Kuratko 8e Chapter 08

CHAPTER 8: SOURCES OF CAPITAL FOR ENTREPRENEURS
TRUE/FALSE
1. Use of debt to finance a new venture involves a payback of funds plus an interest fee for the use of the
money.
ANS: T PTS: 1 NAT: AACSB Analytic | Environmental Influence

KEY: pg 210
2. The most common sources of debt financing are commercial banks.

KEY: pg 211
3. Sources of debt financing include trade credit, accounts receivables, factoring, and finance companies.

KEY: pg 213
4. Equity financing is money invested in the venture with legal obligations to repay the principal amount
of interest or interest rate on it.
ANS: F PTS: 1 NAT: AACSB Analytic | Environmental Influence

KEY: pg 214
5. Public offerings is a term used to refer to corporations taking public donations to raise capital.

KEY: pg 215
6. Because the advantages of going public outweigh the disadvantages, it is in a corporations best
interest to go public.

KEY: pg 215
7. History and nature of the company, capital structure, and description of any material contracts are just
a few examples of the specific detailed information that must be presented about a firm that is going
public.

KEY: pg 215
8. Private placement is a method of raising capital through the private placement of securities.

KEY: pg 216
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
9. Regulation D strengthened the regulations for reports and statements required for selling stock to
private parties, friends, employees, customers, relatives, local professionals.

KEY: pg 216
10. Sophisticated investors are wealthy individuals who invest more or less regularly in new and/or early-
and late-stage ventures.

KEY: pg 217
11. Venture capitalists are a valuable source of equity funding for new ventures.

KEY: pg 218
12. The venture capital pool is rapidly declining due to overfunding.

KEY: pg 219
13. Venture capitalists are quick to invest.

KEY: pg 220
14. Venture capitalists need little information before they make an investment.

KEY: pg 221
15. The business plan is a critical element in the new-venture proposal.

KEY: pg 224
16. There is no way for the venture capitalist to evaluate the new venture.

KEY: pg 222
17. To find the right venture capitalist, it is important for the entrepreneur to know what working on his or
her venture will be like.

KEY: pg 224
18. Venture capital firms want to own control of the firms in which they invest.

KEY: pg 220
19. Venture capitalists are usually satisfied with a reasonable return on investments.

KEY: pg 220
20. Venture capitalists are slow to invest.

KEY: pg 220
21. Venture capitalists need only basic summary information before they make a decision.

KEY: pg 221
22. One of the most frequently used criterion in evaluating new ventures, is the ability of the entrepreneur
to sustain intense effort.

KEY: pg 225
23. There is a small number of informal risk capitalists in the market today.

KEY: pg 228
24. Informal risk capitalists are those who have already made their money and now seek to help new
ventures.

KEY: pg 228
25. Informal risk capitalists are often referred to as business angels.

KEY: pg 228
MULTIPLE CHOICE
1. At start-up time, forms of financing includes all but which of the following.
a. equity c. equitable payback
b. private equity d. bank loans
ANS: C PTS: 1 NAT: AACSB Analytic | Environmental Influence
KEY: pg 214
2. Which of the following is (are) sources of capital for entrepreneurs:

a. equity c. auto leasing
b. debit d. credit cards
ANS: A PTS: 1 NAT: AACSB Analytic | Environmental Influence
KEY: pg 214
3. Many new ventures find that debt financing is

a. necessary. c. not an important consideration.
b. a waste of time. d. their major source of funds.
KEY: pg 211
4. Approximately how many commercial banks are there in this country?

a. 40,000 c. l7,000
b. 8,000 d. 20,000
ANS: B PTS: 1 NAT: AACSB Analytic | Environmental Influence
KEY: pg 211
5. Which of the following is not a question commonly asked by banks of entrepreneurs?

a. What do you plan to do with the money? c. What interest rate did you have in mind?
b. How much do you need? d. How will you repay the loan?
KEY: pg 211
6. When starting a business, which of the following sources of financing are least likely to be used?
a. trade credit c. leasing companies
b. factors d. insurance companies
ANS: D PTS: 1 NAT: AACSB Analytic | Environmental Influence
KEY: pg 214
7. When starting a business, which of the following sources of financing are most likely to be used?
a. trade credit c. leasing companies
b. factors d. insurance companies
KEY: pg 213
8. Which of the following would be most commonly used for short-term financing?
a. insurance companies c. finance companies
b. trade credit d. leasing companies
KEY: pg 214
9. Which of the following would be most commonly used for medium-term financing?
KEY: pg 213
10. Which of the following would be most commonly used for long-term financing?
KEY: pg 213
11. When accounts receivable are bought from a company for capital funding it is called
a. trade credit. c. leasing.
b. financing. d. factoring.
KEY: pg 214
12. Which of the following is not a type of debt financing?

