,385 c. $1,142,857 d. $2,000,334 70. A firm with constant variable costs has a survival revenues breakeven of $375,000. This year, it had $250,000 in sales, $100,000 of which was a fixed cost. What are the firm's cash fixed costs? a. $150,000 b. $225,000 c. $625,000 d. $937,500 71. Which of the following is not a characteristic of marketable securities? a. short term b. illiquid c. high quality d. interest bearing 72. A financial statement that provides a snapshot of a business's financial position as of a specific date is called the: a. income statement b. balance sheet c. statement of retained earnings d. statement of cash flows

Name:

Class:

Date:

Chap_04_7e_Leach 73. Retained earnings is: a. a corporate asset b. part of owners' equity c. a corporate asset minus current liabilities d. long-term debts plus current assets 74. What is the survival revenues breakeven based on the following information: administrative expenses = $200,000; marketing expenses = $180,000; depreciation expenses = $100,000; interest expenses = $20,000; and a variable cost revenue ratio = 0.50? a. $600,000 b. $800,000 c. $1,000,000 d. $1,200,000 75. 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? a. $6,000; $2,040 b. $2,000; $1,320 c. $4,000; $1,360 d. $2,000; $680 Multiple-Choice Questions for Appendix A 76. Which of the following shows the calculation for economic value added (EVA)? a. EVA = NOPAT + After-Tax Dollar Cost of Financial Capital Used b. EVA = ROE – Percentage Cost of Financial Capital c. EVA = NOPAT – After-Tax Dollar Cost of Financial Capital Used d. EVA = ROE + Percentage Cost of Financial Capital 77. Internal operating schedules include all of the following except: a. cost of production schedules b. inventories schedules c. balance sheets d. cost of goods sold schedules 78. Which of the following is not a characteristic of inventories? a. raw materials b. finished products c. goods sold but not yet shipped d. work-in-process

Name:

Class:

Date:

Chap_04_7e_Leach 79. Find the contribution profit margin based on the following information: cash fixed costs = $60,000; variable costs = $70,000; and sales = $100,000. a. 70% b. 60% c. 30% d. 40% 80. In its first year, Joe's Startup Company had revenues of $125,000 and cost of goods sold of $81,250, which was the only variable cost. Depreciation was $20,000. Cash fixed costs were $100,000, consisting of $5,000 in financing costs, $50,000 in administrative expenses, and $45,000 in marketing expenses. What is the survival breakeven revenues? a. $342,857 b. $285,714 c. $271,429 d. $184,615 Multiple-Choice Questions for Appendix A 81. Find the NOPAT given the following information: sales = $520,000; earnings before interest = $100,000; interest = $20,000; and the tax rate = 30%. a. $70,000 b. $56,000 c. $30,000 d. $24,000 82. Use the following information to determine the cash fixed costs: administrative expenses = $200,000; marketing expenses = $180,000; depreciation expenses = $100,000; and interest expenses = $20,000. a. $380,000 b. $400,000 c. $480,000 d. $500,000 83. 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 net income? a. $2,920 b. $680 c. $2,000 d. $1,320

Name:

Class:

Date:

Chap_04_7e_Leach 84. A financial statement that shows how cash, as reflected in accrual accounting, flows into and out of a company during a specific period of operation is called the: a. income statement b. balance sheet c. statement of retained earnings d. statement of cash flows

Name:

Chap_04_7e_Leach Answer Key 1. True 2. False 3. True 4. False 5. True 6. True 7. False 8. True 9. True 10. False 11. True 12. True 13. True 14. False 15. False 16. True 17. True 18. False 19. False 20. True 21. True 22. False 23. False 24. False 25. False 26. True

Class:

Date:

Name:

Chap_04_7e_Leach 27. False 28. True 29. True 30. True 31. True 32. False 33. True 34. True 35. True 36. False 37. True 38. False 39. False 40. False 41. False 42. True 43. a 44. c 45. d 46. d 47. c 48. d 49. a 50. c 51. c 52. a 53. c 54. c

Class:

Date:

Name:

Chap_04_7e_Leach 55. c 56. d 57. d 58. c 59. b 60. b 61. c 62. b 63. b 64. a 65. b 66. d 67. c 68. b 69. c 70. a 71. b 72. b 73. b 74. b 75. d 76. c 77. c 78. c 79. c 80. b 81. a 82. b

Class:

Date:

Name:

Chap_04_7e_Leach 83. d 84. d

Class:

Date:

Name:

Class:

Date:

Chap_05_7e_Leach Indicate whether the statement is true or false.

1. If a firm has positive net income, a decrease in a venture's asset intensity ratio will increase its ROE. a. True b. False 2. Liquidity ratios indicate the venture's ability to pay short-term assets from short-term liabilities. a. True b. False 3. Cross-sectional analysis is used to examine a venture's performance over time. a. True b. False 4. Financial ratios show the relationships between two or more financial variables or between financial variables and time. a. True b. False 5. The equity multiplier is considered an efficiency ratio. a. True b. False 6. Accounting rules require that the current maturities of long-term debt obligations be classified as short-term liabilities. a. True b. False 7. For a venture with inventories, the quick ratio will always be greater than the current ratio. a. True b. False 8. Leverage ratios indicate the extent to which the venture has used debt and its ability to meet debt obligations. a. True b. False 9. The term "cash build" as used in Chapter 5 is equal to net sales minus the change in receivables. a. True b. False 10. The part of a venture's interest payment that is subsidized by the government because of the deductibility of interest is called the interest tax shield. a. True b. False

Copyright Cengage Learning. Powered by Cognero.

Page 1

Name:

Class:

Date:

Chap_05_7e_Leach 11. Net cash burn occurs when cash burn exceeds cash build in a specified time period. a. True b. False 12. The current ratio and the quick ratio differ only because average inventories are subtracted in the numerator of the quick ratio. a. True b. False 13. The cash burn rate is the cash burn for a fixed period of time, typically a month. a. True b. False 14. Total debt includes current liabilities, long-term debt, and retained earnings. a. True b. False 15. During the development and startup stages of a venture's life cycle, important financial ratios and measures include cash burn rates and liquidity ratios. a. True b. False 16. Commercial banks are important users of financial ratios and measures during the development and startup stages of ventures. a. True b. False 17. One must be cautious in stating whether a specific ratio is good or bad because "goodness" is frequently a matter of perspective or strategy. a. True b. False 18. The return on assets model states: ROA = Net Profit Margin × Asset Turnover × Equity Multiplier. a. True b. False 19. Financial ratios are a useful way to summarize large amounts of financial data to simplify comparisons of a venture's performance with itself and other firms over time. a. True b. False 20. Cash burn is the cash a venture expends on its operating, financing, and depreciation expenses. a. True b. False

Copyright Cengage Learning. Powered by Cognero.

Page 2

Name:

Class:

Date:

Chap_05_7e_Leach 21. How efficiently a venture controls its expenses and uses its assets and debt is evaluated with profitability and efficiency ratios. a. True b. False 22. Investment bankers are users of financial ratios and measures primarily during a venture's rapid-growth stage relative to the development and startup stages. a. True b. False 23. The equity multiplier shows the extent by which assets are supported by equity and debt. a. True b. False 24. Leverage ratios are generally considered to be more important during a venture's survival and rapid-growth stages compared to the development and startup stages. a. True b. False 25. Trend analysis is used to examine a venture's performance over time. a. True b. False 26. Net working capital is a dollar amount measure of the cushion between current assets and current liabilities. a. True b. False 27. A venture's cash, marketable securities, and receivables comprise its liquid assets. a. True b. False 28. Net working capital is calculated as fixed assets minus current liabilities. a. True b. False 29. Profitability and efficiency ratios are generally considered to be more important during a venture's development and startup stages compared to the survival and rapid-growth stages. a. True b. False 30. The extent to which a venture is in debt and in its ability to repay its debt obligations is indicated by leverage ratios. a. True b. False

Copyright Cengage Learning. Powered by Cognero.

Page 3

Name:

Class:

Date:

Chap_05_7e_Leach 31. Industry comparable ratio analysis involves comparing a venture's ratios against the industry average for the same ratios. a. True b. False 32. Net working capital reflects current assets deducted from current liabilities. a. True b. False 33. Cash burn, liquidity, and conversion ratios are important during the development and startup life cycle stages. a. True b. False 34. Second-round, mezzanine, and liquidity-stage financing generally occur during a venture's survival stage. a. True b. False 35. The types of financing used during the survival life cycle stage is second-round, mezzanine, and liquidity-stage financing. a. True b. False 36. How efficiently a venture controls its expenses and uses its assets and debt is evaluated with profitability and efficiency ratios. a. True b. False 37. 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). a. True b. False Indicate the answer choice that best completes the statement or answers the question.

38. Last year, Lenny's Lemonade had $3,500 in sales, and cost of goods sold was $2,000. Depreciation expenses totaled $500, and interest expense was $700. If the tax rate is 25%, what is the net profit margin for Lenny's Lemonade? a. 6.43% b. 20.70% c. 2.14% d. 22.86%

Copyright Cengage Learning. Powered by Cognero.

Page 4

Name:

Class:

Date:

Chap_05_7e_Leach 39. 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; longterm liabilities = $1,100; common stock = $1,160; and retained earnings = $1,620.What is the current ratio for Rogex? a. 1.46 b. 1.33 c. 1.23 d. 1.21 40. Last year, Nemo's Fish 'n Chips recorded the following financial data: sales = $85,000; cost of goods sold = $45,000; selling and administrative expenses = $25,000; depreciation and amortization = $7,000; and interest expense = $12,000. The tax rate was 30%. Find Nemo's interest coverage for last year. a. –0.29 times b. 0.66 times c. 0.86 times d. 1.25 times 41. 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; longterm 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? a. 1.91 times b. 0.25 times c. 0.52 times d. 0.23 times 42. Net sales minus cost of goods sold when divided by sales is called: a. gross profit margin b. operating profit margin c. net profit margin d. net operating profit after taxes margin 43. Investment bankers often play an important role in which of the following life cycle stages? a. development stage b. startup stage c. survival stage d. rapid-growth stage 44. How is net cash burn calculated? a. Net Cash Burn = Cash Burn + Cash Build b. Net Cash Burn = Cash Build – Cash Burn c. Net Cash Burn = Cash Burn – Cash Build d. Net Cash Burn = Cash Burn – Cash Build2 Copyright Cengage Learning. Powered by Cognero.

Page 5

Name:

Class:

Date:

Chap_05_7e_Leach 45. 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? a. 26.2% b. 30.3% c. 43.3% d. 56.3% 46. 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; longterm liabilities = $1,100; common stock = $1,160; and retained earnings = $1,620. What is the equity multiplier for Rogex? a. 2.35 times b. 0.48 times c. 1.12 times d. 1.91 times 47. The difference between a venture's ability to generate cash to pay interest and the amount of interest it has to pay is determined by which of the following ratios? a. fixed-charges coverage b. debt-to-equity ratio c. equity multiplier d. interest coverage 48. Net income divided by net sales is the calculation for: a. net operating profit after taxes margin b. net profit margin c. operating profit margin d. gross profit margin 49. Last year, Lenny's Lemonade had $3,500 in sales, and cost of goods sold was $2,000. Depreciation expenses totaled $500, and interest expense was $700. If the tax rate is 25%, what is its NOPAT margin? a. 11.86% b. 21.43% c. 26.57% d. 29.14% 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 quick ratio? a. 1.00 b. 1.11 c. 1.22 d. 1.33 Copyright Cengage Learning. Powered by Cognero.

Page 6

Name:

Class:

Date:

Chap_05_7e_Leach 51. 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; longterm 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? a. 9.6% b. 13.6% c. 19.1% d. 37.9% 52. 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. a. $15,000 b. $30,000 c. $60,000 d. $120,000 53. 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; longterm liabilities = $1,100; common stock = $1,160; and retained earnings = $1,620. The total-debt-to-total-assets ratio for Rogex is: a. 0.48 b. 0.71 c. 0.27 d. 0.53 54. Which of the following statements is true? a. ROA is always greater than or equal to ROE b. an increase in the asset turnover ratio implies a decrease in the asset intensity ratio c. ROE measures the return on the enterprise d. ROA measures the return on fixed assets 55. First-round financing occurs primarily during which of the following life cycle stages? a. development stage b. startup stage c. survival stage d. rapid-growth stage

Copyright Cengage Learning. Powered by Cognero.

Page 7

Name:

Class:

Date:

Chap_05_7e_Leach 56. 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; longterm 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 the return on equity for Rogex? a. 26.1% b. 44.7% c. 62.6% d. 18.4% 57. Which of the following is used to examine a venture's performance over time? a. qualitative analysis b. trend analysis c. cross-sectional analysis d. industry comparable analysis 58. The entrepreneur, business angels, and VCs are important users of financial ratios and measures during which of the following life cycle stages? a. development and startup stages b. survival and rapid-growth stages c. development, startup, and rapid-growth stages d. development, startup, survival, and rapid-growth stages 59. Which of the following is used to compare a venture's performance against another firm at the same point in time? a. qualitative analysis b. trend analysis c. cross-sectional analysis d. industry comparable analysis 60. 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? a. 0.11 b. 0.13 c. 0.15 d. 0.17 61. The term "cash build" is measured as: a. net income plus depreciation b. net sales minus expenses minus (plus) an increase (decrease) in inventories c. net sales minus (plus) an increase (decrease) in receivables d. net income plus depreciation minus (plus) an increase (decrease) in payables

Copyright Cengage Learning. Powered by Cognero.

Page 8

Name:

Class:

Date:

Chap_05_7e_Leach 62. 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 net profit margin for Rogex? a. 22.7% b. 7.9% c. 18.4% d. 26.2% 63. Which of the following ratios is calculated as (Average Current Assets – Average Inventories) ÷ Average Current Liabilities? a. current ratio b. quick ratio c. net-working-capital ratio d. current liabilities-to-total-debt ratio 64. 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 operating profit margin for Rogex? a. 26.2% b. 56.3% c. 43.3% d. 30.3% 65. The type of financing used during the rapid-growth life cycle stage includes: a. second-round financing b. mezzanine financing c. liquidity-stage financing d. all of these choices 66. Which of the following ratios is computed by dividing the average total assets by the average owners' equity? a. equity multiplier b. debt-to-equity ratio c. current liabilities-to-total-debt ratio d. current ratio 67. Which of the following is not a basic ratio technique used to conduct financial analysis? a. trend analysis b. sensitivity analysis c. cross-sectional analysis d. industry comparable analysis

Name:

Class:

Date:

Chap_05_7e_Leach 68. Which of the following is used to compare a venture's performance against the average performance of other firms in the same industry? a. qualitative analysis b. trend analysis c. cross-sectional analysis d. industry comparable analysis 69. 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. a. $1,000 b. $3,000 c. $4,000 d. $6,000 70. A venture has net sales of $400,000, cost of goods sold of $200,000, operating expenses (selling, general, and administrative) of $100,000, and interest expenses of $50,000. What is the operating profit margin? a. 50% b. 75% c. 25% d. 40% 71. 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; longterm liabilities = $1,100; common stock = $1,160; and retained earnings = $1,620. What is the debt-to-equity ratio for Rogex? a. 0.91 b. 2.15 c. 0.48 d. 1.12 72. 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: a. 6.5 times b. 4.5 times c. 9.7 times d. 1.5 times 73. Which of the following is not an efficiency and return measure? a. sales-to-total-assets ratio b. return on equity c. return on assets d. inventory-to-total-assets ratio

Name:

Class:

Date:

Chap_05_7e_Leach 74. Investment bankers and commercial banks are important users of financial ratios and measures during which of the following life cycle stages? a. development stage b. startup stage c. survival stage d. rapid-growth stage

Name:

Chap_05_7e_Leach Answer Key 1. True 2. False 3. False 4. True 5. False 6. True 7. False 8. True 9. True 10. True 11. True 12. True 13. True 14. False 15. True 16. False 17. True 18. False 19. True 20. False 21. False 22. True 23. True 24. True 25. True 26. True

Class:

Date:

Name:

Chap_05_7e_Leach 27. True 28. False 29. False 30. True 31. True 32. False 33. True 34. False 35. False 36. False 37. True 38. a 39. b 40. d 41. c 42. a 43. d 44. c 45. d 46. d 47. d 48. a 49. b 50. d 51. b 52. d 53. a 54. b

Class:

Date:

Name:

Chap_05_7e_Leach 55. c 56. a 57. b 58. d 59. c 60. c 61. c 62. d 63. b 64. c 65. d 66. a 67. b 68. d 69. b 70. a 71. a 72. c 73. d 74. d

Class:

Date:

Name:

Class:

Date:

Chap_06_7e_Leach Indicate whether the statement is true or false.

1. Short-term financial planning is critical during the survival stage because operations not yet turning a profit and the associated cash burn often lead to a venture's inability to pay its maturing liabilities. a. True b. False 2. Even in a young, successful venture, restricted access to bank credit and little to no access to short-term lending markets can hinder operations until the next round of financing. a. True b. False 3. Short-term financial planning forecasts address whether a venture is expected to generate the required cash to meet its coming obligations. a. True b. False 4. The cash conversion cycle measures the time it takes to pay off the principal on a loan. a. True b. False 5. A venture's operating schedules typically include a sales schedule, purchases schedule, and wages and commissions schedule. a. True b. False 6. First-round financing usually occurs during a venture's rapid-growth life cycle stage. a. True b. False 7. A cash budget shows a venture's projected revenues and expenses over a forecast period. a. True b. False 8. The sale-to-cash conversion period is calculated by dividing average revenues by net sales per day. a. True b. False 9. The actions of monitoring financial performance, projecting cash needs, and obtaining first-round financing occurs during a venture's survival stage. a. True b. False

Name:

Class:

Date:

Chap_06_7e_Leach 10. Short-term cash planning tools include preparation of a sales schedule, purchases schedule, wages and commissions schedule, and cash budget. a. True b. False 11. Conversion period ratios show the average time in days it takes to convert certain current assets and current liabilities into cash. a. True b. False 12. Due to the difficulty of projecting financial statements for a young firm, short-term financial forecasts are never required of early-stage ventures. a. True b. False 13. The actions of screening business ideas, preparing a business plan, and obtaining seed financing occurs during a venture's development stage. a. True b. False 14. The cash conversion cycle refers to the time it takes to convert a sale into net income. a. True b. False 15. Most initial business plans contain monthly projected (pro forma) financial statements for at least one year, and sometimes for two or more years. a. True b. False 16. A venture's operating cycle measures the time it takes to purchase required materials, assemble, and sell the product plus the time needed to collect receivables if the sales are on credit. a. True b. False 17. A common way to express a venture's anticipated cash needs is to project the balance sheet and income statement into the future and produce the statement of cash flows. a. True b. False 18. Cash shortages during the rapid-growth stage frequently derive from the lack of operating profits to fund working capital and fixed asset investments needed to support sales growth. a. True b. False

Name:

Class:

Date:

Chap_06_7e_Leach 19. The cash conversion cycle is the amount of time taken to buy materials and produce a finished good plus the time needed to collect sales made on credit minus the time taken to pay suppliers for purchases on credit. a. True b. False 20. Short-term financial planning typically involves preparing monthly financial statements and focuses on identifying and planning for net income demands on the business. a. True b. False 21. Preparing monthly cash budgets for a full year allows the entrepreneur to determine whether there will be a cash need, the maximum size of the cash need, and whether the need can be repaid during the year. a. True b. False 22. Seed financing usually occurs during a venture's development life cycle stage. a. True b. False 23. The sum of the inventory-to-sale conversion period and the purchase-to-payment conversion period minus the sale-to-cash conversion period is called the cash conversion cycle. a. True b. False 24. Most early-stage ventures can easily locate debt-financing arrangements. a. True b. False 25. A venture's cash conversion cycle will decrease if the purchase-to-payment conversion period increases. a. True b. False 26. Early-stage ventures are defined as firms that are only operating in either their development or startup stages. a. True b. False 27. A venture's operating cycle is the same as its cash conversion cycle. a. True b. False

Name:

Class:

Date:

Chap_06_7e_Leach Indicate the answer choice that best completes the statement or answers the question.

