CH-13-14 Sources of Financing: Debt and Equity – Essentials of Entrepreneurship and Small Business Management : Exam Guide

This Document Contains Chapters 13 to 14 Chapter 13 Sources of Financing: Debt and Equity 1) Entrepreneurs needing between $100,000 and $3 million in the current financial environment will likely find acquiring financing to be: A) challenging. B) confusing. C) attainable. D) easy. Answer: A 2) Unlike entrepreneurs of the past, today's entrepreneurs: A) are finding more government interest and funding for business start-ups than in the past decade. B) find fewer closed doors as small business start-ups have become less risky. C) have to piece their capital together from several sources. D) are spending a smaller percentage of their time raising capital for their businesses. Answer: C 3) When searching for capital to launch their companies, entrepreneurs should remember several "secrets" to successful financing. Which of the following is not one of those secrets? A) Choosing the right sources of capital can be just as important as choosing the right form of ownership or the right location. B) The money is out there, but the key is knowing where to look. C) Creativity counts when searching for financing. D) Raising money should not take very long; therefore, if it does not come quickly, it probably will not come at all. Answer: D 4) The Kauffman Foundation reports that the average amount of capital that entrepreneurs use to start small businesses in the U.S. is nearly: A) $25,000. B) $50,000. C) $80,000. D) $100,000. Answer: C 5) Which of the following represents capital? A) Inventory B) Equipment and machinery C) Cash D) All of the above Answer: D 6) The primary disadvantage of equity capital is that the entrepreneur: A) must repay it at some point with interest. B) must give up some-perhaps most-of the ownership in the business to outsiders. C) experiences the disadvantage of the risk/return tradeoff in the form of higher interest rates. D) B and C above Answer: B 7) The primary advantage of equity capital is: A) its lower interest rate. B) that it is readily available to a large number of entrepreneurs from a variety of lenders. C) that it does not have to be repaid like a loan does. D) that it does not appear on a company's balance sheet. Answer: C 8) Entrepreneurs are most likely to give up more equity in their businesses in the ________ phase of their companies than in any other. A) startup B) product development C) product testing D) product shipping Answer: A 9) The first place an entrepreneur should look for startup capital is: A) a bank. B) a venture capitalist. C) the Small Business Administration. D) his own savings. Answer: D 10) A method of raising capital that taps the power of social networking and allows entrepreneurs to post their elevator pitches and proposed investment terms on specialized Web sites and raise money from ordinary people who invest as little as $100 is called: A) crowd funding. B) angel financing. C) venture capital. D) bootstrapping. Answer: A 11) The largest single source of external equity capital for small businesses is: A) angels. B) venture capitalists. C) Small Business Administration loans. D) the stock market; i.e., "going public." Answer: A 12) When looking for an angel, the key is: A) networking. B) waiting until you need the money. C) looking across industries. D) using computer matches. Answer: A 13) Angels are an excellent source of ________ money, often willing to wait ________ years or longer to cash out their investment. A) immediate; 5 B) patient: 7 C) long-term; 10 D) passive; 20 Answer: B 14) The general trend of angel financing is that it has ________ as a source of capital for entrepreneurs over the past 9 years. A) increased B) stabilized C) decreased D) disappeared Answer: A 15) Which of the following is not a characteristic of a typical angel investor? A) Investing money locally B) Purchasing majority ownership in the company C) Investing in the startup phase of the company D) Willing to wait seven years or more to cash out an investment Answer: B 16) Before entering into any partnership arrangement, entrepreneurs must consider: A) the partnership will only have an impact on sharing profits. B) what interest rate the partner is expecting. C) the impact of giving up some personal control and sharing profits with others. D) the ramifications of having another person on the payroll. Answer: C 17) A/An ________ is a private, for-profit organization that purchases equity positions in young businesses that will potentially produce returns of 300 to 500 percent over five to seven years. A) commercial bank B) venture capital company C) angel D) SB-1 filing Answer: B 18) The average venture capital firm screens about ________ investment proposals each year and ultimately invests in ________ of them. A) 10,000; 12 B) 1,000; 1 C) 5,000; 13 D) 5,000; 80 Answer: B 19) Although there is no limit on the amount of stock it can buy, a typical venture capital firm will purchase less than ________ percent of the ownership in a small firm. A) 21 B) 50 C) 70 D) 80 Answer: B 20) Venture capitalists look for ________ as the most important ingredient in the success of any business. A) innovation B) a growth industry C) a competitive edge D) competent management Answer: D 21) When evaluating a company as a potential investment target, venture capitalists look for all but which of the following? A) A competent management team B) Potential for high returns C) Convenient and profitable exit strategy D) Stable industry Answer: D 22) Approximately ________ percent of all venture capital invested comes from corporations. A) 2 B) 8 C) 14 D) 24 Answer: C 23) A(n) ________ is when a company raises capital by selling shares of its stock to the general public for the first time. A) venture capital offering B) partnership C) debt equity arrangement D) initial public offering Answer: D 24) Less than ________ percent of all U.S. companies are publicly held corporations. A) 1 B) 5 C) 10 D) 12 Answer: A 25) The biggest benefit of a public stock offering is: A) the capital infusion the company receives. B) the ability to use its stock to acquire other companies. C) a listing on a stock exchange. D) the ability to use its stock to attract and retain key managers and employees. Answer: A 26) Investment bankers who underwrite public stock offerings typically look for all but which of the following characteristics in a small company? A) A strong record of earnings B) A solid position in a stable market C) Consistently high growth rates D) A sound management team with experience and a strong board of directors Answer: B 27) In an initial public offering, the underwriter, or investment banker, serves to: A) advise and help prepare the company's registration statement for the SEC. B) determine the price of the shares issued in the offering. C) sell the company's stock through an underwriting syndicate of other investment bankers it develops. D) All of the above Answer: D 28) The single most important ingredient in making a successful public offering is: A) choosing a capable underwriter. B) negotiating a favorable letter of intent. C) preparing a suitable registration statement. D) filing Regulation D with the SEC. Answer: A 29) The document outlining the details of the agreement between the entrepreneur and the stock underwriter is called: A) Regulation D. B) a "blue sky" agreement. C) the letter of intent. D) the registration statement. Answer: C 30) The "wait to go effective" is the time period when: A) the SEC registration statement is being prepared. B) the underwriter decides what regulation to file under. C) the firm prices the stock for the offering. D) the company is waiting for SEC approval after filing the registration statement. Answer: D 31) The formal underwriting agreement between the company and the underwriter is signed: A) on the last day before the registration statement becomes effective. B) when the statement of registration is filed. C) during the road show. D) at the time of the letter of intent. Answer: A 32) Typically, the entire process of going public takes ________, but it can take much longer if the issuing company is not properly prepared for the process. A) 30 days B) 6 months C) 120 to 180 days D) one year Answer: C 33) The goal of the SEC's Regulation S-B and S-K is: A) to discourage small companies from trying to "go public." B) to make it easier for the SEC to detect companies whose stock would be bad investments for consumers. C) to open the doors to capital markets to smaller companies by cutting the paperwork and the costs normally required to make a public offering. D) to make the standards for making a public stock offering more stringent. Answer: C 34) To be eligible for the simplified registration process under Regulation S-B and S-K, a company must: A) be based in either the United States or Canada. B) have revenues of less than $25 million. C) have outstanding securities of less than $25 million. D) All of the above Answer: D 35) In a Regulation D stock offering, the company: A) sells its shares directly to private investors. B) makes a private placement without actually "going public." C) does not have to register its shares with the SEC. D) All of the above Answer: D 36) To qualify for a Rule 147 (intrastate) public stock offering, a company must ________ in the state in which it makes this offering. A) be incorporated and maintain its executive offices B) derive 80 percent of its revenue C) use 80 percent of the offering proceeds for business D) All of the above Answer: D 37) Because of the risk/return trade off, small businesses that borrow money repay it with interest at the: A) prime interest rate. B) prime interest rate minus a few percentage points. C) prime interest rate plus a few percentage points. D) lender's cost of capital. Answer: C 38) For small businesses, ________ are the very heart of the financial market, providing the greatest number and variety of loans to small companies. A) commercial banks B) factors C) commercial finance companies D) credit unions Answer: A 39) The recent turbulence in the financial markets has caused banks to ________ their lending standards, making it ________ for small businesses to qualify for loans. A) tighten; easier B) tighten; more difficult C) relax; easier D) relax; more difficult Answer: B 40) Commercial banks provide ________ of loans to small business. A) very few B) about 50 percent C) the greatest number and variety D) more than 89 percent Answer: C 41) Before making a loan to a business startup, banks prefer to see: A) sufficient cash flow generated by the business. B) ample collateral for the loan amount. C) an SBA guarantee to insure the loan. D) All of the above Answer: D 42) The most common type of commercial bank loan granted to small businesses is: A) the short-term loan. B) the line of credit agreement. C) floor planning. D) the unsecured term loan. Answer: A 43) Entrepreneurs basically "borrow from themselves" by pledging their ________ as collateral for the loans they receive in a ________. A) business; commercial loan B) business assets; home equity loan C) home; home equity loan D) big ticket items; floor loan Answer: C 44) A ________ is an agreement with a bank that allows a small business to borrow up to a predetermined specified amount during the year without making an application each time. A) term loan B) factor C) line of credit D) floor plan Answer: C 45) The Tanning Parlor is in the middle of the busy season. Owner Sunny Bright has hired extra help and encountered some unexpected repairs that have left her short of operating capital. What type of financing would Sunny most likely use in this situation? A) A line of credit B) Floor planning C) A discounted installment contract D) Trade credit Answer: A 46) ________ is a method of financing frequently used by retailers of "big ticket items" such as autos. A) Discounted installment contracts B) Trade credit C) Installment loans D) Floor planning Answer: D 47) The Boat and Ski Shop, a small retail boat shop, would most likely rely on which of the following methods to finance its inventory? A) Discounted installment contracts B) Floor planning C) Installment loans D) Trade credit Answer: B 48) A bank loan that imposes restrictions or covenants on the business decisions an entrepreneur makes concerning the company's operations is called a: A) home equity loan. B) floor planning. C) term loan. D) line of credit. Answer: C 49) A term loan: A) is typically unsecured. B) may contain restrictions or covenants. C) is based on past operating history and a firm's high probability of repayment. D) All of the above Answer: D 50) The most common method used by commercial finance companies to provide credit to small businesses is: A) asset based. B) insurance based. C) unsecured lines of credit or "character loans." D) profitability based. Answer: A 51) Asset-based borrowing permits small businesses: A) to borrow up to 100 percent of the value of their inventory or their accounts receivable for the money they need for long-term goals. B) to use normally unproductive assets such as accounts receivable and inventory. C) to obtain loans more easily but with less borrowing power than using unsecured lines of credit. D) access to a source of funds ideally suited for long-term financing needs. Answer: B 52) In asset-based borrowing, the ________ is the percentage of an asset's value that a lender will lend. A) prime rate B) margin rate C) advance rate D) discounted rate Answer: C 53) Which of the following is not an asset-based financing technique? A) Discounting accounts receivable B) Inventory financing C) Term loan D) None