FIN 317 Week 5 MidTerm Exam – Strayer University New

FIN/317 Week 5 Mid Term Exam – Strayer

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Chapters 1 Through 6

CHAPTER 1

INTRODUCTION TO FINANCE FOR ENTREPRENEURS

True-False Questions

1. Entrepreneurs provide the financing to individuals who think, reason, and act to convert ideas into commercial opportunities and create opportunities.

2. Entrepreneurship is the process of changing ideas into commercial opportunities and creating value.

3. An entrepreneur is an individual who thinks, reasons, and acts to convert ideas into commercial opportunities and to create value.

4. Mark Twain once said, “I was always able to see an opportunity before it became one.”

5. Small businesses, those with less than 500 employees, represent over 99 percent of all employers, and account for about one-half of the gross domestic product in the United States.

6. Small and growing enterprises are critical to the U.S. economy; small firms provide 20 to 30 percent of net new jobs.

7. Small high-technology firms are responsible for twice as many product innovations per employee and obtain more patents per sales dollar than large high-technology firms.

8. Phillips and Kirchhoff, using Dun & Bradstreet data, found that 24 percent of new firms were still in existence after two years of operation.

9. Nearly half of business failures are due to economic factors such as inadequate sales, insufficient profits, and industry weakness.

10. Although the risks associated with starting a new entrepreneurial venture are large, there is always room for one more success.

11. Studies by Phillips and Kirchhoff, and by Headd, found that about 38%-40% of new firms survived six years of operation.

12. One study of Inc. magazine’s 500 high-growth firms suggests that about 88 percent of founders feel their firms’ successes are due to extraordinary ideas, while the remaining 12 percent feel their firms’ successes are due to exceptional execution of ordinary ideas.

13. “Fads” are large societal, demographic, or technological trends or changes that are slow in forming but once in place continue for many years.

14. “Fads” are not predictable, have short lives, and do not involve macro changes.

15. Three major megatrends discussed in Chapter 1 include: societal trends or changes, demographic trends or changes, and technological trends or changes.

16. In 1982, Harry Dent identified several major or megatrends shaping U.S. society and the world.

17. The so-called “baby boom” generation applies to people born in the United States during the 1946-1964 time period.

18. Perhaps the most important invention shuttling us from an industrial society to an information society is the computer chip.

19. Environmental commerce, or e-commerce, involves the use of electronic means to conduct business online.

20. The Office of Advocacy of the U.S. Small Business Administration documents that “employer firm births” have exceeded 700,000 annually in recent years.

21. Reasonable estimates place nonemployer (e.g., single person or small family) business started each year at less than 100,000.

22. Bill Gates once said: “I was seldom able to see an opportunity, until it ceased to be one.”

23. A study by Phillips and Kirchhoff using Dun & Bradstreet data found that about three-fourths of new firms were still in existence after two years of operation.

24. Studies by Phillips and Kirchhoff, and by Headd, found that one-half of new firms or new employers were still in existence after four years of operation.

25. Nine principles of entrepreneurial finance are identified and explored in this entrepreneurial finance textbook,

26. The “time value of money” is an important component of the rent one pays for using someone else’s financial capital.

27. A venture’s financial objective is to survive.

28. Private financial markets are a place where standardized contracts or securities are traded on organized security exchanges with restrictions on how they can be transferred.

29. Free cash flow is the net income forecast to be available to the venture’s owners over time.

30. Free cash flows are adjusted for risk and the time value of money when used to calculate the value of a venture.

31. Free cash exists when cash exceeds that which is needed to operate, pay creditors, and invest in assets.

32. Free cash is all the cash available to cover operating expenses.

33. Owner-manager (agency) conflicts are differences between manager’s self-interest and that of the owners who hired the manager.

34. The owner-debtholder conflict is the divergence of the owners’ and lenders’ self-interest as the firm gets close to going “public.”

35. The financial objective of increasing value is inconsistent with developing positive character and reputation.

36. Entrepreneurial finance is the application and adaptation of financial tools and techniques to the planning, funding, operations, and valuation of an entrepreneurial venture.

37. Financial distress occurs when cash flow is insufficient to meet current debt obligations.

38. The second stage in a successful venture’s life cycle is the startup stage.

39. The rapid growth stage directly follows the startup stage.

40. Early-stage ventures include firms in their development, startup, or survival live cycle stages.

41. Business angels are wealthy individuals acting as informal or private investors, who provide venture financing for small businesses.

42. Mezzanine financing is temporary financing needed to keep the venture afloat until the next offering.

43. “Crises and bubbles” and “emerging economies and global change” are considered to be sources of entrepreneurial opportunities.

44. In Chapter I five mega-trend categories are identified as sources of entrepreneurial opportunities.

45. Entrepreneurial opportunities can occur only when there are societal changes in the world.

46. One principal of entrepreneurial finance is “risk and expected reward go hand in hand.

47. While cash is the language of business, accounting is the currency.

48. Venture character and reputation can be assets or liabilities.

Multiple-Choice Questions

1. Successful entrepreneurs exhibit which of the following traits?
a. recognize and seize commercial opportunities
b. economic pessimism
c. tend to be doggedly optimistic
d. both a and b
e. both a and c

2. While one must be careful to avoid too many generalizations about entrepreneurial traits or characteristics, which one of the following characteristics would not normally be associated with successful entrepreneurs?
a. being able to see and seize a commercial opportunity
b. planning for the venture’s future
c. only being able to see an opportunity after it ceases to be one
d. being optimistic about the venture’s success

3. About one-half of all newly created businesses in the U.S. are dissolved or cease operations within how many years after being started?
a. two years
b. four years
c. six years
d. eight years

4. About 60 percent of all newly created businesses in the U.S. are dissolved or cease operations within how many years after being started?
a. two years
b. four years
c. six years
d. eight years

5. “Fads” are:
a. not predictable
b. have short lives
c. do not involve macro changes
d. all of the above

6. Harry Dent documented major generation waves in the United States during the twentieth century in:
a. 1972
b. 1982
c. 1993
d. 2003

7. “E-commerce” refers to:
a. environmental commerce
b. electronic commerce
c. economic commerce
d. exploratory commerce

8. While entrepreneurial opportunities come from an almost unlimited number of sources, this textbook focuses on:
a. societal changes
b. demographic changes
c. technological changes
d. crises and bubbles
e. emerging economies and global changes
f. all of the above

9. Indicate the number of principles of entrepreneurial finance that are emphasized in this textbook:
a. one
b. three
c. five
d. seven
e. nine

10. Maximizing the value of the venture to its owners is the common financial goal of which of the following?
a. the entrepreneur
b. the debtholders
c. the venture equity investors
d. both a and b
e. both a and c

11. Which of the following is considered to be an “agency” conflict?
a. owner-manager conflict
b. stockholder-manager conflict
c. stockholder-debtholder conflict
d. manager-debtholder conflict

12. Which one of the following possible conflicts of interest is usually minimized through the use of equity incentives?
a. owner-manager conflicts
b. owner-employee conflicts
c. manager-employee conflicts
d. manager-debtholder conflicts

13. Which one of the following possible conflicts of interest increases in divergence at venture gets close to bankruptcy?
a. owner-manager conflict
b. owner-employee conflict
c. manager-employee conflict
d. manager-debtholder conflict

14. Which of the following is not a life cycle stage of a successful venture?
a. development stage
b. startup stage
c. survival stage
d. cash cow stage
e. early-maturity stage

15. Which of the following does not describe activity during the venture’s life cycle startup stage?
a. venture’s organization
b. venture’s development
c. operating cash flows are generated
d. initial revenue model is put in place

16. At which stage of the venture’s life cycle stage is best characterized by the period when revenues start to grow and when cash flows from operations begin covering cash outflows?
a. survival stage
b. startup stage
c. rapid growth stage
d. early-maturity stage

17. Which is not a major source of start-up financing for a venture’s startup stage?
a. entrepreneur’s assets
b. business operations
c. family and friends
d. business angels
e. venture capitalists

18. Obtaining bank loan, issuing bonds, and issuing stock is characteristic of which type of financing during the venture’s life cycle?
a. seed financing
b. second round financing
c. mezzanine financing
d. seasoned financing
e. liquidity stage financing

19. During a venture’s rapid growth stage, funds for plant expansion, marketing expenditures, working capital, and product or service improvements is obtained through?
a. seed financing
b. second round financing
c. mezzanine financing
d. seasoned financing
e. liquidity stage financing