28. A venture's operating cycle measures the time it takes to: a. purchase raw materials and assemble a product b. assemble a product and book the sale c. assemble a product, book the sale, and collect on the sale d. purchase raw materials, assemble a product, book the sale, and collect on the sale 29. Which of the following is not considered to be an operating schedule? a. sales schedule b. balance sheet schedule c. purchases schedule d. wages and commissions schedule 30. Which of the following is not part of the operating cycle? a. time it takes to produce products b. time it takes to sell products c. time it takes to pay suppliers d. time it takes to collect receivables 31. Calculate the sale-to-cash conversion period based on the following information: average inventories = $120,000; average receivables = $90,000; average payables = $40,000; cost of goods sold = $182,500; and net sales = $365,000. a. 180 days b. 90 days c. 60 days d. 45 days 32. Based on the following information, determine the average receivables (rounded to thousands of dollars) that were outstanding: net sales = $575,000; sale-to-cash conversion period = 57.1 days; purchase-to-payment conversion period = 76.8 days; and cost of goods sold = $380,000. a. $90,000 b. $180,000 c. $121,000 d. $45,000 33. Calculate the inventory-to-sale conversion period based on the following information: average inventories = $120,000; average receivables = $90,000; average payables = $40,000; cost of goods sold = $182,500; and net sales = $365,000. a. 240 days b. 180 days c. 90 days d. 60 days

Name:

Class:

Date:

Chap_06_7e_Leach 34. First-round financing is generally associated with which of the following life cycle stages? a. development stage b. startup stage c. survival stage d. rapid-growth stage 35. Which of the following measures the average time it takes a firm to complete its operating cycle after deducting the days supported by trade credit and delayed payroll financing? a. sale-to-cash conversion period b. inventory-to-sale conversion period c. purchase-to-payment conversion period d. cash conversion cycle 36. Which of the following is measured by dividing the average daily cost of goods sold into the average inventories? a. sale-to-cash conversion period b. inventory-to-sale conversion period c. purchase-to-payment conversion period d. cash conversion cycle 37. Which of the following measures the average days of sales committed to the extension of trade credit? a. sale-to-cash conversion period b. inventory-to-sale conversion period c. purchase-to-payment conversion period d. cash conversion cycle period 38. Which of the following conversion periods is not a component in the cash conversion cycle? a. inventory-to-sale conversion period b. sale-to-cash conversion period c. purchase-to-payment conversion period d. fixed assets-to-usage conversion period 39. Which of the following conversion periods operates to reduce the length of the cash conversion cycle? a. inventory-to-sale conversion period b. sale-to-cash conversion period c. purchase-to-payment conversion period d. fixed assets-to-usage conversion period 40. A major difference exists between a venture's operating cycle and its cash conversion cycle because the conversion cycle includes the time to: a. buy materials b. produce a finished good c. collect sales made on credit d. pay suppliers for purchases on credit

Name:

Class:

Date:

Chap_06_7e_Leach 41. Which of the following measures the average time from purchase of materials and labor to actual cash payment? a. sale-to-cash conversion period b. inventory-to-sale conversion period c. purchase-to-payment conversion period d. cash conversion cycle 42. A firm would not be considered to be an early-stage venture when it reaches which of the following life cycle stages? a. rapid-growth stage b. startup stage c. survival stage d. early-maturity stage 43. The process of examining exit opportunities is generally associated with which one of the following life cycle stages? a. early-maturity stage b. startup stage c. survival stage d. rapid-growth stage 44. Based on the following information, determine the venture's cash conversion cycle: inventory-to-sale conversion period = 112.9 days; sale-to-cash conversion period = 57.1 days; and purchase-to-payment conversion period = 76.8 days. a. 170.0 days b. 189.7 days c. 93.2 days d. 133.9 days 45. Based on the following information, determine the venture's inventory-to-sale conversion period: cash conversion cycle = 250 days; sale-to-cash conversion period = 60 days; and purchase-to-payment conversion period = 70 days. a. 70 days b. 140 days c. 240 days d. 260 days 46. Seed financing is generally associated with which of the following life cycle stages? a. development stage b. startup stage c. survival stage d. rapid-growth stage

Name:

Chap_06_7e_Leach Answer Key 1. True 2. True 3. True 4. False 5. True 6. False 7. False 8. False 9. True 10. True 11. True 12. False 13. True 14. False 15. True 16. True 17. True 18. True 19. True 20. False 21. True 22. True 23. False 24. False 25. True 26. False

Class:

Date:

Name:

Chap_06_7e_Leach 27. False 28. d 29. b 30. c 31. b 32. a 33. a 34. c 35. d 36. b 37. a 38. d 39. c 40. d 41. c 42. d 43. d 44. c 45. d 46. a

Class:

Date:

Name:

Class:

Date:

Chap_07_7e_Leach Indicate whether the statement is true or false.

1. The excess average return of long-term government bonds over common stock is called the market risk premium. a. True b. False 2. Default risk is the risk that a borrower will not pay the interest and/or the principal on a loan. a. True b. False 3. Startup financing usually comes from entrepreneurs, business angels, and investment bankers. a. True b. False 4. A nominal interest rate is an observed or stated interest rate. a. True b. False 5. The accounting emphasis on accrued revenue and expenses and depreciation is the same emphasis as that of finance managers. a. True b. False 6. Closely held corporations are those companies whose stock is traded over the counter. a. True b. False 7. Over the long run (90 or so years) in the United States, average annual rates of return have been higher for government bonds than for corporate common stocks. a. True b. False 8. 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. a. True b. False 9. First-round financing during a venture's survival stage comes primarily from venture capitalists and investment banks. a. True b. False 10. Bond ratings reflect the inflation risk of a firm's bonds. a. True b. False Copyright Cengage Learning. Powered by Cognero.

Page 1

Name:

Class:

Date:

Chap_07_7e_Leach 11. Private equity investors are owners of proprietorships, partners in partnerships, and owners in closely held corporations. a. True b. False 12. Over the long run (90 or so years) in the United States, average annual rates of return have been higher for small-company stocks relative to large-company stocks. a. True b. False 13. Formal historical accounting procedures include explicit records of debt (interest and principal) and dividend capital costs. a. True b. False 14. 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. a. True b. False 15. Commercial banks provide liquidity-stage financing for ventures in the rapid-growth stage of their life cycles. a. True b. False 16. 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. a. True b. False 17. Inflation premium is the rising prices not offset by increasing quality of goods being purchased. a. True b. False 18. Late- and expansion-stage U.S. venture capital for most holding periods have lower returns than early-stage U.S. venture capital. a. True b. False 19. Public financial markets are markets for the creation, sale, and trade of illiquid securities having less standardized negotiated features. a. True b. False 20. Subordinated debt is secured by a venture's assets, while senior debt has an inferior claim to a venture's assets. a. True b. False Copyright Cengage Learning. Powered by Cognero.

Page 2

Name:

Class:

Date:

Chap_07_7e_Leach 21. A venture with a higher expected return relative to other ventures will necessarily have a higher standard deviation or returns. a. True b. False 22. The relationship between real interest rates and time to maturity when default risk is constant is called the term structure of interest rates. a. True b. False 23. Historically, large-company stocks have averaged higher long-term returns than small-company stocks. a. True b. False 24. The graph of the term structure of interest rates, which plots interest rates to time to maturity, is called the yield curve. a. True b. False True/False Questions for Appendix A 25. EVA is a financial assessment of a venture's environmental value analysis. a. True b. False 26. The coefficient of variation measures the standard deviation of a venture's return relative to its expected return. a. True b. False 27. A venture's riskiness in terms of poor performance or failure is usually very high during the maturity stage of its life cycle. a. True b. False 28. Liquidity premiums reflect the risk associated with firms that possess few liquid assets. a. True b. False 29. The prime rate is the interest rate charged by banks to their highest default-risk business customers. a. True b. False 30. Closely held corporations are corporations whose stock is publicly traded. a. True b. False

Copyright Cengage Learning. Powered by Cognero.

Page 3

Name:

Class:

Date:

Chap_07_7e_Leach 31. 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. a. True b. False 32. Typically, the stocks of closely held corporations aren't publicly traded. a. True b. False 33. Market cap is determined by multiplying a firm's current stock price by the number of shares outstanding. a. True b. False 34. The risk-free interest rate is the interest rate on debt that is virtually free of inflation risk. a. True b. False 35. 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. a. True b. False 36. Early-stage ventures tend to have large amounts of senior debt relative to more mature ventures. a. True b. False 37. The weighted average cost of capital is simply the blended, or weighted, cost of raising equity and debt capital. a. True b. False 38. A venture's riskiness in terms of the likelihood of poor performance or failure decreases as it moves from its development stage to its rapid-growth stage. a. True b. False 39. 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. a. True b. False 40. Components used to calculate the after-tax WACC do not include an equity rate. a. True b. False

Copyright Cengage Learning. Powered by Cognero.

Page 4

Name:

Class:

Date:

Chap_07_7e_Leach True/False Questions for Appendix A 41. EVA equals net operating profit after taxes minus after-tax dollar cost of financial capital used. a. True b. False Indicate the answer choice that best completes the statement or answers the question.

Multiple-Choice Questions for Appendix A 42. Find a venture's economic value added (EVA) based on the following information: EBIT = $200,000; financial capital used = $500,000; WACC = 20%; and effective tax rate = 30%. a. $20,000 b. $30,000 c. $40,000 d. $50,000 43. Use the SML model to calculate the cost of equity for a firm based on the following information: the firm's beta is 1.5; the risk-free rate is 5%; and the market risk premium is 2%. a. 8.0% b. 9.5% c. 10.0% d. 12.0% 44. A venture has raised $4,000 of debt and $6,000 of equity to finance its firm. Its cost of borrowing is 6%, its tax rate is 40%, and its cost of equity capital is 8%. What is the venture's weighted average cost of capital? a. 7.2% b. 7.0% c. 6.2% d. 6.0% 45. Venture capital holding period returns (all stages) for the 20-year period ending in 2018 were approximately: a. 99% b. 21% c. 10% d. 7% 46. Which of the following "premiums" is not typically included in the rate on U.S. Treasury securities? a. liquidity premium b. default risk premium c. market risk premium d. inflation premium

Copyright Cengage Learning. Powered by Cognero.

Page 5

Name:

Class:

Date:

Chap_07_7e_Leach 47. 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%. a. 10.0% b. 16.0% c. 19.8% d. 22.8% 48. The difference between average annual returns on common stocks and returns on long-term government bonds is called a: a. default risk premium b. maturity premium c. risk-free premium d. market risk premium 49. A venture's riskiness in terms of possible poor performance or failure would be considered to be very high in which of the following life cycle stages? a. startup stage b. survival stage c. rapid-growth stage d. early-maturity stage 50. Calculate the weighted average cost of capital (WACC) based on the following information: the equity multiplier is 1.66; the interest rate on debt is 13%; the required return to equity holders is 22%; and the tax rate is 35%. a. 11.5% b. 13.9% c. 15.0% d. 16.6% 51. Which of the following markets involve direct two-party negotiations over illiquid, nonstandardized contracts such as bank loans and direct placement of debt? a. secondary market b. options market c. private financial market d. public financial market Multiple-Choice Questions for Appendix A 52. Estimate a firm's economic value added (EVA) based on the following information: NOPAT = $400,000; amount of financial capital used = $1,600,000; and WACC = 19%. a. $26,000 b. $36,000 c. $96,000 d. $54,000

Copyright Cengage Learning. Powered by Cognero.

Page 6

Name:

Class:

Date:

Chap_07_7e_Leach 53. Which of the following describes the observed or stated interest rate? a. real rate b. nominal rate c. risk-free rate d. prime rate 54. Over the long run (90 or so years), the average annual rates of return in the United States have been highest for which of the following securities? a. five-year government bonds b. twenty-year corporate bonds c. large-company stocks d. small-company stocks 55. Which of the following types of financing would be associated with the highest target compound rate of return on venture equity capital? a. public and seasoned financing b. second-round and mezzanine financing c. first-round financing d. seed financing 56. The additional interest rate premium required to compensate the lender for the probability that a borrower will not be able to repay interest and principal on a loan is known as a(n): a. inflation premium b. default risk premium c. liquidity premium d. maturity premium 57. 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: a. 12%–15% b. 20%–30% c. 25%–35% d. 40%–60% 58. 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? a. 10% b. 12% c. 13% d. 15%

Copyright Cengage Learning. Powered by Cognero.

Page 7

Name:

Class:

Date:

Chap_07_7e_Leach 59. 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: a. 20%–30% b. 25%–35% c. 30%–50% d. 40%–60% 60. Which of the following describes the interest rate in addition to the inflation rate expected on a risk-free loan? a. real rate b. nominal rate c. risk-free rate d. prime rate 61. The additional premium added to the real interest rate by lenders to compensate them for a debt instrument which cannot be converted to cash quickly at its existing value is called a(n): a. inflation premium b. default risk premium c. liquidity premium d. maturity premium 62. Calculate the weighted average cost of capital (WACC) based on the following information: the capital structure weights are 50% debt and 50% equity; the interest rate on debt is 10%; the required return to equity holders is 20%; and the tax rate is 30%. a. 7.0% b. 10.0% c. 13.5% d. 17.5% Multiple-Choice Questions for Appendix A 63. Your venture has net income of $600, taxable income of $1,000, operating profit of $1,200, total financial capital (including both debt and equity) of $9,000, a tax rate of 40%, and a WACC of 10%. What is your venture's EVA? a. $400,000 b. $200,000 c. –$20,000 d. –$180,000 64. Which of the following venture life cycle stages would involve seasoned financing rather than venture financing? a. development stage b. startup stage c. rapid-growth stage d. early-maturity stage

Copyright Cengage Learning. Powered by Cognero.

Page 8

Name:

Class:

Date:

Chap_07_7e_Leach 65. Which of the following describes the interest rate charged by banks to their highest-quality customers? a. real rate b. nominal rate c. risk-free rate d. prime rate 66. The risk-free interest rate is the sum of: a. a real rate of interest and an inflation premium b. a real rate of interest and a default risk premium c. an inflation premium and a default risk premium d. a liquidity premium and a maturity premium 67. Calculate the after-tax WACC based on the following information: nominal interest rate on debt = 12%; cost of common equity = 25%; common equity = $700,000; interest-bearing debt = $300,000; and tax rate = 25%. a. 15.0% b. 16.4% c. 20.2% d. 22.8% 68. Which of the following markets involve liquid securities with standardized contract features such as stocks and bonds? a. private financial market b. commodities market c. real estate market d. public financial market 69. What has been the approximate long-run (90 or so years) average annual rate of return on publicly traded smallcompany stocks? a. 10% b. 17% c. 25% d. 30% 70. The word "risk" developed from the early Italian word "risicare" and means: a. "don't care" b. "take a chance" c. "to dare" d. "to gamble"

Copyright Cengage Learning. Powered by Cognero.

Page 9

Name:

Class:

Date:

Chap_07_7e_Leach 71. Which of the following is not a component in determining the cost of debt? a. inflation premium b. default risk premium c. maturity premium d. interest rate premium 72. Over the long run (90 or so years), the variability (standard deviation) of average annual rates of return in the United States have been lowest for which of the following securities? a. five-year government bonds b. twenty-year corporate bonds c. large-company stocks d. small-company stocks 73. Which of the following describes the interest rate on debt that is virtually free of default risk? a. real rate b. nominal rate c. risk-free rate d. inflation rate Multiple-Choice Questions for Appendix A 74. Estimate a firm's NOPAT based on the following information: net sales = $2,000,000; EBIT = $600,000; net income = $20,000; and effective tax rate = 30%. a. $600,000 b. $420,000 c. $150,000 d. $70,000 75. 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? a. 14% b. 15% c. 16% d. 17% 76. Which of the following types of "premiums" would not be associated with corporate bonds? a. investment risk premium b. default risk premium c. liquidity premium d. maturity premium

Copyright Cengage Learning. Powered by Cognero.

Page 10

Name:

Class:

Date:

Chap_07_7e_Leach 77. Which of the following components is not used when estimating the cost of risky debt capital? a. real interest rate b. inflation premium c. default risk premium d. market risk premium 78. The added interest rate charged due to the inherent increased risk in long-term debt is called a(n): a. inflation premium b. default risk premium c. liquidity premium d. maturity premium 79. Venture capital holding period returns (all stages) for the 10-year period ending in 2018 were approximately: a. 25% b. 18% c. 13% d. 8%

Copyright Cengage Learning. Powered by Cognero.

Page 11

Name:

Class:

Date:

Chap_07_7e_Leach Answer Key 1. False 2. True 3. False 4. True 5. False 6. False 7. False 8. True 9. True 10. False 11. True 12. True 13. True 14. True 15. True 16. True 17. False 18. True 19. False 20. False 21. False 22. False 23. False 24. True 25. False 26. True

Copyright Cengage Learning. Powered by Cognero.