of the above Answer: C 54) A company pledging its inventory, accounts receivables, or fixtures as collateral for a loan is using: A) floor planning. B) asset-based financing. C) trade credit. D) margin loan. Answer: B 55) The advance rate on inventory-based loans is usually between 10 to 50 percent, but a business pledging high-quality accounts receivable as collateral may be able to negotiate up to an ________ percent advance rate. A) 55 B) 65 C) 75 D) 85 Answer: D 56) In discounted accounts receivable financing, a small business can typically borrow an amount equal to ________ percent of its receivables it pledges as collateral. A) 10 - 25 B) 35 - 55 C) 55 - 85 D) 80 - 95 Answer: C 57) In inventory financing, a small business can typically borrow an amount equal to ________ percent of the inventory it pledges as collateral. A) no more than 50 B) 70 to 80 C) 85 to 90 D) 90 to 100 Answer: A 58) Financing through ________ is similar to trade credit and this source of financing offers reasonable credit terms with only a modest down payment with the balance financed over the life of the purchase. A) vendor financing B) equipment suppliers C) savings and loan associations D) margin loans Answer: B 59) The loans from commercial finance companies to small businesses: A) tend to be for smaller amounts than those from commercial banks, and at lower interest rates. B) are based on the strength of the small companies' earning power. C) tend to be at lower interest rates than those from commercial banks and are much harder to qualify for. D) are often similar to the types of loans commercial banks offer, but commercial finance loans usually carry higher interest rates. Answer: D 60) Savings and loan associations typically specialize in loans for: A) equipment. B) inventory. C) real property. D) accounts receivable. Answer: C 61) A margin loan: A) is one made by a commercial bank to a small business whose financial performance is marginal. B) carries much higher rates because the collateral supporting it is so risky. C) is a loan from an entrepreneur's stockbroker that uses the entrepreneur's investment portfolio as collateral for the loan. D) must be repaid within 60 days or is considered to be in default. Answer: C 62) A loan from a stockbroker based on the stocks and bonds in the customer's portfolio: A) tends to be at a higher rate than a bank but easier to obtain. B) can be "called" for payment in a matter of hours or days. C) is for a maximum of $50,000. D) has a fixed repayment schedule and must be paid within 90 days. Answer: B 63) If the value of the borrower's collateral drops, a stockbroker can make a ________, requiring the borrower to provide more collateral for his margin loan. A) broker's margin B) margin call C) broker's call D) None of the above Answer: B 64) A(n) ________ is a private nonprofit financial institution that will make small loans to its members for the purpose of starting a business. A) SBIC B) private placement C) credit union D) insurance company Answer: C 65) A ________ is a hybrid between a conventional loan and a bond; at its heart it is a bond, but its terms are tailored to the borrower's individual needs, as a loan would be. A) private placement B) industrial revenue bond C) 504 loan D) zero coupon bond Answer: A 66) Private placements of debt offer all but which of the following advantages? A) Variable interest rates B) Longer maturity times than most bank loans C) More willing to finance deals for fledgling small companies D) Actually, all of the above are advantages of private placements. Answer: A 67) Which of the following is a characteristic of a typical private placement of debt? A) It carries a variable interest rate. B) Its maturity is shorter than most bank loans. C) Because of the higher risk, more restrictions are imposed on the borrower than with a comparable bank loan. D) It operates much like a bond, but its terms are tailored to the borrower's individual needs, as a loan would be. Answer: D 68) SBICs: A) were chartered by the SBA to help startup companies find private financing from commercial banks and finance companies. B) provide short-term debt-based capital to small businesses through the sale of the debt to private investors. C) cannot invest in or lend money to a business for more than five years. D) were created by the Small Business Investment Act to use a combination of private and federal guaranteed debt to provide long-term capital to small businesses. Answer: D 69) SBICs: A) tend to prefer later-round financing over funding raw start-ups. B) can provide both debt and equity capital to small businesses. C) are prohibited from obtaining a controlling interest in the companies in which they invest. D) All of the above Answer: D 70) A(n) ________ makes only intermediate and long-term SBA guaranteed loans. It specializes in loans many banks would not consider. A) small business investment company B) local development company C) small business lending company D) SBIC Answer: C 71) A federally sponsored program which offers loan guarantees to create and expand businesses in areas with below-average income and high unemployment is called: A) the Small Business Administration. B) the Economic Development Administration. C) SBIC. D) U.S. Department of Agriculture's Rural Business Co-op Service. Answer: B 72) Grants to small businesses made to strengthen the local economy in cities and towns that are considered economically distressed are made by: A) the Department of Housing and Urban Development. B) a local development company. C) U.S. Department of Agriculture's Rural Business Co-op services. D) the Economic Development Administration. Answer: A 73) Malcolm wants to start a business in the prosperous little town of Grove City, a rural town of 10,000 about 65 miles from Pittsburgh, Pennsylvania. His business will create 25 manufacturing jobs. What federal agency would most likely be interested in guaranteeing a bank loan for Malcolm? A) The Department of Housing and Urban Development B) A local development company C) U.S. Department of Agriculture's Rural Business Co-op Service D) The Economic Development Administration Answer: C 74) The ________ awards cash grants or long-term contracts to small companies that want to initiate or to expand their research and development efforts and give the opportunity to attract early-stage capital investments without having to give up significant equity or take on burdensome levels of debt. A) SBIR B) SBA C) RBS D) STTR Answer: A 75) When a bank makes enough SBA-guaranteed loans to become a ________ lender, the SBA promises a faster turnaround time for the loan decision, typically 3 to 10 business days. A) preferred B) qualified C) certified D) LDC Answer: C 76) When a bank proves the quality of its loan decisions to the SBA and becomes a ________ lender, the bank makes the final lending decision itself, subject to SBA review. A) preferred B) qualified C) certified D) LDC Answer: A 77) The majority of loans provided by the SBA are: A) direct. B) preferred. C) guaranteed. D) asset based. Answer: C 78) About ________ percent of SBA-backed loans go to start-up companies. A) 59 B) 49 C) 29 D) 9 Answer: C 79) Under the SBA's Patriot Express Program, the ceiling is ________ and the SBA guarantees up to ________ percent of the loan. A) $250,000: 65 B) $500,000: 85 C) $500,000: 95 D) $6200,000: 100 Answer: B 80) The ________ provides loans to entrepreneurs in economically challenged communities and viewed as high-risk borrowers. A) Certified Development Company Program B) Patriot Express Program C) Community Express Program D) 7(A) Loan Guarantee Program Answer: C 81) The maximum loan under the SBA's Community Express Program is ________ with an SBA guarantee of up to ________ percent with a streamlined application process. A) $250,000; 35 B) $250,000; 75 C) $250,000; 85 D) $500,000; 85 Answer: C 82) In the ________ program, participating lenders use their own loan procedure and applications to make loans of up to $350,000 to small businesses and the SBA guarantees 50 percent of the loan. A) loan guarantee B) SBA loan C) Community Advantage Loan D) SBA Express Answer: D 83) In 2007, the SBA launched the Patriot Express loan program, which is designed to assist some of the nation's 25 million ________ who want to become entrepreneurs. A) veterans and their spouses or widows B) women C) minorities D) corporate cast-offs Answer: A 84) ________ were created by the SBA to provide loans under $100,000 that are normally shunned by banks. A) Microloans B) Preferred loans C) Seasonal lines of credit D) Disaster loans Answer: A 85) For small businesses going global, the SBA offers this program with a one-page loan application and a response time normally within 10 days. A) Export Working Capital (EWC) Program B) International Capital Expansion (ICE) Program C) International Trade Program D) CAPLine Program Answer: A 86) The second most popular SBA loan program is the ________ and designed to encourage small businesses to purchase fixed assets, expand their facilities, and create jobs. : A) 7(A) Loan Guarantee Program. B) Section 504 Certified Development Company Program. C) Community Advantage Loan Program D) Microloan Program. Answer: B 87) Small businesses devastated by floods, earthquakes, fires, and other maladies would seek assistance through which SBA loan program? A) Calamity B) Catastrophic C) Disaster D) SBIR Answer: C 88) Disaster loans carry below-market interest rates and terms as long as ________ years A) 10 B) 30 C) 40 D) 50 Answer: B 89) A program offered by communities that combine private and public funds to make loans to small businesses, often at favorable interest rates, is the: A) CommunityExpress Program. B) CAPLine Program. C) Capital Access Program. D) revolving loan fund. Answer: D 90) Factors typically discount ________ percent of the face value of a company's accounts receivable. A) 5 - 40 B) 10 - 20 C) 60 - 95 D) 95 - 100 Answer: A 91) Selling the small company's accounts receivable outright to another business is called: A) collateral. B) factoring. C) trade credit. D) a line of credit. Answer: B 92) Factoring: A) is a more expensive method of financing than borrowing from a bank. B) places the risk of uncollected accounts receivable on the small business owner. C) is best used as a long-term source of capital. D) is a type of trade credit. Answer: A 93) A small business that uses factoring: A) pledges its accounts receivable as collateral to obtain a loan from a financial institution. B) relies on a third party consultant to apply for SBA-guaranteed loans. C) sells its accounts receivable to a third party to get the capital it needs. D) borrows money from lenders by offering them the option to convert the loan into stock in the company. Answer: C 94) One of the easiest and most common methods of debt capital available is: A) bootstrap financing. B) leasing. C) credit cards. D) revolving loan fund. Answer: C 95) Entrepreneurs have access to two different types of capital, ________ and ________. A) debt; equity B) debt; retained C) debt; leveraged D) layered; equity Answer: A 96) Equity capital represents the personal investment of the owner (or owners) in a business and is sometimes called ________ because of the potential outcome. A) debt capital B) opportunity capital C) risk capital D) layered financing Answer: C 97) Rather than piecing together their startup capital from multiple sources as they have in the past, entrepreneurs now are relying on a single source of funding. Answer: False 98) In startup companies, raising capital can easily consume as much as one-half of the entrepreneur's time and take many months to complete. Answer: True 99) Rather than relying primarily on a single source of funds as they have in the past, entrepreneurs today must piece together their capital from multiple sources, a method known as layered financing. Answer: True 100) Most entrepreneurs seeking money to launch their businesses need more than $1,000,000 in startup capital. Answer: False 101) A recent survey by the NFIB found that 41 percent of small business owners say that the lack of capital is an impediment to the growth of their companies. Answer: True 102) Capital is any form of wealth employed to produce more wealth. Answer: True 103) A small company needs fixed capital to purchase its permanent assets. Answer: True 104) A company that is experiencing rapid expansion has similar capital requirements as those of a fledgling business. Answer: True 105) While equity capital represents the personal investment of the owner(s) of a business and does not have to be repaid, debt capital is a liability that must be repaid with interest in the future. Answer: True 106) Equity capital is also called risk capital because these investors assume the primary risk of losing their funds if the business fails. Answer: True 107) Entrepreneurs are most likely to give up more equity in their businesses in the startup phase than in any other. Answer: True 108) Unlike equity financing, debt financing does not require an entrepreneur to dilute her ownership interest in the company. Answer: True 109) Bootstrapping is a process in which entrepreneurs tap their personal savings and use creative, low-cost start-up methods to launch their businesses. Answer: True 110) Bootstrap financing describes using internal, and often creative, methods of financing a company's need for capital. Answer: True 111) Bootstrapping is a method of raising capital that taps the power of social networking and allows entrepreneurs to post their elevator pitches and proposed investment terms on specialized Web sites and raise money from ordinary people who