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Completion
Complete each sentence or statement.
Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.
Short Answer
CRITICAL THINKING
11. Is it safer to borrow money from friends or from a bank?
12. How does a debt-to-equity ratio help describe the financial health of a company?
13. Why is incorporating and becoming a legal “entity” an advantage for a corporation?
14. How can debt financing be risky?
15. Is there more or less risk in equity financing than debt financing for the entrepreneur?
Chapter 14 - Financing Strategy
Answer Section
COMPLETION
1. ANS: financing
PTS: 1
2. ANS: promissory
PTS: 1
3. ANS: equity
PTS: 1
4. ANS: debt
PTS: 1
5. ANS: leveraged
PTS: 1
MULTIPLE CHOICE
6. ANS: C PTS: 1
7. ANS: A PTS: 1
8. ANS: C PTS: 1
9. ANS: D PTS: 1
10. ANS: B PTS: 1
SHORT ANSWER
11. ANS:
Both involve risks. An un-repaid loan from a friend could hurt that individual’s finances, result in a lawsuit
between friends, or otherwise ruin the friendship. Friends might also need the money back sooner than
agreed. Banks are less likely to forgive a loan, and may be stricter with the rules for repayment. Failure to
repay a bank loan in a timely fashion could also hurt your credit rating.
PTS: 1
12. ANS:
Comparing the amount of money a company has borrowed to its equity value indicates if the amount of
borrowing has been high, moderate, or low. A high debt-to-equity ratio means that the company has higher
monthly costs to repay loans and therefore lower profits. Higher fixed costs such as loan payments also mean
more risk of bankruptcy.
PTS: 1
13. ANS:
Incorporating creates a “being” or entity according to the law, so the business has its own legal and financial
status apart from its owner’s, owners’ or stockholders’ status. A corporation becomes a type of “person” and
therefore it assumes from the owners and protects them from any personal legal liability for debt, business
failure, or other mishaps, except breaking the law. Corporations can also sell shares of ownership to investors.
PTS: 1
14. ANS:
If a business does well, the owner can repay the loans on money borrowed but, if sales drop off, the owner
may not have enough money to make regular payments. If payments are not made, lenders can force the
company into bankruptcy or seize its property and assets.
PTS: 1
15. ANS:
There is probably less risk in equity financing because, if the business fails, the owner doesn’t have to pay
back the money: the investors get their investment back only if the company is profitable. However, giving up
equity could allow the investors to take control of the business from the owner someday.
PTS: 1