a. private placement c. finance companies
b. trade credits d. accounts receivables
KEY: pg 214
13. A disadvantage of debt financing is

a. regular interest payments.
b. possible cash flow enhancement.
c. inhibition of growth and development due to equity investments.
d. relinquishment of ownership.
KEY: pg 212
14. Short-term debt is

a. paid back in six months.
b. paid back in one year.
c. paid back after sales.
d. paid back over an indefinite period of time.
KEY: pg 211
15. Which of the following is a type of equity financing?

a. convertible debentures c. loan with warrants
b. common stock d. loan without warrants
KEY: pg 215
16. AACSB Analytic | Environmental InfluenceThe most common source of debt financing is
a. trade credit. c. commercial banks.
b. factoring. d. finance companies.
KEY: pg 211
17. Advantages of debt financing include all of the following except:

a. low interest rates can justify the opportunity cost.
b. regular interest payments.
c. allows potential greater return on equity.
d. no relinquishment of ownership.
KEY: pg 212
18. Long-term debt is used for

a. start-up capital.
b. funding for purchase of property or equipment.
c. payment of payroll.
d. both a and b.
KEY: pg 211
19. When securing a bank loan an entrepreneur should be prepared to ANS which of the following
questions except?
a. When do you need it? c. What do you need it for?
b. How do you need it? d. What price is the price of your product?
KEY: pg 211
20. SEC stands for the

a. Stock Exchange Corporation. c. Standard Equity Commission.
b. Security and Exchange Commission. d. Source of Equity Company.
KEY: pg 215
21. When going public with public offerings an advantage might be

a. size of the companys capital amount. c. the companys market share.
b. the companys size. d. the product price.
KEY: pg 215
22. SBIC stands for the

a. Small Business in Capital. c. Small Business Investment Co.
b. Securities Bonds, Investment Co. d. Sources Business Investment Co.
KEY: pg 217
23. Equity capital is

a. paid back within one year. c. not a loan but a form of stock.
b. paid back after five years. d. loans from family.
KEY: pg 215
24. Evaluation of new-venture proposals includes what processes except

a. oral presentation c. evaluation of the business plan
b. initial screening d. a product prototype
KEY: pg 226
25. One of the advantages of public offerings is
a. liquidity. c. requirements.
b. disclosure. d. cost.
KEY: pg 215
26. Which of these forms are not required by SEC?

a. proxy statements c. form 4-V
b. form 8-K d. form 10-Q
27. The SEC regulation D exemptions include all of the following except:
a. placements of up to $5 million. c. placements in excess of $5 million.
b. placements of less than $500,000. d. placements in excess of $l0 million.
KEY: pg 216
28. The main objective of regulation D is to

a. increase the investment in private placement.
b. regulate new small business investment.
c. make it easier and less expensive for small ventures to sell stock.
d. reduce debt financing by small enterprises.
KEY: pg 217
29. Which of the following is not one of the most common questions typically required to be answered by
entrepreneurs?
a. What do you plan to do with the money?
b. How much money do you need?
c. When do you need the money?
d. What exact date will you repay the money?
KEY: pg 228
30. Equity capital is often raised through:

a. public stock offerings. c. donations.
b. option sales. d. preferred issues.
KEY: pg 215
31. When going public some specific detailed information that must be presented includes
a. a 20 year plan. c. any financial conflicts of interest.
b. the capital structure of the company. d. any previous business failures.
32. Regulation D defines three separate exemptions that are based on the amount of money being raised.
Which is not a rule that accompanies these exemptions?
a. rule 503 c. rule 505
b. rule 504 d. rule 506
KEY: pg 216
33. Regulation D replaces the term sophisticated investor with the term accredited purchaser.
Included in this second category is/are
a. anyone buying at least $100,000 of the offered security.
b. institutional investors.
c. all tax-exempt organizations with at least $100,000 in assets.
d. general partners of any company.
KEY: pg 217
34. Venture capitalists are experienced professionals who provide a full range of service for new ventures
including
a. supplying labor for start-up. c. management consulting.
b. market research and strategy for pricing. d. R & D knowledge.
KEY: pg 218
35. Which of the following statements is true of the recent developments in the venture capital market?
a. in 1994 VC firms invested 20.9 billion dollars.
b. in 1999 the total pool of venture capital was $3 billion.
c. the venture capital market is currently experiencing a downturn.
d. the venture capital market peaked in 2001.
KEY: pg 219
36. There are four major trends in the venture capital field today. They include all of the following except
a. funds are less specialized and more homogenous.
b. emerging feeder funds.
c. a decrease in smaller start-up investment.
d. a new legal environment.
KEY: pg 219
37. Which of the following statements is not true about venture capitalists?
a. They want the entrepreneur and the management to run the company.
b. They expect high return on investments.
c. They are more interested in trying to manage the firm themselves than in as or products.
d. They take a long time to raise venture capital.
KEY: pg 220
38. Criteria that venture capitalists use in evaluating new venture proposals include:
a. the entrepreneurs education.
b. the entrepreneurs travel expenses.
c. the characteristics of the product or service.
d. when they will be paid back in full.
KEY: pg 223
39. Venture proposals are often rejected due to significant deficiencies in