invest as little as $100. Answer: False 112) After an entrepreneur invests his own money for startup, he or she will typically seek additional financing from friends and family next. Answer: True 113) Crowd funding is a method of raising capital that taps the power of social networking and allows entrepreneurs to post their elevator pitches and proposed investment terms on specialized Web sites and raise money from ordinary people who invest as little as $100. Answer: True 114) Crowd funding is a process in which entrepreneurs tap their personal savings and use creative, low-cost start-up methods to launch their businesses. Answer: False 115) Unlike venture capital firms and most other institutional investors, angels typically invest in businesses in their earliest phases, providing the seed capital needed to get the business going. Answer: True 116) If an entrepreneur needs a relatively small amount of money to launch a company, angels are a primary source of funds. Answer: True 117) Angels are not a good source of financing for entrepreneurs seeking relatively small amounts of money, as they typically do not make investments of less than $1 million. Answer: False 118) Private investors, or angels, seek 60 to 75 percent annual return on investment, which is much higher than those of professional venture capitalists, and tend to take a 51 percent + share of the business. Answer: False 119) Angels fill a significant gap in the seed capital market. Answer: True 120) One of the disadvantages of angels is that they are typically not willing to wait more than three years to cash out their investments. Answer: False 121) Networking through personal contacts and the Internet is one of the best ways to find angels, who usually prefer to invest in local businesses operating in industries they know something about. Answer: True 122) An option for acquiring equity capital is for the entrepreneur to take on partner(s); however, it is important that he consider the impact of giving up some personal control over operations and of sharing profits with others. Answer: True 123) Private investors look to earn the return on their investments in a business through the increased value of the business, not through dividends and interest. Answer: True 124) A typical venture capital firm seeks investments in the $20,000 to $50,000 range and annual returns of 35-50 percent over three to five years. Answer: False 125) Venture capital companies reject 90 percent of the proposals they receive because they don't meet the firms' investment criteria. Answer: True 126) Venture capital firms rarely take an active role in managing the business in which they invest. Answer: False 127) Venture capital companies invest only in companies in the startup phase. Answer: False 128) The most important ingredient that venture capitalists look for in judging the potential success of a small business is a competent management team. Answer: True 129) Two factors that make a deal attractive to venture capitalists include high returns and a convenient and profitable exit strategy. Answer: True 130) Corporate Venture Capital accounts for approximately 14 percent of all venture capital. Answer: True 131) In an initial public offering, a company raises capital by selling shares of its stock to the general public for the first time. Answer: True 132) A public stock sale is an effective method of raising large amounts of capital, but it can be an expensive and time-consuming process filled with regulatory nightmares. Answer: True 133) Few companies with less than $25 million in annual sales manage to go public successfully. Answer: True 134) Only about half of the companies that attempt a public stock offering ever complete the process. Answer: False 135) It is extremely difficult for a startup company with no track record of success to raise money with a public stock offering. Answer: True 136) Publicly held companies must file periodic reports with the Securities and Exchange Commission. Answer: True 137) Since their stock offerings are small, most entrepreneurs are able to take their companies public without the assistance of accountants, attorneys, and underwriters. Answer: False 138) The single most important ingredient in making a successful initial public offering is selecting a capable underwriter to manage the process. Answer: True 139) The typical letter of intent states that the underwriter of a stock issue is not bound to the offering until it is executed, usually the day before or the day of the offering. Answer: True 140) A company involved in an initial public offering may sell its shares of stock before the effective date of the offering as long as the investors are accredited. Answer: False 141) Not only must a company meet SEC requirements for a public offering, but it also must meet securities laws in all states in which the issue is sold. Answer: True 142) The purpose of the road show, coordinated by the underwriter of an initial public offering (IPO), is to promote interest in the IPO among potential syndicate members. Answer: True 143) The goal of regulation S-B and S-K's simplified registration process is to make it easier for small companies to go public by cutting the paperwork and the costs of raising capital. Answer: True 144) Regulation D rules minimize the expense and the time required to raise equity capital for small businesses by simplifying or eliminating the requirement for registering the offering with the SEC. Answer: True 145) In a Rule 147 (intrastate) offering, a company may only sell its shares to investors in the state in which it is incorporated and does business. Answer: True 146) Regulation D Rule 504 (SCOR) offerings has a $1 million ceiling on the amount raised in any 12-month period. Answer: True 147) Because small businesses typically borrow small amounts of money, they pay interest rates below the "prime rate." Answer: False 148) Commercial banks are lenders of last resort for small businesses. Answer: False 149) Bank loans, retained earnings and credit cards are the most popular sources of small business financing. Answer: True 150) Banks tend to be very conservative in their lending practices and prefer to make loans to established small businesses rather than to high-risk business start-ups. Answer: True 151) Banks prefer to make loans to business start-ups because although the risk level is higher, the potential returns are also much higher. Answer: False 152) A line of credit is a form of financing employed by sellers of big-ticket items such as cars, boats, and furniture, which the retailers pledge as collateral against the loan. Answer: False 153) A boat retailer would most likely use a line of credit to finance the purchase of her inventory. Answer: False 154) Commercial banks are primarily lenders of short-term capital to small businesses, although they will make certain intermediate and long-term loans, normally requiring the loan to be secured by collateral. Answer: True 155) A business owner does not pay interest on a floor-planned item in inventory until it is sold. Answer: False 156) Asset-based borrowing enables a small company to borrow money by pledging otherwise idle assets such as accounts receivable and inventory. Answer: True 157) The most common form of secured credit is accounts receivable financing in which businesses can usually borrow an amount equal to 55-80 percent of its receivables. Answer: True 158) Asset-based loans are an expensive method of financing because of the cost of originating and maintaining them and the higher risk involved. Answer: True 159) Typically, a lender is willing to lend a small business owner 100 percent of the value of accounts receivable pledged as collateral. Answer: False 160) Inventory-only deals are the easiest form of asset-based financing to obtain because banks like to have "tangible" assets backing a loan. Answer: False 161) If banks refuse to lend money to a startup business, the owner usually cannot convince his or her vendors and suppliers to extend trade credit either. Answer: False 162) Vendors and suppliers often are willing to finance a small business owner's purchase of goods for 30 to 60 days, interest free, which is usually easier for small businesses than obtaining a bank loan. Answer: True 163) Most equipment vendors encourage business owners to purchase their equipment by offering to finance the purchase and this method of financing is similar to trade credit. Answer: True 164) Commercial finance companies are willing to take more risk in making loans than commercial banks, but they also charge a higher interest rate. Answer: True 165) The majority of the loans a commercial finance company makes are unsecured by collateral. Answer: False 166) Savings and loan associations specialize in loans for the purchase of inventory and for working capital. Answer: False 167) In a typical commercial or industrial loan, a savings and loan association will lend up to 80 percent of the real property's value with a repayment schedule of up to 30 years. Answer: True 168) Loans from stockbrokers carry higher interest rates since the collateral-stocks and bonds in the borrower's portfolio-involve a high level of risk. Answer: False 169) On a margin loan, if the value of the borrower's investment portfolio drops, the broker can make a margin call, requiring the borrower to provide more cash or securities as collateral, within a matter of days or even hours. Answer: True 170) Lending practices at credit unions are very much like those at banks, but credit unions usually are willing to make smaller loans and will loan only to their members. Answer: True 171) Private placement debt is a hybrid between a conventional loan and a bond. Answer: True 172) SBICs, privately owned financial institutions that are licensed and regulated by the SBA, provide both debt and equity financing to small businesses. Answer: True 173) SBICs provide financing to small businesses that are at least 51 percent owned by minorities, or socially or economically disadvantaged people. Answer: True 174) SBIC financing would be attractive to an entrepreneur whose primary concern is maintaining majority ownership in her business, as SBICs are prohibited from obtaining a controlling interest in the companies in which they invest. Answer: True 175) Small business lending companies (SBLCs) make only intermediate and long-term SBA-guaranteed loans that many banks would not consider. Answer: True 176) The Economic Development Administration offers loan guarantees to create new businesses in economically depressed areas with below-average incomes and high unemployment rates. Answer: True 177) The U.S. Department of Agriculture's Rural Business Co-op Service provides financial assistance to businesses that create nonfarm employment opportunities in rural areas. Answer: True 178) Competing for Small Business Innovation Research Program (SBIR) loans is intense; only 7 percent of the small companies that apply receive funding. Answer: False 179) When the SBA makes a loan guarantee, banks are willing to consider riskier deals that they normally would refuse. Answer: True 180) SBAExpress loans typically are between five and ten years, but loan maturities for fixed assets can be up to 25 years and an average SBAExpress loan is $50,000. Answer: True 181) In most SBA loans, the SBA does not actually lend any money; it merely guarantees a bank repayment of a portion of the loan the bank makes in case the borrower defaults. Answer: True 182) To reduce the paperwork required and speed up its loan application process, the SBA has instituted several programs which allow small businesses to benefit due to reduced response time. Answer: True 183) The Patriot Express Program is an SBA program that is designed to assist veterans and their spouses who want to become entrepreneurs. Answer: True 184) The Community Advantage Loan Program provides loans to communities that have suffered a natural disaster. Answer: False 185) The SBA's Section 504 Certified Development Company Program (CDC), which provides long-term, fixed-asset financing, is designed to encourage small businesses to expand their facilities and to create jobs. Answer: True 186) The average loan in the SBA's Microloan Program is $100,000. Answer: False 187) The CAPLine Program makes short-term capital loans to growing companies needed to finance seasonal buildups in inventory or accounts receivable. Answer: True 188) Loans made under the SBA's Disaster Loan Program carry below-market interest rates and are designed to provide assistance to small businesses that have been the victims of a variety of disasters, such as hurricanes, floods, earthquakes, and tornadoes, as well as the terrorist attacks of September 11, 2001. Answer: True 189) Leasing is not an effective method to reduce the long-term capital requirements. Answer: False 190) Unable to find financing elsewhere, many entrepreneurs launch their companies using the fastest and most convenient source of debt capital available: credit cards. Answer: True 191) One study reports that 7 percent of the capital for start-up companies comes from credit cards. Answer: True 192) Explain the difference between equity capital and debt capital. What advantages and disadvantages characterize each? Answer: • Equity financing-represents the personal investment of the owner(s) of the business. The primary advantage of this type of financing is that it does not have to be repaid with interest. The primary disadvantage is that an owner has to share ownership and may lose a great deal of control of the venture, especially if equity capital is being raised in early start-up stages. • Debt financing-involves the funds that the small business owner borrows and must repay with interest. Lenders of debt capital are more numerous than investors of equity capital; however, loans may be more difficult to obtain. The primary advantage of debt capital is that it does not normally remove ownership from the small business owner. Its primary disadvantages are that the debt must be carried as a liability on the balance sheet, and must be repaid with very costly interest payments at some point in the future. 