Page 12

Name:

Class:

Date:

Chap_07_7e_Leach 27. False 28. False 29. False 30. False 31. False 32. True 33. True 34. False 35. True 36. False 37. True 38. True 39. True 40. False 41. True 42. c 43. a 44. c 45. b 46. b 47. d 48. d 49. a 50. d 51. c 52. c 53. b 54. d Copyright Cengage Learning. Powered by Cognero.

Page 13

Name:

Class:

Date:

Chap_07_7e_Leach 55. d 56. b 57. d 58. b 59. c 60. a 61. c 62. c 63. d 64. d 65. d 66. a 67. c 68. d 69. b 70. c 71. d 72. a 73. c 74. b 75. d 76. a 77. d 78. d 79. c

Copyright Cengage Learning. Powered by Cognero.

Page 14

Name:

Class:

Date:

Chap_08_7e_Leach Indicate whether the statement is true or false.

1. Securities crowdfunding occurs when a large number of investors try to buy stocks at the same time. a. True b. False 2. SEC Regulation D requires the registration of securities with the SEC. a. True b. False True-False Questions for Appendix B 3. 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. a. True b. False 4. SEC Regulation D took effect in 1932 and provides the basis for safe harbor as a private placement. a. True b. False 5. In general, while there are specific exceptions, public offerings of securities in the United States must be registered with the SEC. a. True b. False 6. Regulation A, while technically considered an exemption from registration, is a public offering rather than a private placement. a. True b. False 7. 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. a. True b. False True-False Questions for Appendix B 8. The definition of an "accredited investor," initially defined in the Securities Act of 1933, was expanded in Rule 501 of Regulation D. a. True b. False 9. Investor liability in a proprietorship or corporation is unlimited. a. True b. False

Name:

Class:

Date:

Chap_08_7e_Leach 10. 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. a. True b. False 11. The Securities Act of 1933 provides a very narrow definition as to what constitutes a security. a. True b. False 12. Accredited investors are specifically protected by the Securities Act of 1933 from investing in unregistered securities issues. a. True b. False True-False Questions for Appendix B 13. One of the monetary requirements for individuals or natural persons as accredited investors as defined in Rule 501 of Regulation D is a net worth greater than $1,000,000. a. True b. False 14. Rule 504 under Regulation D has a $2 million financing limit (i.e., applies to sales of securities not exceeding $2 million). a. True b. False 15. A private placement, or a transaction by an issuer not involving any public offering, is exempt from registering securities. a. True b. False 16. Regulation A offerings are limited to $10 million and do not have limitations on the number or sophistication of offerees. a. True b. False 17. The Investment Company Act of 1940 defines investment companies and excludes them from using some of the registration exemptions originating in the 1933 Act. a. True b. False 18. 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. a. True b. False

Name:

Class:

Date:

Chap_08_7e_Leach 19. The Securities Exchange Act of 1934 provides for the regulation of securities exchanges and over-the-counter markets. a. True b. False True-False Questions for Appendix B 20. Rule 502 of Regulation D focuses, in part, on resale restrictions imposed on privately placed securities. a. True b. False 21. The typical business organization for a venture in its rapid-growth stage is a partnership or LLC. a. True b. False 22. 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. a. True b. False True-False Questions for Appendix B 23. One of the monetary requirements for individuals or natural persons as accredited investors as defined in Rule 501 of Regulation D is individual annual income greater than $500,000. a. True b. False 24. The life of a proprietorship is determined by the owner. a. True b. False 25. Title II of the JOBS Act of 2012 eliminates the general solicitation and advertising restriction for Regulation D 506 offerings. a. True b. False 26. State laws designed to protect high net-worth investors from investing in fraudulent security offerings are known as blue-sky laws. a. True b. False 27. The Securities Act of 1933 is the main body of federal law governing the creation and sale of securities in the United States. a. True b. False

Name:

Class:

Date:

Chap_08_7e_Leach 28. 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). a. True b. False 29. The Securities Exchange Act was passed in 1933, and the Securities Act was passed in 1934. a. True b. False 30. Ventures in the rapid-growth stage often need to seek new investors through large private or public offerings. a. True b. False 31. The Investment Advisers Act of 1940 provides a definition of an investment company. a. True b. False 32. The trading of securities is regulated under the Securities and Exchange Act of 1964. a. True b. False 33. Regulation A allows for registration exemptions on private security offerings so long as all investors are considered to be financially sophisticated. a. True b. False 34. Regulation A issuers are allowed to "test the waters" before preparing the offering circular (unlike almost all other security offerings). a. True b. False 35. Offerings and sales of securities are regulated under the Securities Act of 1933 and state blue-sky laws. a. True b. False 36. Blue-sky laws are federal laws designed to protect individuals from investing in fraudulent security offerings. a. True b. False 37. The two basic types of exemptions from having to register securities with the SEC are security and transaction exemptions. a. True b. False

Name:

Class:

Date:

Chap_08_7e_Leach 38. 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. a. True b. False 39. Regulation of investment companies (including professional venture capital firms) is carried out under the Investment Company Act of 1940. a. True b. False 40. The objective of the Jumpstart Our Business Startups (JOBS) Act of 2012 is to stimulate the initiation, growth, and development of small businesses. a. True b. False 41. Investor liability in a limited liability company (LLC) is limited to the owners' investments. a. True b. False 42. According to the Investment Advisers Act of 1940, a bank would not be classified as an "investment adviser." a. True b. False 43. It is usually easier to transfer ownership in a proprietorship relative to a corporation. a. True b. False 44. A Rule 504 exemption under Regulation D has no limit in terms of the number and qualifications of investors. a. True b. False Indicate the answer choice that best completes the statement or answers the question.

Multiple-Choice Questions for Appendix B 45. Which of the following is a requirement of natural persons to be accredited investors under Rule 501 of Regulation D? a. net worth greater than $5 million b. total assets greater than $1 million c. individual (single) annual income greater than $200,000 d. stock market portfolio greater than $2 million

Name:

Class:

Date:

Chap_08_7e_Leach 46. Investor liability is unlimited under which of the following types of business organizational forms? a. proprietorship b. limited liability company (LLC) c. C corporation d. S corporation 47. Which of the following is not an exemption method for making an offering exempt from SEC registration? a. 4(a)2 private offering b. accredited investor c. Regulation Z d. Regulation A 48. The U.S. federal law that impacts the creation and sales of securities is the: a. Securities Exchange Act of 1934 b. Securities Act of 1933 c. Investment Company Act of 1940 d. Investment Advisers Act of 1940 49. Which of the following statements regarding securities law is not true? a. ignorance is an acceptable defense b. security regulators may alter your investment agreement to the benefit of the investors c. the Securities Act of 1933 gives the SEC broad civil procedures to use in enforcement d. the Securities Act of 1933 gives the SEC some criminal procedures to use in enforcement 50. None of the following create any securities registration responsibilities except: a. securities issued by state governments b. securities issued by publicly held companies c. securities issued by banks d. securities issued by the federal government 51. Which of the following is not a requirement for registration of securities with the SEC? a. the name under which the issuer is doing business b. the name of the state where the issuer is organized c. the names of all products sold by the issuer d. the names of the underwriters 52. Unless your security is exempted, what section of the Securities Act of 1933 requires you to file a registration statement with the SEC? a. Section 1 b. Section 2 c. Section 4 d. Section 5

Name:

Class:

Date:

Chap_08_7e_Leach 53. Which of the following statements about Regulation A is not true? a. issuers are allowed to "test the waters" prior to preparing the offering circular b. after filing a SEC statement, the issuer can communicate with perspective investors orally, in writing, by advertising in newspapers, on radio and on television, or via the mail to determine investor interest c. issuers can take commitments or funds if the interest level is insufficient d. the issuer can drop a Regulation A filing 54. The JOBS Act of 2012 does not provide for which of the following? a. establishes a new business classification called "Emerging Growth Company" b. lifts restrictions on general solicitation and advertising for Regulation D 506 accredited investor offerings c. changes the maximum amount to be raised under a Regulation A-like offering to $50 million d. prohibits the use of securities crowdfunding for the sale of securities Multiple-Choice Questions for Appendix B 55. Rule 501 of Regulation D expands the categories of accredited investors. Which of the following is not one of the categories? a. any organization formed for the specific purpose of acquiring securities with assets in excess of $5 million b. any director or executive officer of the issuer of securities being sold c. any individual whose net worth exceeds $1 million d. any partnership 56. Which of the following is not a condition of a Regulation D offering under Rule 502? a. integration b. sophistication c. information d. solicitation 57. Rule 506 of Regulation D is limited in terms of the number of unaccredited investors to: a. 20 b. 25 c. 35 d. 40 58. Which of the following statements regarding the Securities Act of 1933 is not true? a. it was passed in response to abuses thought to have contributed to the financial catastrophes of the Great Depression b. it covers securities fraud c. it requires securities to be registered formally with the federal government d. it focuses on those who provide investment advice

Name:

Class:

Date:

Chap_08_7e_Leach Multiple-Choice Questions for Appendix B 59. Which of the following topics does Rule 502 of Regulation D cover? a. accreditation and integration b. integration, information, and accreditation c. information, accreditation, and resale d. resale, information, and accreditation 60. Which title of the JOBS Act of 2012 established a small offering registration exemption involving the sales of securities to an Internet "crowd"? a. Title I b. Title II c. Title III d. Title IV 61. Offerings exempted from registration under Rule 504 of Regulation D may raise up to $5 million in a: a. 6-month period b. 9-month period c. 12-month period d. 24-month period 62. An offering that raises $10,000,000, involving 35 unaccredited investors and 100 accredited investors, might be exempt from registration under: a. Section 4(a)5 b. Regulation D: Rule 504 c. Regulation D: Rule 506 d. Regulation A 63. Which of the following rules under Regulation D has a $5 million financing limit? a. Rule 503 b. Rule 504 c. Rule 506 d. Rule 507 64. The basic types of transaction exemptions from registration with the SEC are: a. the private offering exemption and the accredited investor exemption b. the "too-big-to-fail" exemption and the intrastate offering exemption c. the accredited investor exemption and the public offering exemption d. the intrastate offering exemption and the interstate offering exemption

Name:

Class:

Date:

Chap_08_7e_Leach 65. Which of the following exemptions involves a public, and not a private, offering? a. Regulation D: Rule 501 b. Regulation D: Rule 504 c. Regulation D: Rule 506 d. Regulation A 66. Ventures that reach the survival stage of their life cycles and seek first-round financing are typically organized as: a. proprietorships or partnerships b. LLCs or corporations c. corporations or proprietorships d. partnerships or LLCs 67. In the Ninth Circuit Court of Appeals decision on SEC v. Murphy, all of the following were considerations in determining an offering to be a private placement except: a. there must be an arm's length relationship between the issuer of the security and the prospective purchaser b. the number of offerees must be limited c. the size and the manner of the offering must not indicate widespread solicitation d. the offerees must be sophisticated 68. Security exemptions from registration with the SEC do not include which of the following? a. securities issued by banks and thrift institutions b. government securities c. intrastate offerings d. securities issued by large, high-quality corporations 69. State securities regulations are referred to as: a. Regulation A legislation b. stormy-day laws c. blue-sky laws d. SEC oversight legislation 70. Which of the following is not a security? a. treasury stock b. debenture c. call option d. real property 71. Which SEC regulation took effect in 1982 and provides the basis for safe harbor as a private placement? a. Regulation A b. Regulation B c. Regulation C d. Regulation D

Name:

Class:

Date:

Chap_08_7e_Leach 72. Exemptions for private placement offerings and sales of securities limited to $5 million are covered under which of the following Regulation D rules? a. Rule 501 b. Rule 502 c. Rule 503 d. Rule 504 73. Efforts to regulate the offerings and sales of securities take place under which of the following securities laws? a. the Securities Act of 1933 and state blue-sky laws b. state blue-sky laws and the Securities and Exchange Act of 1934 c. the Securities Act of 1933 and the Securities and Exchange Act of 1934 d. the Investment Company Act of 1940 and the Investment Advisers Act of 1940 74. The efforts to regulate the trading of securities takes place under which of the following securities laws? a. the Securities Act of 1933 b. state blue-sky laws c. the Securities and Exchange Act of 1934 d. the Investment Company Act of 1940 75. Rule 504 of Regulation D limits the total number of investors to: a. 35 total investors b. 100 total investors c. 35 unaccredited investors and any number of accredited investors d. none of these choices; there is no limit on the number of accredited or unaccredited investors 76. Which of the following is not a characteristic of Regulation A? a. an offering is limited to $50 million b. the number of offerees or investors is limited to 35 c. the offering is a public offering d. the securities issued can generally be freely resold 77. While Section 4(a)2 does not limit the dollar amount of an offering, the interpretation of the law has stipulated that the: a. investors must be sophisticated b. number of investors must be limited to 35 c. funds must be raised within a 12-month period d. offering must be extended to the public, and not only investors who have a relationship with the issuer

Name:

Class:

Date:

Chap_08_7e_Leach Multiple-Choice Questions for Appendix B 78. 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? a. 1 day b. 15 days c. 30 days d. 90 days 79. The returning of all funds to equity investors as a common remedy for a fouled-up securities offering is called: a. just action b. fraud c. second-round financing d. a rescission 80. Which of the following statements about Regulation A is not true? a. it is shorter and simpler than the full registration b. it does not have limits on the number or sophistication of investors c. it is a public offering rather than a private placement d. it requires no offering statement be filed with the SEC 81. Which of the following SEC registration exemptions has no financing limit and permits a maximum of 35 unaccredited investors? a. Section 4(a)2 b. Regulation D: Rule 504 c. Regulation D: Rule 506 d. Regulation A Multiple-Choice Questions for Appendix B 82. The primary exemption from the prohibition of resale of unregistered securities (including, but not limited to, securities safely harbored in Rule 506 offerings) is: a. Rule 111 b. Rule 122 c. Rule 133 d. Rule 144 83. Which of the following statements about registering securities with the SEC is not true? a. it is a time-consuming process b. it requires the disclosure of accounting information c. it is an inexpensive process d. it provides information to prospective investors

Name:

Chap_08_7e_Leach Answer Key 1. False 2. False 3. False 4. False 5. True 6. True 7. False 8. True 9. False 10. True 11. False 12. False 13. True 14. False 15. True 16. False 17. True 18. True 19. True 20. True 21. False 22. True 23. False 24. True 25. True 26. False

Class:

Date:

Name:

Chap_08_7e_Leach 27. True 28. True 29. False 30. True 31. False 32. False 33. False 34. True 35. True 36. False 37. True 38. True 39. True 40. True 41. True 42. True 43. False 44. True 45. c 46. a 47. c 48. b 49. a 50. b 51. c 52. d 53. c 54. d

Class:

Date:

Name:

Chap_08_7e_Leach 55. d 56. b 57. c 58. d 59. d 60. b 61. c 62. c 63. b 64. a 65. d 66. b 67. a 68. d 69. c 70. d 71. d 72. d 73. a 74. c 75. d 76. b 77. a 78. b 79. d 80. d 81. c 82. d

Class:

Date:

Name:

Chap_08_7e_Leach 83. c

Class:

Date:

Name:

Class:

Date:

Chap_09_7e_Leach Indicate whether the statement is true or false.

1. A firm's maximum sustainable sales growth rate occurs at a retention ratio of 100%. a. True b. False 2. A customer-driven or "bottom-up" approach to forecasting sales is used primarily to forecast industry sales growth rates. a. True b. False 3. First-round financing usually occurs during a venture's rapid-growth life cycle stage. a. True b. False 4. The added costs associated with obtaining equity capital are based on investor expected rates of return and are explicit costs which affect AFN. a. True b. False 5. Public or seasoned financing typically occurs during the survival stage of a venture's life cycle. a. True b. False 6. Spontaneously generated funds are increases in accounts receivable and accounts payable that accompany sales increases. a. True b. False 7. 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. a. True b. False 8. Internally generated funds is the cash produced from operating a firm over a specified time period. a. True b. False 9. The percent of sales forecasting method must project all cost and balance sheet items at the same growth rate as sales. a. True b. False

Copyright Cengage Learning. Powered by Cognero.

Page 1

Name:

Class:

Date:

Chap_09_7e_Leach 10. A firm with a positive growth rate in sales will require some additional funds, assuming the existing ratios will not be changed. a. True b. False 11. The volatility of a firm's cash balance will steadily decrease as the firm progresses from the survival stage to the rapid-growth stage. a. True b. False 12. The constant-ratio forecasting method is a variant of the percent-of-sales forecasting method. a. True b. False 13. Additional funds needed (AFN) is the gap remaining between the financial capital needed and that funded by spontaneously generated funds and retained earnings. a. True b. False 14. Increases in accounts receivable and accounts payable that accompany sales increases are called spontaneously generated funds. a. True b. False 15. The rate at which a firm can grow sales based on the retention of business profits is known as the sustainable sales growth rate. a. True b. False 16. Financial capital needed (FCN) is the amount of funds needed to acquire assets necessary to support a firm's sales growth. a. True b. False 17. An increase in accounts receivable will require additional financing unless the increase is offset by an equal decrease in another asset account. a. True b. False 18. The cost of obtaining additional funds, such as additional interest expenses from borrowing funds, may be explicit and impact AFN. a. True b. False

Copyright Cengage Learning. Powered by Cognero.

Page 2

Name:

Class:

Date:

Chap_09_7e_Leach 19. Forecasting for firms with operating histories is generally much easier than forecasting for early-stage ventures. a. True b. False 20. The sustainable sales growth rate is equal to ROA times the retention ratio. a. True b. False 21. The weighted average of a set of possible outcomes or scenarios is known as the expected value. a. True b. False 22. Preparing a projected statement of cash flows serves as check on the projected income statement and projected balance sheet. a. True b. False 23. Sales forecasts usually are based on either a single specific scenario or weighted averages of several possible realizations. a. True b. False 24. Sales forecasting accuracy is usually lowest during a venture's development stage in its life cycle. a. True b. False 25. Increases in accounts payable and notes payable are examples of spontaneously generated funds. a. True b. False 26. Sales forecasting accuracy is usually highest during a venture's startup stage in its life cycle. a. True b. False 27. When using the beginning-of-period equity base, the sustainable sales growth rate is equal to ROE times the retention ratio. a. True b. False 28. In a typical venture's life cycle, the rapid-growth stage involves creating and building value, obtaining additional financing, and examining exit opportunities. a. True b. False

Copyright Cengage Learning. Powered by Cognero.