a. the size of the proposal. c. available funds.
b. financial projection. d. both a and b.
KEY: pg 225
40. Which is not a stage of the evaluation process?

a. initial screening c. group discussion
b. evaluation of the business plan d. management integration
KEY: pg 226
41. Which is an important question for the entrepreneur to ask when evaluating the venture capitalist?
a. Is the person someone with whom the entrepreneur can work?
b. Is the person a close relative?
c. Is the person wealthy?
d. Is the person a college graduate?
KEY: pg 228
42. The entrepreneur should ask the venture capitalist questions.

a. at most ten c. an unlimited number of
b. exactly twenty d. no
KEY: pg 228
43. Which is one of the seven most important questions for entrepreneurs regarding venture capitalists?
a. What is it like to work with his firm?
b. Is he or she a good communicator?
c. Is he or she wealthy?
d. is he or she good at financial computation?
KEY: pg 228
44. Criteria for evaluating new-venture proposals include all of the following except
a. the entrepreneurs personality. c. the entrepreneurs experience.
b. the entrepreneurs age. d. financial considerations.
KEY: pg 223
45. Which of the following is a true statement about raising capital?
a. All capital is raised through formal sources.
b. All capital is raised through debt sources.
c. Capital is easy to get.
d. It often takes a great deal of time.
KEY: pg 215
46. How many people in America have net worth in excess of $1 million?
a. 100,000 c. 500,000
b. 200,000 d. l,000,000
KEY: pg 229
47. If 40 percent of the individuals with a net worth in excess of $l million were interested in venture
financing, how many millionaires would be available?
a. 120,000 c. 200,000
b. 150,000 d. 400,000
KEY: 229
48. An informal risk capitalist is referred to as:

a. your neighbor.
b. a business angel.
c. a retiree.
d. someone with extra money to invest but who is not interested becoming an entrepreneur.
KEY: pg 228
49. Informal investors find projects through

a. newspapers. c. commercials.
b. a network of friends. d. banks.
KEY: pg 229
50. What percentage of angel capital is devoted to seed a startup venture versus growth financing?
a. 60 percent c. 5 percent
b. 25 percent d. 100 percent
KEY: pg 230
SHORT ANSWER
1. What are the major types and uses of debt financing?
ANS:
Commercial bank loans are the most common source of debt. Banks typically loan for short to
intermediate terms and require security or collateral for the loan. Banks generally prefer to loan to
already existing firms rather than new start-up firms. Trade credit is given by the firms suppliers and
seen in the form of accounts payable. It is usually granted easily and is very short-term. Accounts
receivable financing uses the firms receivables as either collateral or as a product for sale, factoring.
It is short-term and offered mainly to existing firms. Finance companies make short- to intermediate-
term asset guaranteed loans. They deal mainly with existing firms and often make loans that a bank
would not. They also charge a hefty premium for this by having interest rates that are at least 2
percent over bank rates.
PTS: 1 NAT: AACSB Analytic | Environmental Influence
2. How does a public offering differ from a private placement?
ANS:
A public offering involves entering the stock exchange. Once the stock is publicly offered, anyone can
buy shares and, in turn, ownership. Public offerings are very expensive and highly regulated. These
disadvantages are offset by the large amounts of capital and liquidity the offerings can provide. A
private placement is used more often by small ventures. It allows the sale of the stock to private,
personally selected individuals. The Securities and Exchange Commission has enacted special rules to
make private placement easier and less expensive for small businesses. Both of these equity financing
plans differ from debt financing. They require a relinquishment of ownership, but dont demand a
fixed payback of the invested principal.
3. As the venture capital market has experienced rapid growth, several market trends have emerged.
What are the major trends of today?
ANS:
One trend is specialized funds. As more firms are founded, their interests and focus become more
specialized. Another market trend concerns the emergence of feeder funds. These are funds that are
usually focused on seed-stage and start-ups. As these businesses grow, their business is fed back to the
large firms. There are also fewer start-up investments. Those partners with start-up knowledge are
spending their time trying to fix the numerous troubled ventures they already have. This doesnt allow
them to devote the time needed in start-ups. The final trend concerns legal issues. Competition and
our lawsuit culture have forced highly legalized agreements.
4. Should entrepreneurs accept proposals from the first venture capitalist that offers?
ANS:
Entrepreneurs must evaluate their capitalist just as their capitalist evaluates them. Not every capitalist
is right for every entrepreneur, even if he or she does have the money needed. The entrepreneur must
look at the capitalists skills and knowledge, and decide how well they can work together, while
keeping in mind that venture capital is hard to come by.
5. Are formal firms the only source of venture capital?
ANS:
There are many individuals willing to invest where venture capitalists will not. These are usually
wealthy people looking for investments and are referred to as business angels. These people are
generally well off. They dont need the high, immediate rate of return required by the venture capital
firms. They often seek social rather than purely financial returns on their investments.