193) Your text describes a variety of common sources of equity capital. Outline and briefly describe five. Answer: • The owner's personal savings are the most common source of equity financing. • If the owner lacks sufficient funds, most turn next to family and friends for the needed capital. • Crowd funding is a method of raising capital that taps the power of social networking for investors looking to invest small amounts of as little as $100. • Angels are wealthy private investors, often entrepreneurs themselves, who invest in business start-ups in exchange for equity stakes in the company. • Partners who can share in operational control, equity, and profits • Corporate venture capital is large companies that provide capital as well as shared expertise, distribution channels, marketing know-how, and introductions to important suppliers or clients. • Venture capital companies are private, for-profit organizations that purchase equity positions in young businesses they believe have high growth and high profit potential. • Public stock offerings (IPO) 194) Sarah's aunt and cousin have offered to provide some financial assistance for her new business. Should an entrepreneur turn to friends and family members for money to launch a company? Why or why not? If so, under what conditions? Answer: During the last decade, the financial industry has been through difficult times with resulting credit crunches. Therefore, banks have tightened their lending criteria, venture capitalists have become more conservative, private investors have grown more cautious, and the issuing of public stock remains viable for only a select few businesses with good track records. Because of their relationship with the founder, friends and family are more likely to invest. Often, they are more patient and less meddlesome in the business affairs and say, "pay us back when you can." Therefore, this is an excellent source of "seed" money. Unfortunately, however, unrealistic expectations or misunderstood risks have destroyed many relationships. To avoid such problems, the entrepreneur should honestly present the investment opportunity and the nature of the risks involved to reduce the possibility of alienating friends and family members if the business fails. It is a good idea to treat financial assistance from friends and family as you would that from others-a business deal. 195) Angels fill an important role in equity financing of a small business. Discuss their role, their typical profile, and how to find an angel. Answer: Angels are wealthy investors, often entrepreneurs themselves, who invest in business start-ups in exchange for equity stakes in the companies. They represent the largest single source of external equity capital for small businesses. The typical angel invests in companies in the start-up or infant growth stage. He usually invests in local companies in a clearly defined niche with market potential, a competitive advantage, and qualified managers. The real challenge lies in finding angels-the primary way to locate angels is networking through friends, attorneys, investment institutions, business associations, and other business owners. 196) Venture capital companies are an important source of equity funding for small businesses. Discuss their policies, ownership control, and investment preferences regarding funding small businesses. Answer: Venture capital companies are for-profit organizations that purchase equity positions in young businesses they believe have high growth and profit potential, producing annual returns of 300-500 percent over five to seven years. The screening process of venture capital firms is extremely stringent. These companies rely heavily on their gut instinct, but they do tend to look for small businesses that have competent management, a competitive edge, and exist in a growth industry. Typically, venture capital companies invest in high-tech industries such as computer software, medical care, biotechnology, and communications, but any company with extraordinary growth potential can possibly attract venture capital. Most venture capitalists prefer to purchase 20-40 percent of a business through common stock or convertible preferred stock; however, they may buy 70 percent or more of a company's stock, leaving its founders with a minority share. Although venture capitalists prefer to let the founding team of managers employ its skill to operate the business, they usually join the boards of directors and/or send in some new management to protect their investment. In addition, since venture capital companies are becoming so popular and large, many are choosing to focus their investments in "niches." Venture capital firms differ from private investors in terms of return on investment. Whereas angels require 20-50 percent ROI, venture capitalists shoot for 60-75 percent. Also, angels usually take less than 50 percent ownership control of the business, and venture capital companies base the ownership decision on the individual stability of the firm and the risk involved in the investment. 197) What is an IPO? What type of companies should go public? Outline the advantages and disadvantages of an IPO. Also, outline the steps a company should follow in taking a company public. Answer: An initial public offering (IPO) is how a company raises capital by selling shares of its stock to the general public for the first time. Companies attempting an IPO should have a strong record of earnings, a consistently high growth rate, a three- to five-year record of audited financial statements, a solid position in a rapidly growing market, a sound management team, and a strong board of directors. Advantages include: • Ability to raise large amounts of capital • Improved corporate image • Improved access to future financing • Attracting and retaining key employees • Using stock for acquisitions • Listing on a stock exchange Disadvantages include: • Dilution of founder's ownership • Loss of control • Loss of privacy • Reporting to the SEC • Filing expenses • Accountability to shareholders • Pressure for short-term performance • Timing The key steps in taking a company public include: • Choose the Underwriter • Negotiate a Letter of Intent • Prepare the Registration Statement • File with the SEC • Wait to Go Effective • Meet State Requirements 198) Explain the role that commercial banks play in financing small businesses. What kinds of loans do banks offer small companies? Answer: Commercial banks provide the greatest number and variety of loans to small companies. One study by the Small Business Administration concluded that commercial banks provide 64 percent of the credit available to small businesses. Banks tend to be conservative in their lending practices and prefer to make loans to established small businesses rather than high-risk start-ups. Commercial banks also focus on a company's capacity to create positive cash flows. • Short-term loans, the most common type of commercial loan, are extended for less than one year. They consist of the following types: • Commercial loans-Basic short-term loan that is usually repaid as a lump sum within three to six months and is unsecured. • Lines of credit-A short-term loan with a pre-set limit which provides cash flow for day-to-day operations. It is usually extended for one year and is secured by collateral. There are seasonal lines of credit to finance such needs as inventory or accounts receivable. Sustained growth lines of credit are designed to finance rapidly growing companies' cash flow needs over a longer period of time. • Floor planning-This is a form of financing frequently employed by retailers of "big ticket items" that are easily distinguishable from one another (usually by serial number). • Intermediate and long-term loans are extended for one year or longer and are normally used to increase fixed- and growth-capital balances. Loan repayments are usually made monthly or quarterly. One of the most common types of loan repayments is an installment loan. 199) What is asset-based borrowing? Explain the two major types of asset-based borrowing, including the pros and cons of each. Answer: Asset-based lenders, which are normally smaller commercial banks, commercial finance companies, or specialty lenders, allow small businesses to borrow money by pledging otherwise idle assets such as accounts receivable, inventory, or purchase orders as collateral. Cash-poor but asset-rich small companies can use normally unproductive assets, such as accounts receivable, inventory, fixtures, and purchase orders, to finance growth and the cash crises that normally accompany it. The amount a small business can borrow is determined by the advance rate, a percentage of the assets' determined value, which is often discounted. Asset-based lending is a powerful tool. A small business can borrow an amount significantly larger than it normally could without pledging these assets; however, still typically only 55 to 80 percent of the value of the receivables. It is a more costly method of financing, because of origination and monitoring fees. Rates can run from two to three points above the prime rate. The most common form of secured credit is accounts receivable financing. Under this arrangement a small business pledges its accounts receivables. The lender does not accept past due receivables. Inventory financing is secured by inventory in the form of raw materials, work in progress, and finished goods. Usually, lenders are willing to lend only a portion of the value of the inventory-typically no more than 50 percent. 200) Explain the differences in the lending practices of commercial banks, commercial finance companies, and savings and loans associations. Answer: • Commercial banks-provide the greatest number and variety of loans to small businesses. Commercial banks tend to be conservative in their lending practices and prefer to make loans to established businesses rather than high-risk start-ups. Banks are interested in a company's track record. They also want proof of stability. Banks like to see sufficient cash flow to repay the loan, ample collateral to secure it, or the Small Business Administration guarantee to insure it. Studies suggest that small banks with assets of under $300 million in assets are most likely to lend to small businesses. • Commercial finance companies-are willing to tolerate more risk than banks. They rely more on obtaining a security interest in some type of collateral and are less interested in future financial projections. They provide similar loans to small businesses; however, they charge a higher rate of interest, usually at least prime plus 4 percent. Their most common loans are asset-based, accounts receivable, and inventory financing with rates as high as 20 to 30 percent, including fees. • Savings and loan associations-specialize in loans for real property, including commercial and industrial properties. S&L's will lend up to 89 percent of the value and allow a 30-year repayment schedule. They hesitate in lending for specialized buildings or industries and rely on future profit projections for repayment. 201) What is involved with vendor financing in the form of trade credit? How important is it as a source of debt financing to small firms? What role does it play in "bootstrapping"? What are some other bootstrapping techniques? Answer: Trade credit revolves around getting vendors to extend credit in the form of delayed payments, usually 30, 60, or 90 days, interest free. It is an extremely important source of small business financing, especially when small businesses are seen as a high risk by commercial banks. Firms can generate internal methods of financing through bootstrapping which encompasses trade credit, factoring, leasing rather than purchasing equipment, using credit cards, and managing the business frugally. Factors are financial institutions that buy business' accounts receivable at a discount. Under deals arranged "with recourse," the small business owner retains the responsibility for customers who fail to pay their accounts. The business owner must take back these unpaid invoices. Under deals arranged "with recourse," the owner is relieved of the responsibility for collecting unpaid invoices. The factoring company bears the loss if the accounts are not collected. Factoring is a more expensive type of financing than loans from either banks or commercial finance companies, but for businesses that cannot qualify for those loans, factoring may be the only choice. Small businesses can lease virtually any kind of asset-from office space and telephones to computers and heavy equipment. Leasing allows the small business owner to use the assets without tying up valuable capital for an extended period of time, which improves his cash flow. Credit cards are quick and convenient; however, entrepreneurs should be careful about depending on them for significant amounts of financing. 