Chapter 13 - Entrepreneurial Finance

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					Chapter 13 - Entrepreneurial Finance

Student: ___________________________________________________________________________

1. Virtually all factors and assumptions that are embedded in popular financial theories and models such as
CAPM simply do not apply to new ventures or entrepreneurial ventures.
True False



2. Spreadsheets are best used for modelling the complex financial and strategic interrelationships inherent in
many entrepreneurial ventures.
True False



3. Capital is one of the least important factors in the success of higher potential ventures.
True False



4. Strategies that optimise or maximise the amount of money to be raised decrease the risk in new and emerging
companies.
True False



5. Staged capital commitments is money committed for a three to 18-month phase and is followed by
subsequent commitments based on results and promises.
True False



6. Each potential source of funds has particular requirements and costs, both apparent and hidden.
True False



7. A new or existing business needs to obtain both equity and debt financing if it is to have a sound financial
foundation.
True False
8. Short-term debt is most often used by a business for working capital and is repaid out of the proceeds of its
sales.
True False



9. Lenders rarely demand personal guarantees from the entrepreneur and key director.
True False



10. Larger and longer term loans usually require significant collateral and an established track record by the
venture and its management team.
True False



11. An existing business seeking expansion capital or funds for temporary use has a much easier job obtaining a
combination of debt and equity.
True False



12. What does financial management myopia mean?
A. Self delusion
B. Not understanding the links between financial management and business strategy
C. Businesses can fail due to a lack of financial management understanding
D. All of the given answers



13. Does the increase in sales have any real financial impact on the company?
A. Yes, it increases revenue
B. Yes, it increases costs
C. Yes it impacts on what is needed to finance increased working capital requirements
D. Yes it makes it look as if the company is being successful



14. According to the text, spreadsheets:
A. are difficult to understand
B. contain lots of useful information
C. need to be constantly done
D. are a mirage
15. What is the crux of financial management?
A. Anticipation and vigilance
B. Keeping an eye on costs
C. Hiring a good accountant
D. Doing all the work yourself



16. Financially knowledgeable CEOs enjoy:
A. a knowledge of the company
B. a competitive weapon
C. a competitive culture
D. a knowledge of numbers



17. What are the three central issues in entrepreneurial finance?
A. Value creation, value pie, risk and reward
B. Covering risk, value pie, value diminishing
C. Value creation, slicing the value pie, covering debts
D. Covering risk, value creation, slicing the value pie



18. Which critical issue is concerned with the constituencies for whom value must be created or added to
achieve a positive cash flow and develop a harvest option?
A. Slicing the value pie
B. Covering risk
C. Creating value
D. Covering the value pie



19. In the early stages of development, new firms are:
A. gluttons for capital, yet are usually not very debt worthy
B. gluttons for capital, yet are usually very debt worthy
C. gluttons for capital, yet are usually easy to finance
D. gluttons for capital, yet are usually making money



20. Capital is:
A. one of the least important factors in the success of higher potential ventures
B. one of the most important factors in the success of higher potential ventures
C. one of the most overrated factors in the success of higher potential ventures
D. one of the most obvious factors in the success of higher potential ventures
21. What is the main purpose of the financial strategy framework?
A. A checklist
B. A neat diagram
C. A way to begin crafting financial and fundraising strategies
D. Parameters to use in a spreadsheet program



22. Once an entrepreneur has defined the core market opportunity and strategy for exploiting it, he/she can
begin to examine financial requirements in terms of:
A. asset needs, and operating needs
B. cash needs, debt needs
C. operating needs, debt financing
D. asset needs and capital requirements



23. The core concept in determining the external financing requirements of the venture is:
A. free cash flow
B. the amount of cash on hand
C. who is in charge of the cash
D. who you approach for the finance



24. Why is debt seen as a particularly attractive form of financing?
A. It is a tax deduction
B. It is someone else's money
C. It prevents excessive diminution of equity
D. All of the given answers



