Question 1

The age of a company has little impact on the types of financing available to it.

Accepted Answer

The age of a company can have a significant impact on the types of financing available to it. A new startup may have limited options, while a well-established company with a proven track record may have access to more traditional bank loans or even public offerings.

Question 2

Lines of credit are legal obligations to provide capital.

Accepted Answer

False

Question 3

A small business should limit the amount of debt it takes on because debt can add to the firm's risk.

Accepted Answer

Debt increases the financial risk of a small business because it means the company has to pay back interest on the borrowed money, in addition to the principal. This can strain the company's cash flow and limit its ability to reinvest in the business or weather unexpected financial challenges. Too much debt can lead to bankruptcy or insolvency. Therefore, a small business should limit the amount of debt it takes on to manage its financial risk.

Question 4

Borrowing allows owners to retain voting control of the company.

Accepted Answer

When a company borrows money, the lenders do not become owners of the company and therefore do not have any voting rights. The owners of the company maintain control, even though they have taken on debt.

Question 5

Assets such as the quality of a firm's employees are considered tangible in nature and thus have substantial value as collateral.

Accepted Answer

Assets such as the quality of a firm's employees are intangible in nature and therefore cannot be used as collateral. Tangible assets include items such as property, equipment, and inventory.

Question 6

Venture capitalists restrict their investment in startup companies.

Accepted Answer

Venture capitalists often have specific criteria for the companies in which they invest, such as a proven track record, high growth potential, and a strong management team. This means that they may restrict their investment to a select group of startups that meet their requirements, rather than investing in a wide range of companies.

Question 7

Use of debt financing increases potential returns when a company is performing well, but it also increases the possibility of lower-even negative-returns if the company does not attain its goals in a given year.

Accepted Answer

Debt financing involves borrowing money that has to be paid back with interest. If a company is performing well, it can use the borrowed money to invest in projects that have the potential to generate higher returns than the cost of the debt. This can increase the overall returns for shareholders. However, if the company does not meet its performance goals, it may not generate enough cash flow to cover the interest and principal payments on the debt, which can lead to lower or even negative returns for shareholders.

Question 8

Small business owners sometimes accept higher levels of debt because doing so permits them to retain all of the stock and full ownership.

Accepted Answer

This statement is true. Small business owners may choose to take on higher levels of debt in order to avoid sharing ownership with outside investors or partners. This allows them to have greater control over the direction of the business and potentially earn more profits in the long run.

Question 9

Most startup investors limit their investing to firms that offer potentially high returns within a one-to-three-year period.

Accepted Answer

Startup investors typically seek investments in firms with a longer-term growth potential and are willing to wait several years, even up to a decade, for a return on their investment. They prioritize a company's ability to become a successful, sustainable business in the long run, rather than just short-term gains.

Question 10

Approximately one-half of the financing for startups comes from personal savings.

Accepted Answer

The answer of Approximately one-half of the financing for startups...

Question 11

To retain control and avoid accountability to those with a minority equity position in the firm, small business owners are often reluctant to give away any of the company's ownership.

Accepted Answer

Small business owners often want to retain control and may be hesitant to give up equity to outside investors, including those with a minority stake in the company.

Question 12

If a firm finances with equity rather than with debt, it will bear no interest expense and thus yield greater net income.

Accepted Answer

When a firm finances with equity, it does not have to pay interest on the capital raised, unlike debt financing. Therefore, it will have lower expenses, and its net income will be greater.

Question 13

Borrowing money rather than issuing common stock increases the potential for higher rates of return to owners.

Accepted Answer

Borrowing money (debt financing) can increase the potential return on equity because it allows a company to leverage its operations, potentially increasing profits without diluting ownership. However, it also increases financial risk.

Question 14

Generally, as long as a firm's operating income return on its assets in greater than the cost of debt, the owners' return on equity investment will decrease as the firm uses more debt.

Accepted Answer

The statement is incorrect. As the firm uses more debt, the owners' return on equity investment might actually increase if the firm is able to use the debt to generate higher returns on its assets. However, if the firm's operating income return on its assets is lower than the cost of debt, using more debt can increase the risk of bankruptcy and decrease the owners' return on equity investment.

Question 15

The five Cs of credit are character, capacity, capital, conditions, and collateral.

Accepted Answer

The five Cs of credit are commonly recognized as character, capacity, capital, conditions, and collateral.

Question 16

One potential problem with acquiring funds from friends and relatives is that they might feel that they have the right to interfere in the management of the business.

Accepted Answer

Friends and relatives who have provided funds may feel a sense of ownership and entitlement, which could lead to them wanting to get involved in the decision-making process or exerting influence over how the business is run.

Question 17

The basic factors that determine how a firm is financed include the following: the firm's past economic performance, the nature of its assets, the maturity of the firm, and the personal preferences of owner(s) with respect to the marketing mix.

Accepted Answer

The statement is partially correct, factors such as economic performance, asset nature, and firm maturity do play a vital role in determining how a firm is financed. However, the personal preferences of the owner(s) with regards to the marketing mix do not influence the firm's financing decisions.

Question 18

A firm with potential for large profits has many more possible sources of financing than does a firm that offer only unattractive returns, but high growth potential does not seem to have a similar effect on financing options.

Accepted Answer

The answer of A firm with potential for large profits...

Question 19

For every firm, there is a "right" answer to the question of balancing debt and equity, and it is important that the small business owner find that balance.

Accepted Answer

The answer of For every firm, there is a "right"...

Question 20

A chattel mortgage is a loan for which real property, such as land or a building, serves as collateral.

Accepted Answer

A chattel mortgage is a loan for which personal property, such as equipment, vehicles or inventory, serves as collateral. It is not tied to real property.

Quiz 12: A Firms Sources of Financing