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CHAPTER 1

INTRODUCTION
AND OVERVIEW
True-False Questions
F. 1. Entrepreneurs provide the
financing to individuals who
think, reason, and act to convert
ideas into commercial
opportunities and create
opportunities.
T. 2. Entrepreneurship is the
process of changing ideas into
commercial opportunities and
creating value.
T. 3. An entrepreneur is an
individual who thinks, reasons,
and acts to convert ideas into
commercial opportunities and to
create value.
F. 4. ark Twain once said, !" was
alwa#s a$le to see an opportunit#
$efore it $ecame one.%
T. &. 'mall $usinesses, those with
less than &(( emplo#ees,
represent over )) percent of all
emplo#ers, and account for a$out
one*half of the gross domestic
product in the +nited 'tates.
F. ,. 'mall and growing enterprises
are critical to the +.'. econom#-
small firms provide 2( to 3(
percent of net new .o$s.

T. /. 'mall high*technolog# firms
are responsi$le for twice as man#
product innovations per emplo#ee
and o$tain more patents per sales
dollar than large high*technolog#
firms.
F. 0. 1hillips and 2irchhoff, using
3un 4 5radstreet data, found that
24 percent of new firms were still
in e6istence after two #ears of
operation.
T. ). 7earl# half of $usiness
failures are due to economic
factors such as inade8uate sales,
insufficient profits, and industr#
weakness.
T. 1(. Although the risks associated
with starting a new
entrepreneurial venture are large,
there is alwa#s room for one
more success.
T. 11. 9ecent studies $# 1hillips
and 2irchhoff, and $# :eadd,
found that a$out 30;*4(; of
new firms survived si6 #ears of
operation.
F. 12. <ne stud# of "nc. maga=ine>s
&(( high*growth firms suggests
that a$out 00 percent of founders
feel their firms> successes are due
to e6traordinar# ideas, while the
remaining 12 percent feel their
firms> successes are due to
e6ceptional e6ecution of ordinar#
ideas.
F. 13. !Fads% are large societal,
demographic, or technological
trends or changes that are slow in
forming $ut once in place
continue for man# #ears.
1
?hapter 1@ "ntroduction and <verview
T. 14. !Fads% are not predicta$le,
have short lives, and do not
involve macro changes.
T. 1&. Three ma.or megatrends
discussed in ?hapter 1 include@
societal trends or changes,
demographic trends or changes,
and technological trends or
changes.
F. 1,. "n 1)02, :arr# 3ent
identified several ma.or or
megatrends shaping +.'. societ#
and the world.
T. 1/. The so*called !$a$# $oom%
generation applies to people $orn
in the +nited 'tates during the
1)4,*1),4 time period.
T. 10. 1erhaps the most important
invention shuttling us from an
industrial societ# to an
information societ# is the
computer chip.

F. 1). Environmental commerce, or
e*commerce, involves the use of
electronic means to conduct
$usiness online.
T. 2(. The <ffice of Advocac# of
the +.'. 'mall 5usiness
Administration documents that
!emplo#er firm $irths% have
approached ,((,((( annuall# in
recent #ears.
F. 21. 9easona$le estimates place
nonemplo#er Ae.g., single person
or small famil#B $usiness started
each #ear at less than 1((,(((.
22. 5ill Cates once said@ !" was
seldom a$le to see an opportunit#,
until it ceased to $e one.%
23. A stud# $#
1hillips and 2irchhoff using 3un
4 5radstreet data found that
a$out three*fourths of new firms
were still in e6istence after two
#ears of operation.
24. 9ecent studies $# 1hillips
and 2irchhoff, and $# :eadd,
found that one*half of new firms
or new emplo#ers were still in
e6istence after four #ears of
operation.
F. 2&. 7ine principles of
entrepreneurial finance are
identified and e6plored in this
entrepreneurial finance te6t$ook,
T. 2,. The !time value of mone#% is
an important component of the
rent one pa#s for using someone
else>s financial capital.
F. 2/. A venture>s financial
o$.ective is to survive.
F. 20. Free cash flow is the net
income forecast to $e availa$le to
he venture>s owners over time.