Page 3

Name:

Class:

Date:

Chap_09_7e_Leach 29. Long-term financial planning begins with a forecast of annual working capital needs. a. True b. False 30. A complete balance sheet and income statement mechanically imply a working statement of cash flows. a. True b. False Indicate the answer choice that best completes the statement or answers the question.

31. A new venture usually begins its sales forecast by first: a. forecasting industry sales and expressing the venture's sales as a percent of industry sales b. using a "bottom-up" market-driven approach c. extrapolating past sales d. working with existing and potential customers 32. A sales growth rate based on the retention of profits is referred to as the: a. sustainable sales growth rate b. spontaneous sales growth rate c. nominal sales growth rate d. weighted average sales growth rate 33. Use the following information to estimate a venture's sustainable growth rate: net income = $200,000; total assets = $1,000,000; equity multiplier based on beginning common equity = 2.0 times; and retention rate = 25%. a. 5% b. 25% c. 20% d. 10% 34. 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. a. 1.00 b. 1.25 c. 1.50 d. 2.00 35. 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%. a. 10.0% b. 22.5% c. 20.0% d. 17.5%

Copyright Cengage Learning. Powered by Cognero.

Page 4

Name:

Class:

Date:

Chap_09_7e_Leach 36. During which life cycle stage is a venture typically most accurate in forecasting sales? a. survival stage b. startup stage c. development stage d. early-maturity stage 37. Which of the following statements is not true? a. forecasting sales is the first step in creating projected financial statements b. forecasting sales tends to be more accurate for mature ventures than for early-stage ventures c. forecasting sales is relatively unimportant for early-stage ventures that have little historical financial data d. forecasting sales should consider the likely impact of major operating changes 38. When projecting financial statements, one would first a. project the balance sheet; forecast sales b. forecast sales; project the income statement c. forecast sales; project the balance sheet d. forecast sales; project the statement of cash flows

, and then proceed to

.

39. Which of the following life cycle stages would generally be associated with the second lowest sales forecasting accuracy? a. early-maturity stage b. rapid-growth stage c. survival stage d. startup stage 40. During which round of financing is a venture typically most accurate in forecasting sales? a. seasoned financing b. mezzanine financing c. first-round financing d. startup financing 41. Which of the following is not part of the financial forecasting process used to project financial statements? a. project the cost of equity capital b. project the income statement c. project the balance sheet d. project the statement of cash flows 42. The financial funds needed to acquire assets necessary to support a firm's sales growth is called: a. spontaneously generated funds b. additional funds needed c. addition in retained earnings d. financial capital needed

Copyright Cengage Learning. Powered by Cognero.

Page 5

Name:

Class:

Date:

Chap_09_7e_Leach 43. Determine a venture's sustainable growth rate based on the following information: sales = $1,000,000; net income = $100,000; common equity at the beginning of the year = $500,000; and retention rate = 50%. a. 10% b. 15% c. 20% d. 25% 44. If a venture has a return on assets (ROA) of 10%, an equity multiplier based on beginning equity of 4.0 times, and a dividend payout ratio of 60%, the sustainable growth rate would be: a. 10% b. 16% c. 20% d. 24% 45. 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? a. 25% b. 10% c. 15% d. 20% 46. Which of the following is a forecasting method used to project financial statements? a. percent-of-sales method b. percent-of-expenses method c. return on equity method d. additional funds needed method 47. Which of the following is not a step in forecasting sales for a seasoned firm? a. forecast future growth rates based on possible scenarios and the probabilities of those scenarios b. attempt to corroborate the projected sales growth rates with industry growth rates and the firm's own past market share c. refine the sales forecast by using the sales force as a direct contact with both existing and potential customers d. consider the effects of changes in the firm's debt/equity blend on the sales forecasts 48. 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? a. 15% b. 30% c. 20% d. 25%

Copyright Cengage Learning. Powered by Cognero.

Page 6

Name:

Class:

Date:

Chap_09_7e_Leach 49. Which of the following would increase a firm's need for additional funds? a. an increase in the profit margin b. a decrease in the expected sales growth rate c. a decrease in assets d. an increase in the dividend payout rate 50. Which of the following ratios is not part of the standard return on equity (ROE) model? a. net profit margin b. asset turnover c. equity multiplier d. retention rate 51. If beginning-of-period common equity is $200,000 and end-of-period common equity is $300,000, the sustainable growth rate is: a. 33% b. 40% c. 50% d. 67% 52. Internally generated funds which are available for distribution to owners of for reinvestment back into the business to support future growth can be characterized by which of the following? a. operating income b. operating cash flow c. net income d. net cash flow 53. An expected value is: a. a simple average of a set of scenarios or possible outcomes b. a weighted average of a set of scenarios or possible outcomes c. the highest scenario value or outcome d. the lowest scenario value or outcome 54. 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? a. $200,000 b. $600,000 c. $840,000 d. $960,000

Copyright Cengage Learning. Powered by Cognero.

Page 7

Name:

Class:

Date:

Chap_09_7e_Leach 55. Lola is in the process of forecasting the sales growth rate for an early-stage venture specializing in the production of durable running shoes. Lola predicts a 0.20 probability of an 80% growth in sales, a 0.30 probability of a 60% growth in sales, a 0.40 probability of a 40% growth in sales, and a 0.10 probability of a 10% decrease in sales.

What is the expected sales growth rate of the venture? a. 47% b. 49% c. 51% d. 53% 56. Which of the following is not considered to be a major emphasis during the rapid-growth stage in a successful venture's life cycle? a. choose organizational form b. create and build value c. obtain additional financing d. examine exit opportunities 57. Public or seasoned financing is generally associated with which of the following life cycle stages? a. startup stage b. survival stage c. early-maturity stage d. development stage 58. A firm projects net income to be $500,000, intends to pay out $125,000 in dividends, and had $2 million of equity at the beginning of the year. The firm's sustainable growth rate is: a. 5.50% b. 18.75% c. 6.25% d. 4.69% 59. If a venture has a return on assets (ROA) of 10%, an equity multiplier based on beginning equity of 3.5 times, and a retention rate of 50%, the sustainable growth rate would be: a. 10.0% b. 17.5% c. 20.0% d. 35.0% 60. When long-term financial planning efforts set cash as a percentage of sales or as a fixed dollar amount for planning purposes, the projected cash flow statement is said to be a forecasting statement. a. dynamic b. passive c. conservative d. checking

Copyright Cengage Learning. Powered by Cognero.

Page 8

Name:

Class:

Date:

Chap_09_7e_Leach 61. A firm has net income of $320,000 and sales of $3,200,000. Its assets total $2,000,000, the equity at the beginning of the year was $1,600,000, and dividends paid were $80,000. What is the sustainable growth rate? a. 5.50% b. 15.00% c. 6.25% d. 4.75% 62. Determine a venture's sustainable growth rate based on the following information: sales = $1,000,000; net income = $150,000; common equity at the end of last year = $520,000; and dividend payout percentage = 20%. a. 16% b. 20% c. 24% d. 30% 63. The increase in accounts payables and accruals that occur with a sales increase is called: a. spontaneously generated funds b. additional funds needed c. addition in retained earnings d. financial capital needed 64. If a venture has a return on assets (ROA) of 12%, an equity multiplier based on beginning equity of 3.0 times, and a sustainable growth rate of 18%, the retention rate would be: a. 60% b. 30% c. 50% d. 40%

Copyright Cengage Learning. Powered by Cognero.

Page 9

Name:

Class:

Date:

Chap_09_7e_Leach Answer Key 1. True 2. False 3. False 4. False 5. False 6. False 7. False 8. False 9. False 10. False 11. False 12. True 13. True 14. True 15. True 16. True 17. True 18. True 19. True 20. False 21. True 22. True 23. True 24. True 25. False 26. False

Copyright Cengage Learning. Powered by Cognero.

Page 10

Name:

Class:

Date:

Chap_09_7e_Leach 27. True 28. True 29. False 30. True 31. a 32. a 33. d 34. a 35. c 36. d 37. c 38. b 39. d 40. a 41. a 42. d 43. a 44. b 45. d 46. a 47. d 48. d 49. d 50. d 51. c 52. c 53. b 54. c Copyright Cengage Learning. Powered by Cognero.

Page 11

Name:

Class:

Date:

Chap_09_7e_Leach 55. b 56. a 57. c 58. b 59. b 60. d 61. b 62. d 63. a 64. c

Copyright Cengage Learning. Powered by Cognero.

Page 12

Name:

Class:

Date:

Chap_10_7e_Leach Indicate whether the statement is true or false.

1. The terminal or horizon value is the value of a venture at the end of its explicit forecast period. a. True b. False 2. The stepping-stone year is the second year after the explicit forecast period when valuing a venture. a. True b. False 3. When projecting maximum dividends, changes in surplus cash will be paid out as dividends. a. True b. False 4. The valuation method involving the extraction of pseudo dividends treats changes in surplus cash as possible free cash flows to equity. a. True b. False 5. The terminal value is the value of the venture at the beginning of the explicit forecast period. a. True b. False 6. The reversion value of a venture is the present value of the venture's terminal value. a. True b. False 7. The present value of a venture is the value today of all future cash flows discounted at the investor's required rate of return. a. True b. False 8. Required cash is the amount of cash required to operate a venture through its day-to-day business. a. True b. False 9. The valuation method calculating pseudo dividends involves zero explicitly forecasted dividends and an adjustment to working capital to strip surplus cash. a. True b. False 10. The wider the capitalization (cap) rate (i.e., the discount rate minus the growth rate in the terminal period), the higher the terminal value. a. True b. False

Copyright Cengage Learning. Powered by Cognero.

Page 1

Name:

Class:

Date:

Chap_10_7e_Leach 11. The valuation method involving the projection of maximum dividends involves explicitly forecasted dividends to provide surplus cash which is positive. a. True b. False 12. As used in this textbook, the terminal value is the same as the horizon value. a. True b. False 13. Sweat equity is an individual's work-related, nonfinancially compensated contribution to the enhancement of a venture's value. a. True b. False 14. A venture's reversion value is the present value of ongoing expenses. a. True b. False 15. The stepping-stone year is the first year before the explicit forecast period. a. True b. False 16. The capitalization (cap) rate is the spread between the discount rate and the growth rate of cash flow in the terminal value period. a. True b. False 17. The equity valuation method is the process of projecting and then discounting the relevant cash flows available to providers of debt capital. a. True b. False 18. Equity valuation cash flow is defined as net income before taxes available to venture equity investors. a. True b. False 19. A post-money valuation differs from a pre-money valuation by the cost of financial capital. a. True b. False 20. Net operating working capital is current assets other than surplus cash less interest-bearing long-term liabilities. a. True b. False

Copyright Cengage Learning. Powered by Cognero.

Page 2

Name:

Class:

Date:

Chap_10_7e_Leach 21. Post-money valuation is the pre-money valuation of a venture plus all monies previously contributed by the venture's founders. a. True b. False 22. Pre-money valuation is the present value of a venture prior to a new money investment. a. True b. False 23. Surplus cash is the amount of cash required to pay scheduled dividends for the next quarter. a. True b. False 24. While accounting for the past is all well and good, an investor seeks to quantify and value the future. a. True b. False 25. Finding the present value of the horizon value produces the venture's reversion value. a. True b. False 26. The pseudo dividend approach to valuation treats surplus cash either as stripped out while not in use or as employed outside the venture and stored in a zero NPV investment. a. True b. False 27. Surplus cash is the cash remaining after required cash, all operating expenses, and reinvestments are made. a. True b. False 28. Surplus cash is the cash remaining after required cash, all operating expenses, reinvestments, and dividend payouts are made. a. True b. False 29. Applying the maximum dividend and pseudo dividend approaches to valuation results in different valuation estimates. a. True b. False 30. The valuation approach involving discounting present value cash flows for risk and delay is called discounted cash flow (DCF). a. True b. False

Copyright Cengage Learning. Powered by Cognero.

Page 3

Name:

Class:

Date:

Chap_10_7e_Leach 31. 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. a. True b. False 32. The explicit forecast period is the two- to ten-year period in which the venture's financial statements are explicitly forecast. a. True b. False 33. The pseudo dividend approach to valuation treats equity infusions and withdrawals in a "just-in-time" fashion. a. True b. False 34. The reversion value is the future value of the terminal value. a. True b. False Indicate the answer choice that best completes the statement or answers the question.

35. What is the present value of a set of future flows plus the current undiscounted flow called? a. reversion value b. horizon value c. terminal value d. net present value 36. A venture's going-concern value is the: a. net present value of the current and expected future cash flows b. future value of the expected cash flows c. net future value of the current and expected cash flows d. present value of the expected future cash flows 37. The calculation of equity valuation cash flows nets the cash impact of all other balance sheet and income statement accounts to focus on the account as the repository of any remaining cash flow. a. cash b. net income c. equity d. non-interest-bearing liabilities 38. When estimating the terminal value of a cash flow perpetuity, which of the following is not a component? a. the next period's cash flow b. a constant discount rate c. a constant growth rate d. the payback period

Copyright Cengage Learning. Powered by Cognero.

Page 4

Name:

Class:

Date:

Chap_10_7e_Leach 39. In equation form, the equity valuation cash flow is defined as: a. Net Income + Depreciation and Amortization Expense – Change in Net Operating Working Capital + Capital Expenditures + Net Debt Issues b. Net Income + Depreciation and Amortization Expense + Change in Net Operating Working Capital + Capital Expenditures + Net Debt Issues c. Net Income + Depreciation and Amortization Expense – Change in Net Operating Working Capital + Capital Expenditures – Net Debt Issues d. Net Income + Depreciation and Amortization Expense – Change in Net Operating Working Capital – Capital Expenditures + Net Debt Issues 40. 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? a. $48,000 b. $166,000 c. $218,000 d. $466,000 41. The valuation approach involving pseudo dividends suggests: a. actual dividends expected to be paid b. dividends that reflect cash not involved in venture operations c. projecting dividends that exhaust any surplus cash d. using a net operating working capital adjustment to foster valuation 42. Estimate a venture's cash flow expected next year based on the following information: current year's net sales = $400,000; terminal value = $500,000; constant future growth rate = 10%; and venture investors' required rate of return = 20%. a. $80,000 b. $40,000 c. $50,000 d. $60,000 43. Your firm has been in business for two years. In its first year, the firm ended with $227,000 of current assets, long-term assets of $143,000, $70,000 in surplus cash, current liabilities of $52,000, and long-term assets of $68,000. At the end of the second year, the firm had current assets of $279,000, long-term assets of $195,000, surplus cash of $90,000, current liabilities of $62,000, and long-term assets of $78,000. What is your firm's change in net operating working capital? a. $22,000 b. $62,000 c. $42,000 d. $32,000

Copyright Cengage Learning. Powered by Cognero.

Page 5

Name:

Class:

Date:

Chap_10_7e_Leach 44. What is the present value of the venture's expected future cash flows called? a. going-concern value b. net present value c. terminal value d. reversion value 45. Most discounted cash flow valuations involve using cash flows from a(n): a. historical period, an explicit forecast period, and a terminal value b. historical period and a terminal value c. historical period and an explicit forecast period d. explicit forecast period and a terminal value 46. 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? a. the projection of maximum dividends b. the calibration of pseudo dividends c. sustainable growth dividend retention d. return on equity method 47. The value of the venture at the end of the explicit forecast period is called the: a. going-concern value b. net present value c. terminal value d. reversion value 48. The purpose of the stepping-stone year is to: a. assure that there is sufficient required cash b. assure that future dividends are constant c. assure that investment flows are consistent with terminal growth rates d. allow for a final year of higher-than-sustainable growth 49. 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. a. equity discount; minus b. equity discount; plus c. risk-free; plus d. risk-free; minus

Copyright Cengage Learning. Powered by Cognero.

Page 6

Name:

Class:

Date:

Chap_10_7e_Leach 50. The present value of the terminal value is called the: a. going-concern value b. horizon value c. terminal value d. reversion value 51. To calculate a terminal value, one divides the next period's cash flow by the spread between the discount rate and growth rate. a. variable; constant b. constant; variable c. constant; constant d. variable; variable 52. "Just-in-time" capital injections by equity investors is a reference to: a. sustainable growth b. the present value of the terminal value c. equity investors providing money only when needed d. dividend payout 53. An individual's work-related, nonfinancially compensated contribution to the enhancement of a venture's value is referred to as: a. money equity b. sweat equity c. goodwill d. intangible work 54. The equity valuation method involving explicitly forecasted dividends to provide surplus cash of zero involves: a. maximum dividends b. pseudo dividends c. sustainable growth dividend retention d. actual dividend payments 55. What is the difference between pre-money valuation and post-money valuation? a. the size of the capitalization rate b. the amount of money injected by new investors c. the terminal value d. the amount of money previously contributed by founders

Copyright Cengage Learning. Powered by Cognero.

Page 7

Name:

Class:

Date:

Chap_10_7e_Leach 56. Estimate a venture's terminal value based on the following information: current year's net income = $20,000; next year's expected cash flow = $26,000; constant future growth rate = 7%; and venture investors' required rate of return = 20%. a. $356,846 b. $285,714 c. $200,000 d. $150,000 57. Which of the following is not a component of the equity valuation cash flow calculation? a. net income b. depreciation and amortization expense c. change in net operating working capital (without surplus cash) d. net equity repurchases 58. Estimate a venture's terminal value based on the following information: current year's net sales = $500,000; next year's expected cash flow = $16,000; constant future growth rate = 10%; and venture investors' required rate of return = 20%. a. $285,714 b. $200,000 c. $150,000 d. $160,000 59. The value today of all future cash flows discounted to the present at the investor's required rate of return is called the: a. horizon value b. present value c. terminal value d. reversion value 60. Estimate a venture's constant growth rate (g) based on the following information: terminal value = $400,000; current year's net income = $20,000; next year's expected cash flow = $25,000; and required rate of return = 20%. a. 4.00% b. 13.25% c. 7.75% d. 15.50% 61. What is the present value of the terminal value called? a. horizon value b. net present value c. reversion value d. entity value

Copyright Cengage Learning. Powered by Cognero.