25. What has dramatically improved the facilitation and movement of financial instruments and trade
documents?
A. Most of the business world speaks English
B. Companies have offices in more parts of the world
C. The growth and development of the internet
D. Everyone wants to do business



26. What is the prevailing financial mindset and strategy among highly successful entrepreneurs?
A. Fund raising
B. Forecasting
C. Creating long-term value
D. Maximising quarterly earnings
27. In the financial strategy framework, financial requirements are driven by all of the following except:
A. Burn rate
B. Operating needs
C. Time to close
D. Asset requirements



28. In the financial strategy framework, degrees of financial freedom include all of the following except:
A. Time to Out of Cash
B. Future alternatives
C. Risk/Reward
D. Burn rate



29. What leads and drives the financial strategy framework?
A. Financial requirements
B. Opportunity
C. Sources and deal structures
D. Financial strategy



30. What is the most important aspect of locating viable sources of funding?
A. Stage
B. Amount
C. Return
D. Funding source profile



31. What is the most likely source for early stage equity capital under $250 000?
A. Informal investors
B. SBICs
C. Corporations
D. Private placements



32. Mezzanine and bridge capital is available at what venture stage of development?
A. R&D
B. Startup
C. Early Growth
D. Exit
33. Which of the following is a likely source for funding a venture that is preparing for a harvest?
A. Strategic alliances
B. Mezzanine capital
C. Corporate partnerships
D. MESBICs



34. Major sales increases and profit increases can have a significant impact on the ________ required to finance
the increased receivables and inventory.
________________________________________



35. The core concept in determining the external financing requirements of the venture is ________.
________________________________________



36. Earnings before interest and taxes (EBIT)
Less Tax exposure (tax rate times EBIT)
Plus Depreciation, amortisation, and other non-cash charges
Less Increase in operating working capital
Less Capital expenditures
This formula is used to calculate ________.
________________________________________



37. Transactions cash balances
Plus Accounts receivable
Plus Inventory
Plus Other operating current assets (e.g., prepaid expenses)
Less Accounts payable
Less Taxes payable
Less Other operating current liabilities (e.g., accrued expenses)
This formula is used to calculate ________.
________________________________________



38. What are the three core principles of entrepreneurial finance?
39. What are the three central issues in entrepreneurial finance?




40. Give an example of an important asset that would not appear on a balance sheet.




41. Name four factors that can affect the availability of various financing options and their suitability and cost.




42. What funding structure provides a sound financial foundation for growth without excessive dilution of an
entrepreneur's equity?




43. Explain why financial ratios are misleading when applied to most private entrepreneurial companies.
44. Discuss the premise behind fund-raising strategies of the successful entrepreneur.
Chapter 13 - Entrepreneurial Finance Key


1. (p. 450) Virtually all factors and assumptions that are embedded in popular financial theories and models such
as CAPM simply do not apply to new ventures or entrepreneurial ventures.
TRUE

It is the very nature of newly established entrepreneurial ventures which pose problems for popular financial
theories – often the theories simply do not reflect the real world of the entrepreneur.


Difficulty: Easy



2. (p. 447) Spreadsheets are best used for modelling the complex financial and strategic interrelationships inherent
in many entrepreneurial ventures.
FALSE


Difficulty: Easy



3. (p. 451) Capital is one of the least important factors in the success of higher potential ventures.
TRUE


Difficulty: Easy



4. (p. 451) Strategies that optimise or maximise the amount of money to be raised decrease the risk in new and
emerging companies.
FALSE


Difficulty: Medium



5. (p. 451) Staged capital commitments is money committed for a three to 18-month phase and is followed by
subsequent commitments based on results and promises.
TRUE


Difficulty: Easy
6. (p. 453) Each potential source of funds has particular requirements and costs, both apparent and hidden.
TRUE


