Entrepreneurship Theory Process and Practice 9th Edition Kuratko
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CHAPTER 8: SOURCES OF CAPITAL FOR ENTREPRENEURS
TRUE/FALSE
1. Use of debt to finance a new venture involves a payback of funds plus an interest fee for the use of the money.
ANS: T PTS: 1 NAT: AACSB Analytic | Environmental Influence
2. The most common sources of debt financing are commercial banks.
ANS: T PTS: 1 NAT: AACSB Analytic | Environmental Influence
3. Sources of debt financing include trade credit, accounts receivables, factoring, and finance companies.
ANS: T PTS: 1 NAT: AACSB Analytic | Environmental Influence
4. Equity financing is money invested in the venture with legal obligations to repay the principal amount of interest or interest rate on it.
ANS: F PTS: 1 NAT: AACSB Analytic | Environmental Influence
5. Public offering is a term used to refer to corporations taking public donations to raise capital.
ANS: F PTS: 1 NAT: AACSB Analytic | Environmental Influence
6. Because the advantages of going public outweigh the disadvantages, it is in a corporation’s best interest to go public.
ANS: F PTS: 1 NAT: AACSB Analytic | Environmental Influence
7. History and nature of the company, capital structure, and description of any material contracts are just a few examples of the specific detailed information that must be presented about a firm that is going public.
ANS: T PTS: 1 NAT: AACSB Analytic | Environmental Influence
8. Private placement is a method of raising capital through the private placement of securities.
ANS: T PTS: 1 NAT: AACSB Analytic | Environmental Influence
9. Regulation D augments the regulations for reports and statements required for selling stock to private parties, friends, employees, customers, relatives, local professionals.
ANS: F PTS: 1 NAT: AACSB Analytic | Environmental Influence
10. Sophisticated investors are wealthy individuals who invest more or less regularly in new and/or earlyand late-stage ventures.
ANS: T PTS: 1 NAT: AACSB Analytic | Environmental Influence
11. Venture capitalists are a valuable source of equity funding for new ventures.
ANS: T PTS: 1 NAT: AACSB Analytic | Environmental Influence
12. The venture capital pool is rapidly declining due to overfunding.
ANS: F PTS: 1 NAT: AACSB Analytic | Environmental Influence
13. Venture capitalists are quick to invest.
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14. Venture capitalists, surprisingly, require little information before they make an investment.
ANS: F PTS: 1 NAT: AACSB Analytic | Environmental Influence
15. The business plan is a critical element in a new-venture proposal.
ANS: T PTS: 1 NAT: AACSB Analytic | Environmental Influence
16. There is no way for the venture capitalist adequately to evaluate a new venture.
ANS: F PTS: 1 NAT: AACSB Analytic | Environmental Influence
17. The average size of a social loan is around $7,000.
ANS: T PTS: 1 NAT: AACSB Analytic | Environmental Influence
18. Social lending sites are different from so-called microlending sites.
ANS: T PTS: 1 NAT: AACSB Analytic | Environmental Influence
19. A potential danger of social lending is the implication that social loans may be viewed as gifts and taxed accordingly.
ANS: T PTS: 1 NAT: AACSB Analytic | Environmental Influence
20. Venture capital firms want to own control of the firms in which they invest.
ANS: F PTS: 1 NAT: AACSB Analytic | Environmental Influence
21. Venture capitalists are usually satisfied with a reasonable return on investments.
ANS: F PTS: 1 NAT: AACSB Analytic | Environmental Influence
22. Venture capitalists are slow to invest.
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NAT: AACSB Analytic | Environmental Influence
23. Venture capitalists need only basic summary information before they make funding decisions.
ANS: F PTS: 1
NAT: AACSB Analytic | Environmental Influence
24. One of the most frequently used criterion in evaluating new ventures, is the ability of the entrepreneur to sustain intense effort.
