Business 3215 – Principles of Entrepreneurship Practice Self-Test CHAPTER 10 Getting Funding or Financing

MULTIPLE-CHOICE QUESTIONS The Importance of Getting Financing or Funding Answer: E Medium Page: 231 1. A company’s __________ rate is the rate at which it is spending its capital until it reaches profitability. A. B. C. D. E. Answer: A Medium Page: 231 2. liquidity utilization intensity usage burn

Joe Camp is the founder of a company in the medical products industry. Joe’s firm is still in the feasibility analysis state, and doesn’t have a product that is ready to sell. The company is spending about $50,000 per month, and expects to maintain that level of spending until it reaches profitability. The $50,000 a month is Joe’s: A. B. C. D. E. burn rate consumption rate utilization rate usage rate liquidity rate

Answer: B Medium Page: 231

3.

For startup firms, the cost of buying real estate, building facilities, and purchasing equipment often exceeds the firms’ ability to prov ide funds for those needs on their own. Which of the following reasons that motivate firms to seek funding or financing is illustrated in this example? A. B. C. D. E. lengthy product development cycles capital investments costs associated with building a brand cash flow challenges personnel costs

the seed money that gets a company off the ground typically comes from: A. B. cash flow challenges lengthy product development cycles capital investments personnel costs marketing costs Answer: D Medium Page: 231 6. E. D. In startup firms. C. C. D. it takes 2-3 years to develop a good electronic game. E. B. The up-front costs often exceed a firm’s ability to fund these activities on its own. This example illustrates the need for funding or financing referred to as: A. Although Karen’s game designers and programmers are very good. capital investments lengthy product development cycles cash flow challenges personnel costs costs associated with incorporating Answer: B Medium Page: 231 5. Karen Jenkins owns an electronic games company. B. . D. E. employees must be trained and paid. B. inventory must be purchased.Chapter 7: Assessing A new Venture’s Financial Strength And Viability Answer: C Medium Page: 231 4. and advertising must be paid for before cash is generated from sales. some products are under development for years before they generate earnings. the founders of the firm angel investors venture capitalists commercial banks governmental agencies 2 . Which of the following reasons that motivate firms to seek funding or financing is illustrated in this example? A. Which of the following reasons that motivate firms to seek funding or financing is illustrated in this example? A. E. D. C. According to our textbook. C. cash flow challenges capital investments costs associated with building a brand lengthy product development cycles personnel costs Answer: A Easy Page: 232 7.

B. This form of contribution is often called: A.000 of their own money.000. All founders contribute __________ to their ventures. E. D. prior to its formal launch. E. which leaves $60. subtle equity elusive equity intangible equity vague equity sweat equity Answer: C Medium Page: 232 9. which is in the communications industry. and small investment by Tim’s sister. D. they decided to turn to friends and family for the money they need. Fortunately. After getting turned down by a couple of banks. Tim and Linda Collins are planning to open a smoothie restaurant near a large soccer complex in Des Moines. Friends and family are a common source of funds for new ventures. C. they were able to raise the money through a gift from Tim’s grandfather. and need $75. C. B. B. However. E. 2005. legacy money statutory money care money compassion money love money Answer: A Medium Page: 233 11. A. Gary spent many hours working on his business. They have $15. C. The time and effort that entrepreneurs put into their venture. D. a loan from Linda’s parents. was launched on January 1. B.000 to get started. is referred to as: A. D.Chapter 7: Assessing A New Venture’s Financial Strength And Viability Answer: E Medium Page: 232 8. C. pound the payment equity vague equity sweat equity intangible equity subtle equity Answer: E Medium Page: 233 10. which represents the value of the time and effort that a founder puts into a new firm. Ellen. E. Gary Graham’s startup. particularly during the feasibility analysis stage. The money that an entrepreneur raises from family and friends is often referred to as: A. Iowa. love money bootstrapping care money compassion money legacy money 3 . that can’t be easily measured from a financial point of view.

establish partnerships and share expenses with other companies avoid unnecessary expenses. D. exchanging partial ownership in a firm. ingenuity. E. Reaching Prospecting Bootstrapping Inventive processing Scrambling Answer: C Hard Page: 233 13. B. such as lavish office space moving processes online Answer: A Medium Page: 234 15. E. B. The feature focuses on how entrepreneurs can save money by: A. and any means possible to obtain resources other than borrowing money or raising capital from traditional sources. C. D. B. usually in the form of stock. D. A. leasing equipment rather than buying it sharing office space or employees with other businesses establishing partnerships and sharing expenses with partners avoiding unnecessary expenses.Chapter 7: Assessing A new Venture’s Financial Strength And Viability Answer: C Medium Page: 233 12. E. The “Savvy Entrepreneurial Firm” feature in Chapter 10 focuses on bootstrapping. Which of the following was not identified in the textbook as a common (and sound) bootstrapping strategy? A. Equity financing (or funding) means: A. C. __________ is the use of creativity. getting a grant or outright gift C. C. getting a loan guarantee 4 . getting a loan D. for funding B. such as lavish office space buy rather than lease equipment share office space or employees with other businesses minimize personal expenses and put all profit back into the business Answer: E Medium Page: 233 14. getting a lease E.