Page 8

Name:

Class:

Date:

Chap_10_7e_Leach 62. The equity valuation method involving zero explicitly forecasted dividends and an adjustment to working capital to strip surplus cash involves: a. maximum dividends b. pseudo dividends c. sustainable growth dividend retention d. actual dividend payments 63. Estimate a venture's required rate of return based on the following information: terminal value = $400,000; current year's net income = $20,000; next year's expected cash flow = $25,000; and constant growth rate = 7%. a. 7.50% b. 9.00% c. 10.75% d. 13.25% 64. Which of the following is not a component of the equity valuation cash flow? a. net operating profit after taxes b. change in net operating working capital (without surplus cash) c. capital expenditures d. net debt issues 65. Estimate a venture's equity valuation cash flow based on the following information: net income = $6,372; depreciation = $4,600; change in net operating working capital = $2,415; capital expenditures = $6,900; and new debt issues = $1,000. a. $6,787 b. $5,487 c. $4,487 d. $3,787 66. Required cash is: a. the cash needed to pay interest expense b. a valuation method for early-stage ventures c. the cash needed to cover a venture's day-to-day operations d. the cash available to pay as a dividend 67. The valuation approach involving maximum dividends suggests: a. actual dividends expected to be paid b. dividends that reflect cash not involved in venture operations c. projecting dividends that exhaust any surplus cash d. using a net operating working capital adjustment to foster valuation

Copyright Cengage Learning. Powered by Cognero.

Page 9

Name:

Class:

Date:

Chap_10_7e_Leach Answer Key 1. True 2. False 3. True 4. True 5. False 6. True 7. True 8. True 9. True 10. False 11. False 12. True 13. True 14. False 15. False 16. True 17. False 18. False 19. False 20. False 21. False 22. True 23. False 24. True 25. True 26. True

Copyright Cengage Learning. Powered by Cognero.

Page 10

Name:

Class:

Date:

Chap_10_7e_Leach 27. True 28. False 29. False 30. False 31. True 32. True 33. True 34. False 35. d 36. d 37. c 38. d 39. d 40. b 41. d 42. c 43. a 44. a 45. d 46. b 47. c 48. a 49. a 50. d 51. c 52. c 53. b 54. a Copyright Cengage Learning. Powered by Cognero.

Page 11

Name:

Class:

Date:

Chap_10_7e_Leach 55. b 56. c 57. d 58. d 59. b 60. b 61. c 62. b 63. d 64. a 65. b 66. c 67. c

Copyright Cengage Learning. Powered by Cognero.

Page 12

Name:

Class:

Date:

Chap_11_7e_Leach Indicate whether the statement is true or false.

1. If a venture issues debt prior to the exit period, the initial equity investors will still receive first claims on the venture's net worth at exit time. a. True b. False 2. The basic venture capital method estimates a venture's value using only terminal/exit flows to all of the venture's owners. a. True b. False The following True/False Questions relate to Learning Supplements 11A and 11B 3. A price-earnings ratio is related to the level and growth of earnings. a. True b. False 4. The expected present value method incorporates the present values of different scenarios, as well as their probabilities, into the valuation process. a. True b. False 5. 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. a. True b. False The following True/False Questions relate to Learning Supplements 11A and 11B 6. The return on book equity equals the sustainable growth rate when all earnings are paid out in the form of dividends. a. True b. False 7. The utopian venture valuation approach uses probability-weighted outcomes that are summed to get an expected present value for the venture. a. True b. False The following True/False Questions relate to Learning Supplements 11A and 11B 8. For the typical business plan having current and early cash outflows and later-stage cash inflows, the VCSC and DDA methods will typically give lower valuations than the MDM and PDM. a. True b. False

Copyright Cengage Learning. Powered by Cognero.

Page 1

Name:

Class:

Date:

Chap_11_7e_Leach 9. Multiplying a venture's earnings by a price-earnings ratio represents a form of direct comparison valuation. a. True b. False 10. The venture capital valuation method which capitalizes earnings using a cap rate implied by a comparable ratio is known as direct capitalization. a. True b. False 11. The basic venture capital method estimates a venture's value using intermediate and terminal/exit flows to founders. a. True b. False The following True/False Questions relate to Learning Supplements 11A and 11B 12. The VSCS and DDA methods are "just-in-time" capital methods which do not assess capital charges for idle cash. a. True b. False 13. 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. a. True b. False 14. The value of the venture's equity is equal to the value the financing contributed in the first venture capital round. a. True b. False The following True/False Questions relate to Learning Supplements 11A and 11B 15. The venture capital shortcut (VCSC) method is a post-money version of the delayed dividend approximation (DDA). a. True b. False 16. Post-money valuation of a venture is the pre-money valuation plus money injected by new investors. a. True b. False 17. For most early-stage ventures, there are no strong motives for having an equity component in employee compensation. a. True b. False

Copyright Cengage Learning. Powered by Cognero.

Page 2

Name:

Class:

Date:

Chap_11_7e_Leach 18. Venture investors' returns depend on the venture's ability to generate cash flows or to find an acquirer for the venture. a. True b. False 19. A direct application of the earnings-per-share ratio to venture earnings is known as the direct comparison valuation method. a. True b. False The following True/False Questions relate to Learning Supplements 11A and 11B 20. For the typical business plan having current and early cash outflows and later-stage cash inflows, the VSCS will give a higher valuation than the DDA. a. True b. False 21. Staged financing is financing provided in sequences of rounds rather than all at one time. a. True b. False 22. The internal rate of return (IRR) is the compound rate of return that equates the present value of the cash inflows received with the initial investment. a. True b. False 23. Almost without exception, professional venture investors demand that some equity or deferred equity compensation be structured into any valuation. a. True b. False 24. 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. a. True b. False 25. In staged financing, the expected effect of future dilution is borne by both founders and the investors currently seeking to invest. a. True b. False 26. The discount rate that one applies in a multiple scenario valuation will usually be lower than the discount rate that would be applied to the business plan cash flows. a. True b. False

Copyright Cengage Learning. Powered by Cognero.

Page 3

Name:

Class:

Date:

Chap_11_7e_Leach 27. The market value of a venture's equity is equal to the market value of the venture's total assets minus its total liabilities. a. True b. False 28. The alternative to a utopian venture valuation approach is a mean venture valuation approach which considers that two or more outcomes could occur. a. True b. False The following True/False Questions relate to Learning Supplements 11A and 11B 29. The DDA and VCSC methods give the same valuation. a. True b. False 30. All of the scenarios in a multiple scenario analysis must have exit cash flows in the same year. a. True b. False 31. The capitalization rate is the sum of the discount rate and the growth rate of the cash flow in the terminal value period. a. True b. False 32. The discount rate applied in an expected PV approach should be the same rate across scenarios. a. True b. False Indicate the answer choice that best completes the statement or answers the question.

33. Determine the net income of a comparable firm based on the following information: value of the target firm = $4,000,000; net income of the target firm = $200,000; stock price of the comparable firm = $30; and number of shares of stock outstanding for the comparable firm = 300,000. a. $450,000 b. $500,000 c. $550,000 d. $600,000

Copyright Cengage Learning. Powered by Cognero.

Page 4

Name:

Class:

Date:

Chap_11_7e_Leach 34. A potential investor is willing to provide $500,000 in first-round financing with the expectation of a 50% annual compound rate of return over the next five years. Founders currently hold 1,000,000 million shares of stock. The venture is expected to produce $500,000 in net income in year 5. A similar firm with annual net income of $1,000,000 sold shares to the public for $10,000,000. What is the post-money valuation? a. $658,354 b. $499,954 c. $408,377 d. $249,977 35. Determine the future value of a target venture which has net income expected to be $40,000 at the end of four years from now. A comparable firm currently has a stock price of $20 per share, 100,000 shares outstanding, and net income of $50,000. a. $1.0 million b. $1.4 million c. $1.6 million d. $2.0 million 36. The value of the existing venture plus the proceeds from the potential new equity issue is known as: a. pre-money valuation b. post money valuation c. staged financing d. the capitalization rate 37. The utopian approach to valuation ignores which of the following venture scenarios? a. black-hole scenarios b. living-dead scenarios c. black-hole scenarios and living-dead scenarios d. venture utopia scenarios 38. Estimate the value of a privately held firm based on the following information: total market value (or capitalization value) of a comparable firm = $200,000; net income of the comparable firm = $40,000; number of shares outstanding for the comparable firm = 20,000; net income for the target firm = $15,000; and number of shares outstanding for the target firm = 10,000. a. $7.50 b. $10.00 c. $12.50 d. $15.00

Copyright Cengage Learning. Powered by Cognero.

Page 5

Name:

Class:

Date:

Chap_11_7e_Leach 39. A potential investor is willing to provide $500,000 in first-round financing with the expectation of a 50% annual compound rate of return over the next five years. Founders currently hold 1,000,000 million shares of stock. The venture is expected to produce $500,000 in net income in year 5. A similar firm with annual net income of $1,000,000 sold shares to the public for $10,000,000. What is the issue price per share? a. $0.1939 b. $0.1203 c. $0.3168 d. $0.1584 The following Multiple-Choice Questions relate to Learning Supplements 11A and 11B 40. The two “just-in-time” capital methods are: a. DDA and VCSC b. DDA and PDM c. VSCS and MDM d. MDM and PDM 41. A potential investor is willing to provide $500,000 in first-round financing with the expectation of a 50% annual compound rate of return over the next five years. Founders currently hold 1,000,000 million shares of stock. The venture is expected to produce $500,000 in net income in year 5. A similar firm with annual net income of $1,000,000 sold shares to the public for $10,000,000. What is the percent ownership of the venture that must be sold in order to provide the venture investor's target return? a. 33.33% b. 75.94% c. 12.76% d. 15.00% 42. Suppose your venture's expected mean cash flows are –$85,000 initially, followed by expected mean cash flows at the end of the first, second, and third years of $40,000, $40,000, and $35,000, respectively. What is the internal rate of return? a. 13.9% b. 14.7% c. 16.2% d. 17.2% 43. Which of the following is not a variation of the venture capital valuation method? a. venture capital method b. expected present value c. utopian discount process d. actual dividend payments

Copyright Cengage Learning. Powered by Cognero.

Page 6

Name:

Class:

Date:

Chap_11_7e_Leach 44. 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. a. $10 b. $20 c. $30 d. $40 45. The value of the existing venture without the proceeds from the potential new equity issue is known as: a. pre-money valuation b. post money valuation c. staged financing d. the capitalization rate 46. During the exit period, which of the following will have last crack at the venture's wealth? a. banks giving loans to the venture b. convertible debtholders of the venture c. initial equity investors of the venture d. participating preferred equity holders The following Multiple-Choice Questions relate to Learning Supplements 11A and 11B 47. For the typical venture investing project, the valuation will be highest under: a. DDA b. PDM and MDM c. VCSC d. initial book value of equity 48. When a firm has growth that only meets, rather than exceeds, the cost of capital, we would expect its priceearnings multiple to be approximately equal to: a. the reciprocal of its required return on equity b. its earnings per share c. its book-to-market ratio d. its debt-to-value ratio 49. Financing provided in sequences of rounds rather than all at one time is known as: a. pre-money valuation b. post money valuation c. staged financing d. the capitalization rate

Copyright Cengage Learning. Powered by Cognero.

Page 7

Name:

Class:

Date:

Chap_11_7e_Leach 50. Which of the following are components of the mean venture valuation approach? a. the present value of each outcome is calculated b. each outcome's present value is multiplied by the probability that the outcome will occur c. the probability-weighted outcomes are summed to get an expected present value for the venture d. the future value of each outcome is calculated 51. Determine the market value of a comparable firm based on the following information: value of the target firm = $4,000,000; net income of the target firm = $200,000; and net income of the comparable firm = $500,000. a. $15 million b. $7.5 million c. $10 million d. $12.5 million 52. A potential investor is willing to provide $500,000 in first-round financing with the expectation of a 50% annual compound rate of return over the next five years. Founders currently hold 1,000,000 million shares of stock. The venture is expected to produce $500,000 in net income in year 5. A similar firm with annual net income of $1,000,000 sold shares to the public for $10,000,000. What is the value of the venture at the end of year 5 using direct capitalization? a. $500,000 b. $5,000,000 c. $1,000,000 d. $100,000 53. Which of the following financing rounds does not dilute the ownership of founders? a. first round b. second round c. incentive ownership round d. founder's round 54. A potential investor is willing to provide $500,000 in first-round financing with the expectation of a 50% annual compound rate of return over the next five years. Founders currently hold 1,000,000 million shares of stock. The venture is expected to produce $500,000 in net income in year 5. A similar firm with annual net income of $1,000,000 sold shares to the public for $10,000,000. What is the pre-money valuation? a. $120,300 b. $316,800 c. $158,400 d. $193,900

Copyright Cengage Learning. Powered by Cognero.

Page 8

Name:

Class:

Date:

Chap_11_7e_Leach 55. A potential investor is willing to provide $500,000 in first-round financing with the expectation of a 50% annual compound rate of return over the next five years. Founders currently hold 1,000,000 million shares of stock. The venture is expected to produce $500,000 in net income in year 5. A similar firm with annual net income of $1,000,000 sold shares to the public for $10,000,000. What is the number of shares that must be issued to the new investor in order for the investor to earn his target return? a. 3,156,276 b. 1,578,138 c. 4,156,276 d. 2,578,138 56. For early-stage ventures, which of the following is a strong reason for having an equity component in employee compensation? a. the expected deferred and tax-preferred compensation allows the venture to pay a lower current compensation to employees b. it is a way to motivate employees to strive for a goal of low equity value c. any dividends received as part of the equity compensation reduces taxable income d. it reduces the percentage of ownership held by debtholders 57. To obtain the percent ownership to be sold in order to expect to provide the venture investor's target return, one must consider the cash investment today and the cash return at exit by the venture investor's target return, then today's cash investment by the venture's NPV. a. multiplied; divide b. discounted; divide c. multiplied; divide d. discounted; multiply 58. The return to venture investors directly depends on the: a. venture's ability to generate cash flows b. ability to convince a debtholder to buy the venture c. amount of the venture's short-term liabilities d. sum of past retained earnings 59. Which of the following does a P/E multiple refer to? a. price/expectations multiple b. price/earnings multiple c. profit/EBIT multiple d. profit/earnings multiple

Copyright Cengage Learning. Powered by Cognero.

Page 9

Name:

Class:

Date:

Chap_11_7e_Leach Answer Key 1. False 2. True 3. True 4. True 5. False 6. False 7. False 8. True 9. True 10. True 11. False 12. False 13. True 14. False 15. True 16. True 17. False 18. True 19. False 20. False 21. True 22. True 23. True 24. False 25. False 26. True

Copyright Cengage Learning. Powered by Cognero.

Page 10

Name:

Class:

Date:

Chap_11_7e_Leach 27. True 28. True 29. True 30. False 31. False 32. True 33. a 34. a 35. c 36. b 37. c 38. a 39. d 40. d 41. b 42. d 43. d 44. c 45. a 46. c 47. b 48. a 49. c 50. d 51. c 52. b 53. d 54. c Copyright Cengage Learning. Powered by Cognero.

Page 11

Name:

Class:

Date:

Chap_11_7e_Leach 55. a 56. a 57. b 58. a 59. b

Copyright Cengage Learning. Powered by Cognero.

Page 12

Name:

Class:

Date:

Chap_12_7e_Leach Indicate whether the statement is true or false.

1. The term "capital call" refers to the flow of business plans and term sheets involved in the venture capital investing process. a. True b. False 2. SLOR stands for "standard letter of recognition." a. True b. False 3. Carried interest is the portion of profits paid to the professional venture capitalist as incentive compensation. a. True b. False 4. The beginning of professional venture capitalists began with the formation of American Research and Development in 1966. a. True b. False 5. The summary of the investment terms and conditions accompanying an investment proposed by the venture capitalist is known as the statement of strengths and weaknesses. a. True b. False 6. The first major government foray into venture investing came with the formation of the Small Business Administration (SBA) in 1947. a. True b. False 7. Two typical issues addressed in a term sheet are valuation and the size and staging of financing. a. True b. False 8. When the venture fund calls upon the investors to deliver their investment funds, it reflects the deal flow. a. True b. False 9. Once the venture capital firm has received exit proceeds from a venture in the form of cash or securities, some method of returning the proceeds (less the carried interest) must be determined. a. True b. False

Name:

Class:

Date:

Chap_12_7e_Leach 10. The initial stage in the professional venture investing cycle begins with determining the objectives and policies for the next fund. a. True b. False 11. The phrase "two and twenty shops" refers to investment management firms having a contract that gives them two percent carried interest and a 20 percent of assets annual management fee. a. True b. False 12. 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. a. True b. False 13. Professional venture capital, as we know it today, did not exist before World War II. a. True b. False 14. In 1958, the Small Business Administration created Small Business Investment Companies. a. True b. False 15. Endowments and foundations are the smallest percentage source of venture capital. a. True b. False 16. The professional venture investing cycle begins with the obtaining of commitments for a series of capital calls. a. True b. False 17. Most venture investing came from wealthy individuals and families prior to World War II. a. True b. False 18. Due diligence (in venture investing context) is the process of ascertaining the viability of a business plan. a. True b. False 19. Annual VC investments reached an all-time high in the year 1990. a. True b. False

Name:

Class:

Date:

Chap_12_7e_Leach 20. Created by the Small Business Administration, Small Business Investment Companies possess important tax advantages and are eligible to borrow amounts up to four times their equity base from the government. a. True b. False 21. A term sheet is a summary of the investment terms and conditions accompanying an investment by venture capitalists. a. True b. False 22. When a syndicate of VCs invests in a venture, the investor in charge of organizing the due diligence process is known as the lead investor. a. True b. False 23. Endowments and foundations are more important suppliers of venture capital relative to individuals and families. a. True b. False 24. SLOR stands for "standard letter of rejection." a. True b. False 25. The American Research and Development (ARD) organization was formed in 1946. a. True b. False 26. Internet financing led the record level of venture investing in the 1999–2000 time period. a. True b. False 27. Public pension funds supply about 20 percent of venture capital funds. a. True b. False 28. Term sheets may contain demands regarding the voting rights of shares issued to venture investors. a. True b. False 29. The deal flow reflects the flow of business plans and term sheets involved in the venture capital investing process. a. True b. False

Name:

Class:

Date:

Chap_12_7e_Leach 30. In venture investing context, due diligence describes the process of investigating a potentially worthy concept or plan. a. True b. False 31. Term sheets consist of the terms and conditions accompanying an investment, as stipulated by the founders of the venture. a. True b. False 32. Pension funds are the largest percentage source of venture capital. a. True b. False 33. Individuals and families are more important suppliers of venture capital relative to finance and insurance firms. a. True b. False 34. Family offices are the largest supplier of venture capital. a. True b. False 35. 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. a. True b. False Indicate the answer choice that best completes the statement or answers the question.