ANS: T PTS: 1
NAT: AACSB Analytic | Environmental Influence
25. There is only a small number of informal risk capitalists in the market today.
ANS: F PTS: 1
NAT: AACSB Analytic | Environmental Influence
26. Informal risk capitalists are those who have already made their money and now seek to help new ventures.
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27. Informal risk capitalists are often referred to as “business angels.”
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28 Entrepreneurs are rarely able to set up a business without investment funds or bank loans.
ANS: F PTS: 1
NAT: AACSB Analytic | Environmental Influence
29. Frugality is deemed a bootstrapping technique.
ANS: T PTS: 1
NAT: AACSB Analytic | Environmental Influence
30. Most venture capital funds later stages of venture development, not the start-up (or seed) stage.
ANS: F PTS: 1
MULTIPLE CHOICE
NAT: AACSB Analytic | Environmental Influence
1. At start-up time, forms of financing includes all but which of the following?
a. equity
b. private equity
c. equitable payback
d. bank loans
ANS: C PTS: 1
NAT: AACSB Analytic | Environmental Influence
2. Which of the following is (are) sources of capital for entrepreneurs?
a. equity
b. debit
c. auto leasing
d. credit cards
ANS: A PTS: 1 NAT: AACSB Analytic | Environmental Influence
3. Many new ventures find that debt financing is
a. necessary.
b. a waste of time.
c. not an important consideration.
d. their major source of funds.
ANS: A PTS: 1 NAT: AACSB Analytic | Environmental Influence
4. Approximately how many commercial banks are there in this country?
a. about 40,000
b. about 7,000
c. about l7,000
d. about 20,000
ANS: B PTS: 1 NAT: AACSB Analytic | Environmental Influence
5. Which of the following is not a question commonly asked by banks of entrepreneurs?
a. What do you plan to do with the money?
b. How much do you need?
c. What interest rate did you have in mind?
d. How will you repay the loan?
ANS: C PTS: 1 NAT: AACSB Analytic | Environmental Influence
6. When starting a business, which of the following sources of financing are least likely to be used?
a. trade credit
b. factors
c. leasing companies
d. insurance companies
ANS: D PTS: 1 NAT: AACSB Analytic | Environmental Influence
7. When starting a business, which of the following sources of financing are most likely to be used?
a. trade credit
b. factors
c. leasing companies
d. insurance companies
ANS: A PTS: 1 NAT: AACSB Analytic | Environmental Influence
8. Which of the following would be most commonly used for short-term financing?
a. insurance companies
b. trade credit
c. finance companies
d. leasing companies
ANS: B PTS: 1 NAT: AACSB Analytic | Environmental Influence
9. Which of the following would be most commonly used for medium-term financing?
a. insurance companies
b. trade credit
c. finance companies
d. leasing companies
ANS: C PTS: 1 NAT: AACSB Analytic | Environmental Influence
10. Which of the following would be most commonly used for long-term financing?
a. insurance companies
b. trade credit
c. finance companies
d. leasing companies
ANS: A PTS: 1 NAT: AACSB Analytic | Environmental Influence
11. When accounts receivable are bought from a company for capital funding it is called
a. trade credit.
b. financing.
c. leasing.
d. factoring.
ANS: D PTS: 1 NAT: AACSB Analytic | Environmental Influence
12. Which of the following is not a type of debt financing?
a. private placement
b. trade credits
c. finance companies
d. accounts receivables
ANS: A PTS: 1 NAT: AACSB Analytic | Environmental Influence
13. A disadvantage of debt financing is
a. regular interest payments.
b. possible cash flow enhancement.
c. inhibition of growth and development due to equity investments.
d. relinquishment of ownership.
ANS: A PTS: 1 NAT: AACSB Analytic | Environmental Influence
14. Short-term debt is
a. paid back in six months.
b. paid back in one year.
c. paid back after sales.
d. paid back over an indefinite period of time.