T. 2). !Free cash% e6ists when cash
e6ceeds that which is needed to
operate, pa# creditors, and invest
in assets.
T. 3(. <wner*manager Aagenc#B
conflicts are differences $etween
manager>s self*interest and that of
the owners who hired him.
2
?hapter 1@ "ntroduction and <verview
F. 31. The owner*de$tholder conflict
is the divergence of the owners>
and lenders> self*interest as the
firm gets close to going !pu$lic.%
F. 32. The financial o$.ective of
increasing value is inconsistent
with developing positive character
and reputation.
T. 33. Entrepreneurial finance is the
application and adaptation of
financial tools and techni8ues to
the planning, funding, operations,
and valuation of an entrepreneurial
venture.
F. 34. Financial distress occurs when
cash flow is insufficient to meet
current de$t o$ligations.
T. 3&. The second stage in a
successful venture>s life c#cle is the
startup stage.
T. 3,. Earl#*stage ventures include
firms in their development, startup,
or survival live c#cle stages.
F. 3/. e==anine financing is
temporar# financing needed to
keep the venture afloat until the
ne6t offering.
Note: Followin are true-!alse
"uestions relatin to #aterials
$resente% in t&e A$$en%i' to C&a$ter
1(
T. 30. ?lick and mortar firms ma# $e
a manufacturer that sells its
products directl# to customers who
order via the "nternet at the firms>
De$ site.
F. 3). The "nternet commerce la#er of
commercial activit# features firms
that don>t generate revenues
directl# from transactions such as
EahooF and e5a#.
4(. The "nternet intermediar#
la#er is comprised of firms that
conduct De$*$ased commerce
transactions such as Ama=on.com.
)ulti$le-C&oi*e Questions
1. 'uccessful entrepreneurs
e6hi$it which of the following
traitsG
a. recogni=e and sei=e
commercial opportunities
$. fear failure
c. tend to $e doggedl#
optimistic
d. $oth a and b
e. $oth a and c
2. !Fads% are@
a. not predicta$le
$. have short lives
c. do not involve macro
changes
d. all of the a$ove
c. 3. :arr# 3ent documented ma.or
generation waves in the +nited
'tates during the twentieth centur#
in@
a. 1)/2
$. 1)02
c. 1))3
d. 2((3
$. 4. !E*commerce% refers to@
a. environmental
commerce
$. electronic commerce
3
?hapter 1@ "ntroduction and <verview
c. economic commerce
d. e6plorator# commerce

e. &. a6imi=ing the value of the
venture to its owners is the
common financial goal of which of
the followingG
a. the entrepreneur
$. the de$tholders
c. the venture e8uit#
investors
d. $oth a and b
e. $oth a and c
a. ,. Dhich of the following is
considered to $e an !agenc#%
conflictG
a. owner*manager conflict
$. stockholder*manager
conflict
c. stockholder*de$tholder
conflict
d. manager*de$tholder
conflict
d. /. Dhich of the following is not a
life c#cle stage of a successful
ventureG
a. development stage
$. startup stage
c. survival stage
d. cash cow stage
e. maturit# stage
c. 0. Dhich of the following does
not descri$e activit# during the
venture>s life c#cle startup stageG
a. venture>s organi=ation
$. venture>s
development
c. operating cash flows
are generated
d. initial revenue model
is put in place
). At which stage of the venture>s
life c#cle stage is $est
characteri=ed $# the period when
revenues start to grow and when
cash flows from operations $egin
covering cash outflowsG
a. survival stage
$. startup stage
c. rapid growth stage
d. maturit# stage
1(. Dhich is not a ma.or source of
start*up financing for a venture>s
startup stageG
a. entrepreneur>s assets
$. $usiness operations
c. famil# and friends
d. $usiness angels
e. venture capitalists
11. <$taining $ank loan, issuing
$onds, and issuing stock is
characteristic of which t#pe of
financing during the venture>s life
c#cleG
a. seed financing
$. second round
financing
c. me==anine financing
d. seasoned financing
e. li8uidit# stage
financing
12. 3uring a venture>s rapid
growth stage, funds for plant
e6pansion, marketing
e6penditures, working capital, and
product or service improvements is
o$tained throughG
a. seed financing
$. second round
financing
c. me==anine financing
d. seasoned financing
4
?hapter 1@ "ntroduction and <verview
e. li8uidit# stage
financing
$. 13. Founder and venture investor
shares are sold to the pu$lic after
the initial offering to the pu$lic is
calledG
a. secondar# market
transaction
$. secondar# stock
offering
c. venture offering
d. $ridge loan
d. 14. Dhich of the following advise
and assist corporations on the t#pe,
timing, and costs of issuing new
de$t and e8uit# securities and
facilitate the sale of firmsG
a. $rokerage firms
$. venture law firms
c. specialist firms
d. investment $anking
firms
c. 1&. Dhich stage in the venture life
c#cle is characteri=ed $# creating
and $uilding value, o$taining
additional financing, and
e6amining opportunitiesG
a. survival stage
$. startup stage
c. rapid growth stage
d. maturit# stage
c. 1,. A$out ,( percent of all newl#
created $usinesses in the +.'. are
dissolved or cease operations
within how man# #ears after $eing
startedG
a. two #ears
$. four #ears
c. si6 #ears
d. eight #ears
1/. Dhich one of the following
possi$le conflicts of interest is
usuall# minimi=ed through the use
of e8uit# incentivesG
a. owner*manager
conflicts
$. owner*emplo#ee
conflicts
c. manager*emplo#ee
conflicts
d. manager*de$tholder
conflicts
10. The last three stages of a
successful venture>s life c#cle
occur in the following order@
a. startup, development,
rapid growth
$. startup, survival, rapid
growth
c. survival, rapid growth,
maturit#
d. development, startup,
survival
e. 1). The stage that precedes the
middle stage in a successful
venture>s life c#cle is called the@
a. rapid growth stage
$. maturit# stage
c. development stage
d. survival stage
e. startup stage
e. 2(. 3uring the maturit# stage of a
venture>s life c#cle, the
primar# source of funds is in
the form of@
a. me==anine financing
$. seed financing
c. startup financing
d. first round financing
e. seasoned financing
a. 21. The t#pe of financing that
occurs during the
&
?hapter 1@ "ntroduction and <verview
development stage of a
venture>s life c#cle is t#picall#
referred to as@
a. seed financing
$. startup
financing
c. first round
financing
d. second round
financing
e. me==anine
financing
d. 22. e==anine financing is
associated with which one of
the following life c#cle stages@
a. development stage
$. startup stage
c. survival stage
d. rapid growth stage
e. maturit# stage
c. 23. Dhile one must $e careful to
avoid too man#
generali=ations a$out
entrepreneurial traits or
characteristics, which one of
the following characteristics
would not normall# $e
associated with successful
entrepreneursG
a. $eing a$le to see and
sei=e a commercial
opportunit#
$. planning for the
venture>s future
c. onl# $eing a$le to see
an opportunit# after it
ceases to $e one
d. $eing optimistic a$out
the venture>s success
$. 24. A$out one*half of all newl#
created $usinesses in the +.'.
are dissolved or cease
operations within how man#
#ears after $eing startedG
a. two #ears
$. four #ears
c. si6 #ears
d. eight #ears
2&. Entrepreneurial finance is the
application and adaptation of
financial tools and techni8ues to an
entrepreneurial venture.
Entrepreneurial finance involves@
a. planning
$. funding
c. operations
d. valuation
e. a and d a$ove
f. all of the a$ove
2,. Dhich one of the following
possi$le conflicts of interest
increases in divergence at venture
gets close to $ankruptc#G
a. owner*manager
conflict
$. owner*emplo#ee
conflict
c. manager*emplo#ee
conflict
d. manager*de$tholder
conflict
2/. The first three stages of a
successful venture>s life c#cle occur
in the following order@
a. development, rapid
growth, survival
$. startup,
development, rapid growth
c. startup, survival,
rapid growth
d. survival, rapid
growth, maturit#
e. development,
startup, survival
,
?hapter 1@ "ntroduction and <verview
$. 20. The last stage in a successful
venture>s life c#cle is called the@
a. rapid growth stage
$. maturit# stage
c. development stage
d. survival stage
e. startup stage
a. 2). 3uring the development stage
of a venture>s life c#cle, the primar#
source of funds is in the form of@
a. seed financing
$. startup financing
c. first round financing
d. second round
financing
e. me==anine financing
c. 3(. The t#pe of financing that
occurs during the survival stage of a
venture>s life c#cle is t#picall#
referred to as the@
a. seed financing
$. startup financing
c. first round financing
d. second round
financing
e. me==anine financing
e. 31. Dhich one of the following
would not $e considered a t#pe of
venture financingG
a. seed financing
$. startup financing
c. me==anine financing
d. li8uidit#*stage
financing
e. seasoned financing
d. 32. Dhile entrepreneurial
opportunities come from an almost
unlimited num$er of sources, this
te6t$ook focuses on@
a. societal changes
$. demographic
changes
c. technological
changes
d. all of the a$ove
e. none of the a$ove
33. <ne stud# of successful
entrepreneurs indicated that a
ma.orit# felt that the most important
factor in the long*term success of
their ventures was@
a. $eing greed#
$. having high ethical
standards
c. working hard
d. taking fre8uent
vacations
34. "ndicate the num$er of
principles of entrepreneurial finance
that are emphasi=ed in this
te6t$ook@
a. one
$. three
c. five
d. seven
e. nine
3&. Financial markets where
customi=ed contracts or securities
are negotiated, created, and held
with restrictions on how the# can $e
transferred are called@
a. private financial
markets
$. pu$lic financial
markets
c. domestic financial
markets
d. international
financial markets
e. all of the a$ove
/
?hapter 1@ "ntroduction and <verview
a. 3,. 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 $e rented
from owners
$. risk and e6pected
reward go hand in hand
c. while accounting is
the language of
$usiness, cash is the
currenc#
d. it is dangerous to
assume that people
act against their
own self*interests
c. 3/. Eou have the opportunit# of
making a H&,((( investment. The
outcomes one #ear from now will
$e either H4,&(( or H,,((( with an
e8ual chance of either outcome
occurring. Dhat is the e6pected
value outcomeG
a. H4,&((
$. H,,(((
c. H&,2&(
d. H&,/&(
e. H&,(((
a. 30. Eou have the opportunit# of
making a H&,((( investment. The
outcomes one #ear from now will
$e either H&,((( or H,,((( with an
e8ual chance of either outcome
occurring. Dhat is the e6pected
value rate of returnG
a. 1(;
$. 1&;
c. 2(;
d. 2&;
e. 3(;
3). Assume that #ou can sell a new
product at H&.(( per unit. Eour
varia$le costs are H3.(( per unit and
#ou fi6ed costs are H2(,(((. Dhat
is #our $reakeven point in sales
unitsG
a. &,(((
$. /,&((
c. 1(,(((
d. 12,&((
e. 1&,(((
4(. Assume that #ou can sell a new
product at H&.(( per unit. Eour
varia$le costs are H3.(( per unit and
#ou fi6ed costs are H2(,(((. Dhat
will $e #our profit $efore ta6es if
#ou sell 12,((( units ne6t #earG
a. H(
$. H1,(((
c. H2,(((
d. H4,(((
e. H0,(((
Note: Followin are #ulti$le-*&oi*e
"uestions relatin to t&e A$$en%i' in
C&a$ter 1(
41. Dhich one of the following can
$est $e descri$ed as having ph#sical
facilities in place for manufacturing,
marketing, selling and distri$uting
their products and servicesG
a. click and mortar
firms
$. $rick and mortar
firms
c. dot*com firms
d. entrepreneurial firms
42. Dhich of the following is not a
la#er of commercial activit#
involving the "nternetG
0
?hapter 1@ "ntroduction and <verview
a. "nternet
infrastructure la#er
$. "nternet intermediar#
la#er
c. "nternet design la#er
d. "nternet applications
infrastructure la#er
e. "nternet commerce
la#er

a. 43. The term to descri$e the
percentage of total De$ users in the
+nited 'tates who visited a De$
site in a given time period is@
a. reach
$. hits
c. e#e$alls
d. churn rates
e. uni8ue visitors
)

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