202) Explain how a typical SBA loan guarantee works. What interest rates do these loans normally carry? Answer: The SBA has several loan programs designed to help finance both startup and existing businesses that cannot qualify for traditional loans because of their thin asset base or their high risk of failure. The SBA works with local lenders to offer a variety of loan programs. The SBA does not actually lend any money; it merely acts as an insurer, guaranteeing the lender a certain amount of repayment in case the borrower defaults on the loan. Contrary to popular beliefs, SBA loans do not carry special interest rate deals. The lender determines the terms and rate set within SBA limits. The average rate on an SBA loan is prime plus 2 percent, compared with prime plus 1 for conventional banks. The SBA also assesses a one-time fee of 3.875 for all loan guarantees. The most common loan is the 7(A) loan guarantee. Mini-Case 13-1: "Where do I go now...? Christine Hernandez is in the process of launching a restaurant. Christine has never owned her own restaurant before, but she has worked for two of the best restaurants in town. Starting out as a hostess, Christine developed a special knack for the business and quickly worked her way up to the job of manager. Her 18 years of experience have given her a solid foundation for running her own restaurant. Christine has worked with a counselor at a nearby Small Business Development Center and a counselor from the Service Corps of Retired Executives to prepare a business plan. She asked two other consultants and an accountant to review the plan and incorporated their suggestions into the finished product. When Christine took her plan to her bank, however, the bank turned down her loan request of $165,000, citing the venture as "too risky, given the failure rate of restaurants." The bank acknowledged her experience as "a major asset," but said that it "could not expose itself to such risks in its portfolio." Christine heard the same story from three other banks. Christine is confident in her ability to manage her own restaurant successfully, and she is determined to get the financing she needs to launch it. 203) What might Christine do to convince a bank to lend her the money she needs to launch her company? Answer: Christine has discovered the disadvantage of approaching banks for loans to finance startup ventures: They are typically very conservative in their lending practices. Unless she finds a bank targeting small businesses as its primary customers, she is likely to get the same response from other bankers. Christine should consider equity sources such as friends and family members, partners, and private investors (angels). However, raising equity capital will require her to give up some of the ownership in her business, something she may not be willing to do. 204) Review the various loan programs under the Small Business Administration designed to help finance businesses like Christine's. Which of these programs would most likely help Christine get the capital she needs? Answer: Christine should seek out a bank that is an SBA preferred lender to explore the possibility of getting a loan guarantee under the SBA's 7(a) loan program. With her experience in the business and a solid business plan, she would stand a good chance of getting the financing she seeks. 205) What other sources of capital would you suggest that Christine explore? Answer: Other sources of debt capital are another possibility. Christine could approach her stockbroker if she has an investment portfolio, her insurance company (for a policy loan), friends and relatives (careful!), a state agency, or the SBA. Since she has already been turned down by four banks, Christine may be able to quality for an SBA loan guarantee, especially given her experience in the restaurant business. Mini-Case 13-2: Bowden Brake Service Jim Bowden has been operating his business for some time now and thinks it is time to grow and expand. To compute the cost of expanding his existing business, Jim Bowden makes the following estimates: 206) Explain to Jim the possible (and realistic) sources of capital for expansion. Where would you recommend that he go for the funds he needs? Why? Answer: To meet his fixed capital requirements, Jim should approach banks, savings and loan associations, insurance companies, and the SBA. It is doubtful that venture capitalists would be interested in an investment in a brake repair business. Jim may be able to find equity financing in the form of a partner or a wealthy angel. Jim could seek working capital at banks, savings and loan associations, the SBA, and suppliers. Chapter 14 Choosing the Right Location and Layout 1) The first phase of determining where to locate a business is: A) choosing a state in which the business owner wants to live. B) determining which city has the demographics that best fit the business. C) conducting a specific site analysis. D) determining which regions of the country are experiencing growth. Answer: D 2) The location has far-reaching ramifications, such as high-tech companies that need: A) a highly skilled work force. B) a high traffic site. C) easy access to shipping routes. D) a nearby retail district. Answer: A 3) Entrepreneurs using the Census Bureau's Web site to evaluate potential locations have access to which of the following information about the residents in those locations? A) Income levels B) Age distributions C) Occupational data D) All of the above Answer: D 4) Which of the following information is available from U.S. Census data? A) The value of the homes in an area B) The number of rooms in the homes in an area C) Number of vehicles owned D) All of the above Answer: D 5) Which of the following information is not available from Census data? A) Education levels B) Income levels C) Expenditures on dining out D) Occupational data Answer: C 6) ________, published annually, provides a detailed breakdown of population, retail sales, spendable income, and other characteristics for census regions, states, metropolitan areas, counties, and cities. It also includes analyses of changes in metro markets, descriptions of newspaper and TV markets, and summaries of sales of certain merchandise. A) The Survey of Buying Power B) The Commercial Atlas and Marketing Guide C) The Zip Code Atlas and Market Planner D) A Researcher's Guide to the 1990 Census Answer: A 7) A publication that reports on more than 120,000 places in the United States, many of which are not available through census data, and includes eleven economic indicators for major markets, is the: A) Topological Integrated Geographic Encoding Referencing. B) Commercial Atlas and Marketing Guide. C) Zip Code Atlas and Market Planner. D) Sales and Marketing Management's Survey of Buying Power. Answer: B 8) A Geographic Information System (GIS): A) is a software package combining the ability to draw detailed maps with the power to search through databases. B) helps entrepreneurs discover important trends and characteristics in the population that otherwise might go unnoticed. C) can be an incredibly powerful tool for determining the ideal location based on specific criteria the entrepreneur establishes. D) All of the above Answer: D 9) TIGER: A) is a software package combining the ability to draw detailed maps with the power to search through databases. B) breaks down the population, retail sales, etc., by census region. C) contains the names of every street in the country and detailed block statistics for 345 urban areas. D) All of the above Answer: C 10) When choosing a state in which to locate, one must evaluate which of the following? A) The general business climate B) The state's business laws, regulations, and taxes C) Tax incentives and/or investment credits D) All of the above Answer: D 11) Locating close to ________ is critical for manufacturers, service providers and other companies that will be competitive. A) markets they plan to serve B) suppliers C) transportation routes D) airports and rail transportation Answer: A 12) When the cost of transporting finished goods to market is high relative to their value, the key location criterion is: A) low rental or lease rates. B) proximity to raw materials. C) proximity to markets. D) zoning regulations. Answer: C 13) A glass manufacturer that requires an extremely pure, very fine sand in its production process would be most concerned about the: A) business climate. B) proximity to raw materials. C) demographic profile of the local market. D) local wage rates. Answer: B 14) When would a business choose to locate near the source of the raw material? A) The company requires an important raw material that is difficult to transport. B) The company requires an important raw material that is expensive to transport. C) The company keeps its inventory of an important raw material low to keep costs down and counts on quick deliveries from suppliers. D) All of the above Answer: D 15) When examining a state's available labor force, the potential business owner needs to know: A) the state's labor relations history. B) the demographics of the target customers. C) both the number and education of the available workforce. D) the proximity of its customers. Answer: C 16) A labor force that has technical training would be most important to a: A) clothing store. B) restaurant. C) skiing equipment specialty store. D) computer company. Answer: D 17) What is the state's overall attitude toward your kind of business? Has it passed laws that impose restrictions on the way a company can operate? Does the state offer small business support programs of financial assistance to entrepreneurs? These questions help an entrepreneur to assess the overall: A) population trends. B) proximity to markets C) labor supply. D) business climate. Answer: D 18) One direct way to lower annual operating costs is to locate in a state where: A) there is an attractive business climate. B) the labor market is highly competitive. C) taxes and regulatory costs are lowest. D) the key markets are relatively accessible. Answer: C 19) The "Best and Worst States for Doing Business" indicates that California is one of the least attractive states in which to do business based on these factors: A) wage costs based on hourly and salaried compensation. B) tax costs and electricity costs. C) industrial and office rent costs. D) all the above Answer: D 20) Which of the following characteristics for selecting a city would be of greatest interest to a retail store selling fine china and collectibles? A) Public services B) Transportation C) Zoning D) Population characteristics Answer: D 21) Geographic concentrations of interconnected companies, specialized suppliers, and service providers that are present in a region are called: A) zones. B) clusters. C) trading areas. D) variances. Answer: B 22) ________ is a system that divides a county or city into small cells or districts to control the use of land, buildings, and sites. A) An enterprise zone B) Zoning C) Apportioning D) Redistricting Answer: B 23) When Jan and Detmar Wolcinski bought their 152-year-old house, they began remodeling it with one goal in mind: opening a bed and breakfast inn. The Chadwick Inn has exceeded the Wolcinski's expectations in its first year of operation, but now some neighbors are starting to complain about the increased traffic in their neighborhood and the late hours some of the Inn's guests keep. The Wolcinski's greatest challenge in the near future is most likely: A) convincing the local historical preservation board that the modifications they made to the house are in keeping with its historical character. B) zoning laws prohibiting commercial businesses in a residentially zoned area. C) major hotel chains opening competing "bed and breakfast" hotels on adjacent lots. D) encroaching shopping centers and malls that push up real estate prices. Answer: B 24) The purpose of zoning regulations is to: A) restrict the growth of businesses. B) contain similar types of activities in suitable locations. C) help new businesses "incubate" in their startup period. D) build the traffic volume for retail and service businesses. Answer: B 25) Job training for workers and reduced tax rates, to financial grants and loans, are examples of what some ________ offer as business ________ to locate in their jurisdictions. A) states; motivators B) cities; incentives C) regions; perks D) counties; attractions Answer: B 26) A ________ is a special exemption to a zoning ordinance. A) variance B) exception C) trade area D) cluster Answer: A 27) A location in a city offering a high quality of life can be attractive to the entrepreneur and may make ________ easier. A) financing B) recruiting employees C) resolving zoning issues D) access to a trading area Answer: B 28) The region from which a business can expect to draw its customers over a reasonable time span is called its: A) enterprise zone. B) zoning area. C) trading area. D) retail draw. Answer: C 29) The primary variable(s) that influence(s) the scope of a trading area is/are: A) the character of the transportation network. B) the nature of competing businesses. C) the type and size of the business operation. D) the racial and political barriers in the local community. Answer: C 30) Nature's Way, a health food store, has just opened in a popular neighborhood shopping center next to Silver's Gym, a physical fitness center catering to both men and women. Nature's Way is relying on which location principle? A) Trade area B) Retail consistency C) Retail compatibility D) Zoning Answer: C 31) The index of retail saturation: A) is retail expenditures times retail facilities divided by the number of customers. B) is the ratio of a trading area's sales potential to its sales capacity. C) evaluates both the number of customers and the intensity of competition in a trading area. D) B and C above Answer: D Refer to the following information to answer the(se) question(s): An entrepreneur