Question 1

Identify and discuss the tools that investors can use to manage information and asymmetry problems.

Accepted Answer

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Question 2

List several different sources of capital that a new business can have and discuss the characteristics of each.

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Question 3

Entrepreneurs might use an initial investment to reach a milestone,or a set target that they need to achieve for investors to consider additional financing. Which of the following is an example of a milestone?
A) The development of a prototype for the product.
B) Obtaining customer feedback through a survey or focus group.
C) Organizing the relevant venture team.
D) Hiring employees.
E) Any of the above.

Accepted Answer

Milestones for entrepreneurs often include tangible achievements that demonstrate progress and potential for success, such as developing a prototype, obtaining customer feedback, organizing a venture team, and hiring key employees. These milestones show investors that the business is moving forward and is a viable candidate for additional financing.

Question 4

An entrepreneur needs office equipment for the new business. In order to raise the money to buy the equipment,the entrepreneur takes a loan and pledges the equipment as collateral for the loan. This type of financing is known as
A) equity-based.
B) asset-based.
C) covenant-based.
D) social-based.
E) cost of capital-based.

Accepted Answer

The type of financing described is asset-based financing, as the entrepreneur is using the equipment as collateral for the loan. Equity-based financing involves selling a portion of ownership in the business in exchange for funding. Covenant-based financing involves setting certain financial or performance targets that must be met for the loan to be maintained. Social-based financing involves funding from socially responsible investors, and cost of capital-based financing involves evaluating the cost of various sources of funding to determine which is most cost-effective for the business.

Question 5

An investor who wants to invest in only one start-up business is trying to decide between two new businesses. The entrepreneurs in both businesses seem quite similar to the investor. However,they are not similar. One has much better skills than the other,who is misrepresenting his skills. The investor is facing the situation known as
A) equity apprehension.
B) breakeven syndrome.
C) adverse selection.
D) covenants.
E) cash flow condition.

Accepted Answer

The situation described in the scenario is an example of adverse selection. Adverse selection is the phenomenon where one party in a transaction has more information than the other party, resulting in the less-informed party making a less-than-optimal decision. In this case, the entrepreneur who is misrepresenting their skills is the less-informed party, and the investor is at risk of making a poor investment decision.

Question 6

Investors in new ventures demand high rates of return for several reasons.Which of the following is NOT a reason?
A) New ventures are extremely risky.
B) Investors in new ventures are able to diversify their risks fairly well.
C) Entrepreneurs have information about new ventures that they don't share with investors, allowing them an unfair advantage.
D) Entrepreneurs are often overoptimistic when they project the future prospects of their new ventures.
E) Unlike investors in the stock market who are largely passive, investors in new ventures provide several types of assistance to new ventures and they want compensation for this assistance.

Accepted Answer

It is not a reason for investors to demand high rates of return in new ventures as diversification of risk is not particularly possible in new ventures due to their inherent high risk nature.

Question 7

Due diligence typically includes an investigation of
A) the business model.
B) the market.
C) the legal entity.
D) the financial records.
E) all of the above.

Accepted Answer

Due diligence includes a comprehensive investigation of various aspects of a company, including its business model, market, legal entity, and financial records. All of these factors are critical in evaluating the potential risks and benefits of an investment or business deal. Therefore, choice E (all of the above) is the correct answer.

Question 8

An entrepreneur wants to start a new business and is writing down estimates of sales,cost of sales,and net profits. This entrepreneur is crating a
A) balance sheet.
B) pro-forma income statement.
C) cash flow statement.
D) selection of adverse impact.
E) long-term liability.

Accepted Answer

The entrepreneur is estimating sales, cost of sales, and net profits, which are all parts of an income statement. Therefore, the entrepreneur is creating a pro-forma income statement.

Question 9

Total assets divided by total debt is called
A) the income statement ratio.
B) debt ratio.
C) operating expenses.
D) cost of sales.
E) profit margin.

Accepted Answer

The ratio of total assets to total debt is called the debt ratio. It measures the company's leverage or the extent to which it is using borrowed funds to finance its operations.

Question 10

Which of the following is a fixed asset?
A) Inventory.
B) Cash.
C) Marketable securities.
D) Long-term liabilities.
E) Buildings.

Accepted Answer

Fixed assets are long-term assets that are essential to business operations and are not meant to be sold. Buildings are a type of fixed asset as they are used to conduct business operations and are not intended for sale. Inventory, cash, and marketable securities are considered current assets, while long-term liabilities are considered long-term debts rather than assets.

Question 11

When dealing with the staging of investment,staging
A) helps to protect investors against efforts by entrepreneurs to use their information advantage to gain at the expense of the investor.
B) gives the investor the opportunity to gather information about how the venture is doing before putting more money into the venture.
C) helps investors manage the uncertainty of investing in new ventures.
D) A and C only.
E) A, B, and C.

Accepted Answer

Staging of investment has multiple advantages for investors. It helps protect investors against entrepreneurs who could use their informational advantage to take advantage of the investors' lack of knowledge. Additionally, staging investments allows investors to gather critical information about the venture before investing more money, and manage the uncertainties that come with investing in new ventures. Therefore, all options A, B, and C are correct.

Question 12

Define debt and equity financing and discuss how they differ from each other.

