Question 1

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 2

Venture capitalists restrict their investment in startup companies.

Accepted Answer

Venture capitalists are known for being selective in their investment process and typically only invest in startups that have the potential for high growth and profitability. They may also have specific industry or geographic focuses that limit their investment options.

Question 3

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

Accepted Answer

Borrowing money typically comes with interest payments, which must be paid back regardless of the company's profits. However, this can increase the potential for higher rates of return to owners because the company can use the borrowed funds to invest in projects with high potential returns, which can result in increased profits and ultimately higher returns for shareholders. Issuing common stock dilutes existing shareholders' ownership stake and can also put downside pressure on the company's share price, potentially lowering returns for shareholders.

Question 4

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

Accepted Answer

Leveraging debt can increase the owners' return on equity (ROE) as long as the firm's return on assets (ROA) is greater than the cost of debt, because it allows the firm to amplify its earnings without requiring additional equity investment.

Question 5

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 an impact on the types of financing available to it. For example, start-up companies may have limited options for financing compared to established companies with a solid credit history.

Question 6

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

There is no universally "right" answer for the optimal balance of debt and equity for every firm, as it depends on various factors such as industry, market conditions, and the specific financial situation of the business.

Question 7

A firm with potential for large profits, as opposed to high growth potential, has many more possible sources of financing than does a firm that offers only unattractive returns.

Accepted Answer

The statement is incorrect. A firm with high growth potential often has many more possible sources of financing than a firm with potential for large profits but no growth. Investors are often more willing to invest in a high-growth company with the potential for high returns, even if there is more risk involved.

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

Small business owners may choose to accept higher levels of debt in order to avoid giving up equity in their business and maintaining full ownership.

Question 9

Business loans are the primary source of financing for startups.

Accepted Answer

Business loans are not always the primary source of financing for startups. Other options such as venture capital, angel investors, and crowdfunding are also commonly used.

Question 10

Goodwill is considered an intangible asset and is highly valued when securing a loan.

Accepted Answer

Goodwill is an intangible asset that represents the excess value of a purchased company over its tangible assets and liabilities. However, it is not typically considered as collateral or highly valued by lenders when securing a loan because it is not a physical asset that can be easily liquidated or valued in case of default.

Question 11

The main advantage of using credit cards for financing is the relatively low interest rate compared to bank loans.

Accepted Answer

While credit card interest rates can vary, they are generally higher than traditional bank loans.

Question 12

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

Accepted Answer

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

Question 13

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

Accepted Answer

When friends and relatives invest in a business, they may feel entitled to offer their opinions and suggestions on how the business should be run. This can create conflicts if the entrepreneur does not agree with their suggestions or if the suggestions interfere with the overall vision of the business.

Question 14

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 that is secured by a movable asset, such as a vehicle or equipment. Real property cannot serve as collateral for a chattel mortgage.

Question 15

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

Accepted Answer

When a firm finances with equity, it does not have to pay interest, as there is no debt. This means that the net profits will be higher since there is no interest expense to subtract from the revenues. However, it is important to consider that equity financing may dilute ownership and control of the firm, and shareholders may expect dividends or capital gains, which can affect the overall profitability of the firm.

Question 16

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 considered intangible in nature and are difficult to value and use as collateral.

Question 17

Debt financing as opposed to equity financing allows owners to retain voting control of the company.

Accepted Answer

Debt financing involves borrowing money from lenders who do not become owners of the company. This means that the owners can retain their voting control of the company while using the borrowed funds to finance their business operations. On the other hand, equity financing involves selling ownership stakes in the company to investors who then become part owners and have a say in the company's decision-making processes.

Question 18

Three basic characteristics determine how a firm is financed: the firm's economic potential, the size of the company, and the nature of its assets.

Accepted Answer

Three basic characteristics that determine how a firm is financed are the firm's profitability, the amount of assets it has, and the availability of financing options. The size of the company is not a determining factor in how a firm is financed.

Question 19

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 can amplify a company's profits, but it can also intensify losses if the company fails to meet its targets.

Question 20

Lines of credit are legal obligations to provide capital.

Accepted Answer

The answer of Lines of credit are legal obligations to...

Quiz 12: A Firms Sources of Financing