considering two sites for a men and boys' shop determines that he needs sales of $158 per square foot to be profitable. Site #1 has 13,500 potential customers who spend an average of $160.20 per year on men and boys' wear. Two competitors occupy 14,200 square feet of space. Site #2 has 10,800 potential customers spending an average of $152.10 per year on men and boys' wear. One competitor has 10,000 square feet. 32) The index of retail saturation for site #1 is: A) $150.21. B) $168.51. C) $152.30. D) $166.19. Answer: B 33) The index of retail saturation for site #2 is: A) $164.27. B) $140.83. C) $170.64. D) $146.30. Answer: A 34) Based on the above calculations, what is the entrepreneur's best option? A) He should choose site #1. B) He should choose site #2. C) Neither site meets minimum criteria of $158 per square foot. D) Either site will work well since both meet minimum criteria of $158 per square foot. Answer: A 35) Reilly's Law of Retail Gravitation: A) uses the analogy of gravity to estimate the attractiveness of a particular business to potential customers. B) predicts the declining fate of brick-and-mortar retail to online shopping. C) is based on downward trending of established locations. D) uses the analogy of contagious diseases and attracting customers. Answer: A 36) Shopping malls typically average ________ parking spaces per 1,000 square feet of shopping while a typical central business district offers ________ spaces per 1,000 square feet of shopping space. A) 20; 1 B) 3; 6 C) 5; 3.5 D) 3; 8 Answer: C 37) Carmen is starting a childcare center. One location closed after a murder on the property and is near a neighborhood where there are many single parents. What city site selection factor might give Carmen problems with her childcare center? A) Transportation B) Police and fire protection C) The reputation of the location D) Compatibility with the community Answer: C 38) Mary's successful clothing store was located on the back edge of the parking lot of a large mall. She did not have to pay mall rents since she was not part of the mall, but drew many customers who parked at the mall and then noticed her store. The mall developers built a movie theater on the part of the parking lot directly in front of Mary's store, basically hiding her from most mall customers. After about six months, Mary's business dropped off so much she had to move. What retailer site selection criterion forced Mary to move? A) Proximity of competitors B) Visibility C) Adequate parking D) Room for expansion Answer: B 39) Factors such as ________ should be sought out in the selection of retail and service business locations. A) the lowest possible rent/lease options, transportation network, adequate parking, physical and psychological barriers B) modest customer traffic, transportation network, lack of parking, physical and psychological barriers C) customer traffic, transportation network, adequate parking, physical and psychological barriers D) customer traffic, isolation from other stores, adequate parking, physical and psychological barriers Answer: C 40) The central business district (CBD): A) is the traditional center of town. B) in many cities experienced decay in years past as customers began shopping more frequently at malls and shopping centers, but are now going through revitalization programs. C) attracts customers from the entire trading area of the city. D) All of the above Answer: D 41) Which of the following is an advantage of locating in a central business district? A) Low rent B) Easy and abundant parking C) The ability to attract customers from the entire trading area D) Moderate to low levels of competition Answer: C 42) Which of the following are disadvantages of locating in a central business district? A) Intense competition B) High rental rates C) Traffic congestion and inadequate parking facilities D) All of the above Answer: D 43) The typical ________ is relatively small, contains from 3 to 12 stores, and serves a population that lives within a 10-minute drive. A) neighborhood shopping center B) community shopping center C) regional shopping mall D) central business district Answer: A 44) A ________ contains from 12 to 50 stores and serves a population of 40,000 to 150,000 people. A) neighborhood shopping center B) community shopping center C) regional shopping mall D) central business district Answer: B 45) The ________ serves a large trading area (10 to 15 miles or more), contains from 50 to 100 stores, and draws customers from a population that lives within 20- to 40-minutes driving time. A) neighborhood shopping center B) community shopping center C) regional shopping mall D) central business district Answer: C 46) A ________ combines the drawing strength of a large regional mall with the convenience of a neighborhood shopping center. A) power center B) community shopping center C) central business district D) strip mall Answer: A 47) Which of the following is an important consideration for an entrepreneur evaluating a shopping mall or center location? A) In terms of customer demographics, is the mall or center a good fit for my products or services? How much foot traffic and vehicle traffic does the mall or center generate? B) Who are the other tenants? The anchor tenants? Is there a good fit for my products and services? C) What are the mall's or center's vacancy and turnover rates? D) All of the above Answer: D 48) A ________ center combines the drawing strength of a large regional mall with the convenience of a neighborhood shopping center. A) neighborhood B) power C) theme or festival D) lifestyle Answer: B 49) Typically located near affluent residential neighborhoods where their target customers live, ________ centers are designed to look less like shopping centers and malls and more like the busy streets in the central business districts that once existed in town and cites. A) neighborhood B) power C) lifestyle D) community shopping Answer: C 50) A type of business that does well when located near competition is: A) one that has a unique product line, dissimilar to that of its competitors. B) one that carries products for which customers comparison shop. C) one whose location is part of its trademark. D) None of the above Answer: B 51) Which of the following is the greatest advantage of operating a home-based business? A) The ability to save money by avoiding business startup taxes B) The exemption that home-based businesses receive from local zoning laws C) The low cost of setting up and operating the business D) The ability to claim all household expenses as business deductions for tax purposes Answer: C 52) Which of the following is not true of home-based businesses? A) Home-based businesses represent the fastest-growing segment of the U. S. economy. B) The biggest benefit of operating a business from home typically is its low cost. C) Home-based retail businesses represent the fastest-growing segment of all home-based businesses. D) None of the above Answer: C 53) Which of the following is a potential disadvantage of a home-based business? A) Frequent interruptions of work B) Feelings of isolation C) Problems with zoning laws from running a business D) All of the above Answer: D 54) A specially designated area in or near a U.S. customs port of entry that allows resident companies to import materials and components from foreign counties; assemble, process, manufacture, or package them, and then ship the finished product back out while either reducing or eliminating tariffs and duties is a: A) empowerment zone. B) foreign trade zone C) business incubator. D) trading area. Answer: B 55) ________ offer new businesses the protection of low-cost locations and a multitude of support services in an attempt to improve the companies' chances of success. A) Research parks B) Business incubators C) Industrial parks D) Discount malls Answer: B 56) Incubator facilities are established in order to: A) revitalize central business districts. B) enhance economic development and diversify the local economy. C) centralize types of businesses and provide tax breaks to those businesses. D) reuse old military bases and abandoned structures in economically depressed areas of a city. Answer: B 57) The most common sponsors of business incubators are: A) colleges and universities. B) government agencies. C) private investment groups. D) public/private partnerships. Answer: B 58) Most business incubator residents are engaged in which businesses? A) Heavy manufacturing B) Light manufacturing, service, or technology-related fields C) Mixed retail and restaurant business D) Heavy manufacturing, food preparation, and service Answer: B 59) Which of the following do incubators offer their tenants? A) Flexible rental space at discounted market rates B) Larger trading areas C) Exemptions from zoning regulations D) Lower, or an exemption from, state and city taxes Answer: A 60) According to the National Business Incubation Association, graduates from incubators have a success rate of ________ percent. A) 57 B) 67 C) 77 D) 87 Answer: D 61) The National Business Incubation Association reports that ________ percent of the companies that have graduated from a incubator stay in the local community. A) 84 B) 70 C) 54 D) 33 Answer: A 62) ________ is the logical arrangement of the physical facilities in a business that contributes to efficient operations, increased productivity, and higher sales. A) The Index of Retail Saturation B) Layout C) Logistics D) The Sales Conversion Index Answer: B 63) When evaluating existing buildings, retailers: A) need to find the lowest cost per square foot possible due to the need for maximum display space. B) should locate in store space previously occupied by a similar type of business. C) should recognize that the store's appearance and layout create an image for the customers of the business. D) can discount the interior appearance of the building if it has a strong exterior appeal. Answer: C 64) Which of the following statements concerning layout is true? A) A company's physical facilities send important messages to potential customers about its "personality." B) The physical appearance of a building provides customers with their first impressions of a business. C) Communicating the right signals through a business's layout and physical facilities is an important step in creating a competitive edge over rivals. D) All of the above Answer: D 65) Entrances should invite entry. The way to accomplish this is to: A) have wide entryways and attractive displays set back from the doorway that can lure customers into the store. B) offer discounts. C) have displays as close to the entry of the store as possible. D) have a big sign to attract customers. Answer: A 66) When designing the layout of a store, office, or plant, a business owner's primary focus is usually on ________, however, it should be on ________. A) minimizing costs; maximizing security B) enhancing workers' productivity; minimizing costs C) increasing sales; customer accessibility D) minimizing costs; minimizing injuries and enhancing employees' productivity Answer: D 67) The Americans with Disabilities Act of 1990 requires: A) buildings be remodeled to accommodate any disabled customer or employee. B) businesses must accommodate all disabled customers or job candidates, regardless of the cost to the business. C) that businesses have all facilities available to physically challenged customers and employees. D) All of the above Answer: C 68) The Justice Department estimates that more than 20 percent of the cases customers have filed under the Americans with Disabilities Act involved changes the business owners could have made at a cost of: A) $0. B) $250. C) $1,000. D) $8,000. Answer: A 69) Under the Americans with Disabilities Act, a newly constructed: A) building must have elevators if they are three stories or higher. B) retail store must have checkout aisles wide enough to accommodate wheelchairs (36 inches). C) restaurant must make five percent of its tables accessible to wheelchair-bound patrons. D) All of the above Answer: D 70) The Americans with Disabilities Act: A) protects disabled employees, job candidates, and customers. B) does not apply to small businesses with fewer than 15 employees. C) requires companies to hire any disabled worker who applies for a job and then find a way to fit the job requirements to that worker's abilities. D) All of the above Answer: A 71) To be effective, a business sign should: A) be large enough for passersby to read from a distance. B) contain a message that is short, simple, and clear. C) be properly illuminated so that it is legible both day and night. D) All of the above Answer: D 72) Which of the following is not a characteristic of an effective business sign? A) Includes a message that is short, simple, and clear. B) Is illuminated so that it is readable both day and night. C) Uses complementary color schemes and ornate typefaces. D) Is well maintained. Answer: C 73) The science of adapting work and working conditions to complement employees' strengths and to suit customers' needs is called: A) physiology. B) ergonomics. C) terminology. D) kinesiology. Answer: B 74) Which of the following is an example of ergonomics? A) Evaluating the climate-control needs of the work environment B) Assessing the lighting needs and the acoustics of a business office C) Considering the proper height of desks, chairs, etc., when designing a work station D) All of the above Answer: D 75) Studies and experts have concluded that changes in office design have a direct impact on workers': A) performance. B) job satisfaction. C) ease of communication. D) All of the above Answer: D 76) In addition