Which of the following is not a source of equity funding? A. angel investors initial public offering commercial banks venture capital private placement Answer: A Medium Page: 234 17. Angel investors. E.Chapter 7: Assessing A New Venture’s Financial Strength And Viability Answer: C Medium Page: 234 16. venture capital. B. bootstrap speech elevator speech sway speech stump speech brevity speech 5 . C. C. D. D. D. E. angel investors are a common source of equity funding equity funding is not a loan equity investors are very demanding equity investors fund the majority of the plans they consider most equity investors have a three-to-five year investment horizon Answer: B Medium Page: 236 19. A(n) __________ is a brief. E. D. B. B. C. carefully constructed statement that outlines the merits of a business opportunity. equity funding debt financing guaranteed loans grants and outright gifts bootstrapping Answer: D Hard Page: 235 18. private placement. B. Which of the following statements is incorrect regarding equity funding? A. A. E. C. and initial public offerings are the most common sources of: A.

has a degree from Princeton. C. is about 50 years of age is worth between $1 and $10 million invest between $1 million and $3 million per venture is well educated has high income and wealth Answer: D Medium Page: 237 23. The primary disadvantage of __________. venture capitalists institutional investor capital asset provider business angel banker 6 .000 a year retirement income. Stan is at the point in his life where he’s interested in investing $25. D. Stan is a(n): A. E. from the point of view of the firm receiving funding. D. B.000 to $100. bootstrapping leasing debt financing receiving an SBIR Program grant equity funding __________ are individuals who invest their personal capital directly in start-ups. E. D.1 million. B. C. E. and has a $250. B. is worth $2. C. D. B. Which of the following is not a characteristic of a prototypical business angel? A. E. Answer: D Medium Page: 237 21. C.Chapter 7: Assessing A new Venture’s Financial Strength And Viability Sources of Equity Funding Answer: E Medium Page: 237 20. A.000 per firm of his own money in startup companies. is the owners of the firm must give up part of their ownership interest. Stan Baker is 52 years old. A. Venture capitalists Capital asset providers Commercial bankers Business angels Commercial capitalists Answer: C Medium Page: 237 22.

business angels are difficult to find Answer: C Medium Page: 239 27. business angels fund approximately: A. B. Which of the following statement is not correct regarding business angels? A. 2.000 companies per year 50. business angels are valuable because of their willingness to make relatively small investments E. business angels usually take a seat on the board of directors of the firms in which they invest D.000 companies per year 20. $20 billion to $30 billion $5 billion to $10 billion $35 billion to $50 billion $40 billion to $65 billion $75 billion to $100 billion Answer: C Hard Page: 237 25. According to the textbook. D. A. E. B. nationwide. angels invest __________ annually into some 30. __________ is/are money that is invested by venture-capital firms in start-ups and small businesses with exceptional growth potential. According to the textbook. C. B. D.000 companies per year Answer: B Medium Page: 237 26.500 companies per year 10.Chapter 7: Assessing A New Venture’s Financial Strength And Viability Answer: A Hard Page: 237 24. E. A. business angels invest in more startups on a yearly basis than venture capitalists B. the number of angel investors has decreased dramatically over the past decade C. C.000 small companies. D. At-risk capital Institutional capital Venture capital Angel dollars Wealth capital 7 .000 companies per year 30. C. E.