ANS: B PTS: 1 NAT: AACSB Analytic | Environmental Influence
15. Which of the following is a type of equity financing?
a. convertible debentures
b. common stock
c. loan with warrants
d. loan without warrants
ANS: B PTS: 1 NAT: AACSB Analytic | Environmental Influence
16. The most common source of debt financing is
a. trade credit.
b. factoring.
c. commercial banks.
d. finance companies.
ANS: C PTS: 1 NAT: AACSB Analytic | Environmental Influence
17. Advantages of debt financing include all of the following except:
a. low interest rates that justify the opportunity cost.
b. regular interest payments.
c. potential greater return on equity.
d. no relinquishment of ownership.
ANS: B PTS: 1 NAT: AACSB Analytic | Environmental Influence
18. Long-term debt is used for
a. start-up capital.
b. purchase of property or equipment.
c. payment of payroll.
d. both a and b.
ANS: D PTS: 1 NAT: AACSB Analytic | Environmental Influence
19. When securing a bank loan an entrepreneur should be prepared to answer which of the following questions except?
a. When do you need it?
b. How do you need it?
c. What do you need it for?
d. What is the price of your product?
ANS: D PTS: 1 NAT: AACSB Analytic | Environmental Influence
20. SEC stands for the
a. Stock Exchange Corporation.
b. Securities and Exchange Commission.
c. Standard Equity Commission.
d. Source of Equity Company.
ANS: B PTS: 1 NAT: AACSB Analytic | Environmental Influence
21. When going public with public offerings an advantage might be
a. size of the company’s capital amount.
b. the company’s size.
c. the company’s market share.
d. the product price.
ANS: A PTS: 1 NAT: AACSB Analytic | Environmental Influence
22. SBIC stands for the
a. small business in capital.
b. securities, bonds, investment, capital.
c. small-business investment companies
d. sources of business investment companies
ANS: C PTS: 1 NAT: AACSB Analytic | Environmental Influence
23. Equity capital is
a. paid back within one year.
b. paid back after five years.
c. not a loan but a form of stock.
d. loans from family.
ANS: C PTS: 1
NAT: AACSB Analytic | Environmental Influence
24. Evaluation of new-venture proposals includes all the following processes except
a. oral presentation
b. initial screening
c. evaluation of the business plan
d. a product prototype
ANS: D PTS: 1
25. One of the advantages of public offerings is
a. liquidity.
b. disclosure.
c. requirements.
d. cost.
ANS: A PTS: 1
NAT: AACSB Analytic | Environmental Influence
NAT: AACSB Analytic | Environmental Influence
26. __________ is(are) one of the disadvantages of going public.
a. Proxy statements
b. Form 8-K
c. Shareholder pressure
d. Liquidity
ANS: C PTS: 1
NAT: AACSB Analytic | Environmental Influence
27. The Regulation D exemptions include all of the following except:
a. placements of up to $5 million.
b. placements of less than $500,000.
c. placements in excess of $5 million.
d. placements in excess of $l0 million.
ANS: D PTS: 1
28. The main objective of Regulation D is to
NAT: AACSB Analytic | Environmental Influence
a. increase investment in private placement.
b. regulate new small-business investment.
c. make it easier and less expensive for small ventures to sell stock.
d. reduce debt financing by small enterprises.
ANS: C PTS: 1
NAT: AACSB Analytic | Environmental Influence
29. Which of the following is not one of the most common questions typically required to be answered by entrepreneurs seeking funding?
a. What do you plan to do with the money?
b. How much money do you need?
c. When do you need the money?
d. What exact date will you repay the money?
ANS: D PTS: 1
30. Equity capital is often raised through:
a. public stock offerings.
NAT: AACSB Analytic | Environmental Influence
b. option sales.
c. donations.
d. preferred issues.
ANS: A PTS: 1 NAT: AACSB Analytic | Environmental Influence
31. When going public specific detailed information that must be presented includes
a. a 20-year plan.
b. the capital structure of the company.
c. any financial conflicts of interest.
d. any previous business failures.