Difficulty: Easy



7. (p. 455) A new or existing business needs to obtain both equity and debt financing if it is to have a sound
financial foundation.
TRUE


Difficulty: Easy



8. (p. 455) Short-term debt is most often used by a business for working capital and is repaid out of the proceeds of
its sales.
TRUE


Difficulty: Easy



9. (p. 455) Lenders rarely demand personal guarantees from the entrepreneur and key director.
FALSE


Difficulty: Easy



10. (p. 455) Larger and longer term loans usually require significant collateral and an established track record by
the venture and its management team.
TRUE


Difficulty: Easy



11. (p. 455) An existing business seeking expansion capital or funds for temporary use has a much easier job
obtaining a combination of debt and equity.
TRUE


Difficulty: Easy
12. (p. 446) What does financial management myopia mean?
A. Self delusion
B. Not understanding the links between financial management and business strategy
C. Businesses can fail due to a lack of financial management understanding
D. All of the given answers

Financial myopia is a result of an entrepreneur being short-sighted in relation to finance. Because of this
inability to see the broader picture, there is a very narrow focus on what is happening with financial
management and strategic impacts in the organisation. The two are linked and yet entrepreneurs often overlook
this.


Difficulty: Medium



13. (p. 447) Does the increase in sales have any real financial impact on the company?
A. Yes, it increases revenue
B. Yes, it increases costs
C. Yes it impacts on what is needed to finance increased working capital requirements
D. Yes it makes it look as if the company is being successful

While A, B and C are all possible outcomes of an increase in sales, a more specific impact would be on
inventories, receivables, wages and so on, which may require higher levels of working capital than the increased
revenue is bringing into the company.


Difficulty: Hard



14. (p. 447) According to the text, spreadsheets:
A. are difficult to understand
B. contain lots of useful information
C. need to be constantly done
D. are a mirage

Too much reliance is placed upon spreadsheets, as they are not a good way of understanding what processes and
interactions are taking place within an organisation. Rather, they simply show the outcome of different decision
parameters and do not really reveal the interdependencies and connections between business decisions and
financial structures. This is a very human skill.


Difficulty: Medium
15. (p. 447) What is the crux of financial management?
A. Anticipation and vigilance
B. Keeping an eye on costs
C. Hiring a good accountant
D. Doing all the work yourself

Constantly asking 'what if' questions and the potential impact of the answers upon the financial well-being of
the company are owners/CEOs need to be continually asking themselves.


Difficulty: Medium



16. (p. 448) Financially knowledgeable CEOs enjoy:
A. a knowledge of the company
B. a competitive weapon
C. a competitive culture
D. a knowledge of numbers

Financial management is a crucial element of an organisation's operations; if the CEO has a really good
understanding then they are in the position to be able to have a much greater appreciation of what potential
impacts of strategic decisions might have on the organisation, as they often have access to information those
who are providing financial data do not.


Difficulty: Medium



17. (p. 448) What are the three central issues in entrepreneurial finance?
A. Value creation, value pie, risk and reward
B. Covering risk, value pie, value diminishing
C. Value creation, slicing the value pie, covering debts
D. Covering risk, value creation, slicing the value pie

Each issue is central to the growth of the organisation – if any of these issues are ignored then there is a very
real possibility the organisation will fail.


Difficulty: Easy
18. (p. 449) Which critical issue is concerned with the constituencies for whom value must be created or added to
achieve a positive cash flow and develop a harvest option?
A. Slicing the value pie
B. Covering risk
C. Creating value
D. Covering the value pie

Unless you are aware of the key stakeholders/constituencies involved in the company and able to meet their
financial needs or requirements, then you could well lose their support and withdrawal of their support may
prove fatal to the company.


Difficulty: Easy



19. (p. 449) In the early stages of development, new firms are:
A. gluttons for capital, yet are usually not very debt worthy
B. gluttons for capital, yet are usually very debt worthy
C. gluttons for capital, yet are usually easy to finance
D. gluttons for capital, yet are usually making money

Because they are so new, there are usually very little assets than can be leant upon. Possibilities do not count for
financing; it is results that matter and without results (or reputation) it can be very difficult to raise debt
financing.