D. According to the textbook.000 companies per year 500 to 750 companies per year Answer: E Hard Page: 240 32.000 to 15.000 companies per year 6. A. Which of the following is not an industry that venture capitalists are typically interested in? A. is called the: A. D.000 to 4. as part of their compensation for managing a venture capital fund. A. E. B. C. In exchange for their efforts. B. E. 3 to 8 percent 20 to 25 percent 10 to 15 percent 20 to 30 percent 40 to 60 percent Answer: D Hard Page: 239 30. the venture capitalists that manage a venture capital fund receive an annual management fee in addition to __________ of the profits earned by the fund. 1. B. C.000 companies per year 12. computer software telecommunications networking semiconductors food 8 .000 to 8. C. D. residual derivative rest carry remainder Answer: B Hard Page: 239 31. corporations formal associations loose collections collations limited partnerships Answer: B Hard Page: 239 29.000 to 1. D. B.500 companies per year 3. venture capitalists fund about: A. D. B. E. C. E. C. Venture-capital firms are __________ of money managers who raise money in “funds” to invest in start-ups and growing firms. The percentage of profits the venture capitalists get.Chapter 7: Assessing A new Venture’s Financial Strength And Viability Answer: E Medium Page: 239 28. E.

E. C. subsequent investments are made in rounds and are referred to as: A. B. Once a venture capitalist makes an investment in a firm. seed funding second-stage funding first-stage funding mezzanine financing start-up funding Answer: E Hard Page: 240 36. second-state funding start-up funding first-state funding seed funding mezzanine financing 9 . the stage of funding that occurs when the firm has stated commercial production and sales but requires additional financing to ramp up its production is called: A. E. C. E. C. automobiles biotechnology home appliances toys clothing Answer: D Medium Page: 240 34. E. Which of the following is an industry that venture capitalists are heavily involved with? A.Chapter 7: Assessing A New Venture’s Financial Strength And Viability Answer: B Medium Page: 240 33. D. In regard to the stages (or rounds) of venture capital funding. D. B. later funding subsequent backing ensuing backing follow-on funding successive funding Answer: C Hard Page: 240 35. C. funding made in a firm to provide for further expansion or to bridge its financing needs before a public offering of stock or before a buyout is referred to as: A. B. B. D. In regard to the stages (or rounds) of venture capital funding. D.

B. D. D. B. initial public offering original public submission preemptive initial offering original open offering first unrestricted offering Answer: D Medium Page: 241 38.Chapter 7: Assessing A new Venture’s Financial Strength And Viability Answer: A Medium Page: 241 37. which is the direct sale of an issue of securities to a large institutional investor. 41. A. B. C. that acts as an underwriter or agent for a firm engaged in an initial public offering. The first sale of stock by a firm to the public is referred to as a(n): A. C. B. C. D. B. raising venture capital or securing a private placement selling corporate bonds or selling stock via an IPO getting a grant or selling corporate bonds getting a loan or raising venture capital getting a loan or selling corporate bonds Answer: A Medium Page: 243 There are two common types of loans: A. C. single-purpose loans and lines of credit multiple-purpose loans and venture capital private placements and lines of credit single-purpose loans and multiple-purpose loans one-time-purpose loans and venture capital 10 . E. A variation of the IPO is a(n) __________. E. E. such as Credit Suisse First Boston. E. Debt financing involves: A. E. special placement private placement statutory placement individual placement singular placement Sources of Debt Financing Answer: E Medium Page: 243 40. venture bank statutory bank fiduciary bank investment bank public bank Answer: B Medium Page: 243 39. A(n) __________ is an institution. D. C. A. D.

services. small businesses that have been profitable for at least three consecutive years C. banks are reliable sources of funding for startups and interest payments are tax deductible D. small businesses that are not able to obtain investment capital B. small businesses involved in manufacturing D. There are two major advantages of getting a loan vs. small businesses that are unable to secure financing on reasonable terms through normal lending channels E. The most notable SBA program available to small businesses is the: A. banks are reliable sources of funding for startups and lenders typically take an active interest in borrowers Answer: C Medium Page: 244 43. the money doesn’t have to paid back and lenders typically take an active interest in their borrowers C. B. Which of the following statements is not correct regarding the SBA 7(A) Loan Guaranty Program? A. the 7(B) direct loan program D. it is the most notable SBA program available to small businesses B. the 7(A) guaranty program has a direct loan counterpart. the money doesn’t have to paid back and no ownership in the firm is surrendered E. the program accounts for 90 percent of the SBA’s loan activity C. no ownership in the firm is surrendered and interest payments are tax deductible B. almost all small businesses are eligible to apply for it E. small businesses in the following industries: agricultural. and real estate Answer: C Hard Page: 244 45. D. E. C. SBA 1060 Guaranty Code 604 Guaranty Program 7(A) Guaranty Program SBA 101 Program Small Business 401 Program Answer: D Medium Page: 244 44. The SBA 7(A) Guaranty loan program is available to: A. retail sales.Chapter 7: Assessing A New Venture’s Financial Strength And Viability Answer: A Medium Page: 243 42. a 7(A) guaranteed loan can be used for working capital 11 . investment capital: A.