36. In a venture capital fund placement memorandum, which of the following is not part of the fund overview? a. fund size b. investment focus c. fund management d. general partners' capital contributions 37. All of the following are typically part of a venture fund's typical compensation and incentive structure except a. some percent annual fee on invested capital b. a percent share of any profits to the managing general partner c. carried interest d. a salary for the general partners

Name:

Class:

Date:

Chap_12_7e_Leach 38. Which of the following is the largest percentage supplier of venture capital? a. public pension funds b. family offices c. endowments and foundations d. financial and insurance 39. Professional venture investing usually involves setting up a venture capital firm as a(n): a. proprietorship b. corporation c. partnership d. S corporation 40. Term sheets are usually drafted by: a. the mangers of the venture seeking VC funding b. the VC fund seeking to fund the venture c. management and founders d. a third party, in order to ensure the fair treatment of both parties 41. All of the following are typical issues addressed in a term sheet except: a. valuation b. employment contracts c. registration rights d. management fees 42. The term "carried interest" refers to: a. interest not currently paid but which must be paid in the future by a b. professional venture capitalist c. interest transported directly to a bank d. interest owed on a loan in default e. the portion of profits paid to a professional venture capitalist as incentive compensation 43. In a venture capital fund placement memorandum, which of the following is not a front-matter declaration? a. description of limited manner of the offering b. targeted fund size c. imposition of confidentiality d. notice of lack of SEC registration 44. A venture fund calls upon its investors to deliver their investment funds. This is known as: a. carried interest b. a deal flow c. a capital call d. a SLOR

Name:

Class:

Date:

Chap_12_7e_Leach 45. 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? a. market attractiveness b. managerial references c. potential size d. technology 46. In a venture capital fund placement memorandum, all of the following are included in the summary of terms except: a. indemnification b. objective c. liquidation d. valuation 47. When evaluating the prospects of a new venture, venture capital firms consider which of the following? a. characteristics of the proposal, characteristics of the entrepreneur/team, and nature of the proposed industry b. characteristics of the proposal and the entrepreneur/team c. characteristics of the entrepreneur/team and nature of the proposed industry d. characteristics of the proposal and nature of the proposed industry 48. After a new professional venture capital fund is organized, the fund managers: a. conduct due diligence and actively invest b. solicit investments and obtain commitments c. arrange harvest or liquidation d. identify prospective venture investments and then solicit investments 49. As venture firms attract money from investors, it is placed in a fund. Important issues that must be put in place with the establishment of the fund include all of the following except: a. determining the general partners b. establishing a fee structure c. establishing a profit sharing arrangement d. assigning the management team to each borrower 50. After determining the next fund's objectives and policies, the professional venture investing cycle's next step is to: a. solicit investments in new fund b. organize the new fund c. obtain commitments for a series of capital calls d. arrange harvest or liquidation

Name:

Class:

Date:

Chap_12_7e_Leach 51. If an investment management firm is known to be a two and twenty shop, this implies that the firm receives an annual: a. 2% fee on invested capital and 20% carried interest b. 20% fee on invested capital and 2% carried interest c. 2% fee on gross operating profits and 20% carried interest d. 20% fee on gross operating profits and 2% carried interest 52. Which of the following is not one of the likely outcomes of the venture firm's screening process? a. seek the lead investor position b. seek a nonlead investor position c. close the capital fund d. issue a standard letter of rejection 53. Which of the following is the smallest percentage supplier of venture capital? a. financial and insurance b. public pension funds c. endowments and foundations d. funds of funds 54. The beginning of professional venture capitalists is considered to have begun with the establishment or formation of: a. the Small Business Administration b. Small Business Investment Companies c. the American Research and Development organization d. the Professional Venture Capitalists organization 55. In a venture capital fund placement memorandum, which of the following is not part of the offering summary? a. objective of formation b. declaration of general partner c. management fee d. minimum capital restrictions 56. When screening prospective new ventures, venture capital firms consider their own funds' requirements. Which of the following is not one of the venture firm's requirements relating to its own funds? a. investor control b. rate of return c. size of investment d. probable stock listing exchange for the mature venture

Name:

Class:

Date:

Chap_12_7e_Leach 57. In a syndicate of venture investors, the investor who is responsible for governing the process of due diligence is: a. the primary investor b. the lead investor c. a small group of secondary investors d. none of these choices; it is a democratic process that is shared by all investors in the group 58. 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? a. industry type b. venture stage c. management style d. size of investment 59. A summary of the investment terms and conditions accompanying an investment is referred to as: a. a term sheet b. a business plan c. a fund created by professional venture capitalists d. due diligence in venture investing 60. When screening possible investments, a venture capital firm might issue a SLOR, which stands for: a. "standard letter of rejection" b. "standing letter of reconciliation" c. "standard letter of reassessment" d. "senior letter of reference" 61. When evaluating the prospects of a new venture, venture capital firms consider the characteristics of the entrepreneur and its team. Which of the following is not part of the review of the entrepreneur/team? a. its background and experience b. its managerial capabilities c. management's stake in the firm d. the VC firms' ability to cash out 62. The beginning of professional venture capitalists is considered to have occurred: a. prior to World War II b. in 1946 c. in 1956 d. after the Vietnam War 63. In a venture capital fund placement memorandum, all of the following are part of the executive summary except: a. general partners' capital contributions b. limitation of liability c. allocation of gains and losses d. imposition of confidentiality

Name:

Chap_12_7e_Leach Answer Key 1. False 2. False 3. True 4. False 5. False 6. False 7. True 8. False 9. True 10. True 11. False 12. False 13. True 14. True 15. False 16. False 17. True 18. True 19. False 20. True 21. True 22. True 23. True 24. True 25. True 26. True

Class:

Date:

Name:

Chap_12_7e_Leach 27. True 28. True 29. True 30. True 31. False 32. True 33. False 34. False 35. True 36. d 37. d 38. a 39. c 40. b 41. d 42. d 43. b 44. c 45. b 46. b 47. a 48. b 49. d 50. b 51. a 52. c 53. d 54. c

Class:

Date:

Name:

Chap_12_7e_Leach 55. c 56. d 57. b 58. c 59. a 60. a 61. d 62. b 63. d

Class:

Date:

Name:

Class:

Date:

Chap_13_7e_Leach Indicate whether the statement is true or false.

1. Pay-after-delivery is a common model for obtaining funds from customers to help finance startups. a. True b. False 2. 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. a. True b. False 3. Receivables lending is the use of receivables as collateral for an equity issue. a. True b. False 4. Rewards-based crowdfunding involves soliciting nonequity funds to finance specific business products and services or to request donations for a specific purpose. a. True b. False 5. The 7(a) loan traditionally has been the SBA's primary loan program. a. True b. False 6. The SBA's venture capital credit program works through Community Development Financial Institutions (CDFIs). a. True b. False 7. The Immigration and Nationality Act (INA) of 1990 provided an opportunity for foreign nationals to obtain a "green card" through the EB-5 immigrant visas program. a. True b. False 8. Warrants are a debt instrument frequently used by commercial banks when financing entrepreneurial ventures. a. True b. False 9. 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. a. True b. False 10. The Small Business Administration was created by an act of Congress in 2003. a. True b. False Copyright Cengage Learning. Powered by Cognero.

Page 1

Name:

Class:

Date:

Chap_13_7e_Leach 11. Most business incubator organizations make equity investments in their client firms. a. True b. False 12. With venture leasing, one component of the return to the lessor is the opportunity to take an equity interest in the venture. a. True b. False 13. Compensation received by commercial loan officers makes them more likely to finance early-stage ventures. a. True b. False 14. The SBA approves the standard 7(a) loan and guarantees up to 85% of the loan value. a. True b. False 15. Microloans in the SBA credit program are made by not-for-profit or government-affiliated Community Development Financial Institutions (CDFIs). a. True b. False 16. Because of loan restrictions, obtaining funding from commercial lenders is prohibitive for entrepreneurs. a. True b. False 17. Factoring is the sale of payables to a third party at a discount from their face value. a. True b. False 18. Commercial loan officers have the expertise to project new ventures' business successes, and thus are as willing to make funds available to entrepreneurs on the same basis as other businesses. a. True b. False 19. The returns to venture bank lenders are generated solely from interest payments made by borrowers plus the return of the loan principal. a. True b. False 20. SBA 7(a) loans are made usually for 1 to 3 years in amounts up to $10,000,000, require collateral, and can be used for most business purposes. a. True b. False

Copyright Cengage Learning. Powered by Cognero.

Page 2

Name:

Class:

Date:

Chap_13_7e_Leach 21. Two types of crowdfunding are rewards-based crowdfunding and debt crowdfunding. a. True b. False 22. 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. a. True b. False 23. A foreign national may seek Lawful Permanent Resident (LPR) status by investing $1 million in the United States that will preserve or create at least 100 jobs for U.S. workers. a. True b. False 24. The SBA's role in its microloan credit program is to approve the loans and guarantee up to 85% of the loan value. a. True b. False 25. 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. a. True b. False 26. Business crowdsourcing is the process of obtaining business ideas, development support, and operating services from a large network of nonemployees. a. True b. False 27. Factoring is the selling of receivables to a third party at a discount from their face value. a. True b. False 28. In a factoring arrangement, the third party makes its money by purchasing the receivables at a discount from the total amount due on the receivables. a. True b. False 29. Congress created the Treasury Department's Community Development Financial Institutions (CDFI) Fund in 1954. a. True b. False

Copyright Cengage Learning. Powered by Cognero.

Page 3

Name:

Class:

Date:

Chap_13_7e_Leach 30. Collateral plays an important role in determining the willingness to lend and the amount and terms of the loan, making it the most important factor in the lending process. a. True b. False 31. Because investors and commercial lenders both seek returns on the funds given to startup firms, entrepreneurs can obtain financing as easily from either source. a. True b. False 32. 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. a. True b. False 33. Unlike traditional commercial banks, venture banks typically provide debt to startups that have already received equity financing from professional venture capital firms. a. True b. False 34. A business incubator is an organization that helps startup companies develop by providing management, operating, and financial services. a. True b. False 35. Credit cards issued to startups have proven to be an alternative source of startup financing. a. True b. False 36. By an act of Congress, the Small Business Administration (SBA) was created for the purpose of fostering the initiation and growth of small businesses. a. True b. False 37. Warrants allow lenders to buy equity at a specified price. a. True b. False 38. Indirect public offerings have recently become a serious challenge to traditional venture capital firms. a. True b. False 39. 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. a. True b. False Copyright Cengage Learning. Powered by Cognero.

Page 4

Name:

Class:

Date:

Chap_13_7e_Leach Indicate the answer choice that best completes the statement or answers the question.

40. Bank debt is not a realistic source of financing for startups due to all of the following reasons except: a. payables either do not yet exist or the startup's history is inadequate b. a large portion of the assets are intangible and provide no collateral c. the startup's dependence on a small number of irreplaceable people is not a good match to demand deposits or other bank liabilities d. the startup's receivables collection track record is incomplete 41. Which of the following types of crowdfunding involves soliciting funds from a large number of small investors in exchange for an equity position in the venture requesting the funding? a. debt crowdfunding b. equity crowdfunding c. rewards-based crowdfunding d. asset incentive crowdfunding 42. All of the following are common loan restrictions except: a. limits on total debt b. limits on total equity c. restrictions on dividends or other payments to owners and/or investors d. performance standards on financial ratios 43. Which of the following is not a source of debt funding for a startup firm? a. accounts payable b. vendor financing c. factoring d. leasing 44. In which of the following credit programs does the SBA borrow money to be lent to Small Business Investment Companies (SBICs) and guarantee payment to investors? a. 7(a) loan b. CDC/504 loan c. microloan d. venture capital loan 45. A provision that allows lenders to acquire equity at a specific price is known as a(n): a. factor b. warrant c. venture lease d. equity carve-out

Copyright Cengage Learning. Powered by Cognero.

Page 5

Name:

Class:

Date:

Chap_13_7e_Leach 46. When assessing the creditworthiness of new entrepreneurs, lending institutions review the "Five C's." The ability of the entrepreneur to repay borrowed funds is known as: a. capacity b. capital c. collateral d. character 47. Which of the following types of crowdfunding involves soliciting nonequity funds to finance specific business products and services or requesting donations for a specific purpose? a. debt crowdfunding b. equity crowdfunding c. rewards-based crowdfunding d. asset incentive crowdfunding 48. Selling receivables to a third party at a discount from their face value is referred to as: a. factoring b. receivables lending c. venture banking d. venture financing 49. In which of the following credit programs does the SBA approve a loan and guarantee up to 85% of loan value? a. 7(a) loan b. CDC/504 loan c. microloan d. venture capital loan 50. Which of the following statements regarding factoring is not true? a. receivables lending is the process of factoring b. factoring is done at a discount to the third-party purchaser c. factoring discounts are often a function of the riskiness of the receivables d. factoring speeds the inflow of cash to the seller of the receivables 51. An organization that usually provides both an equity investment and a mentoring and educational program to help startup firms succeed is called a(n): a. business incubator b. seed accelerator c. angel assistor d. crowdfunding arranger

Copyright Cengage Learning. Powered by Cognero.

Page 6

Name:

Class:

Date:

Chap_13_7e_Leach 52. Which of the following is not a duty of the Small Business Administration? a. provide capital and credit to entrepreneurial startups b. guarantee loans issued under its credit programs to small businesses c. provide equity financing for startups d. help create new jobs in small businesses 53. When assessing the creditworthiness of new entrepreneurs, lending institutions review the "Five C's." The general impression the entrepreneur makes on the potential lender or investor is known as: a. capacity b. character c. collateral d. conditions 54. Arranging for partial ownership as a component of the expected return to a lessor is known as: a. venture leasing b. capital leasing c. investment leasing d. direct public leasing 55. Venture banks do not seek loan returns from: a. interest received b. principal repayments c. warrants being exercised d. direct public offerings 56. Which of the following is not a Small Business Administration program? a. loan guaranty programs b. certified and preferred lender programs c. energy and conservation loan programs d. certified financial planner funding programs 57. What does SBA stand for in the context of new ventures? a. "Standard Business Arrangement" b. "Small Business Association" c. "Small Business Administration" d. "Standard Borrowing Arrangement" 58. By an act of Congress, the Small Business Administration (SBA) was created in which of the following years? a. 1953 b. 1968 c. 1973 d. 1985

Copyright Cengage Learning. Powered by Cognero.

Page 7

Name:

Class:

Date:

Chap_13_7e_Leach 59. When assessing the creditworthiness of new entrepreneurs, lending institutions review the "Five C's." The focus on the intended purpose of the loan is known as: a. capacity b. capital c. collateral d. conditions 60. Which of the following is not a common model for obtaining funds from customers to help finance startups? a. pay-in-advance b. subscription c. matchmaking d. pay-at-delivery 61. Personal credit cards have proven to be a source of financing for startup firms for all of the following reasons except: a. credit card debt is not based on the firm's ability to repay, but rather the individual cardholder's ability to repay b. teaser rates afford initial low cost borrowing c. balance transfers occur at below-prime rates d. credit card debt can create problems if the firm doesn't generate cash flows to cover credit card payments once low introductory rates expire 62. The use of receivables as collateral for a loan is known as: a. capital leasing b. warehouse financing c. receivables lending d. venture leasing 63. 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? a. 7(a) loan b. CDC/504 loan c. microloan d. credit card loan 64. Unlike traditional commercial banks, venture banks typically provide debt to startups that have already received equity financing from professional venture capital firms. In return for providing additional debt financing, these venture banks receive in return all of the following except: a. repayment of principal b. implementation of loan restrictions c. tax breaks on the interest received d. the right to buy equity at a specific price

Copyright Cengage Learning. Powered by Cognero.

Page 8

Name:

Class:

Date:

Chap_13_7e_Leach 65. Not-for-profit or government-affiliated Community Development Financial Institutions (CDFIs) are lenders in which of the following SBA credit programs? a. 7(a) loan b. CDC/504 loan c. microloan d. venture capital loan 66. Commercial banks, credit unions, and/or financial services firms are lenders in which of the following SBA credit programs? a. 7(a) loan b. CDC/504 loan c. microloan d. venture capital loan 67. In which of the following credit programs does the SBA approve and guarantee a not-for-profit Certified Development Company's portion of the debt? a. 7(a) loan b. CDC/504 loan c. microloan d. venture capital loan 68. Commercial banks, jointly with not-for-profit Certified Development Companies, are lenders in which of the following SBA credit programs? a. 7(a) loan b. CDC/504 loan c. microloan d. venture capital loan 69. When assessing the creditworthiness of new entrepreneurs, lending institutions review the "Five C's." The money the entrepreneur has invested in the business, which is an indication how much is at risk if the business should fail, is known as: a. capacity b. capital c. collateral d. conditions 70. Which of the following is not a current Small Business Administration (SBA) credit program? a. 7(a) loan b. CDC/504 loan c. microloan d. credit card loan

Copyright Cengage Learning. Powered by Cognero.

Page 9

Name:

Class:

Date:

Chap_13_7e_Leach 71. When assessing the creditworthiness of new entrepreneurs, lending institutions review the "Five C's." The guarantees, or additional forms of security (such as assets), the entrepreneur can provide the lender are known as: a. character b. capital c. collateral d. conditions 72. Which of the following is not a common characteristic of business incubators? a. they make equity investments in their client firms b. they help entrepreneurs obtain private and public loan funds c. they are usually formed as nonprofit organizations that are operated by either private firms or public entities d. they require entrepreneurs to apply for admittance to their business incubation programs 73. Small Business Investment Companies (SBICs) are lenders in which of the following SBA credit programs? a. 7(a) loan b. 504 loan c. microloan d. venture capital loan

Copyright Cengage Learning. Powered by Cognero.

Page 10

Name:

Class:

Date:

Chap_13_7e_Leach Answer Key 1. False 2. True 3. False 4. True 5. True 6. False 7. True 8. False 9. True 10. False 11. False 12. True 13. False 14. True 15. True 16. True 17. False 18. False 19. False 20. False 21. False 22. True 23. False 24. False 25. False 26. True

Copyright Cengage Learning. Powered by Cognero.