ANS: B PTS: 1 NAT: AACSB Analytic | Environmental Influence
32. Regulation D defines separate exemptions that are based on the amount of money being raised. Which is not a rule that accompanies these exemptions?
a. rule 503
b. rule 504
c. rule 505
d. rule 506
ANS: A PTS: 1 NAT: AACSB Analytic | Environmental Influence
33. Of the following, which is not typically identified as a bootstrapping technique?
a. sharing office space
b. hiring seasoned veterans
c. encouraging customers to pay early
d. trading equity for services
ANS: B PTS: 1 NAT: AACSB Analytic | Environmental Influence
34. Venture capitalists are experienced professionals who provide a full range of service for new ventures including
a. supplying labor for start-up.
b. market research and strategy for pricing.
c. management consulting.
d. R & D knowledge.
ANS: C PTS: 1 NAT: AACSB Analytic | Environmental Influence
35. Major trends in the venture capital field today include all of the following except
a. less specialized and more homogenous funds
b. emerging feeder funds
c. decrease in start-up investment amounts
d. global reach
ANS: A PTS: 1 NAT: AACSB Analytic | Environmental Influence
36. Which of the following terms is not synonymous with social lending?
a. crowdfunding
b. peer-to-peer (P2P) lending
c. banking 2.0
d. commercially viable lending
ANS: D PTS: 1 NAT: AACSB Analytic | Environmental Influence
37. Of the following, which is more likely than the others to be deemed a potential danger of social lending?
a. high funding success rate
b. business plan disclosure
c. potential tax advantage
d. regulatory certainty
ANS: B PTS: 1 NAT: AACSB Analytic | Environmental Influence
38. Which of the following statements is not true of venture capitalists?
a. They want the entrepreneur and the management to run the company.
b. They expect high return on investments.
c. They are interested in trying to manage firms themselves.
d. They take a long time to raise venture capital.
ANS: C PTS: 1 NAT: AACSB Analytic | Environmental Influence
39. Criteria that venture capitalists use in evaluating new venture proposals include:
a. the entrepreneur’s education.
b. the entrepreneur’s travel expenses.
c. the characteristics of the product or service.
d. when they will be paid back in full.
ANS: C PTS: 1 NAT: AACSB Analytic | Environmental Influence
40. Venture proposals are often rejected due to significant deficiencies in
a. the size of the proposal.
b. financial projections.
c. available funds.
d. both a and b.
ANS: D PTS: 1 NAT: AACSB Analytic | Environmental Influence
41. Which is not a stage of the evaluation process?
a. initial screening
b. evaluation of the business plan
c. group discussion
d. management integration
ANS: B PTS: 1
NAT: AACSB Analytic | Environmental Influence
42. Which is an important question for the entrepreneur to ask when evaluating the venture capitalist?
a. Is the person someone with whom the entrepreneur can work?
b. Is the person a close relative?
c. Is the person wealthy?
d. Is the person a college graduate?
ANS: A PTS: 1
NAT: AACSB Analytic | Environmental Influence
43. The entrepreneur should ask the venture capitalist questions.
a. at most ten
b. exactly twenty
c. an unlimited number of
d. no
ANS: C PTS: 1
NAT: AACSB Analytic | Environmental Influence
44. Which is one of the most important questions for entrepreneurs to ask regarding venture capitalists?
a. What is it like to work with their firm?
b. Are they good communicators?
c. Are they wealthy?
d. Are they good at financial computation?
ANS: A PTS: 1 NAT: AACSB Analytic | Environmental Influence
45. Which of the following is a true statement about raising capital?
a. All capital is raised through formal sources.
b. All capital is raised through debt sources.
c. Capital is easy to get.
d. It often takes a great deal of time to raise capital.