Difficulty: Easy



20. (p. 451) Capital is:
A. one of the least important factors in the success of higher potential ventures
B. one of the most important factors in the success of higher potential ventures
C. one of the most overrated factors in the success of higher potential ventures
D. one of the most obvious factors in the success of higher potential ventures

Overall, it is the best deal which is most important, not simply the capital – such factors as know-how, wisdom,
counsel and help – which creates a higher value add than just money.


Difficulty: Easy
21. (p. 452) What is the main purpose of the financial strategy framework?
A. A checklist
B. A neat diagram
C. A way to begin crafting financial and fundraising strategies
D. Parameters to use in a spreadsheet program

The framework sets out the various factors which need to be taken into account in any financial strategy and
also helps to establish the connections between each of the important financial areas.


Difficulty: Easy



22. (p. 453) Once an entrepreneur has defined the core market opportunity and strategy for exploiting it, he/she can
begin to examine financial requirements in terms of:
A. asset needs, and operating needs
B. cash needs, debt needs
C. operating needs, debt financing
D. asset needs and capital requirements

Any business has two basic needs – what assets it needs and what it needs for the operations of the organisation.
It is the combination of these two needs which help define the financial requirements of the organisation.


Difficulty: Easy



23. (p. 453) The core concept in determining the external financing requirements of the venture is:
A. free cash flow
B. the amount of cash on hand
C. who is in charge of the cash
D. who you approach for the finance

If you run out of cash in 90 days or less you are at a major disadvantage. Something as simple as an unpaid
telephone bill can cause all kinds of grief if there is not the cash flow there to pay it.


Difficulty: Easy
24. (p. 455) Why is debt seen as a particularly attractive form of financing?
A. It is a tax deduction
B. It is someone else's money
C. It prevents excessive diminution of equity
D. All of the given answers

All of the above reasons make sense – the problem is making sure that the level of debt does not climb too high
and become a potential firm failure issue.


Difficulty: Easy



25. (p. 456) What has dramatically improved the facilitation and movement of financial instruments and trade
documents?
A. Most of the business world speaks English
B. Companies have offices in more parts of the world
C. The growth and development of the internet
D. Everyone wants to do business

The internet facilitates communication at a local, regional, national, and international level. As it 'works' 24/7
there are much greater opportunities to transact business than there once were. International financing also
brings with it important issues (exchange issues).


Difficulty: Easy



26. (p. 452) What is the prevailing financial mindset and strategy among highly successful entrepreneurs?
A. Fund raising
B. Forecasting
C. Creating long-term value
D. Maximising quarterly earnings


Difficulty: Easy



27. (p. 453) In the financial strategy framework, financial requirements are driven by all of the following except:
A. Burn rate
B. Operating needs
C. Time to close
D. Asset requirements


Difficulty: Medium
28. (p. 453) In the financial strategy framework, degrees of financial freedom include all of the following except:
A. Time to Out of Cash
B. Future alternatives
C. Risk/Reward
D. Burn rate


Difficulty: Medium



29. (p. 452) What leads and drives the financial strategy framework?
A. Financial requirements
B. Opportunity
C. Sources and deal structures
D. Financial strategy


Difficulty: Easy



30. (p. 456) What is the most important aspect of locating viable sources of funding?
A. Stage
B. Amount
C. Return
D. Funding source profile


Difficulty: Medium



31. (p. 456) What is the most likely source for early stage equity capital under $250 000?
A. Informal investors
B. SBICs
C. Corporations
D. Private placements


Difficulty: Easy



32. (p. 456) Mezzanine and bridge capital is available at what venture stage of development?
A. R&D
B. Startup
C. Early Growth
D. Exit


Difficulty: Easy
33. (p. 456) Which of the following is a likely source for funding a venture that is preparing for a harvest?
A. Strategic alliances
B. Mezzanine capital
C. Corporate partnerships
D. MESBICs


Difficulty: Medium



34. (p. 453) Major sales increases and profit increases can have a significant impact on the ________ required to
finance the increased receivables and inventory.
cash flow


Difficulty: Easy



35. (p. 453) The core concept in determining the external financing requirements of the venture is ________.
free cash flow


Difficulty: Medium



36. (p. 454) Earnings before interest and taxes (EBIT)
Less Tax exposure (tax rate times EBIT)
Plus Depreciation, amortisation, and other non-cash charges
Less Increase in operating working capital
Less Capital expenditures
This formula is used to calculate ________.
Cash flow


Difficulty: Medium



37. (p. 454) Transactions cash balances
Plus Accounts receivable
Plus Inventory
Plus Other operating current assets (e.g., prepaid expenses)
Less Accounts payable
Less Taxes payable
Less Other operating current liabilities (e.g., accrued expenses)
This formula is used to calculate ________.
operating working capital


Difficulty: Medium
38. (p. 445) What are the three core principles of entrepreneurial finance?

(1) more cash is preferred to less cash, (2) cash sooner is preferred to cash later, and (3) less risky cash is
preferred to more risky cash.


Difficulty: Medium



39. (p. 448) What are the three central issues in entrepreneurial finance?

Value creation, slicing the value pie, and covering risk.


Difficulty: Medium



40. (p. 452) Give an example of an important asset that would not appear on a balance sheet.

Mentioned in the text; an excellent management team; a top scientist, technician, or designer; know-how and
business skill


Difficulty: Medium



41. (p. 454) Name four factors that can affect the availability of various financing options and their suitability and
cost.


 Mentioned in the text:
 - Accomplishments and performance to date.
 - Investor's perceived risk.
 - Industry and technology.
 - Venture upside potential and anticipated exit timing.
 - Venture anticipated growth rate.
 - Venture age and stage of development.
 - Investor's required rate of return or internal rate of return.
 - Amount of capital required and prior valuations of the venture.
 - Founders' goals regarding growth, control, liquidity, and harvesting.
 - Relative bargaining positions.
 - Investor's required terms and covenants.


Difficulty: Hard
42. (p. 455) What funding structure provides a sound financial foundation for growth without excessive dilution
of an entrepreneur's equity?

 Raising money using a combination of debt and equity.


Difficulty: Medium



43. (p. 452) Explain why financial ratios are misleading when applied to most private entrepreneurial companies.

Entrepreneurs often own more than one company at once and move cash and assets from one to another. For
example, an entrepreneur may own real estate and equipment in one entity and lease it to another company. Use
of different fiscal years compounds the difficulty of interpreting what the balance sheet really means and the
possibilities for aggressive tax avoidance. Further, many of the most important value and equity builders in the
business are off the balance sheet or are hidden assets: the excellent management team; the best scientist,
technician, or designer; know-how and business relationships that cannot be bought or sold, let alone valued for
the balance sheet.


Difficulty: Hard



44. (p. 453) Discuss the premise behind fund-raising strategies of the successful entrepreneur.

The premise is that successful entrepreneurs are aware of potentially punishing situations, and that they are
careful to 'sweat the details' and proceed with a certain degree of wariness as they evaluate, select, negotiate,
and craft business relationships with potential funding sources. In doing so, they are more likely to find the right
sources, at the right time, and on the right terms and conditions. They are also more likely to avoid potential
mismatches, costly sidetracking for the wrong sources, and the disastrous marriage to these sources that might
follow.


Difficulty: Medium
Chapter 13 - Entrepreneurial Finance Summary

     Category        # of Questions
Difficulty: Easy          24
Difficulty: Hard           3
Difficulty: Medium        17

				
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