Page 11

Name:

Class:

Date:

Chap_13_7e_Leach 27. True 28. True 29. False 30. False 31. False 32. True 33. True 34. True 35. False 36. True 37. True 38. False 39. True 40. a 41. b 42. b 43. c 44. d 45. b 46. a 47. c 48. a 49. a 50. a 51. b 52. c 53. b 54. a Copyright Cengage Learning. Powered by Cognero.

Page 12

Name:

Class:

Date:

Chap_13_7e_Leach 55. d 56. d 57. c 58. a 59. d 60. d 61. d 62. c 63. c 64. c 65. c 66. a 67. b 68. b 69. b 70. d 71. c 72. a 73. d

Copyright Cengage Learning. Powered by Cognero.

Page 13

Name:

Class:

Date:

Chap_14_7e_Leach Indicate whether the statement is true or false.

1. A European-style option may only be exercised on a specific date. a. True b. False 2. Common stock represents the least senior claim on a venture's assets. a. True b. False The following True/False Questions relate to Learning Supplements 14A and 14B 3. An alternative approach to the enterprise valuation method adds the tax shield from paying interest back into the flows and discounts at a before-tax weighted average cost of capital. a. True b. False 4. The Black and Scholes model requires the stock price as an input. a. True b. False 5. Convertible preferred stockholders have the right to convert a preferred share into a specified number of common shares at any time after the expiration date. a. True b. False 6. An American-style option is an option that can be exercised only at the expiration date. a. True b. False The following True/False Questions relate to Learning Supplements 14A and 14B 7. The unadjusted Black and Scholes model is a model for determining the value of a warrant to buy a new share. a. True b. False 8. The enterprise method of valuation can be executed with either an after-tax or before-tax weighted average cost of capital as long as the rate is applied to the appropriate enterprise cash flows. a. True b. False 9. A preemptive right is a right for existing owners to buy sufficient shares to preserve their ownership share. a. True b. False

Copyright Cengage Learning. Powered by Cognero.

Page 1

Name:

Class:

Date:

Chap_14_7e_Leach 10. If a call option can be bought for $12 and the stock's market value is $12, it's said to be "at the money." a. True b. False 11. Convertible notes are debt allowing for conversion into stock at a price set by a future financing round. a. True b. False The following True/False Questions relate to Learning Supplements 14A and 14B 12. Warrant valuation (as presented in this text) is similar to option valuation except that one applies a dilution factor to the option value to arrive at a warrant value. a. True b. False 13. A call option is the obligation to purchase a specific asset at a predetermined price. a. True b. False 14. 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. a. True b. False 15. Registration rights embedded in a venture's securities grant certain classes of shareholders the right, under certain circumstances, to have their securities registered with the SEC. a. True b. False 16. Convertible debt is debt with the option to exchange it into nonconvertible or straight debt. a. True b. False 17. Convertible debt is debt that converts into preferred stock. a. True b. False 18. As the underlying stock price increases in value, a put option to sell it becomes more valuable. a. True b. False 19. The enterprise value includes the value of the debt, equity, and warrant pieces of a venture. a. True b. False

Copyright Cengage Learning. Powered by Cognero.

Page 2

Name:

Class:

Date:

Chap_14_7e_Leach 20. Owning a put option on a stock is the same as selling a call option on that same stock. a. True b. False 21. Preferred stock is the equity claim senior to common stock and providing preference on dividends but not liquidation proceeds. a. True b. False 22. For preferred noncumulative stock, all previously unpaid preferred dividends must be paid before any common stock dividend is paid. a. True b. False 23. 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." a. True b. False 24. 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. a. True b. False The following True/False Questions relate to Learning Supplements 14A and 14B 25. The Black and Scholes model requires the inflation rate as an input. a. True b. False 26. Options generally have no effect on the value of a venture capital investment. a. True b. False 27. Entity valuation allows us to answer the question of how much debt a venture needs to issue to achieve a target capital structure (D/V). a. True b. False 28. A warrant is a type of call option. a. True b. False 29. The value of a warrant can be directly derived from the value of a call option. a. True b. False Copyright Cengage Learning. Powered by Cognero.

Page 3

Name:

Class:

Date:

Chap_14_7e_Leach 30. Piggyback registration rights allow holders of convertible securities to "vote as if converted." a. True b. False 31. If a share of preferred stock has a $10 par value, and the stock has a 2:1 conversion ratio, then the conversion price would be $5. a. True b. False 32. An option not currently worth exercising is said to be "out of the money." a. True b. False 33. A warrant is a call option issued by a company granting the holder the right to buy common stock at a specific price at a specific time. a. True b. False 34. An option is a right to buy or sell additional shares of stock. a. True b. False The following True/False Questions relate to Learning Supplements 14A and 14B 35. The Black and Scholes model requires an exercise price as an input. a. True b. False 36. For American and Bermudan embedded options, the exercise price can change over time as specified in the security agreement. a. True b. False Indicate the answer choice that best completes the statement or answers the question.

37. Which of the following is an example of a put option that is "in the money"? a. option to sell at $11, stock is worth $12 b. option to buy at $13, stock is worth $12 c. option to buy at $11, stock is worth $12 d. option to sell at $13, stock is worth $12 38. Which of the following provides the option to transform preferred stock into common stock? a. paid in kind preferred stock b. cumulative preferred stock c. participating preferred stock d. convertible preferred stock Copyright Cengage Learning. Powered by Cognero.

Page 4

Name:

Class:

Date:

Chap_14_7e_Leach 39. Which of the following requires that all previously unpaid preferred dividends must be paid prior to any common dividend? a. paid in kind preferred stock b. cumulative preferred stock c. participating preferred stock d. convertible preferred stock 40. Which of the following is an example of a call option that is "out of the money"? a. option to sell at $11, stock is worth $12 b. option to buy at $13, stock is worth $12 c. option to buy at $12, stock is worth $12 d. option to sell at $13, stock is worth $12 41. A round of financing where shares sell for a lower price than previous rounds is known as a(n): a. reset round b. recessive round c. angel round d. anticipation round 42. Which of the following is not a typical characteristic of convertible notes? a. debt allowing for conversion into equity (common stock or convertible preferred stock) b. convertible at a price set by a future financing round c. issued to allow for a delayed valuation estimate d. seasoned firms are the primary issuers of convertible notes 43. Generally speaking, warrants are call options that allow the holder to purchase what type of security at a specific price? a. common stock b. preferred stock c. convertible debt d. convertible notes 44. Convertible debt can have all of the following characteristics except: a. bankruptcy rights b. regular dividend payments c. a structure to provide senior interest in specific assets d. a tax shield due to interest expense

Copyright Cengage Learning. Powered by Cognero.

Page 5

Name:

Class:

Date:

Chap_14_7e_Leach 45. When consistent assumptions are used, estimated equity values under the enterprise and equity methods should be: a. the same for the two methods b. higher for the equity method c. higher for the enterprise method d. different for the two methods 46. To calculate the enterprise valuation cash flow, one begins with which of the following items from the income statement? a. Net Sales ÷ Net Income b. Operating Profit ÷ Gross Sales c. Earnings Before Interest and Taxes) × (1 – Enterprise Tax Rate) d. Net Income × Enterprise Tax Rate 47. Which of the following is not a component of a preferred stock's security structure? a. the right to participate in any dividends paid to common stock shareholders b. the payment of dividends in the form of additional shares of preferred stock c. the option for the holder to convert preferred stock into common stock d. the option for the holder to convert preferred stock into debt securities 48. The right to sell a specified asset at a specified price up until a specified date is called a(n): a. American-style put option b. American-style call option c. European-style call option d. European-style put option 49. Which of the following is an example of a put option that is "out of the money"? a. option to sell at $11, stock is worth $12 b. option to buy at $13, stock is worth $12 c. option to buy at $12, stock is worth $12 d. option to sell at $13, stock is worth $12 The following Multiple-Choice Questions relate to Learning Supplement 14B 50. The Black and Scholes model is intended to be used to value: a. stocks b. bonds c. options d. futures contracts

Copyright Cengage Learning. Powered by Cognero.

Page 6

Name:

Class:

Date:

Chap_14_7e_Leach 51. Which of the following has the least senior claim on a venture's asset? a. common stock b. preferred stock c. convertible preferred stock d. convertible debt 52. The right to buy a specified asset at a specified price on a specified date is called a(n): a. forward contract b. American-style put option c. American-style call option d. European-style call option 53. An option that can be exercised only at its expiration date is called a(n): a. Asian-style option b. American-style option c. European-style option d. Bermuda-style option The following Multiple-Choice Questions relate to Learning Supplement 14B 54. Which of the following is not an input to the Black and Scholes model? a. earnings per share b. stock price c. risk-free rate d. volatility 55. Which of the following is an example of a call option that is "in the money"? a. option to sell at $11, stock is worth $12 b. option to buy at $13, stock is worth $12 c. option to sell at $13, stock is worth $12 d. option to buy at $11, stock is worth $12 56. Which of the following is not a type of option? a. call option b. put option c. warrant d. leveraged buyout 57. The right for existing owners to maintain their ownership share by purchasing sufficient shares to keep their percentage share of the firm is called: a. a stock option b. a stock warrant c. preemptive rights d. participating stock Copyright Cengage Learning. Powered by Cognero.

Page 7

Name:

Class:

Date:

Chap_14_7e_Leach 58. Which of the following offers the option where the dividend obligation can be satisfied in cash or by issuing additional par amounts of the preferred security? a. paid in kind preferred stock b. cumulative preferred stock c. participating preferred stock d. convertible preferred stock 59. An option that can be exercised at any time until its expiration is called a(n): a. Asian-style option b. American-style option c. European-style option d. Bermuda-style option 60. An option that can be exercised only at a specific set of dates is called a(n): a. Asian-style option b. American-style option c. European-style option d. Bermuda-style option 61. Which of the following is an example of a put option that is "at the money"? a. option to sell at $11, stock is worth $12 b. option to buy at $13, stock is worth $12 c. option to sell at $12, stock is worth $12 d. option to buy at $11, stock is worth $12 62. Which of the following can be structured to assure shareholders that they will share in the payment of any dividends to common stockholders? a. paid in kind preferred stock b. cumulative preferred stock c. participating preferred stock d. convertible preferred stock The following Multiple-Choice Questions relate to Learning Supplement 14B 63. N(h) in the Black and Scholes model involves the use of the: a. number of shares issued b. next time that a venture capitalist will invest money c. normal distribution cumulative density function d. number of times that the venture will have to raise money

Copyright Cengage Learning. Powered by Cognero.

Page 8

Name:

Class:

Date:

Chap_14_7e_Leach Answer Key 1. True 2. True 3. True 4. True 5. False 6. False 7. False 8. True 9. True 10. True 11. True 12. True 13. False 14. True 15. True 16. False 17. False 18. False 19. True 20. False 21. False 22. False 23. True 24. True 25. False 26. False

Copyright Cengage Learning. Powered by Cognero.

Page 9

Name:

Class:

Date:

Chap_14_7e_Leach 27. True 28. True 29. True 30. False 31. True 32. True 33. False 34. True 35. True 36. True 37. d 38. d 39. b 40. b 41. a 42. d 43. a 44. b 45. a 46. c 47. d 48. a 49. a 50. c 51. a 52. d 53. c 54. a Copyright Cengage Learning. Powered by Cognero.

Page 10

Name:

Class:

Date:

Chap_14_7e_Leach 55. d 56. d 57. c 58. a 59. b 60. d 61. c 62. c 63. c

Copyright Cengage Learning. Powered by Cognero.

Page 11

Name:

Class:

Date:

Chap_15_7e_Leach Indicate whether the statement is true or false.

1. While not a direct loss to a venture, underpricing can represent a significant opportunity cost to the venture's owners. a. True b. False 2. ESOP stands for "employee stock ownership plan." a. True b. False 3. A special type of harvesting process where the firm's top management continues to run the firm and has a substantial equity position in the reorganized firm is known as a leveraged buyout. a. True b. False 4. Most companies choose best efforts agreements in order to minimize the inherent risks of going public. a. True b. False 5. IPO underpricing results in a direct loss to the venture's owners. a. True b. False 6. For harvesting purposes, we need to decide on the venture's value at exit and how that exit value pie will be divided up among investors. a. True b. False 7. In a typical venture's life cycle, the examining of exit opportunities often occurs during the rapid-growth stage. a. True b. False 8. Exit values for many mature ventures are usually determined by (1) discounted cash flow (DCF) methods or (2) relative valuation models based on some form of multiples analysis. a. True b. False 9. An advantage of an exit strategy that pays out the venture's investment value over several years can make it more difficult for entrepreneurs to start a new venture because adequate capital has not been released from the existing venture. a. True b. False

Copyright Cengage Learning. Powered by Cognero.

Page 1

Name:

Class:

Date:

Chap_15_7e_Leach 10. One method of harvesting a successful venture is through systematic distribution of assets directly to lenders. a. True b. False 11. A leveraged buyout (LBO) takes place when the purchase price of a firm is financed largely with debt financial capital. a. True b. False 12. The relative value method estimates a firm's value by examining how comparable firms are valued based on value-related multiples. a. True b. False 13. Other than when the venture is operating in a declining industry, it is difficult to think of cases where the disadvantages of liquidation outweigh the advantages. a. True b. False 14. An outright sale occurs when an entrepreneur sells the venture to family members, managers, employees, or outside buyers. a. True b. False 15. The process of exiting the privately held business venture to unlock the owners' investment value is known as harvesting. a. True b. False 16. Valuation methods that estimate a firm's worth using value-related multiples of comparable firms are sometimes known as relative value methods. a. True b. False 17. In determining a harvest value, nonmonetary items such as culture, managerial succession, and employee retention are not factored in. a. True b. False 18. A management buyout (MBO) is a special type of leveraged buyout (LBO). a. True b. False

Copyright Cengage Learning. Powered by Cognero.

Page 2

Name:

Class:

Date:

Chap_15_7e_Leach 19. When harvesting a venture, the methodical distribution of assets directly to the owners is known as a systematic liquidation. a. True b. False 20. When an initial business plan is prepared, attention should be paid to the investors' and founders' desire for eventual liquidity by anticipating a harvest for the venture investors. a. True b. False 21. When harvesting a venture, the outright purchase of the going concern by managers, employees, or external buyers is known as going public. a. True b. False 22. The sale of used shares of common stock is a secondary market offering. a. True b. False 23. An initial public offering (IPO) is the only method used by entrepreneurs when exiting a venture. a. True b. False 24. An obligatory disclaimer disavowing any intent to act as an offer to sell, or solicit an offer to buy, securities is known as a red herring. a. True b. False 25. A lockup provision prohibits insiders from selling their existing shares for a specified period of time. a. True b. False 26. A direct listing is a private company's initial public offering sold exclusively to institutional investors. a. True b. False 27. Unicorns are low-expected-growth companies with valuations in excess of $1 trillion. a. True b. False 28. Restructuring is the process of exiting the privately held business venture to unlock the owners' investment value. a. True b. False

Copyright Cengage Learning. Powered by Cognero.

Page 3

Name:

Class:

Date:

Chap_15_7e_Leach 29. Two discounted cash flow (DCF) methods are the enterprise method and the debt funds method. a. True b. False 30. When an industry is in decline, a systematic liquidation is typically the most attractive harvest strategy. a. True b. False 31. One method of harvesting a venture is through systematic distribution of assets directly to the owners. a. True b. False 32. When harvesting a venture, the two-step public equity registration and sale is known as an outright sale. a. True b. False 33. In a typical venture's life cycle, the rapid-growth stage involves managing ongoing operations, maintaining and adding value, and obtaining seasoned financing. a. True b. False 34. A leveraged buyout (LBO) is a special type of management buyout (MBO). a. True b. False 35. The sale of new shares of common stock is a secondary offering. a. True b. False Indicate the answer choice that best completes the statement or answers the question.

36. If venture investors invest $1,000,000 now, will receive 50% of the exit value, and expect a 20% compounded rate of return on their investment, what will be the amount of the exit value at the end of two years? a. $5,760,000 b. $1,440,000 c. $2,880,000 d. $5,000,000 37. Ventures that are high-expected-growth companies with valuations in excess of $1 billion are called: a. giraffes b. unicorns c. elephants d. giants

Copyright Cengage Learning. Powered by Cognero.

Page 4

Name:

Class:

Date:

Chap_15_7e_Leach 38. An order to purchase stock that can be executed only at a specified price or better is called a: a. market order b. limit order c. stop order d. private order 39. Registering equity and selling it via an IPO of new shares followed by a secondary offering of existing shares is a venture harvesting process known as: a. a systematic liquidation b. an outright sale c. Chapter 11 bankruptcy d. going public 40. Based on the following information, estimate the percentage appreciation on stock bought by the venture investors: founders' purchase price = $0.50; venture investors' purchase price = $2.00; current stock price = $10.00; founders' holding period = 5 years; and venture investors' holding period = 3 years. a. 100% b. 400% c. 600% d. 800% 41. An initial public offering (IPO) involves a: a. sale of new securities to private investors b. sale of used securities to the public c. venture's first offering of SEC-registered securities to the public d. venture's reoffering of its publicly traded securities 42. The distribution of the venture's cash flows directly to the owners is a venture harvesting process known as: a. a systematic liquidation b. an outright sale c. Chapter 11 bankruptcy d. going public 43. Assume that a venture is expected to have an EBITDA of $1,500,000 at the end of five years from now. If the venture's value is expected to be $12,000,000, what valuation multiple was being assumed? a. 12 times b. 4 times c. 8 times d. 10 times

Copyright Cengage Learning. Powered by Cognero.

Page 5

Name:

Class:

Date:

Chap_15_7e_Leach 44. The NYSE participates in: a. the sale of new securities to private investors b. primary offerings c. primary and secondary offerings d. secondary and liquidation offerings 45. The negotiated period around an equity securities offering during which insiders are prohibited from selling their existing shares is called a(n): a. seasoned offering b. underpricing c. underwriting spread d. lockup provision 46. A venture is expected to have an exit value of $10,000,000 two years from now. If venture investors invest $2,000,000 now, and expect a 20% compounded rate of return on their investment, what portion of the exit value would they need? a. 10.0% b. 20.2% c. 25.0% d. 28.8% 47. Which of the following is not a candidate for a leveraged buyout? a. a venture with stable and adequate operating cash flows b. a venture with a high amount of equity relative to debt c. a venture with the ability to protect market share d. a venture with a high debt ratio 48. A venture can be harvested in which of the following ways? a. systematic liquidation, outright sale, and going public b. outright sale, going public, and acquisition c. going public and acquisition d. acquisition and systematic liquidation 49. Which of the following is not a characteristic of a "unicorn" company? a. high expected growth b. a valuation in excess of $1 billion c. a previously successful IPO d. high expected growth and a valuation in excess of $1 billion

Copyright Cengage Learning. Powered by Cognero.