ANS: D PTS: 1 NAT: AACSB Analytic | Environmental Influence
46. How many people in America have net worth in excess of $1 million?
a. less than 100,000
b. about 200,000
c. about 500,000
d. more than l,000,000
ANS: C PTS: 1 NAT: AACSB Analytic | Environmental Influence
47. How do informal investors find projects to invest in?
a. networks of friends
b. business classifieds
c. Forbes
d. university think tanks
ANS: A PTS: 1 NAT: AACSB Analytic | Environmental Influence
48. An informal risk capitalist is referred to as:
a. your neighbor.
b. a business angel.
c. a retiree.
d. someone with extra money to invest but who is not interested becoming an entrepreneur.
ANS: B PTS: 1 NAT: AACSB Analytic | Environmental Influence
49. Informal investors find projects through
a. newspapers.
b. a network of friends.
c. commercials.
d. banks.
ANS: B PTS: 1 NAT: AACSB Analytic | Environmental Influence
50. Which of the following does not represent a category of angel investors?
a. micromanagement angels
b. entrepreneurial angels
c. amateur angels
d. corporate angels
ANS: C PTS: 1 NAT: AACSB Analytic | Environmental Influence
SHORT ANSWER
1. What are the major types and uses of debt financing?
ANS:
Many new ventures find that debt financing is not a choice but a necessity. Short-term borrowing (one year or less) often is required to obtain working capital and is repaid out of proceeds from sales. Long-term debt (term loans of one to five years or long-term loans maturing in more than five years) is used to finance the purchase of property or equipment, with the purchased asset serving as collateral for the loans. The most common sources of debt financing are commercial banks.
PTS: 1 NAT: AACSB Analytic | Environmental Influence
2. What is the potential future of social lending with respect to entrepreneurs?
ANS:
If the social lending movement continues, entrepreneurs will have an effective weapon in their arsenal to combat the cash-flow issues inherent in running a business. As with all lenders, entrepreneurs need to carefully review the policies and procedures as well as the reputation for any social lender they are considering taking a loan through. For those individuals who have been putting their entrepreneurial aspirations on hold due to financial fears, social lending could provide the peace of mind needed for them to dust off their ideas and put them into action.
PTS: 1 NAT: AACSB Analytic | Environmental Influence
3. How does a public offering differ from a private placement?
ANS:
A public offering involves entering the stock exchange. Once the stock is publicly offered, anyone can buy shares and, in turn, ownership. Public offerings are very expensive and highly regulated. These disadvantages are offset by the large amounts of capital and liquidity the offerings can provide. A private placement is used more often by small ventures. It allows the sale of the stock to private, personally selected individuals. The Securities and Exchange Commission has enacted special rules to make private placement easier and less expensive for small businesses. Both of these equity financing plans differ from debt financing. They require a relinquishment of ownership, but don’t demand a fixed payback of the invested principal.
PTS: 1 NAT: AACSB Analytic | Environmental Influence
4. As the venture capital market has experienced rapid growth, several market trends have emerged. What are the major trends of today?
ANS:
A number of major trends have occurred in venture capital over the last few years: the predominant investor class is changing from individuals, foundations, and families to pension institutions; innovation has become more global and many venture capitalists have opened offices in China, India, Israel, and Vietnam; funds are becoming more specialized and less homogeneous; syndicated deals are emerging; venture capitalists are allocating premium time to salvaging or turning around problem ventures.
PTS: 1 NAT: AACSB Analytic | Environmental Influence
5. Should entrepreneurs accept proposals from the first venture capitalist that offers?
ANS: Entrepreneurs must evaluate their capitalist just as their capitalist evaluates them. Not every capitalist is right for every entrepreneur, even if he or she does have the money needed. The entrepreneur must look at the capitalist’s skills and knowledge, and decide how well they can work together, while keeping in mind that venture capital is hard to come by.
PTS: 1 NAT: AACSB Analytic | Environmental Influence
6. Are formal firms the only source of venture capital?
ANS:
There are many individuals willing to invest where venture capitalists will not. These are usually wealthy people looking for investments and are referred to as “business angels.” These people are generally well off. They don’t need the high, immediate rate of return required by the venture capital firms. They often seek social rather than purely financial returns on their investments.
PTS: 1 NAT: AACSB Analytic | Environmental Influence