20. Founder and venture investor shares are sold to the public after the initial offering to the public is called?
a. secondary market transaction
b. secondary stock offering
c. venture offering
d. bridge loan

21. Which of the following advise and assist corporations on the type, timing, and costs of issuing new debt and equity securities and facilitate the sale of firms?
a. brokerage firms
b. venture law firms
c. specialist firms
d. investment banking firms

22. Which stage in the venture life cycle is characterized by creating and building value, obtaining additional financing, and examining opportunities?
a. survival stage
b. startup stage
c. rapid growth stage
d. early-maturity stage

23. Which of these statements is correct?
a. The development stage occurs between the startup and survival stages of a venture’s life cycle
b. The early-maturity stage is the final stage of a new venture’s lifecycle
c. Firms typically begin to cover all expenses with internally-generated funds during the survival stage
d. During the startup stage, revenues grow much more rapidly than cash expenditures
e. None of the above

24. The last three stages of a successful venture’s life cycle occur in the following order:
a. startup, development, rapid growth
b. startup, survival, rapid growth
c. survival, rapid growth, early-maturity
d. development, startup, survival

25. The stage that precedes the middle stage in a successful venture’s life cycle is called the:
a. rapid growth stage
b. early-maturity stage
c. development stage
d. survival stage
e. startup stage

26. During the maturity stage of a venture’s life cycle, the primary source of funds is in the form of:
a. mezzanine financing
b. seed financing
c. startup financing
d. first round financing
e. seasoned financing

27. The type of financing that occurs during the development stage of a venture’s life cycle is typically referred to as:
a. seed financing
b. startup financing
c. first round financing
d. second round financing
e. mezzanine financing

28. Mezzanine financing is associated with which one of the following life cycle stages:
a. development stage
b. startup stage
c. survival stage
d. rapid growth stage
e. early-maturity stage

29. Entrepreneurial finance is the application and adaptation of financial tools and techniques to an entrepreneurial venture. Entrepreneurial finance involves:
a. planning
b. funding
c. operations
d. valuation
e. a and d above
f. all of the above

30. The first three stages of a successful venture’s life cycle occur in the following order:
a. development, rapid growth, survival
b. startup, development, rapid growth
c. startup, survival, rapid growth
d. survival, rapid growth, early-maturity
e. development, startup, survival

31. The last stage in a successful venture’s life cycle is called the:
a. rapid growth stage
b. early-maturity stage
c. development stage
d. survival stage
e. startup stage

32. The type of financing that occurs during the survival stage of a venture’s life cycle is typically referred to as the:
a. seed financing
b. startup financing
c. first round financing
d. second round financing
e. mezzanine financing

33. Which one of the following would not be considered a type of venture financing?
a. seed financing
b. startup financing
c. mezzanine financing
d. liquidity-stage financing
e. seasoned financing

34. One study of successful entrepreneurs indicated that a majority felt that the most important factor in the long-term success of their ventures was:
a. being greedy
b. having high ethical standards
c. working hard
d. taking frequent vacations

35. Financial markets where customized contracts or securities are negotiated, created, and held with restrictions on how they can be transferred are called:
a. private financial markets
b. public financial markets
c. domestic financial markets
d. international financial markets
e. all of the above

36. The time value of money concept is associated with which one of the following principles of entrepreneurial finance:
a. real, human, and financial capital must be rented from owners
b. risk and expected reward go hand in hand
c. while accounting is the language of business, cash is the currency
d. it is dangerous to assume that people act against their own self-interests

37. The goal of the entrepreneurial process is to:
a. develop opportunities
b. gather resources
c. manage and build operations
d. create value

38. Which of the following is not considered to be a mega-trend in this textbook?
a. societal, demographic, and technological changes
b. crises and bubbles
c. fads
d. emerging economies and global changes

Supplementary Questions (may require basic knowledge of probability and/or prior introductory accounting and business concepts)

1. You have the opportunity of making a $5,000 investmen The outcomes one year from now will be either $4,500 or $6,000 with an equal chance of either outcome occurring. What is the expected outcome?
a. $4,500
b. $6,000
c. $5,250
d. $5,750
e. $5,000

2. You have the opportunity of making a $5,000 investmen The outcomes one year from now will be either $5,000 or $6,000 with an equal chance of either outcome occurring. What is the expected rate of return?
a. 10%
b. 15%
c. 20%
d. 25%
e. 30%

3. A project requires an initial investment of $1,000,000. In one year, there is a 40% chance of a $950,000 return; a 50% chance of a $1,200,000 return; and a 10% chance of a $2,000,000 return. What is the project’s expected return one year from now?
a. 12.8%
b. 15.5%
c. 18.0%
d. 38.3%

4. Lindsey and Tobias have the opportunity to invest in a project that requires an investment of $3,000. There is a 35% chance of a $2,900 return; a 40% chance of a $3,400 return; and a 25% chance of a $4,500 return one year from now. Lindsey requires a 15% return on the project after the first year, but Tobias requires a return of only 12%. Using the expected rate of return:
a. Lindsey and Tobias should both invest in the project
b. Only Tobias should invest in the project
c. Only Lindsey should invest in the project
d. Lindsey and Tobias should both reject the project

5. You are considering investing in two independent projects “A” and “B”. Project A requires an initial investment of $12,000. In one year, there is a 30% chance of a $10,500 return; a 50% chance of a $12,500 return; and a 20% chance of a $14,500 return. Project B requires an initial investment of $1,000. In one year, there is a 25% chance of a $950 return; a 25% chance of a $1,000 return; and a 50% chance of a $1,200 return. If you require a 7% return on your investment after one year, you should:
a. Accept A and reject B
b. Accept B and reject A
c. Accept both projects
d. Reject both projects

6. Assume that you can sell a new product at $5.00 per uni Your variable costs are $3.00 per unit and you fixed costs are $20,000. What is your breakeven point in sales units?
a. 5,000
b. 7,500
c. 10,000
d. 12,500
e. 15,000

7. Assume that you can sell a new product at $5.00 per uni Your variable costs are $3.00 per unit and you fixed costs are $20,000. What will be your profit before taxes if you sell 12,000 units next year?
a. $0
b. $1,000
c. $2,000
d. $4,000
e. $8,000

CHAPTER 2

DEVELOPING THE BUSINESS IDEA

True-False Questions

1. For ventures that first get to market or create intellectual property rights, it’s common to price new products or services at high markups or profit margins.

2. Lifestyle firms are growth-driven in terms of revenues, profits, and cash flows and also performance-oriented as reflected in rapid value creation over time.

3. “Salary-replacement” firms provide their owners with income levels comparable to what they could have earned working for much larger firms.

4. An entrepreneur may start a number of different types of businesses, including salary-replacement firms, lifestyle firms, and entrepreneurial firms or ventures.

5. “Entrepreneurial ventures” are firms that allow owners to pursue specific lifestyles while being paid for doing what they like to do.

6. Entrepreneurial ventures emphasize survival and providing an acceptable living for their owners with growth being a secondary goal.

7. A sound business model is a plan to generate investor interest, make profits, and grow asset investments.

8. A sound business model should provide a plan to generate revenues, make profits, and produce free cash flows.

9. Mark Twain said: “Like I tell anybody, if you fail to plan, you’re planning to fail.”

10. Best practices of high-growth, high-performance firms applied in the marketing practices area include “developing new products or services that are considered to be the bes ”

11. Best practices of high-growth, high-performance firms applied in the marketing practices area include “preparing detailed monthly financial plans for the next year and annual financial plans for the next five years.

12. Best practices of high-growth, high-performance firms applied in the financial practices area include “preparing detailed monthly financial plans for the next year and annual financial plans for the next five years.

13. Best practices of high-growth, high-performance firms applied in the management practices area include “assembling a management team that is balanced in both functional area coverage and industry/market knowledge.”

14. Business opportunities, because they exist in real time, have a relatively narrow window of opportunity to become a successful business venture. However being the first to market does not guarantee success.

15. Ideas that are said to be “ahead of their time” are too early to become viable business opportunities for the inventor or innovator.

16. Once conceptualized, a new idea should be examined for its business feasibility.

17. A SWOT analysis is an examination of the strengths, weaknesses, opportunities, and threats to determine the business opportunity viability of an idea.

18. A SWOT analysis focuses on strengths (S), worries (W), opportunities (O), and treats (T).

19. A “venture opportunity screening” is the same thing as preparing a business plan.

20. A SWOT analysis should consider as potential strengths or weaknesses whether there are unfilled customer needs and the extent to which intellectual property rights exis

21. A SWOT analysis should consider the extent of existing competition and the likelihood of substitute products or services as potential strengths or opportunities.

22. Venture opportunity screening involves assessment of an idea’s commercial potential to produce revenue growth, financial performance, and value.

23. A venture with a low score on the VOS Indicator should always be abandoned.

24. The VOS Indicator is useful in assessing the commercial potential of a venture, but should not be used as the sole tool to determine a venture’s fate.

25. The VOS Indicator provides both qualitative and quantitative information about a venture’s commercial potential.

26. A venture opportunity-screening guide, called the VOS Indicator, is used to determine potential attractiveness of venture opportunities as business opportunities.

27. Asset intensity is the net after-tax profit divided by total assets.

28. One way to describe asset intensity is the dollar investment in assets needed to generate a dollar in sales.

29. Business changes resulting in higher net profit always increases ROA.

30. The compound rate of return that equates the present value of the cash inflows with the initial investment outlay is called the internal rate of return (IRR).

31. Bootstrapping refers to the process of minimizing resources such as the need for financial capital and finding unique sources for financing a new venture.

32. Free cash flow to equity is the cash flow from producing and selling a product or providing a service.

33. In a typical business plan, the section covering the management team does not need to disclose the expertise and experience of the managemen

34. The non-financial option available to managers as the venture progresses through its lifecycle is known as real options.

35. The process of moving from entrepreneurial opportunities to new businesses, products, or services begins with ideas, then moves to the preparation of a business plan, and finally ends with a feasibility study.

36. A well-designed entrepreneurial venture bins with an idea that survives an analysis of its feasibility and results in a business model/plan.

37. A successful, sound business model does not have to ultimately produce free cash flows.

38. The first component of a sound business model is the need to generate revenues.

Multiple-Choice Questions

1. Firms that allow owners to pursue specific lifestyles while being paid for doing what they like to do are referred to as:
a. salary-replacement firms
b. lifestyle firms
c. entrepreneurial ventures
d. rapid value creation firms

2. U.S. small businesses are predominately:
a. salary-replacement or entrepreneurial firms
b. lifestyle or entrepreneurial firms
c. entrepreneurial ventures
d. salary-replacement or lifestyle firms

3. The definition of an entrepreneurial firm is:
a. survival, high growth
b. high growth, high performance
c. survival, average performance
d. high, growth, average performance

4. A sound business model provides a plan which includes all of the following except?
a. generates revenues
b. makes profits
c. retains all its earnings
d. produces free cash flows
e. all of the above are included

5. A sound business model includes a plan to:
a. generate revenues, make profits
b. make profits, produce free cash flows
c. produce free cash flows for the owners of the venture
d. generate revenues, make profits, and produce free cash flows

6. Which one of the following components is not a standard component of a sound business model?
a. produce low-cost products
b. generate revenues
c. make profits
d. produce free cash flows

7. Free cash flows, which can be paid back to investors occurs when cash generated from operations exceeds all of the following except?
a. borrowing costs
b. non-cash depreciation
c. taxes
d. investment in assets

8. A venture’s value is determined by
a. the size and timing of its future free cash flows
b. time value of money
c. its net income
d. a and b
e. a and c

9. Developing new and delivering high-quality products or services that command higher prices and margins best describes strong
a. marketing practices
b. financial practices
c. operating practices
d. management practices

10. Effective entrepreneurial management teams should include all of the following except?
a. provide expertise in the areas of marketing, finance, and operations
b. have successful experience in the venture’s industry and markets
c. work collaboratively with each other
d. share the entrepreneurial spirit
e. in-house accounting, auditing, and tax professionals

11. A viable venture opportunity is characterized by all of the following except?
a. creating or meeting a customer need
b. has perceived attraction to prospective investors
c. provides an initial competitive advantage
d. is timely in terms of time-to-market
e. offers the expectation of added value to investors

12. A SWOT analysis does not focus on which of the following components or areas?
a. strengths
b. weaknesses
c. new ideas
d. opportunities
e. threats

13. A SWOT analysis focuses on which of the following components or areas?
a. strengths
b. weaknesses
c. opportunities
d. threats
e. all of the above
a, b, and d

14. When conducting a SWOT analysis, “unfilled customer needs” are examined in terms of:
a. strengths
b. weaknesses
c. opportunities
d. threats
e. a or b
c or d

15. SWOT analysis should at the very least consider which of the following areas:
a. experience/expertise
b. reputation value
c. first mover
d. a and b
e. a, b, and c

16. Which one of the following is not a part of the VOS indicator?
a. industry/market considerations
b. pricing/profitability considerations
c. financial/harvest considerations
d. management team considerations
e. location/profitability considerations

17. The evaluation of “entry barriers” occurs under which one of the following parts of the VOS indicator?
a. industry/market considerations
b. pricing/profitability considerations
c. financial/harvest considerations
d. management team considerations

18. A VOS indicator stands for:
a. venture opportunity screening indicator
b. viable opportunity statement indicator
c. venture only success indicator
d. viable assessment screening indicator

19. The factor categories in a VOS indicator are:
a. industry/market considerations
b. pricing/profitability considerations
c. financial/harvest considerations
d. management team considerations
e. all of the above
a, b, and d

20. A “score” in the range of 2.34-3.00 using the VOS IndicatorTM ¬¬¬¬ ¬would be considered a:
a. a low score
b. an average score
c. a high score
d. a very, very high score

21. An average score on using the VOS Indicator¬TM would fall in the range:
a. 0.00-0.99
b. 1.00-1.66
c. 1.67-2.33
d. 2.34-3.00

22. At the end of a qualitative-based venture opportunity screening exercise, the interviewer prepares a subjective assessment and indicates one of the following except for:
a. natural commercial potential
b. high commercial potential
c. average commercial potential
d. low commercial potential

23. Direct costs of producing a product or providing a service is called
a. gross profit
b. gross profit margin
c. net profit
d. net profit margin
e. cost of goods sold

24. Revenues minus the cost of goods sold is called
a. gross profit
b. gross profit margin
c. net profit
d. net profit margin

25. Dollar profit left after all expenses, including financing costs and taxes have been deducted from the firm’s revenues is called
a. gross profit
b. gross profit margin
c. net profit
d. net profit margin
e. cost of goods sold

26. Return on assets can be stated as which of the following?
a. net after-tax profit divided by total assets
b. net profit margin times asset turnover
c. net cash flow divided by total assets
d. both a and b
e. both a and c

27. All else held constant, a higher asset turnover:
a. increases ROA
b. decreases ROA
c. has no effect on ROA
d. may raise or lower ROA, depending on how it affects revenues.

28. The return on assets (ROA) model measures:
a. revenues divided by net profit times the asset turnover
b. net profit margin times the equity multiplier
c. net profit margin times asset turnover
d. net profit divided by total assets multiplied by the asset turnover

29. Free cash flow to equity is the cash available to the entrepreneur and venture investors after all of the following except?
a. net cash flows
b. operating cash outflows
c. financing and tax cash flows
d. investment in assets needed to sustain the venture’s group
e. net increase in debt capital

30. The free cash flows to equity of an entrepreneurial firm includes cash flows to:
a. venture investors
b. creditors
c. the entrepreneur
d. a and b
e. a and c
f a, b, and c

31. Determine the cost of goods sold for a venture with the following financial information: revenues = $50,000; net profit margin = 20%;
gross profit margin = 70%
a. $40,000
b. $35,000
c. $15,000
d. $10,000

32. Determine gross profit of a venture with the following
financial information: cost of goods sold = $30,000; net profit = $17,000; asset turnover = 1.6; return on assets 32%
a. $85,000
b. $72,000
c. $55,000
d. $38,000
33. Determine the return on assets (ROA) for a venture with the following financial information: revenues = $500,000; net profit = $70,000; and asset turnover = 2.00 times.
a. 10%
b. 14%
c. 20%
d. 28%
e. 34%

34. Determine the dollar amount of total assets for a venture with the following financial information: revenues = $500,000; net profit = $70,000; and asset turnover = 2.00 times.
a. $100,000
b. $250,000
c. $375,000
d. $500,000
e. $650,000

35. Determine the dollar amount of net profit for a venture with the following financial information: revenues = $500,000; return on assets = 20%; and asset turnover = 2.00 times.
a. $10,000
b. $25,000
c. $50,000
d. $60,000
e. $75,000

36. Determine the dollar amount of revenues for a venture with the following financial information: net profit = $60,000; assets turnover = 1.5 times; and return on assets 30%.
a. $300,000
b. $500,000
c. $800,000
d. $1,000,000
e. $1,200,000

37. Determine the asset intensity of a venture with the following financial information: net profit = $22,000; revenues = $132,000; return on assets 30%. a. .05
b. .56
c. 1.8
d. 20

38. In the venture life cycle, moving from the development stage to the startup stage frequently begins with the preparation of a business plan. The business plan is a written document that describes the proposed venture in all of the following terms except:
a. the proposed product or service opportunity
b. the accounting data for the last five years
c. current resources available to the venture
d. financial projections

39. A typical business plan includes all of the following sections except:
a. executive summary
b. business description
c. marketing plan and strategy
d. disclosure of pending litigation
e. operations and support

40. When composing the financial plans and projections section of a business plan, all of the following should be included except:
a. income statements and balance sheets
b. statement of cash flows
c. past and present dividend per share information
d. breakeven analysis
e. funding needs and sources

41. A typical business plan includes all of the following except:
a. management team
b. financial plans and projections
c. risk and opportunities
d. timeline and milestones
e. initial public offering information

42. The first two requirements of a sound business model are:
a. generate revenues, make profits
b. make profits, produce free cash flows
c. produce free cash flows for creditors and owners of the venture
generate revenues and produce free cash flows

43. The process involving minimizing the need for financial capital and finding unique sources for financing a new venture is referred to as:
a. mezzanine financing
b. financial bootstrapping
c. seed financing
d. startup financing

44. A written document that describes the proposed venture in terms of the product or service opportunity, current resources, and financial projections is called a:
a. financial plan
b. business plan
c. entrepreneurial plan
d. survival plan

45. In the Kauffman Center study of best practices of high-growth, high-performance firms, which of the following practices was not included?
a. marketing practices
b. financial practices
c. management practices
d. production/operations practices

46. When moving from entrepreneurial opportunities to new businesses, products, or services, which one of the following is not considered a component?
a. ideas
b. feasibility
c. business plan
d. harvest of venture

47. A firm’s option to abandon a venture is an example of a:
a. bootstrapping option
b. financial option
c. survival option
d. real option

48. A venture’s value to its owners is determined by the:
a. size and timing of its future free cash flows (to equity)
b. level of its past revenues
c. prior losses and expenses
d. all of the above

49. A well-designed entrepreneurial venture typically includes:
a. generating ideas
b. analyzing the feasibility of ideas
c. producing business models/plans
d. only a and c above
e. a, b, and c above

50. Some venture investors like to draw analogies between baseball terms and venture performance. The baseball term used to reflect a total loss of an investment is:
a. home run
b. single
c. strikeout
d. double

CHAPTER 3

ORGANIZING AND FINANCING A NEW VENTURE

True-False Questions

1. The difference between a limited partnership and a general partnership is that the limited partnership has partners who actively manage the day-to-day operations but also has passive investors.

2. A limited partnership limits certain partners’ liabilities to pay the venture’s obligations to the amount each paid for their partnership interests.

3. In a corporate legal entity, the personal assets of the owners are separate from the business’ assets, but the personal liabilities of the owners are no

4. Limited liability in the corporate business structure means creditors can seize only some of the corporation’s assets.

5. The articles of incorporation are the basic legal declarations contained in the corporate charter.

6. Limited liability companies (LLCs) are owned by shareholders with limited liability and its earnings are taxed at the corporate rate.

7. Partnerships are treated with pass-through taxation. This means that profits and losses of the business pass directly through to investors on the basis specified in the partnership agreemen

8. An employment contract is an agreement between an employer and employee about the terms and conditions of employment including the employee’s agreement to keep confidential information secret and to assign ideas and inventions to the employer.

9. Financial bootstrapping maximizes the need for financial capital.

10. The income received by a proprietorship is taxed at personal tax rates.

11. The equity capital sources for a proprietorship are partners, families, and friends.

12. The maximum number of owners in a Subchapter S corporation is 150.

13. An S corporation provides unlimited liability for its shareholders.

14. Professional corporations (PCs) and service corporations (SCs) are corporate structures that “states” provide for professionals such as physicians, dentists, lawyers, and accountants.

15. The marginal tax rate for the first dollar of taxable income is higher for corporations than for individuals.

16. Based on 201209 tax laws, the highest possible marginal tax table rate is higher for corporations than for individuals.

17. The highest marginal income tax rate for taxable personal income is 45 percen

18. There are four types of “marks” that can be used to try to protect intellectual property.

19. Patents, trade secrets, trademarks, and copyrights are intangible assets.

20. “Certification marks” cover memberships in groups (e.g., a sorority or a labor union).

21. “Collective marks” cover memberships in groups (e.g., a sorority or a labor union).

22. Most trademarks take the form of names, words, or graphic designs.

23. A “color mark” is considered to be one four types of “marks” used to try to protect intellectual property.

24. A copyright must be registered with the U.S. Copyright Office in order for a work to be protected.

25. A work does not need to be registered to receive copyright protection; the work’s creation is enough to provide copyright protection.

26. There are four kinds of patents.

27. “Business method” is one kind of paten

28. An idea is enough to be patented.

29. “Design patents” cover most inventions pertaining to new products, services, and processes.

30. “Business method” patents protect a specific way of doing business and the underlying computer codes, programs, and technology.

31. “Patents” are intellectual property rights granted for inventions that are useful, novel, and obvious.

32. Nondisclosure agreements prohibit the creator of an idea or other form of intellectual property from sharing it with others once it has been presented the first time.

33. Confidential disclosure agreements are used to protect intellectual property when disclosure must be made to an outside individual or organization.

34. “Certification marks” are intellectual property rights in the form of inventions and information (e.g., formulas, processes, customer lists, etc.) not generally known to others.

35. “Trademarks” are intellectual property rights that allow firms to differentiate their products and services through the use of unique marks.

36. A trademark must be novel in order to receive protection.

37. Business angels are wealthy individuals who invest in early-stage ventures in exchange for the excitement of launching the business, as well as a share of the firm’s financial gains.

38. “Service marks” refer to services such as those provided by a sorority or a labor union.

39. “Certification marks” provide indications of quality.

40. Copyrights are intellectual property rights to writings in printed and electronically stored forms.

Multiple-Choice Questions

1. In which form of business organization are the owners not offered the protection of limited liability?
a. proprietorship
b. limited partnership
c. corporation
d. subchapter S corporation
e. limited liability corporation

2. In which form of business organization is the taxation effects characterized by the income flowing to shareholders taxed at personal tax rates?
a. proprietorship
b. limited partnership
c. corporation
d. subchapter S corporation
e. general partnership

3. Which form of business organization is characterized by having the shortest start-up time and lowest legal costs?
a. proprietorship
b. limited partnership
c. corporation
d. subchapter S corporation
e. limited liability corporation

4. Which form of business organization typically offers the easiest transfer of ownership?
a. proprietorship
b. limited partnership
c. corporation
d. subchapter S corporation
e. general partnership

5. Which form of business organization is characterized as having unlimited life?
a. proprietorship
b. limited partnership
c. limited liability corporation
d. subchapter S corporation
e. general partnership

6. Which of the following is not a right or a duty of general partners?
a. participation in profits and losses
b. some liability for partnership obligations
c. veto right on new partners
d. eventual return of capital
e. access to partnership books

7. The rules and procedures established to govern the corporation are called the
a. corporate charter
b. articles of incorporation
c. corporate bylaws
d. confidentiality disclosure agreements
e. partnership agreements

8. In a general partnership, legal action that treats all partners equally as a group is called:
a. joint and several liability
b. joint liability
c. limited liability
d. accrued liability
e. general liability

9. Which of the following business organizational forms provides the owners with limited investor liability and passes its income before taxes through to the owners?
a. partnership
b. subchapter S (or S) corporation
c. regular or (C ) corporation
d. limited liability company (LLC)
e. both a and b
f. both b and d

10. Which of the following numbers of shareholders is allowed in a Subchapter S (or S) corporation business form?
a. 74
b. 125
c. 130
d. 500

11. Based on 2012 tax schedules, the first dollar of personal taxable income is taxed at which of the following marginal tax rates:
a. 05.0%
b. 10.0%
c. 15.0%
d. 20.0%
e. 25.0%

12. Based on 2012 tax schedules, the first dollar of corporate income is taxed at which of the following marginal tax rates:
a. 05.0%
b. 10.0%
c. 15.0%
d. 20.0%
e. 25.0%

13. Based on 2012 tax schedules, the highest marginal tax rate on personal taxable income is:
a. 25.0%
b. 28.0%
c. 33.0%
d. 35.0%
e. 40.0%