Page 6

Name:

Class:

Date:

Chap_15_7e_Leach 50. In the investment banking process, which of the following is a duty of the investment bank? a. be the targeted investors for a firm's securities b. provide banking services, such as checking accounts, to firms c. find buyers for a firm's securities d. market only founder shares 51. Which of the following is not a way to harvest a venture? a. systematic liquidation b. outright sale c. Chapter 11 bankruptcy d. going public 52. A type of agreement with an investment bank employing only marketing and distribution efforts without the actual transfer of securities ownership to the investment banking syndicate is called: a. IPO underpricing b. due diligence c. a firm commitment d. a best efforts agreement 53. Shares registered with the Securities and Exchange Commission and state securities regulators and sold to the public are known as a(n): a. primary offering b. secondary offering c. initial public offering d. shelf offering 54. The acquisition of the venture by family members, managers, or outside buyers is a venture harvesting process known as: a. a systematic liquidation b. an outright sale c. Chapter 11 bankruptcy d. going public 55. Which of the following is not a disadvantage of a systematic liquidation? a. the treatment and taxation of liquidation proceeds as ordinary income rather than capital gains b. the commitment of the entrepreneur's resources and focus on a dying venture rather than on other more lucrative ventures c. the harvesting of the investment gets spread out over a number of years d. the acceleration of the venture's rate of decline as other industry participants respond to the reduction in investment

Copyright Cengage Learning. Powered by Cognero.

Page 7

Name:

Class:

Date:

Chap_15_7e_Leach 56. In the aftermarket trading for the venture's securities, an order that is to be executed as soon as possible at the prevailing market price is known as a: a. put order b. market order c. limit order d. stop order 57. Based on the following information, estimate the percentage appreciation on stock bought by the founders: founders' purchase price = $1.00; venture investors' purchase price = $2.00; current stock price = $10.00; founders' holding period = 5 years; and venture investors holding period = 3 years. a. 100% b. 400% c. 600% d. 900% 58. Which of the following is not a type of trading order? a. market order b. limit order c. stop order d. repurchase order 59. The sale of used shares is known as a(n): a. primary offering b. secondary offering c. initial public offering d. shelf offering 60. If venture investors invest $1,000,000 now, will receive 25% of the exit value, and expect a 20% compounded rate of return on their investment, what is the approximate expected exit value at the end of five years? a. $9,950,000 b. $2,490,000 c. $4,980,000 d. $7,470,000 61. The arrangement where an underwriter has the option of selling additional shares when the issue is heavily oversubscribed is known as a: a. green shoe option b. red herring c. best efforts agreement d. lockup provision

Copyright Cengage Learning. Powered by Cognero.

Page 8

Name:

Class:

Date:

Chap_15_7e_Leach 62. In an outright sale of a venture, the venture can be sold to: a. family members and managers b. managers and employees c. employees and outside (external) buyers d. family members, managers, employees, and outside (external) buyers 63. The difference between what the investment bank gets from selling securities to public investors and what they pay to the issuing firm is known as: a. IPO underpricing b. an underwriting spread c. a firm commitment d. best efforts 64. Which of the following describes when a syndicate's offering price is less than the market price immediately following the offering? a. IPO underpricing b. due diligence c. a firm commitment d. best efforts 65. IPO stand for: a. "investment pricing organization" b. "initial public offering" c. "institutional pricing overhead" d. "immediate pricing opportunity" 66. In the aftermarket trading for the venture's securities, an order that converts to a market order once a certain price is achieved is known as a: a. put order b. market order c. limit order d. stop order 67. The type of agreement with an investment bank involving the investment bank's underwritten purchase and resale of securities is called: a. a firm commitment b. a best efforts agreement c. due diligence d. a red herring disclaimer

Copyright Cengage Learning. Powered by Cognero.

Page 9

Name:

Class:

Date:

Chap_15_7e_Leach 68. The sale of new securities is known as a(n): a. primary offering b. secondary offering c. initial public offering d. shelf offering 69. The investment bank's process of ascertaining, to the extent possible, an issuing firm's financial condition and investment intent is known as: a. IPO underpricing b. due diligence c. a firm commitment d. an underwriting spread 70. A venture is expected to have an exit value of $10,000,000 five years from now. If venture investors invest $1,000,000 now, and expect a 20% compounded rate of return on their investment, what portion of the exit value would they need? a. 10.5% b. 20.1% c. 24.9% d. 28.8% 71. Which of the following is the premium that would be applied to venture valuation due to an investor's majority ownership of a venture? a. proxy premium b. control premium c. influence premium d. liquidity premium 72. Which of the following is not an advantage of a systematic liquidation? a. maintaining control throughout the harvest period b. the harvesting of the investment value can be spread out over a number of years c. the taxation treatment of liquidation proceeds as ordinary income d. the time, effort, and costs of finding a buyer for the venture can be avoided 73. If venture investors invest $6,750,000 now, will receive 32% of the exit value, and expect a 22% compounded rate of return on their investment, what is the exit value at the end of seven years? a. $103,521,949 b. $39,931,321 c. $69,552,505 d. $84,854,057

Copyright Cengage Learning. Powered by Cognero.

Page 10

Name:

Class:

Date:

Chap_15_7e_Leach 74. A stock offering by a private firm involving the registration and sale to the public of existing shares, but no new shares, is called: a. IPO underpricing b. due diligence c. a direct listing d. a best efforts agreement

Copyright Cengage Learning. Powered by Cognero.

Page 11

Name:

Class:

Date:

Chap_15_7e_Leach Answer Key 1. True 2. True 3. False 4. False 5. False 6. True 7. True 8. True 9. True 10. False 11. True 12. True 13. False 14. True 15. True 16. True 17. False 18. True 19. True 20. True 21. False 22. True 23. False 24. True 25. True 26. False

Copyright Cengage Learning. Powered by Cognero.

Page 12

Name:

Class:

Date:

Chap_15_7e_Leach 27. False 28. False 29. False 30. False 31. True 32. False 33. False 34. False 35. False 36. c 37. b 38. b 39. d 40. b 41. c 42. a 43. c 44. c 45. d 46. d 47. d 48. a 49. c 50. c 51. c 52. d 53. c 54. b Copyright Cengage Learning. Powered by Cognero.

Page 13

Name:

Class:

Date:

Chap_15_7e_Leach 55. c 56. b 57. d 58. d 59. b 60. a 61. a 62. d 63. b 64. a 65. b 66. d 67. a 68. a 69. b 70. c 71. b 72. c 73. d 74. c

Copyright Cengage Learning. Powered by Cognero.

Page 14

Name:

Class:

Date:

Chap_16_7e_Leach Indicate whether the statement is true or false.

1. Ventures that reorganize under Chapter 11 bankruptcies may still be liquidated via Chapter 7 bankruptcies. a. True b. False 2. An acceleration provision provides that all future interest and principal obligations on a loan become immediately due when default occurs. a. True b. False 3. About two-thirds of new businesses with employees survive more than two years, and about one-half make it past the five-year mark. a. True b. False 4. Cash flow insolvency occurs when a venture's cash flow is insufficient to meet its' current contractual equity obligations. a. True b. False 5. Balance sheet insolvency exists when a venture has negative net debt. a. True b. False 6. An involuntary bankruptcy petition is filed by the venture's management. a. True b. False 7. The two basic options available to resolve a venture in financial distress are restructure or liquidate. a. True b. False 8. Balance sheet insolvency exists when a venture has negative book equity or net worth. a. True b. False 9. A cross-default provision provides that defaulting on one loan makes the venture liquidate all other loans. a. True b. False 10. A debt payments extension involves postponing due dates for interest and principal payments. a. True b. False

Name:

Class:

Date:

Chap_16_7e_Leach 11. A cross-default provision and an acceleration provision both cause principal obligations on a loan to become immediately due. a. True b. False 12. Foreclosure occurs when cash flows are insufficient to meet current debt obligations. a. True b. False 13. A venture is bankrupt when a petition for bankruptcy is filed with a federal bankruptcy court. a. True b. False 14. Increasing revenues relative to current costs is the same thing as cutting costs relative to current revenues. a. True b. False 15. Balance sheet insolvency exists when a venture's total assets exceeds its total debt. a. True b. False 16. A debt composition change occurs when creditors reduce their contractual claims against the venture. a. True b. False 17. Foreclosure is the legal process used by creditors to try to collect amounts owed on loans in default. a. True b. False 18. When a venture's cash flow is insufficient to meet its current contractual debt obligations, asset flow insolvency exists. a. True b. False 19. Operations restructuring always involves growing a venture's revenues relative to its costs. a. True b. False 20. The transfer of title to the venture's assets to a third-party trustee is called assignment. a. True b. False 21. Cash flow insolvency exists when a venture's cash flow is insufficient to meet its current contractual debt obligations. a. True b. False

Name:

Class:

Date:

Chap_16_7e_Leach 22. Financial distress occurs when cash flow is insufficient to meet current debt obligations. a. True b. False 23. When one or more creditors refuse to agree to the reorganization terms of a venture in the hopes of making a larger individual recovery, it is said that a holdout problem has arisen. a. True b. False 24. A voluntary bankruptcy petition is filed by the venture's management. a. True b. False 25. During the rapid-growth stage of a venture's life cycle, the relevant financing and operating decisions encountered are to go public, or to sell or merge the firm. a. True b. False 26. Operations restructuring involves growing revenues relative to costs and/or cutting costs relative to the venture's revenues. a. True b. False 27. The common pool problem exists because individual creditors have the incentive to foreclose on the venture even though it is worth more as a going concern. a. True b. False 28. During the development, startup, and survival stages of a venture's life cycle, the relevant financing and operating decisions faced are either restructuring or liquidating. a. True b. False 29. A venture in financial distress tries to reorganize under Chapter 7 of the U.S. Bankruptcy Code. a. True b. False 30. Asset restructuring involves improving the working-capital-to-sales relationship and/or selling off fixed assets. a. True b. False 31. A Chapter 7 bankruptcy filing permits a venture in financial distress the opportunity to reorganize. a. True b. False

Name:

Class:

Date:

Chap_16_7e_Leach 32. A private workout is a voluntary agreement between a venture's owners and its shareholders that provides for a financial restructuring of the venture's outstanding debt. a. True b. False 33. A Chapter 11 bankruptcy filing requires liquidation of the venture. a. True b. False 34. Foreclosure is a legal process used by entrepreneurs to avoid diluting their ownership positions. a. True b. False 35. A prepackaged bankruptcy involves using a combination of a private workout and a Chapter 7 liquidation. a. True b. False Indicate the answer choice that best completes the statement or answers the question.

36. When a venture's cash on hand is insufficient to pay currently due liabilities, this is referred to as: a. financial distress b. balance sheet insolvency c. bankruptcy d. liquidation 37. Your firm has an average collection period of 36.5 days. Sales revenues are $30,000. What is your firm's average investment in accounts receivables? a. $3,650 b. $3,000 c. $1,000 d. $822 38. During the rapid growth stage of a venture's life cycle, which of the following is not a basis for operating or financial decisions? a. creating and building value b. obtaining additional financing c. choosing the organizational form d. examining exit opportunities 39. Asset restructuring involves: a. improving the working-capital-to-sales relationship b. growing revenues relative to costs c. changing the contractual terms of existing debt obligations d. cutting costs relative to the venture's revenues

Name:

Class:

Date:

Chap_16_7e_Leach 40. During the maturity stage of a venture's life cycle, which of the following is not a basis for operating or financial decisions? a. managing ongoing operations b. maintaining and adding value c. obtaining seasoned financing d. obtaining seed financing 41. Your firm has inventory of $188,000, cost of goods sold of $522,000, and accounts receivable of $214,000. What is your inventory conversion period? a. 98 days b. 152 days c. 168 days d. 131 days 42. Which of the following refers to when a bankruptcy court accepts a reorganization plan for all creditors, including dissenting creditor classes? a. an automatic stay provision b. a holdout problem c. a cram-down procedure d. net worth requirements 43. Which of the following refers to when a venture has a negative equity or net worth position and/or when its cash flow is insufficient to meet current debt obligations? a. insolvency b. loan default c. an acceleration provision d. foreclosure 44. Which of the following provides that all future interest and principal obligations on a loan become immediately due when default occurs? a. insolvency b. loan default c. an acceleration provision d. a cross-default provision 45. Financial restructuring involves: a. improving the working-capital-to-sales relationship b. growing revenues relative to costs c. changing the composition of existing debt claims against the venture d. cutting costs relative to the venture's revenues

Name:

Class:

Date:

Chap_16_7e_Leach 46. When a venture files for legal bankruptcy through Chapter 11 and attempts to reorganize, which of the following is not likely to be a possible outcome? a. Chapter 7 liquidation b. a merger c. asset restructuring d. reorganization and continuation of operations 47. The Federal Bankruptcy Reform Act was implemented between: a. 1900–1902 b. 1930–1932 c. 1978–1979 d. 2008–2009 48. A venture may file for legal bankruptcy in order to liquidate the venture under which of the following chapters? a. Chapter 1 b. Chapter 5 c. Chapter 7 d. Chapter 11 49. The legal process that facilitates a creditor's ability to collect on loans in default is known as: a. an acceleration provision b. a holdout provision c. foreclosure d. a private workout 50. Financial restructuring involves: a. growing revenues relative to costs b. reducing the cash conversion cycle c. issuing mortgage debt d. a debt composition change and a debt payments extension 51. Your firm had net sales of $80,000, receivables of $20,000, and a cost of goods sold of $522,000 this past year.

What were the days sales outstanding? a. 91 days b. 48 days c. 36 days d. 5 days

Name:

Class:

Date:

Chap_16_7e_Leach 52. Which of the following is not a typical outcome of a Chapter 11 bankruptcy? a. successful reorganization and the continuation of operations b. liquidation under Chapter 7 bankruptcy legislation c. a government bailout resulting in continued operations at the expense of operational independence from the government d. merging the venture with another firm 53. A venture may file for legal bankruptcy in order to attempt to reorganize under which of the following chapters? a. Chapter 13 b. Chapter 5 c. Chapter 7 d. Chapter 11 54. Operations restructuring involves: a. improving the working-capital-to-sales relationship b. postponing due dates for interest and principal payments c. selling off fixed assets d. cutting costs relative to the venture's revenues 55. When a venture is in financial distress but believes it has a turnaround opportunity, which of the following will not apply? a. operations restructuring b. asset restructuring c. private restructuring d. financial restructuring 56. Which of the following refers to changing the contractual terms of the existing debt obligations? a. a debt payments extension b. asset restructuring c. financial restructuring d. a debt composition change 57. Which of the following refers to the legal process used by creditors to try to collect amounts owed on loans in default? a. foreclosure b. loan default c. an acceleration provision d. a cross-default provision

Name:

Class:

Date:

Chap_16_7e_Leach 58. Which of the following is not considered to be a primary way for resolving financial distress? a. operations restructuring b. financial restructuring c. asset restructuring d. management restructuring 59. When individual creditors have an incentive to foreclose on a venture, even though it is worth more as a going concern, it is said that there is a: a. common pool problem b. holdout problem c. solvency problem d. cram-down problem 60. Which of the following refers to the failure to meet loan interest or principal payments when due? a. insolvency b. loan default c. a cross-default provision d. foreclosure 61. The rule governing hierarchical order in which claim payments must be made during a bankruptcy is known as the: a. cram-down procedure b. absolute priority rule c. prepackaged bankruptcy rule d. involuntary bankruptcy rule 62. Balance sheet insolvency occurs when a venture has: a. positive net worth b. total liabilities less than total assets c. negative retained earnings but positive net worth d. total liabilities greater than total assets 63. Which of the following refers to postponing due dates for interest and principal on loans and payments on credit purchases? a. a debt payments extension b. asset restructuring c. operations restructuring d. a debt composition change

Name:

Class:

Date:

Chap_16_7e_Leach 64. During the development stage of a venture's life cycle, which of the following is not a basis for operating or financial decisions? a. screening business ideas b. preparing the business plan c. obtaining seed financing d. managing the ongoing operations 65. Which of the following restricts the ability of individual creditors to foreclose to try to recover their individual claims? a. an automatic stay provision b. a holdout problem c. a cram-down procedure d. net worth requirements 66. Which of the following refers to when creditors reduce their contractual claims against the venture? a. a debt payments extension b. asset restructuring c. operating restructuring d. a debt composition change 67. Which of the following provides that defaulting on one loan places all loans in default? a. insolvency b. loan default c. an acceleration provision d. a cross-default provision 68. Operations restructuring involves: a. growing revenues relative to costs b. reducing the amount of outstanding debt c. reducing net working capital d. reducing the cash conversion cycle 69. During the startup stage of a venture's life cycle, which of the following is not a basis for operating or financial decisions? a. creating and building value b. choosing the organizational form c. preparing initial financial statements d. obtaining startup financing

Name:

Class:

Date:

Chap_16_7e_Leach 70. During the survival stage of a venture's life cycle, which of the following is not a basis for operating or financial decisions? a. monitoring financial performance b. obtaining seasoned financing c. projecting cash needs d. obtaining first-round financing

Name:

Chap_16_7e_Leach Answer Key 1. True 2. True 3. True 4. False 5. False 6. False 7. True 8. True 9. False 10. True 11. False 12. False 13. True 14. False 15. False 16. True 17. True 18. False 19. False 20. True 21. True 22. True 23. True 24. True 25. True 26. True

Class:

Date:

Name:

Chap_16_7e_Leach 27. True 28. True 29. False 30. True 31. False 32. False 33. False 34. False 35. False 36. a 37. b 38. c 39. a 40. d 41. d 42. c 43. a 44. c 45. c 46. c 47. c 48. c 49. c 50. d 51. a 52. c 53. d 54. d

Class:

Date:

Name:

Chap_16_7e_Leach 55. c 56. c 57. a 58. d 59. a 60. b 61. b 62. d 63. a 64. d 65. a 66. d 67. d 68. a 69. a 70. b

Class:

Date: