BUS 400, Entrepreneurial Finance, Test 1 Dr. Wei Feng Name: _______________ Date: _______________ True / False: 20 * 1 = 20 points 1. Although the risks associated with starting a new entrepreneurial venture are large, there is always room for one more success. 2. ?Fads? are large societal, demographic, or technological trends or changes that are slow in forming but once in place continue for many years. 3. A venture?s financial objective is to survive. 4. While cash is the language of business, accounting is the currency. 5. A sound business model is a plan to generate investor interest, make profits, and grow asset investments. 6. Business changes resulting in higher net profit always increases ROA. 7. A successful, sound business model does not have to ultimately produce free cash flows. 8. Limited liability in the corporate business structure means creditors can seize only some of the corporation?s assets. 9. 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. 10. Patents, trade secrets, trademarks, and copyrights are intangible assets. 11. An idea is enough to be patented. 12. ?Patents? are intellectual property rights granted for inventions that are useful, novel, and obvious. 13. A trademark must be novel in order to receive protection. Page 2 of 8 14. The balance sheet equation is: Total Assets = Total Liabilities + Net Income. 15. ?Cost of goods sold? is the cost of materials, labor, and advertising incurred to produce the products that were sold. 16. ?Variable expenses? are costs that are expected to remain constant over a range of revenues for a specific time period. 17. For a venture with inventories, the quick ratio will always be greater than the current ratio. 18. During the development and startup stages of a venture?s life cycle, important financial ratios and measures include cash burn rates and liquidity ratios. 19. The equity multiplier shows the extent by which assets are supported by equity and debt. 20. How efficiently a venture controls its expenses and uses its assets and debt is evaluated with profitability and efficiency ratios. Multiple choices: 30 * 3 = 60 21. 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 22. 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 23. 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 24. Which is not a major source of start-up financing for a venture?s startup stage? Page 3 of 8 a. entrepreneur?s assets b. business operations c. family and friends d. business angels e. venture capitalists 25. 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 26. 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 27. 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 28. 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 29. 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 30. Revenues minus the cost of goods sold is called a. gross profit Page 4 of 8 b. gross profit margin c. net profit d. net profit margin 31. 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. 32. 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 33. 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 Note: The following information should be used for the next question. 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 34. 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 Page 5 of 8 35. Which one of the following is not considered to be a current asset? a. cash b. receivables c. inventories d. fixed assets 36. ?Retained earnings? is: a. a corporate asset b. part of owners? equity c. neither a or b d. both a and b 37. 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 38. 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 39. 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 40. 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 41. 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 Page 6 of 8 d. revenues + variable costs ? cash fixed costs 42. 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 cost. 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 43. 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 44. 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 45. 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 pl
us depreciation minus (plus) an increase (decrease) in payables 46. ?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 47. 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 Page 7 of 8 48. 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 49. 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 50. 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% Question 51 (5 points) What are the five stages in the life cycle of a successful venture? Describe the major activities and sources of financing for each stage. Question 52 (15 points) Use the included income statement and balance sheet to answer the following questions: a. For year 2013, calculate the survival revenue for EBDAT breakeven. (5 points) b. Calculate the net profit margin, the sales-to-total-assets ratio, and the equity multiplier for both 2012 and 2013 using year-end (rather than average) balance sheet data. Use the results from Part A to calculate the venture?s return on equity in each year. Describe what happened in terms of the financial performance of the Safety-First, Inc. between 2012 and 2013. (10 points)