14. Based on 2012 tax schedules, the highest marginal tax rate on corporate taxable income is:
a. 25.0%
b. 28.0%
c. 35.0%
d. 38.0%
e. 39.0%

Note: The following information should be used for multiple choice questions 15-19. Following is a partial 2012 personal income tax schedule for a single filer:
Taxable Income

Beginning Ending Bracket Marginal
Amount Amount Amount Tax Rate
$1 $8,700 $8,700 0.10
$8,700 $35,350 $26,650 0.15
$35,350 $85,650 $50,300 0.25

15. The dollar amount of income taxes paid by a single filer who has taxable income of $8,700 would be:
a. $150
b. $870
c. $3,840
d. $4,675
e. $10,385

16. The cumulative dollar amount of income taxes paid by a single filer who has taxable income of $35,350 would be:
a. $150
b. $835
c. $3,840
d. $4,867.50
e. $10,385

17. The maximum dollar amount of income taxes in the $35,350-$85,650 “bracket” paid by a single filer with taxable income of $85,650 would be:
a. $150
b. $870
c. $3,997.50
d. $4,675
e. $12,575

18. The average tax rate for a single filer with taxable income of $35,350 would be:
e. 10.0%
f. 13.8%
g. 15.0%
h. 16.7%
i. 20.0%

19. The average tax rate for a single filer with taxable income of $85,650 would be:
a. 14.7%
b. 16.7%
b. 20.0%
c. 20.4%
d. 25.0%

Note: The following information should be used for multiple choice questions 20-36. Following is a partial 2012 corporate income tax schedule:

Taxable Income
Beginning Ending Bracket Marginal
Amount Amount Amount Tax Rate
$1 $50,000 $50,000 0.15
$50,000 $75,000 $25,000 0.25
$75,000 $100,000 $25,000 0.34

20. The dollar amount of income taxes paid by a corporation with taxable income of $50,000 would be:
a. $1,500
b. $6,250
c. $7,500
d. $8,500
e. $10,850

21. The cumulative dollar amount of income taxes paid by a corporation with taxable income of $75,000 would be:
a. $6,250
b. $7,500
c. $8,500
d. $13,750
e. $22,250

22. The maximum dollar amount of income taxes in the $75,000-$100,000 bracket paid by a corporation with taxable income of $100,000 would be:
a. $6,250
b. $7,500
c. $8,500
d. $13,750
e. $22,250

23. The average tax rate for a corporation with taxable income of $75,000 would be:
a. 15.0%
b. 18.3%
c. 20.0%
d. 22.7%
e. 25.0%

24. The average tax rate for a corporation with taxable income of $100,000 would be:
a. 15.0%
b. 16.75%
c. 20.0%
d. 22.25%
e. 25.0%

25. Intellectual property can be protected by all of the following except:
a. patents
b. trademarks
c. legal disclaimers
d. copyrights
e. trade secrets

26. Which of the following are intellectual property rights granted for inventions that are useful, novel, and non-obvious?
a. patents
b. trademarks
c. legal disclaimers
d. copyrights
e. trade secrets

27. Which of the following are intellectual property rights in the form of inventions and information such as formulas, processes, and customer lists that are not generally known to others and which convey economic advantage to the holders?
a. patents
b. trademarks
c. legal disclaimers
d. copyrights
e. trade secrets

28. Which of the following are intellectual property rights that allow firms to differentiate their products and services through the use of unique marks which allow consumers to easily identify the source and quality of the products and services?
a. patents
b. trademarks
c. legal disclaimers
d. copyrights
e. trade secrets

29. Which of the following are intellectual property rights to writings in written and electronically stored forms?
a. patents
b. trademarks
c. legal disclaimers
d. copyrights
e. trade secrets

30. Which of the following are not sources of seed and start-up financing?
a. family and friends
b. the entrepreneur’s physical and financial assets
c. business angels
d. venture capitalists
e. stock and bond markets

31. Wealthy individuals who invest in early stage ventures in exchange for the excitement of launching a business and a share in any financial rewards are known as:
a. creditors
b. white knights
c. corporate raiders
d. business angels
e. stakeholders

32. Business angels typically initiate their investments during the:
a. early stages of a venture’s lifecycle
b. middle stages of a venture’s lifecycle
c. maturity stage of a venture’s lifecycle
d. all of the above

33. Which of the following forms of protecting intellectual property had its protection limit increased from 17 to 20 years?
a. copyrights
b. trademarks
c. patents
d. trade secrets

34. Patents are intellectual property rights granted for inventions that are:
a. not useful, novel, and non-obvious
b. not useful, not novel, and obvious
c. useful, novel, and non-obvious
d. useful, not novel, and obvious

35. Patents that cover most inventions pertaining to new products, services, and processes, are referred to as:
a. design patents
b. plant patents
c. utility patents
d. electrical patents
e. mechanical patents

36. Intellectual property rights to “writings” in written and electronically-stored forms are protected by:
a. Patents
b. copyrights
c. trade secrets
d. trademarks

37. Which of the following forms of protecting intellectual property currently has a protection limit of 20 years?
a. copyrights
b. patents
c. trade secrets
d. trademarks

38. Certification marks are typically used to:
a. indicate membership in a trade group
b. indicate a certain brand of service
c. indicate quality
d. are symbols used to associate products to a specific brand

39. Which of the following is not a “kind” of patent?
a. Utility
b. Design
c. Mark
d. Plant
e. Business method

40. Which of the following is not a “type” of mark?
a. Trademark
b. Service mark
c. Collective mark
d. Certification mark
e. Design mark

41. During the development stage, seed financing chiefly comprises:
a. funds from business angels and venture capitalists
b. the entrepreneur’s personal assets
c. funds from family and friends
d. a, b, and c
e. only b and c

42. The term that refers only to words, symbols, shapes, and similar items associated with products is:
a. trademarks
b. service marks
c. collective marks
d. certification marks

CHAPTER 4

PREPARING AND USING FINANCIAL STATEMENTS

True-False Questions

1. Assets are financial and physical items controlled or owned by the business.

2. GAAP stands for “General American Accounting Principles.”

3. GAAP stands for “Generally Accepted Accounting Principles.”

4. The practice of recording economic activity when realized is known as accrual accounting.

5. Accrual accounting is the practice of recording economic activity when recognized rather than waiting until realized.

6. The balance sheet equation is: Total Assets = Total Liabilities + Net Income.

7. On the balance sheet, Total Liabilities = Total Assets – Owners Equity.

8. How quickly an asset can be converted into cash is called liability.

9. Cash or other assets that are expected to be converted into cash in less than one year are known as current liabilities.

10. The reduction in value of a fixed asset over its expected life intended to reflect the usage or wearing out of the asset is called accumulated depreciation.

11. Amounts owed to another for purchase made on credit which come due in less than one year are known as receivables.

12. Long-term, non-cancelable leases whereby the owner receives payments that cover the cost of the equipment plus a return on investment in the equipment is known as a capital lease.

13. Operating income, or earnings before interest and taxes, reflects the firm’s profits after all operating expenses, excluding financing costs, have been deducted from net sales.

14. Net income, or profit, is the bottom line measure of what’s left from the firm’s net sales after operating expenses, financing costs, and taxes have been deducted.

15. Net cash burn occurs when the sum of cash flows from operations and investing is positive.

16. Net cash build occurs when the sum of cash flows from operations and investing is negative.

17. During the development stage in a new venture’s life cycle, the balance sheet reflects the acquisition of initial assets and the obtaining of seed financing.

18. During the development stage in a new venture’s life cycle, the income statement typically shows no sales but expenses such as rent, utilities, and a subsistence salary for the entrepreneur.

19. During the startup stage in a new venture’s life cycle, the income statement typically shows no sales but expenses including the production and market of products or services.

20. Production assets (e.g., inventories and equipment to produce products and give credit to customers) usually occurs during the development stage in a new venture’s life cycle.

21. Seed financing (e.g., financing from the entrepreneur’s assets, family, and friends) usually occurs during the development stage in a new venture’s life cycle.

22. Startup financing (e.g., financing from business angels and venture capitalists) usually occurs during the development stage in a new venture’s life cycle.

23. “Cost of goods sold” is the cost of materials, labor, and advertising incurred to produce the products that were sold.

24. “Variable expenses” are costs or expenses that vary directly with revenues.

25. “Variable expenses” are costs that are expected to remain constant over a range of revenues for a specific time period.

