Question 1

Your bank has agreed to grant you a discount loan with an APR of 4.25%.If you need $6,000 today,how large is the face value of the loan?

Accepted Answer

The face value of a discount loan is calculated by dividing the amount needed by (1 - APR). Here, $6,000 / (1 - 0.0425) = $6,266.

Question 2

You have agreed to a $40,000 fixed-rate loan from Chase Bank today and promise to repay the loan with 36 equal monthly payments at an APR of 5.50%.How large are your monthly payments? Use a financial calculator to determine your answer.

Accepted Answer

Using a financial calculator, inputting the values:
- Present Value (PV) = -$40,000 (since it's a loan, money is going out)
- Interest Rate (I/Y) = 5.50% / 12 months = 0.4583% per month
- Number of Payments (N) = 36
- Payment Amount (PMT) = ?
Solving for PMT results in $1,207.84, which is closest to choice A.

Question 3

Your bank grants you a lump sum loan today equal to the face value of the loan less the interest.Further you must repay the face value of the loan amount in a single lump sum at the end of one year.These terms most closely resemble which of the following types of bank loan?

Accepted Answer

The terms given in the question are for a discount loan, where the interest is deducted upfront from the loan amount, and the borrower pays back the face value of the loan in a single payment at maturity.

Question 4

Pacific Automotive has a $150,000 compensating balance loan with its bank.The terms of the loan call for Pacific to keep 8% of the loan as a compensating balance and pay interest at an annual rate of 5.50% on the entire amount.If the firm borrows the maximum amount for one year,what is the EAR on this loan?

Accepted Answer

The EAR is 5.98% because the firm is paying interest on the entire amount of the loan, but only has access to 92% of the loan.

Question 5

The Atlantic Group has a $300,000 compensating balance loan with its bank.The terms of the loan call for Atlantic to keep 8% of the loan as a compensating balance and pay interest at an annual rate of 5.50% on the entire amount.If the firm borrows the maximum amount for one year,how much interest is due at the end of the year?

Accepted Answer

The amount of the loan is $300,000, and 8% of this amount is held as a compensating balance, which means only $276,000 is actually available for use. Atlantic pays annual interest of 5.50% on the entire amount, which is $16,275 per year. Therefore, the total interest due at the end of the year would be $16,275.

Question 6

The venture capitalist's objective is to help small business owners qualify for loans when they may not be able to qualify through the normal lending policies of a commercial lender.

Accepted Answer

The objective of a venture capitalist is to invest in startups with high growth potential in exchange for equity or ownership in the company, with the intention of earning a significant return on their investment. While venture capitalists may provide funding to small businesses, their focus is typically on high-growth startups, rather than helping small business owners qualify for loans.

Question 7

"A company can borrow money at a preset rate from the bank at any time without seeking approval of the loan each time it needs funds" is a description of what type of loan?

Accepted Answer

The description provided refers to a line of credit, where the borrower can access a predetermined amount of funds at any time without needing approval for each withdrawal.

Question 8

Ventures that have low burn or bleed rates may require less ________ compared to a venture with a high bleed rate.

Accepted Answer

Ventures with low burn or bleed rates are generally more financially stable and less risky, thus requiring less time, monitoring, and stringent performance benchmarks from financiers or venture capitalists compared to ventures with high bleed rates.

Question 9

Financing through angel investors is a fairly common way for funding a start-up.

Accepted Answer

The answer of Financing through angel investors is a fairly...

Question 10

Which of the following characteristics of angel financiers are NOT important considerations for a firm or entrepreneur seeking financing?

Accepted Answer

All of the above characteristics, including the financial strength of the angel, their contacts, and their exit strategy are important considerations for a firm or entrepreneur seeking financing from an angel or venture capitalist. It is essential to evaluate all aspects of potential investors to make an informed decision.

Question 11

Loans to start-ups without sufficient outside resources for collateral are the exception for commercial banks.This type of lending is usually left to the SBA.

Accepted Answer

Commercial banks typically require collateral in order to provide loans, making it difficult for start-ups without sufficient resources to secure funding. The Small Business Administration (SBA), on the other hand, offers loan programs specifically designed to support small businesses and start-ups without the same collateral requirements.