it is easier to obtain credit on a lease than a purchase Answer: E Medium Page: 245 49. E. lease loan guarantee warranty assurance The major advantage of leasing is that: A. C. E. B. E. The __________ is a competitive grant program that provides over $1 billion per year to small businesses for early-state and development projects. The 7(A) Loan Guaranty Program accounts for __________ of all the SBA’s loan activity. D. A. Answer: B Medium Page: 244 48. it enables a company to access average to above average facility or equipment B. 5 percent 20 percent 55 percent 75 percent 90 percent Creative Sources of Financing and Funding Answer: A Easy Page: 244 47. C. a lease agreement is easier to negotiate than a purchase agreement E. A __________ is a written agreement in which the owner of a piece of property allows an individual or business to use the property for a specified period of time in exchange for payments. D. B. A. it is cheaper in the long run than purchasing D. C. D. SAIR Program SBTA Program SBAP Program SBTT Program SBIR Program 12 .Chapter 7: Assessing A new Venture’s Financial Strength And Viability Answer: E Hard Page: 244 46. B. it enables a company to acquire the use of assets with little or no down payment C. A.

capital investments. C. Phase I Phase II Phase III Phase V Phase XX Answer: B Medium Page: 245 51. Debt financing (or funding) means exchanging partial ownership in a firm in exchange for cash. and lengthy product development cycles. Sweat equity represents the value of the time and effort that a founder puts into a new firm. 55. 53. C. 13 . B. D. D. A company’s “release rate” is the rate at which it is spending its capital until it reaches profitability. 54. Which “phase” of the SBIR Program is intended to demonstrate the proposed innovation’s technical feasibility? A. 57. and any means possible to obtain resources other than borrowing money or raising capital from traditional sources. A. The SBIR is a __________. Bootstrapping is the use of creativity. meaning that firms that qualify have the potential to receive more than one grant to fund a particular proposal. Typically. E.Chapter 7: Assessing A New Venture’s Financial Strength And Viability Answer: A Medium Page: 245 50. 56. E. the seed money that gets a company off the ground comes from bankers or investors. ingenuity. There are three reasons that most firms need to raise money during their early life: cash flow challenges. two-phase program three-phase program six-phase program nine-phase program twelve-phase program TRUE-FALSE QUESTIONS The Importance of Getting Funding Answer: T Easy Page: 231 Answer: F Medium Page: 231 Answer: F Medium Page: 232 Answer: T Medium Page: 232 Answer: T Medium Page: 233 Answer: F Medium Page: 235 52. B.

The most common sources of debt financing are commercial banks. An IPO is the first sale of stock by a firm to the public on an organized exchange. 59. Venture capital is money that is invested by venture-capital firms in start-ups and small businesses with exceptional growth potential. Angel investors. Venture capitalists frequently fund service organizations. 65. Sources of Equity Funding Answer: F Medium Page: 237 Answer: F Medium Page: 237 Answer: T Medium Page: 237 Answer: T Medium Page: 239 Answer: F Medium Page: 240 Answer: F Medium Page: 240 Answer: T Medium Page: 241 60. 62. 63. 61. Funding that occurs when the firm has started commercial production and sales but requires additional financing to ramp up its production is referred to as seed funding. Sources of Debt Financing Answer: T Medium Page: 243 67.Chapter 7: Assessing A new Venture’s Financial Strength And Viability Answer: T Medium Page: 235 Answer: F Medium Page: 235 58. private placement. and the Small Business Administration. venture capital. angel investors. like convenience store chains and restaurants. 64. 66. 14 . and initial public offerings are the most common sources of equity funding. Business angels are valuable because of their willingness to make relatively small investments. The number of angel investors in the United States has decreased dramatically over the past decade. Debt financing involves getting a loan or selling corporate bonds. Venture capitalists are individuals who invest their personal capital directly in start-ups.

15 .000 for Phase 1.Chapter 7: Assessing A New Venture’s Financial Strength And Viability Answer: F Medium Page: 243 Answer: T Medium Page: 244 68. commercial banks have been viewed as excellent sources of financing for startup firms. 71. An SBIR grant provides the recipient up to $500. The most notable SBA program available to small businesses is the 7(A) Loan Guaranty Program. A lease is a written agreement in which a piece of property allows an individual or business to use the property for a specified period of time in exchange for payments. Creative Sources of Financing and Funding Answer: T Medium Page: 244 Answer: F Hard Page: 245 70. Historically. 69.

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