to the layout of the store, behavioral experts recommend that retailers consider the impacts of ________, ________ and ________ on customer behavior. A) lighting; sound; scent B) lighting; noise; orientation C) lighting; sound; noise D) signage; sound; scent Answer: A 77) A bakery is an example of a business that may benefit from intentional use of ________ within the space. A) color B) music C) smell D) lighting Answer: C 78) The most progressive companies seeking environmentally-friendly designs are using: A) all new materials, installing high efficiency lighting, and striving to meet LEED standards. B) recycled materials, installing high efficiency lighting, and meeting building code standards. C) recycled materials, installing high efficiency lighting, and striving to meet LEED standards. D) recycled materials, installing high cost lighting, and striving to meet LEED standards. Answer: C 79) An effective retail layout should: A) pull customers into the store. B) make it easy for customers to locate the merchandise they are looking for. C) take customers past displays of items they might buy on impulse. D) All of the above Answer: D 80) The most valuable space in a store is the: A) non-selling space. B) main entry-level space. C) space at the back of the store. D) left-side, entry-level space. Answer: B 81) Products with the highest markup should be placed: A) so as to pull customers into the store. B) in prime selling space. C) near the front of the store. D) anywhere since they draw their own customers. Answer: B 82) When the typical shopper enters a store, (s)he turns ________ and moves in a ________ fashion which increases the value of this section of the space. A) left; clockwise B) right; clockwise C) left; counterclockwise D) right; counterclockwise Answer: D 83) Which of the following sections of a retail store would be most valuable? A) Third floor B) Intersection of two secondary aisles C) The front right corner of the store D) The front left corner of the store Answer: C 84) Which of the following statements concerning store layout is true? A) The farther an area is from the store's entrance, the greater its value. B) Most shoppers turn left upon entering a store and move around it in a clockwise fashion. C) Only about one-fourth of a store's customers will go more than halfway into a store. D) The second quarter of the store is worth one-half of the front quarter. Answer: C 85) What is the 40-30-20-10 rule in retailing? A) A way of figuring who your best and worst customers are B) A formula for calculating the ratio of expenditures on signage, displays, advertising, and interior decorating C) An expression of the decline of the value of store space as you move front to back in the store D) The percentage of customers who move straight into a store, go right, go left, leave before fully entering Answer: C 86) Manufacturing layout decisions take into consideration: A) customer buying behavior, the types of product sold, and the physical dimensions of the building. B) the status of the building: built, bought, or leased, and the type of product sold. C) the product, the process, the space availability within the facility, ergonomic considerations, and key economic considerations. D) the employees, the customer, and the mechanical process used to produce the product. Answer: C 87) The objective(s) of a manufacturing layout include: A) efficiency. B) productivity. C) quality. D) All the above Answer: D 88) An arrangement of workers and equipment according to the sequence of operations performed on a product is called ________ layout. A) fixed position B) process C) product or line D) procedural Answer: C 89) A process layout would be best suited to: A) an automobile assembly plant. B) an oil refinery. C) a manufacturer of handmade metal gifts. D) a textbook publishing plant. Answer: C 90) A good manufacturing layout requires all but which of the following? A) Flow/process study B) Easy adjustment to changing conditions C) Good housekeeping D) An assembly line Answer: D 91) Two important criteria for selecting and designing a production layout are: A) worker effectiveness and material handling costs. B) worker effectiveness and maximum visibility. C) space use and proximity to raw materials. D) material handling costs and overall convenience factors. Answer: A 92) An arrangement in which materials do not move down a production line but rather, because of their weight, size, or build, are assembled on the spot is called a ________ layout. A) fixed position B) process C) product D) line Answer: A 93) The key to finding a suitable location is identifying the characteristics that can give a company a competitive edge and then searching out potential sites that meet those criteria. Answer: True 94) By collecting a wealth of data on possible locations, entrepreneurs will find that the location decision is made for them. Answer: False 95) The first level of the location decision is the selection of a particular region of the country. Answer: True 96) The first phase in selecting a location is determining what regions of the country are experiencing substantial growth. Answer: True 97) When conducting a regional evaluation, one of the first places an entrepreneur should turn for information is the U.S. Census Bureau. Answer: True 98) Published annually, Sales and Marketing Management's Survey of Buying Power provides a detailed breakdown of population, retail sales, spendable income, etc., for various census regions, states, etc. Answer: True 99) The Zip Code Atlas and Market Planner provides detailed information on sales, spendable income, etc., by census region, county, and city. Answer: False 100) Geographic Information Systems (GIS) are powerful software programs that allow entrepreneurs to pinpoint the ideal location for their businesses. Answer: True 101) The U.S. Census departments "TIGER" file is a computerized map of the entire United States that gives entrepreneurs the power to pinpoint existing and potential customers. Answer: True 102) By studying the demographics of a proposed location, a small business owner can determine how well it matches the market for the owner's product or service. Answer: True 103) When the cost of transporting a product is high relative to its value, locating close to the market a manufacturer plans to serve is critical. Answer: True 104) Proximity to needed raw materials is critically important for a service firm. Answer: False 105) When analyzing the labor supply, a small business is concerned only with the level of education and training of the labor force in the area. Answer: False 106) When choosing a location, a small business owner should match the characteristics of the labor force her company requires with the characteristics of an area's available labor pool. Answer: True 107) Knowing the type of labor a business needs and preparing job descriptions and job specifications in advance will help a business owner determine whether or not there is a good match with the available labor pool. Answer: True 108) The most important factor when evaluating the labor supply in an area is its prevailing wage rate. Answer: False 109) The "friendliness" of the overall business environment is an important consideration in location selection and information is available to offer objective insight for this assessment. Answer: True 110) The choice of the location for a Tiffany & Company should be determined by the compatibility with the community it will serve. Answer: True 111) Zoning is a system for mixing types of business and industrial activities in order to make maximum efficient use of the area. Answer: False 112) Zoning is a system that divides a city or country into small cells or districts to control the use of land, buildings, and sites. Answer: True 113) A variance is a special exemption to a zoning ordinance. Answer: True 114) For many entrepreneurs, quality of life is one of the key determinants of their choice of locale. Answer: True 115) Few decisions are as important for retailers as the choice of a location. Answer: True 116) One element of the location decision common to all businesses is the need to locate where customers want to do business. Answer: True 117) Criteria for a "good location" are universal and apply to all types of small businesses. Answer: False 118) Generally, the larger a retail store and the greater its selection, the broader its trade area size. Answer: True 119) A company's trade area can be influenced by intangible factors, such as physical and political barriers. Answer: True 120) Clever business owners choose their location with an eye on the surrounding mix of businesses. Answer: True 121) Retail compatibility describes the benefits a company receives by locating near other businesses selling complementary products and services. Answer: True 122) The Index of Retail Saturation (IRS) is a measure of the potential sales per square foot of store space for a given product in a specific trading area. Answer: True 123) To calculate the IRS, a retailer needs to know the number of customers in the area, the retail expenditures for his product, and the total square feet of space allocated to selling his kind of product in the trading area. Answer: True 124) To calculate the IRS, a retailer needs to know the number of customers, the number of competitors, and the total square feet of space allocated to selling his kind of product in the trading area. Answer: False 125) Reilly's Law of Retail Gravity uses the analogy of gravity to estimate the attractiveness of a particular business to potential customers. Answer: False 126) The average community net income is the key factor in Reilly's Law of Retail Gravitation to determine the point of customer indifference. Answer: False 127) Increased traffic flow can be beneficial to similar businesses located in close proximity to one another, such as auto dealers, clothing retailers, and antique shops. Answer: True 128) One of the key factors in choosing a location for a convenience store is finding a location with high traffic volume and easy accessibility. Answer: True 129) On average, the typical central business district has more parking spaces per square foot of shopping space than the typical shopping mall. Answer: False 130) Choosing a location in which many other businesses have failed can create a negative image, even for a "new" business. Answer: True 131) A location that has housed several businesses that have failed within the past few years is likely to have a bad reputation and a negative image. Answer: True 132) Because they are centrally located, central business district locations offer business owners the ability to attract customers from the entire trading area of the city. Answer: True 133) Many central business districts suffer from intense competition, high rental rates, traffic congestion, and inadequate parking facilities. Answer: True 134) The typical neighborhood shopping center contains from 3 to 12 stores and serves a population that lives within a 10-minute drive. Answer: True 135) A community shopping center contains from three to twelve stores and serves a population that lives within a 10-minute drive. Answer: False 136) A community center is an upscale shopping experience with specialty stores, dining and entertainment in an outdoor setting. Answer: False 137) A power center combines the drawing strength of a large regional mall with the convenience of a neighborhood shopping center. Answer: True 138) A regional shopping mall serves a large trading area (10 to 15 miles or more), contains from 50 to 100 stores, and draws customers from a population that lives within 20 to 40 minutes driving time. Answer: True 139) Clothing is one of the most popular items sold in regional shopping malls. Answer: True 140) Shopping centers are always a wise location for a small business owner to choose. Answer: False 141) The customer group that spends the most time in shopping malls are teenagers between the ages of 14 and 17. Answer: True 142) For some retailers, locating near competitors makes sense because similar businesses located near one another can increase traffic flow to all. Answer: True 143) Retailers should be careful not to locate near anyone in direct competition with them. Answer: False 144) If a business sells merchandise for which customers typically do a good deal of comparison shopping, it should choose a location as far away from competitors as possible. Answer: False 145) The ideal location for a retail business is in the entrepreneur's home. Answer: False 146) For a service company that goes into its customers' homes to perform its service, the choice to locate in the entrepreneur's home is a poor one. Answer: False 147) A recent SBA study found that 52 percent of all small companies are home based. Answer: True 148) Many home-based entrepreneurs whose businesses are successful run into problems with zoning laws as they run businesses from locations in areas that are zoned "residential." Answer: True 149) Some entrepreneurs may find that a mobile business that takes their products and services to their customers is an attractive "location" decision. Answer: True 150) To ensure ready access to raw materials and to customers, a manufacturer should consider the quality of an area's transportation network when choosing a location. Answer: True 151) A foreign trade zone is an area designated as economically disadvantaged in which businesses get tax breaks on the investments they make within zone boundaries. Answer: False 152) There are 256 foreign trade zones and 498 subzones, which are special foreign trade zones that are established for limited purposes, operating