Accepted Answer

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Question 13

Explain how you making a loan and then buying a car with the proceeds from the loan is the same thing as asset-based financing used by a business.

Accepted Answer

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Question 14

Assume that you are running a small business and you estimate that you will run out of cash in two months. Which of the following could you do to avoid running out of cash?
A) Arrange to pay accounts payable later.
B) Offer customers a discount for paying more quickly.
C) Reduce raw materials.
D) All of these will help to increase cash available.
E) None of these (a, b, or c) will help to increase cash.

Accepted Answer

All of these options (arranging to pay accounts payable later, offering customers a discount for paying more quickly, and reducing raw materials) will help to increase cash available. By paying accounts payable later, you are able to hold onto your cash for longer, while offering customers a discount for paying more quickly will encourage them to pay faster, bringing in more cash sooner. Reducing raw materials or finding ways to cut costs can also help to increase cash available. By combining these strategies, you may be able to extend your cash runway and avoid running out of cash in two months.

Question 15

Two separate entrepreneurs have approached a potential investor to raise money for starting up their new businesses. One entrepreneur has good experience and skills for the planned new business. The other entrepreneur has considerably less experience and skills. The potential investor does not know this and decides to invest in the new business proposed by the entrepreneur with less experience and skills because that person was a more convincing speaker. This demonstrates the idea of
A) proforma financing.
B) insolvent financing.
C) adverse selection.
D) self financing.
E) mandatory redemption.

Accepted Answer

This scenario demonstrates adverse selection, which occurs when the potential investor lacks information about the two entrepreneurs and decides to invest in the one who appears more convincing but has less experience and skills. This can lead to a higher risk of failure and lower return on investment. Adverse selection is a common problem in venture capital and can be mitigated by conducting due diligence and gathering more information on the entrepreneurs and their proposed businesses.

Question 16

An investor will provide money for a start-up business only if the entrepreneur will agree to giving the investor the right to approve any purchase or sale of assets totaling $100,000 or more. This is know as
A) a proforma statement.
B) a breakeven statement.
C) a mandatory redemption.
D) a covenant.
E) a business angel.

Accepted Answer

This scenario describes a covenant, which is a requirement or condition agreed upon by the entrepreneur and investor. In this case, the covenant is that the investor has the right to approve any purchase or sale of assets totaling $100,000 or more.

Question 17

Net income divided by net sales is known as
A) profit margin.
B) cost of sales ratio.
C) return on sales.
D) both profit margin and cost of sales ratio.
E) both profit margin and return on sales.

Accepted Answer

Net income divided by net sales is known as both profit margin and return on sales. These terms are used interchangeably to describe the percentage of profit generated from sales.

Question 18

The financial statement that shows assets,liabilities,and owners' equity is known as
A) income statement.
B) balance sheet.
C) cash flow statement.
D) profit margin statement.
E) profit and loss statement.

Accepted Answer

The balance sheet is the financial statement that shows the assets, liabilities, and owners' equity of a company. It provides a snapshot of the company's financial position at a specific point in time. The income statement, cash flow statement, profit margin statement, and profit and loss statement all provide different types of financial information but do not include all the elements of the balance sheet.

Question 19

Define illiquidity premium and explain why it would be used.

Accepted Answer

The answer of Define illiquidity premium and explain why it...

Question 20

Because investors in a new business venture cannot sell the investment easily,they might demand some form of extra compensation. This is known as
A) an illiquidity premium.
B) a break even charge.
C) adverse effect.
D) capital method.
E) terminal value.

Accepted Answer

An illiquidity premium is a compensation demanded by investors in a new business venture because they cannot sell their investment easily. It is a premium paid on the investment to compensate for the lack of liquidity.

Quiz 6: Financial Resources For New Ventures: How To Get Them, How To Manage Them

Identify and discuss the tools that investors can use to manage information and asymmetry problems.

List several different sources of capital that a new business can have and discuss the characteristics of each.

Entrepreneurs might use an initial investment to reach a milestone,or a set target that they need to achieve for investors to consider additional financing. Which of the following is an example of a milestone?

An entrepreneur needs office equipment for the new business. In order to raise the money to buy the equipment,the entrepreneur takes a loan and pledges the equipment as collateral for the loan. This type of financing is known as

Investors in new ventures demand high rates of return for several reasons.Which of the following is NOT a reason?

Due diligence typically includes an investigation of

An entrepreneur wants to start a new business and is writing down estimates of sales,cost of sales,and net profits. This entrepreneur is crating a

Total assets divided by total debt is called

Which of the following is a fixed asset?

When dealing with the staging of investment,staging

Define debt and equity financing and discuss how they differ from each other.

Explain how you making a loan and then buying a car with the proceeds from the loan is the same thing as asset-based financing used by a business.

Assume that you are running a small business and you estimate that you will run out of cash in two months. Which of the following could you do to avoid running out of cash?

An investor will provide money for a start-up business only if the entrepreneur will agree to giving the investor the right to approve any purchase or sale of assets totaling $100,000 or more. This is know as

Net income divided by net sales is known as

The financial statement that shows assets,liabilities,and owners' equity is known as

Define illiquidity premium and explain why it would be used.

Because investors in a new business venture cannot sell the investment easily,they might demand some form of extra compensation. This is known as