26. EBDAT is earnings before interest, taxes, depreciation, and amortization.

27. “Contribution profit margin” is the portion of the sale of a product that contributes to covering the cash fixed costs.

28. EBDAT stands for “Earnings Before Depreciation And Taxes”.

29. Cash fixed costs = survival revenues – variable cost revenue ratio × survival revenues.

True-false questions for Chapter 4, Appendix A:

1. “Economic value added” (EVA) measures a firm’s market value added over a specified time period.

2. Economic value added (EVA) is a measure of a firm’s economic profit over a specified time period.

3. NOPAT equals Net Sales multiplied by on minus the tax rate.

4. When EBIT is zero, a firm’s net operating profit after taxes (NOPAT) also is zero because no taxes are payable.

Multiple-Choice Questions

1. Financial statement that provides a snapshot of a business’ financial position as of a specific date is called the:
a. income statement
b. balance sheet
c. statement of retained earnings
d. statement of cash flows

2. Financial statement that reports the revenues generated and expenses incurred over an accounting period is called the
a. income statement
b. balance sheet
c. statement of retained earnings
d. statement of cash flows

3. Financial statement that shows how cash, as reflected in accrual accounting, flows into and out of a company during a specific period of operation is called the:
a. income statement
b. balance sheet
c. statement of retained earnings
d. statement of cash flows

4. The balance sheet equation states that total assets =
b. total liabilities + depreciation
c. total liabilities + owners’ equity
d. owners’ equity + net income
e. owners’ equity + current liabilities
f. total liabilities + net income

5. Which one of the following is not considered to be a current asset?
a. cash
b. receivables
c. inventories
d. fixed assets

6. “Retained earnings” is:
a. a corporate asset
b. part of owners’ equity
c. neither a or b
d. both a and b

7. Cash includes all of the following except:
a. coins
b. currency
c. checking accounts
d. certificates of deposit

8. Which of the following is not a characteristic of marketable securities?
a. short-term
b. illiquid
c. high-quality
d. interest-bearing

9. Which of the following is not a characteristic of inventories?
a. raw materials
b. finished products
c. goods sold but not yet shipped
d. work-in-process

10. Which of the following is not depreciated?
a. inventory
b. machinery
c. land
d. both a and b
e. both a and c

11. Which of the following is a use of cash?
a. a decrease in inventory
b. an increase in accrued liabilities
c. the sale of an asset for a gain
d. a drop in the amount owed on a bond
e. an increase in stock issued

12. Which of the following is a source of cash?
a. an increase in accounts receivable
b. a decrease in wages payable
c. the acquisition of land
d. an increase in the amount owed on a note payable
e. the repurchase of outstanding shares of stock

13. Which of the following is not a category on the statement of cash flows?
a. cash flow from operating activities
b. cash flow from equity activities
c. cash flow from investing activities
d. cash flow from financing activities

Note: Use the following data for the next three problems (14, 15, & 16).
Acme Pest Control has sales of $13,500, cost of goods sold of $4,000, selling expenses of $3,500, depreciation of $2,000, interest expense of $2,000, and a tax rate of 34%.

14. What is Acme’s operating income?
a. $4,000
b. $2,000
c. $9,500
d. $6,000
e. $1,320

15. What is Acme’s taxable income and tax expense?
a. $6,000; $2,040
b. $2,000; $1,320
c. $4,000; $1,360
d. $2,000; $680
e. $9,500; $3,230

16. What is Acme’s net income?
a. $2,720
b. $897.60
c. $6,460
d. $2,040
e. $1,320

17. Your venture has total assets of $690, net fixed assets of $500, long term debt of $80, and stockholders’ equity of $400. What is the amount of your venture’s current liabilities?
a. -$100
b. $100
c. $210
d. $290
e. $1,090

18. In breakeven analysis, solving for when EBITDA is equal to zero gives breakeven in terms of:
a. economic revenues
b. variable costs
c. survival revenues
d. fixed costs

19. A lease that provides maintenance in addition to financing and is also usually cancelable is called:
a. capital lease
b. liability lease
c. operating lease
d. asset lease
e. equity lease

20. Which one of the following is not considered to be an internal operating schedule?
a. income statement
b. cost of production schedule
c. cost of goods sold schedule
d. inventories schedule

21. “Net cash burn” occurs when the sum of which of the following items is negative?
a. cash flows from operations and financing
b. cash flows from investing and financing
c. cash flows from operations and investing
d. cash flows from net income and depreciation
e. cash flows from operations and net income

22. Expenses or costs that vary directly with revenues are said to be:
a. fixed expenses
b. semi-fixed expenses
c. semi-variable expenses
d. variable expenses

23. EBDAT is equal to:
a. revenues – variable costs – cash fixed costs
b. revenues + variable costs + cash fixed costs
c. revenues – variables costs – total fixed costs
d. revenues + variable costs – cash fixed costs

24. “Gross earnings” is equal to:
a. Revenue – After-Tax cost of financial capital used
b. net income ÷ sales
c. (net sales – the cost of production) × tax rate
d. net sales – the cost of production

25. According to Appendix A of Chapter 4, NOPAT is defined as:
a. revenues times (1 + tax rate)
b. revenues times (1 – tax rate)
c. EBITDA times (1 – tax rate)
d. EBIT times (1 – tax rate)
e. net income times (1 + tax rate)

26. Last year a firm had sales of $200,000. Its cost of goods sold was $75,000, and administrative and marketing expenses were $25,000 each. Depreciation expense was $10,000, while interest expense was $15,000. If the tax rate is 30%, what was the firm’s NOPAT last year?
a. $19,500
b. $35,000
c. $45,500
d. $52,500
e. $80,500

27. What is the survival revenues breakeven based on: cash fixed costs = $400,000 and a variable cost revenue ratio = .65?
a. $460,500
b. $615,385
c. $1,142,857
d. $2,000,334
e. $4,000,667

28. Use the following information to determine the cash fixed costs: Administrative expenses = $200,000; Marketing expenses = $180,000; Depreciation expenses = $100,000; and Interest expenses = $20,000.
e. $380,000
f. $400,000
g. $480,000
h. $500,000
i. $620,000

29. Find the “contribution profit margin” based on the following information: cash fixed costs = $60,000; variable costs = $70,000; and sales = $100,000.
a. 70%
b. 60%
c. 30%
d. 40%
e. 100%

30. Find the “survival revenues” (SR), also known as the EBDAT breakeven) based on the following information: cash fixed costs = $60,000; variable costs = $70,000; and sales = $100,000.
a. $85,714
b. $100,000
c. $116,667
d. $200,000
e. $300,000

31. What is the survival revenues breakeven based on the following: Administrative expenses = $200,000; Marketing expenses = $180,000; Depreciation expenses = $100,000; and Interest expenses = $20,000; and a variable cost revenue ratio = .50?
a. $400,000
b. $600,000
c. $800,000
d. $1,000,000
e. $1,200,000

32. A firm with constant variable costs has a survival revenue breakeven of $375,000. This year it had $250,000 in sales, $100,000 of which was a fixed cos What are the firm’s cash fixed costs?
a. $150,000
b. $225,000
c. $625,000
d. $937,500

33. Last year, Beth’s Baked Goods exactly broke even with cash fixed costs of $63,000. If its breakeven survival revenue level was $94,000, what was its variable cost revenue ratio (VCRR)?
a. .27
b. .30
c. .33
d. .67

34. In its first year, Joe’s Start-Up Company had revenues of $125,000 and cost of goods sold of $81,250, which was the only variable cos Depreciation was $20,000, and cash costs were $5,000 in financing costs, admin expenses of $50,000, and $45,000 in marketing expenses – all of which were fixed. What is the survival breakeven revenue?
a. $342,857
b. $285,714
c. $271,429
d. $184,615
e. $153,846

Multiple Choice Questions and Problems for Chapter 4, Appendix A:

1. Economic Value Added (EVA) is calculated as:
a. NOPAT plus after-tax dollar cost of financial capital used
b. ROE minus percentage cost of financial capital
c. NOPAT minus after-tax dollar cost of financial capital used
d. ROE plus the percentage cost of financial capital

2. A firm’s net operating profit after taxes (NOPAT) is calculated as:
a. net profit
b. EBIT times one minus the tax rate
c. EBT minus interest paid
d. EBIT times the tax rate

3. Total operating fixed costs (TOFC) equal:
a. cash operating fixed costs (excluding interest expenses)
b. noncash fixed costs (e.g., depreciation)
c. interest expenses
d. a plus b
e. a plus b plus c

4. Find the NOPAT given the following information: sales = $520,000, earnings before interest = $100,000; interest = $20,000; and the tax rate = 30%.
a. $70,000
b. $56,000
c. $30,000
d. $24,000
e. $10,000

5. Find the NOPAT breakeven revenues (NR) given the following information: total operating fixed costs = $75,000; variable costs = $150,000; and sales = $200,000.
a. $100,000
b. $240,000
c. $300,000
d. $400,000
e. $460,000

6. Determine the total operating fixed costs (TOFC) based on the following: Administrative expenses = $200,000; Marketing expenses = $180,000; Depreciation expenses = $100,000; and Interest expenses = $20,000.
a. $200,000
b. $380,000
c. $400,000
d. $480,000
e. $500,000

CHAPTER 5

EVALUATING OPERATING AND FINANCIAL PERFORMANCE

True-False Questions

1. Showing the relationships between two or more financial variable and/or time, financial ratios are useful means of summarizing large amounts of financial data for comparative purposes.