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CHAPTER 8: SOURCES OF CAPITAL FOR ENTREPRENEURS

ANS: T PTS: 1 NAT: AACSB Analytic | Environmental Influence

2. The most common sources of debt financing are commercial banks.

ANS: T PTS: 1 NAT: AACSB Analytic | Environmental Influence

ANS: T PTS: 1 NAT: AACSB Analytic | Environmental Influence

ANS: F PTS: 1 NAT: AACSB Analytic | Environmental Influence

ANS: F PTS: 1 NAT: AACSB Analytic | Environmental Influence

ANS: F PTS: 1 NAT: AACSB Analytic | Environmental Influence

ANS: T PTS: 1 NAT: AACSB Analytic | Environmental Influence

ANS: T PTS: 1 NAT: AACSB Analytic | Environmental Influence

ANS: F PTS: 1 NAT: AACSB Analytic | Environmental Influence

ANS: T PTS: 1 NAT: AACSB Analytic | Environmental Influence

ANS: T PTS: 1 NAT: AACSB Analytic | Environmental Influence

12. The venture capital pool is rapidly declining due to overfunding.

ANS: F PTS: 1 NAT: AACSB Analytic | Environmental Influence

13. Venture capitalists are quick to invest.

ANS: F PTS: 1 NAT: AACSB Analytic | Environmental Influence

ANS: F PTS: 1 NAT: AACSB Analytic | Environmental Influence

15. The business plan is a critical element in the new-venture proposal.

ANS: T PTS: 1 NAT: AACSB Analytic | Environmental Influence

ANS: F PTS: 1 NAT: AACSB Analytic | Environmental Influence

ANS: T PTS: 1 NAT: AACSB Analytic | Environmental Influence

ANS: F PTS: 1 NAT: AACSB Analytic | Environmental Influence

ANS: F PTS: 1 NAT: AACSB Analytic | Environmental Influence

20. Venture capitalists are slow to invest.

ANS: T PTS: 1 NAT: AACSB Analytic | Environmental Influence

ANS: F PTS: 1 NAT: AACSB Analytic | Environmental Influence

ANS: T PTS: 1 NAT: AACSB Analytic | Environmental Influence

ANS: F PTS: 1 NAT: AACSB Analytic | Environmental Influence

ANS: T PTS: 1 NAT: AACSB Analytic | Environmental Influence

25. Informal risk capitalists are often referred to as business angels.

ANS: T PTS: 1 NAT: AACSB Analytic | Environmental Influence

2. Which of the following is (are) sources of capital for entrepreneurs:

3. Many new ventures find that debt financing is

4. Approximately how many commercial banks are there in this country?

5. Which of the following is not a question commonly asked by banks of entrepreneurs?

12. Which of the following is not a type of debt financing?

13. A disadvantage of debt financing is

14. Short-term debt is

15. Which of the following is a type of equity financing?

17. Advantages of debt financing include all of the following except:

18. Long-term debt is used for

20. SEC stands for the

21. When going public with public offerings an advantage might be

22. SBIC stands for the

23. Equity capital is

24. Evaluation of new-venture proposals includes what processes except

26. Which of these forms are not required by SEC?

28. The main objective of regulation D is to

30. Equity capital is often raised through:

39. Venture proposals are often rejected due to significant deficiencies in

40. Which is not a stage of the evaluation process?

42. The entrepreneur should ask the venture capitalist questions.

48. An informal risk capitalist is referred to as:

49. Informal investors find projects through

1. What are the major types and uses of debt financing?

PTS: 1 NAT: AACSB Analytic | Environmental Influence

2. How does a public offering differ from a private placement?

PTS: 1 NAT: AACSB Analytic | Environmental Influence

PTS: 1 NAT: AACSB Analytic | Environmental Influence

PTS: 1 NAT: AACSB Analytic | Environmental Influence

5. Are formal firms the only source of venture capital?

PTS: 1 NAT: AACSB Analytic | Environmental Influence