Question 12

SBA loans are delivered directly to the small business and bypass the need for a commercial bank.

Accepted Answer

SBA loans are partially guaranteed by the Small Business Administration, but they are still typically delivered through a commercial bank or other approved lender. The SBA does not directly provide loans to small businesses.

Question 13

The terms angel investors and venture capitalists are often used interchangeably in the popular and financial press,but the textbook highlights some differences between them.What are these differences?

Accepted Answer

The answer of The terms angel investors and venture capitalists...

Question 14

Your bank has agreed to grant you a discount loan with an APR of 5.00%.If you need $5,000 today,the loan is to be repaid in full in one year,and the total interest to be paid is $277,what is the EAR of the loan?

Accepted Answer

To find the EAR, we need to use the formula:

EAR = (1 + APR / m)^m - 1

Where m is the number of compounding periods per year. Since the loan has an APR of 5.00%, we can assume that it is compounded once a year, so m = 1.

Let's plug in the values we have:

EAR = (1 + 0.05 / 1)^1 - 1
EAR = 0.055 or 5.54%

So the answer is B) 5.54%

Question 15

You have agreed to a $40,000 fixed-rate loan from Chase Bank today and promise to repay the loan with 36 equal monthly payments at an APR of 5.50%.What is the EAR of this loan?

Accepted Answer

The EAR (Effective Annual Rate) of the loan can be calculated using the formula:

EAR = (1 + APR/m)^m - 1

where APR is the Annual Percentage Rate and m is the number of compounding periods per year. In this case, APR is 5.50% and there are 12 compounding periods (monthly payments) in a year. Thus,

EAR = (1 + 0.055/12)^12 - 1 
= 0.0564 or 5.64%

Therefore, the best choice is B.

Question 16

You have agreed to a $35,000 fixed-rate loan from Wells Fargo Bank today and promise to repay the loan with 24 equal monthly payments at an APR of 5.75%.How large are your monthly payments? Use a financial calculator to determine your answer.

Accepted Answer

The correct answer is A. $1,547.28. To calculate the monthly payment, we can use the following formula:Monthly payment = (Loan amount * APR) / (1 - (1 + APR)^(-n))where:Loan amount = $35,000APR = 5.75% / 12 = 0.004792n = 24Plugging these values into the formula, we get:Monthly payment = (35000 * 0.004792) / (1 - (1 + 0.004792)^(-24))= 1547.28Therefore, the monthly payment is $1,547.28.

Question 17

The most popular loan program provided by the Small Business Administration is the basic 7(a)Loan Guaranty program.What is the 7(a)Loan Guaranty program? In your answer please address the following points: who is eligible for the loans,how the loans are administered,typical requirements of the applicant,who is responsible for the repayment of the loan,and what happens if there is a loan default.

Accepted Answer

The answer of The most popular loan program provided by...

Question 18

With a line of credit,the bank is compensated ________.

Accepted Answer

With a line of credit, the bank earns interest based on the outstanding balance of the loan. As the borrower draws on the credit line and repays the balance, the interest charged by the bank will fluctuate accordingly.

Question 19

If you go to your bank and it grants you a lump sum loan today that requires monthly payments for a fixed period of time to repay the borrowed money,you have most likely received a ________.

Accepted Answer

A straight loan with a preset payment schedule requires monthly payments for a fixed period of time to repay the borrowed money, which is described in the scenario. A discount loan is a short-term loan that has a lower interest rate but requires the borrower to pay it back in a lump sum at maturity. A line of credit is a revolving credit facility that allows the borrower to draw funds as needed, up to a pre-approved credit limit. A compensating balance loan requires the borrower to maintain a minimum balance in their account with the lender to offset the cost of the loan. None of these options are described in the scenario.

Question 20

A ________ type of loan is similar to a line of credit.However,even though only a portion of the loan is available to the borrower,interest is paid on the entire face value of the loan.

Accepted Answer

A compensating balance loan is similar to a line of credit, as only a portion of the loan is available to the borrower. However, interest is paid on the entire face value of the loan, which is the amount of money borrowed plus any fees or charges. This "compensating balance" serves as collateral for the loan and must be maintained by the borrower for the duration of the loan.

Quiz 15: Raising Capital