2. Second-round, mezzanine, and liquidity-stage financing generally occur during a venture’s survival stage.

3. Commercial banks are important users of financial ratios and measures during the development and startup stages of ventures.

4. Investment bankers are users of financial ratios and measures of ventures primarily during the rapid-growth stage relative to the development and startup stages.

5. Trend analysis is used to examine a venture’s performance over time.

6. Cross-sectional analysis is used to examine a venture’s performance over time.

7. “Cash burn” is the cash a venture expends on its operating, financing, and depreciation expenses.

8. “Net cash burn” occurs when cash burn exceeds cash build in a specified time period.

9. The “cash burn rate” is the cash burn for a fixed period of time, typically a month.

10. The term “cash build” as used in Chapter 5 is equal to net sales minus the change in receivables.

11. Liquidity ratios indicate the venture’s ability to pay short term assets from short-term liabilities.

12. Net working capital reflects current assets deducted from current liabilities.

13. “Net working capital” is calculated as fixed assets minus current liabilities.

14. A venture’s cash, marketable securities, and receivables comprise the venture’s “liquid assets”.

15. The current ratio and the quick ratio differ only because average inventories are subtracted in the numerator of the quick ratio.

16. For a venture with inventories, the quick ratio will always be greater than the current ratio.

17. Net working capital is a dollar amount measure of the cushion between current assets and current liabilities.

18. Leverage ratios indicate the extent to which the venture has used debt and its ability to meet debt obligations.

19. Total debt includes current liabilities, long-term debt, and retained earnings.

20. How efficiently a venture controls its expenses and uses its assets and debt is evaluated with profitability and efficiency ratios.

21. During the development and startup stages of a venture’s life cycle, important financial ratios and measures include cash burn rates and liquidity ratios.

22. During the development and startup stages of a venture’s life cycle, important users of financial ratios and measures include the entrepreneur, business angels, and venture capitalists (VCs).

23. Leverage ratios are generally considered to be more important during the survival and rapid-growth stages compared to the development and startup stages.

24. The equity multiplier is considered an efficiency ratio.

25. The extent to which a venture is in debt and in its ability to repay its debt obligations is indicated by leverage ratios.

26. The equity multiplier shows the extent by which assets are supported by equity and deb

27. Accounting rules require that the current maturities of long-term debt obligations be classified as short-term liabilities.

28. Profitability and efficiency ratios are generally considered to be more important during the development and startup stages compared to the survival and rapid-growth stages.

29. The part of a venture’s interest payment that is subsidized by the government because of the deductibility of interest is called the interest tax shield.

30. How efficiently a venture controls its expenses and uses its assets and debt is evaluated with profitability and efficiency ratios.

31. The Return on Assets model states: ROA = net profit margin × asset turnover × the equity multiplier.

32. If a firm has positive net income, a drop in a venture’s asset intensity ratio will increase its ROE.

Multiple-Choice Questions

1. Investment bankers and commercial banks are important users of financial ratios and measures during which of the following life cycle stages?
a. Development stage
b. Startup stage
c. Survival stage
d. Rapid-growth stage
e. All four stages

2. The entrepreneur, angels, and VCs are important users of financial ratios and measures during which of the following life cycle stages?
a. Development stage
b. Startup stage
c. Survival stage
d. Rapid-growth stage
e. All four stages

3. Which of the following is used to examine a venture’s performance over time?
a. qualitative analysis
b. trend analysis
c. cross sectional analysis
d. industry comparable analysis

4. Which of the following is used to compare a venture’s performance against another firm at the same point in time?
a. qualitative analysis
b. trend analysis
c. cross sectional analysis
d. industry comparable analysis

5. Which of the following is used to compare a venture’s performance against the average performance of other firms in the same industry?
a. qualitative analysis
b. trend analysis
c. cross sectional analysis
d. industry comparable analysis

6. Which one of the following is not a basic ratio techniques used to conduct financial analysis?
a. trend analysis
b. sensitivity analysis
c. cross-sectional analysis
d. industry comparables analysis

7. The term “cash build” is measured as:
a. net income plus depreciation
b. net sales minus expenses minus (plus) an increase (decrease) in inventories
c. net sales minus (plus) an increase (decrease) in receivables
d. net income plus depreciation minus (plus) an increase (decrease) in payables

8. “Net cash burn” is calculated as:
a. cash burn plus cash build
b. cash build minus cash burn
c. cash burn minus cash build
d. cash burn minus cash build squared

9. Using the following information, determine the average monthly net cash burn rate: annual net income = $20,000; annual interest = $10,000; annual cash build = $150,000; and annual cash burn = $186,000.
a. $1,000
b. $3,000
c. $4,000
d. $6,000
e. $7,000

10. Use the following information to determine a firm’s “cash build:” net sales = $150,000; net income = $15,000; beginning-of-period accounts receivable = $60,000; end-of-period accounts receivable = $90,000; and interest = $10,000.
a. $10,000
b. $15,000
c. $30,000
d. $60,000
e. $120,000

11. Average current assets minus average inventories when divided by average current liabilities is called which of the following ratios?
a. current ratio
b. quick ratio
c. net working capital ratio
d. current liabilities to total debt ratio

12. Dividing the average total assets by the average owners’ equity is called which of the following ratios?
a. equity multiplier
b. debt to equity ratio
c. current liabilities to total debt ratio
d. current ratio

13. Net sales minus cost of goods sold when divided by sales is called which of the following ratios?
a. gross profit margin
b. operating profit margin
c. net profit margin
d. net operating profit after taxes margin

14. Net income divided by net sales is called which of the following ratios?
a. net operating profit after taxes margin
b. net profit margin’
c. operating profit margin
d. gross profit margin

15. The difference between a venture’s ability to generate cash to pay interest and the amount of interest it has to pay is determined by which of the following ratios?
a. fixed charges coverage
b. debt to asset
c. equity multiplier
d. debt to equity
e. interest coverage

16. Which of the following is not a profitability and efficiency ratio?
a. sales-to-total-assets
b. return on equity
c. return on assets
d. inventory-to-total assets
e. NOPAT profit margin

17. Which of the following is true?
a. ROA is always greater than or equal to ROE
b. an increase in the asset turnover ratio implies a decrease in the asset
intensity ratio
c. a and b
d. none of the above

18. A firm has the following balance sheet information: total assets = $100,000; current assets = $30,000; inventories = $10,000; cash = $5,000; total liabilities = $30,000; current liabilities = $15,000; notes payable = $2,000. What are the firm’s quick and NWC-to-Total-Assets ratios?
a. 1.00 and .13
b. 1.33 and .13
c. 1.00 and .15
d. 1.33 and .15

19. Last year, Nemo’s Fish ‘n Chips recorded the following financial data: sales = $85,000; cost of goods sold = $45,000; selling and administrative expenses = $25,000; depreciation and amortization = $7,000; interest expense = $12,000. The tax rate was 30%. Find Nemo’s interest coverage for last year.
a. -.29 times
b. .66 times
c. .86 times
d. 1.25 times
e. 3.33 times

20. A venture has net sales of $400,000, cost of goods sold of $200,000, operating expenses (selling, general, and administrative) of $100,000, and interest expenses of $50,000. What is the operating profit margin?
a. 50.0%
b. 75%
c. 25%
d. 40%

21. Last year, Lenny’s Lemonade had $3,500 in sales, and cost of goods sold was $2,000. Depreciation expenses totaled $500 and interest expense was $700. If the tax rate is 25%, what is the net profit margin for Lenny’s Lemonade? What is its NOPAT margin?
a. 6.43% and 21.43%
b. 20.7% and 21.43%
c. 2.14% and 32.14%
d. 22.86% and 32.14%

Note: The following information should be used for the next eleven (22 through 32) problems.
In its closing financial statements for its first year in business, the Runs and Goses Company, had cash of $242, accounts receivable of $850, inventory of $820, net fixed assets of $3,408, accounts payable of $700, short-term notes payable of $740, long-term liabilities of $1,100, common stock of $1,160, retained earnings of $1,620, net sales of $2,768, cost of goods sold of $1,210, depreciation of $360, interest expense of $160, taxes of $312, addition to retained earnings of $508, and dividends paid of $218.

22. What is the return on equity for Runs and Goses?
a. 26.1%
b. 44.7%
c. 62.6%
d. 18.4%
e. 7.9%

23. What is Runs and Goses’ return on total assets?
a. 9.6%
b. 13.6%
c. 19.1%
d. 37.9%
e. 22.5%

24. What is the net profit margin for Runs and Goses?
a. 60.0%
b. 22.7%
c. 7.9%
d. 18.4%
e. 26.2%

25. Runs and Goses operating profit margin is?
a. 26.2%
b. 56.3%
c. 43.3%
d. 30.3%
e. 60.0%

26. The gross profit margin for Runs and Goses is?
a. 26.2%
b. 30.3%
c. 43.3%
d. 56.3%
e. 60.0%

27. What is Runs and Goses’ sales to total asset ratio?
a. 1.91
b. 0.25
c. 0.52
d. 0.23
e. 0.57

28. What is the current ratio for Runs and Goses?
a. 1.46
b. 1.33
c. 1.23
d. 1.21
e. 1.13

29. The total-debt-total-asset ratio for Runs and Goses is?
a. 0.48
b. 0.71
c. 0.27
d. 0.53
e. 0.82

30. What is Runs and Goses’ debt-to-equity ratio?
a. 0.91
b. 2.15
c. 0.48
d. 1.12
e. 2.32

31. What is the equity multiplier for Runs and Goses?
a. 4.59 times
b. 2.35 times
c. 0.48 times
d. 1.12 times
e. 1.91 times

32. The interest coverage ratio for Runs and Goses is:
a. 6.5 times
b. 4.5 times
c. 9.7 times
d. 3.5 times
e. 1.5 times

CHAPTER 6

MANAGING CASH FLOW

True-False Questions

1. The actions of screening business ideas, preparing a business model/plan, and obtaining seed financing occurs during a venture’s development stage.

2. The actions of monitoring financial performance, determining project cash needs, and obtaining first-round financing occurs during a venture’s survival stage.

3. “First-round financing” usually occurs during a venture’s rapid-growth life cycle stage.

4. Short-term financial planning is critical during the survival stage because operations not yet turning a profit and the associated cash burn often lead to a venture’s inability to pay its maturing liabilities.

5. Cash shortages during the rapid growth stage frequently derive from the lack of operating profits to fund working capital and fixed asset investments needed to support sales growth.

6. Due to the difficulty of projecting financial statements for a young firm, short-term financial forecasts are never required of early-stage ventures.

7. Early-stage ventures are defined as firms that are only operating in either their development or startup stages.

8. Even in a young, successful venture, restricted access to bank credit and with little to no access to short-term lending markets can hinder operations until the next round of financing.

9. “First-round financing” usually occurs during a venture’s rapid-growth life cycle stage.

10. Short-term cash planning tools include preparation of a: sales schedule, a purchases schedule, a wages and commissions schedule, and a cash budge

11. Short-term financial planning typically involves preparing monthly financial statements and focuses on identifying and planning for net income demands on the business.

12. A venture’s operating schedules typically include a: sales schedule, purchases schedule, and wages and commissions schedule.

13. A cash budget shows a venture’s projected revenues and expenses over a forecast period.

14. Preparing monthly cash budgets for a full year allows the entrepreneur to determine whether there will be a cash need, the maximum size of the cash need, and whether the need can be repaid during the year.

15. Conversion period ratios show the average time in days it takes to convert certain current assets and current liabilities into cash.

16. A venture’s operating cycle is the same as its cash conversion cycle.

17. The sum of the inventory-to-sale conversion period and the purchase-to-payment conversion period minus the sale-to-cash conversion period is called the cash conversion cycle.

18. The cash conversion cycle refers to the time it takes to convert a sale into net income.

19. The “cash conversion cycle” measures the time it takes to pay off the principal on a loan.

20. The sale-to-cash conversion period is calculated by dividing average revenues by net sales per day.

21. A venture’s cash conversion cycle will decrease if the purchase-to-payment conversion period increases.

Multiple-Choice Questions

1. A firm is said to be an early stage venture when it is in which of the following except?
a. rapid growth stage
b. startup stage
c. development stage
d. survival stage
e. early-maturity stage

2. Seed financing is generally associated with which one of the following life cycle stages:
a. development stage
b. startup stage
c. survival stage
d. rapid-growth stage
e. early-maturity stage

3. First-round financing is generally associated with which one of the following life cycle stages:
a. development stage
b. startup stage
c. survival stage
d. rapid-growth stage
e. early-maturity stage

4. Which of the following is not part of the operating cycle?
a. time it takes to purchase products
b. time it takes to produce products
c. time it takes to sell the products
d. time it takes to pay suppliers
e. time it takes to collect receivables

5. Which one of the following “measures” the average days of sales committed to the extension of trade credit?
a. sale-to-cash conversion period
b. inventory-to-sale conversion period
c. purchase-to-payment conversion period
d. cash conversion cycle period

6. Which of the following is measured by dividing the average daily cost of goods sold into the average inventory?
a. sale-to-cash conversion period
b. inventory-to-sale conversion period
c. purchase-to-payment conversion period
d. cash conversion cycle

7. Which of the following measures the average time from purchase of materials and labor to actual cash payment?
a. sale-to-cash conversion period
b. inventory-to-sale conversion period
c. purchase-to-payment conversion period
d. cash conversion cycle

8. Which of the following measures the average time it takes a firm to complete its operating cycle after deducting the days supported by trade credit and delayed payroll financing?
a. sale-to-cash conversion period
b. inventory-to-sale conversion period
c. purchase-to-payment conversion period
d. cash conversion cycle

9. Which one of the following conversion periods operates to reduce the length of the cash conversion cycle?
a. inventory-to-sale conversion period
b. sale-to-cash conversion period
c. purchase-to-payment conversion period
d. fixed assets-to-usage conversion period

10. Which one of the following conversion periods is not a component in the cash conversion cycle?
a. inventory-to-sale conversion period
b. sale-to-cash conversion period
c. purchase-to-payment conversion period
d. fixed assets-to-usage conversion period

11. Calculate the inventory-to-sale conversion period based on the following information: average inventories = $120,000; average receivables = $90,000; average payables = $40,000; cost of goods sold = $182,500; and net sales = $365,000.
a. 240.0 days
b. 180.0 days
c. 90.0 days
d. 60.0 days
e. 45.0 days

12. Calculate the sale-to-cash conversion period based on the following information: average inventories = $120,000; average receivables = $90,000; average payables = $40,000; cost of goods sold = $182,500; and net sales = $365,000.
a. 240.0 days
b. 180.0 days
c. 90.0 days
d. 60.0 days
e. 45.0 days

13. Based on the following information, determine the venture’s cash conversion cycle: Inventory-to-sale conversion period = 112.9 days; Sale-to-cash conversion period= 57.1 days; and Purchase-to-payment conversion period = 76.8 days.
a. 170.0 days
b. 189.7 days
c. 93.2 days
d. 246.8 days
e. 133.9 days

14. Determine the cash conversion cycle based on the following information: inventory-to-sale conversion period = 112.9 days; sale-to-cash conversion period = 57.1 days; and purchase-to-payment conversion period = 76.8 days.
a. 93.2 days
b. 132.6 days
c. 170.0 days
d. 246.8 days
e. 365.0 days

15. Based on the following information, determine the average receivables (rounded to thousands of dollars) that were outstanding: Net sales = $575,000; Sale-to-cash conversion period = 57.1 days; Purchase-to-payment conversion period = 76.8 days; and Cost of goods sold = $380,000.
a. $90,000
b. $180,000
c. $121,000
d. $31,000
e. $41,000

16. Based on the following information, determine the venture’s inventory-to-sale conversion period: cash conversion cycle = 250 days; sale-to-cash conversion period = 60 days; and purchase-to-payment conversion period = 70 days.
a. 70 days
b. 140 days
c. 240 days
d. 260 days
e. 330 days