in the United States. Answer: True 153) A "business incubator" is a facility that offers low rental rates and permits startup small businesses to share resources. Answer: True 154) The primary reason for establishing a business incubator is to enhance economic development in an area and to diversify the local economy. Answer: True 155) Common sponsors of incubators include government agencies and colleges and universities. Answer: True 156) Graduates from business incubators have a much higher success rate than the typical small business. Answer: True 157) Layout is the logical arrangement of the physical facilities in a business that contribute to efficient operations, increased productivity, and higher sales. Answer: True 158) A store's external appearance plays only an insignificant role in identifying its "personality" or image to customers. Answer: False 159) Developing a layout plan really is not essential unless an entrepreneur is able to build a new building to house the business. Answer: False 160) Communicating the right image through layout and physical facilities is an important step in attracting customers. Answer: True 161) The rules of the Americans with Disabilities Act protecting customers are designed to ensure that disabled customers have equal access to a company's goods and services. Answer: True 162) Any company with 15 or more employees and any buildings occupied after January 25, 1993, must comply with the Americans with Disabilities Act. Answer: True 163) Studies show that complying with the Americans with Disabilities Act (ADA) requires businesses to spend an average of almost $17,000 to bring their buildings up to ADA standards. Answer: False 164) The Justice Department estimates that more than 20 percent of the cases customers have filed under the Americans with Disabilities Act involved changes the business owners would have made at no cost. Answer: True 165) Most small companies that invest in making their locations accessible to all customers under the Americans with Disabilities Act qualify for a tax deduction of up to $15,000. Answer: True 166) In some cities and towns, local regulations impose restrictions on the size, location, height, and construction materials used in business signs. Answer: True 167) Signs are one of the most expensive and least effective ways of communicating with customers available to small businesses. Answer: False 168) Ergonomics, the science of adapting work and the work environment to complement employees' strengths and to suit customers' needs, is an integral part of a successful layout. Answer: True 169) When planning store, office, or plant layouts, business owners usually focus on minimizing costs when what they should focus on is minimizing injuries and enhancing employees' productivity. Answer: True 170) Lighting is often an inexpensive investment for improving employee performance and the overall appearance of the business. Answer: True 171) Attributes such as lighting, sound and scent are unimportant attributes to most retail stores. Answer: False 172) When designing the layout of a store, office, or plant, a business owner's primary focus should be minimizing costs. Answer: False 173) Office design has little impact on workers' job performance, job satisfaction, and ease of communication. Answer: False 174) Environmentally friendly design is no longer affordable or justified. Answer: False 175) LEED building techniques and standards are playing a significant role in creating more environmentally conscious work spaces. Answer: True 176) Retailers design their layouts with the goal of maximizing sales revenue while manufacturers see layout as an opportunity to increase efficiency and productivity and to lower costs. Answer: True 177) Layout in a retail store evolves from a clear understanding of customers' buying habits. Answer: True 178) The layout of any retail facility requires the owner's observation and understanding of what will work best for their staff. Answer: False 179) Observing customer behavior in a retail store can help a business owner identify "hot spots" where merchandise sells briskly and "cold spots" where it may sit indefinitely. Answer: True 180) The wise small retailer separates selling and non-selling activities; she does not waste valuable selling space with non-selling activities. Answer: True 181) Well-designed floor displays are critical to a retailer's success. Answer: True 182) In a retail layout, impulse and convenience goods should be located near the front of the store. Answer: True 183) Prime selling space should be reserved for items that are slow sellers so that customers will notice them. Answer: False 184) Prime selling space should be reserved for items that carry the highest markups. Answer: True 185) In small stores, every portion of the interior space is of equal value in generating sales. Answer: False 186) The majority of a store's customers go more than halfway into the store. Answer: False 187) Space values increase as their distance from the main entry-level floor increases. Answer: False 188) The decline in value of store space from front to back of the shop is expressed in the 40-30-20-10 rule. Answer: True 189) Creating a proper layout is important for retail operations, but not for manufacturers since manufacturing layout principles offer very little opportunity to improve efficiency or to increase productivity. Answer: False 190) Retail layout is a never-ending experiment in which entrepreneurs learn what works and what does not and noting customer behavior and buying trends within the retail space is key. Answer: False 191) An effective manufacturing layout avoids what lean manufacturing principles identify as the seven forms of waste: transportation, inventory, motion, waiting, overproduction, processing, and defects. Answer: True 192) Ergonomics is a key factor in retail, service and manufacturing environments. Answer: True 193) Manufacturers can lower materials handling costs by using layout designed so that product flow is automated whenever possible and flow distances and times are minimized. Answer: True 194) Discuss the various sources of information available to the small business owner for deciding in which region of the country to locate her business. Answer: In evaluating a region for site selection, entrepreneurs should evaluate the general demographic characteristics of the population in government publications, census information, and statistical data. In evaluating a region for site selection, entrepreneurs should evaluate the general demographic characteristics of the population. Government publications, census information, and statistical data are useful sources of this information. The U.S. Census Bureau sources: U.S. Statistical Abstract, County and City Data Book and the www.census.gov site. Other sources of demographic data include: • Sales and Marketing Management's Survey of Buying Power • Editor and Publisher Market Guide • The American Marketplace • Demographic and Spending Patterns • Rand McNally's Commercial Atlas and Marketing Guide • Zip Code Atlas and Market Planner Many entrepreneurs combine map drawing and database management capabilities (GIS). GIS street files originate in the U. S. Census Department's TIGER (Topographically Integrated Geographic Encoding Referencing). Universities and the Small Business Administration Small Business Development Centers also provide numerous sources of information. 195) Identify and explain five of the seven criteria a small business owner should consider when selecting the state in which to locate her business. Answer: 1. Proximity to markets-Locating close to markets is critical in reducing distribution costs, staying competitive and making it easy for customers to access products and services. 2. Proximity to needed raw materials-The value of product and service components, their material costs, transportation costs, and their function all interact in determining how close a business needs to be to its source of supplies. 3. Wage rates-Wages can vary significantly from state to state, affecting a company's cost of doing business. 4. Labor supply needs-Two factors should be considered: the number of workers available in the area and their level of education. 5. Business climate-Includes whether a city/state regulates restrictions on the way a company can operate, imposes inventory taxes, implements laws that prohibit certain business activities on Sundays ("blue laws"), and whether or not a state provides support programs or financial assistance. 6. Tax rates-Location selection must consider: state income taxes, payroll taxes, sales taxes, property taxes, and any specialized taxes on the operations of their business. 7. Internet access-High speed and reliable service is important. DSL and T1 line availability is essential for a high-tech company and those engaging in e-commerce. 8. Total operating costs-The impact of a state's total cost of operation on the business venture must consider wages, taxes, electricity, industrial rent and office rent costs. 196) Identify and briefly discuss the nine factors an entrepreneur should consider when selecting the city in which to locate her business. Answer: 1. Population trends-In addition to demographics; growth trends, family size, age distribution, education, income levels, religion, race, nationality, and gender, matching the market to your products or services. 2. Competition-Locate near or away from competitors? Evaluate the number and strengths/weaknesses of competitors. 3. Clustering-Some cities have characteristics that attract certain industries, and, as a result, companies tend to cluster there. 4. Compatibility with the community-Company's image must fit in with the character of a town and the needs and wants of its residents. 5. Local laws and regulations-Government regulations affect many aspects of a company's operation, from acquiring business licenses and building permits to erecting business signs and dumping trash. Zoning laws are another consideration 6. Cost of utilities and public services-Seek a municipality that provides all utility services, street maintenance, police and fire protection and other services at a reasonable cost. 7. Incentives- Financial and other incentives may encourage businesses in an effort to create jobs to locate within city and county borders. 8. Quality of life-Comfortable weather, cultural events, museums, outdoor activities, concerts, restaurants, interesting night life, and other quality of life factors are attractive to an entrepreneur and can make recruiting employees easier. 197) List and explain the main location criteria for retail and service businesses. Answer: • Trade area size-The region from which the business can expect to draw customers over a reasonable time span. The following environmental factors influence trading area size: • Retail compatibility-Shoppers tend to be drawn to clusters of related businesses. • Degree of competition-Size, location, and activity of competing businesses. • Index of retail saturation-Measures the level of saturation in an area; ratio of a trading area's sales potential for a particular product or service to its sales capacity. • Reilly's Law of Retail Gravitation-Uses an analogy of gravity to estimate the attractiveness of a particular business to potential customers. • Transportation network-Highways, roads, and public service routes that presently exist or are planned. If customers find it inconvenient to get to a location, the store's trading area is reduced. • Physical and psychological barriers-Parks, rivers, lakes, high crime areas; clusters of people sharing a common culture and language; fear. • Customer traffic-The business must be able to generate sufficient sales to surpass its breakeven point, and that requires an ample volume of customer traffic going past its doors. • Adequate parking-If customers cannot find convenient and safe parking, they are not likely to stop in the area. • Reputation-Of the previous owner or the fact that several businesses have failed in that location (creates negative image in customers' minds). • Visibility-Makes it easy for customers to find your business and to make purchases. 198) List and discuss the eight options where retail and service businesses can serve their customers. What are their advantages and disadvantages? Answer: 1. Central business districts (CBDs)-The traditional center of town. Advantages include the ability to attract customers from the entire trading area and benefiting from the customer traffic generated by other stores in the district. Disadvantages may include intense competition, high rental rates, traffic congestion, and inadequate parking facilities. 2. Neighborhood locations -Locating near residential areas relies heavily on the local trading areas for business. Most grocery stores are within a five-mile radius of their customers. An advantage is relatively low rents and operating costs. 3. Shopping centers and malls-There are four types and each have separate requirements: neighborhood shopping centers (3-12 stores within a 10-mile drive), community shopping centers (12-50 stores from 40-150 thousand people), regional shopping malls (50-100 stores needs an excess of 150,000 people living within 20- 40-minute drive), power centers (80 percent need to be anchor stores). 4. Near competitors-High price items and those products and services that customers prefer to comparison shop, typically benefit from locating near competitors or retail outlets offering complementary offerings. Potential disadvantage of market saturation, with one store cannibalizing sales from another, making it difficult to succeed. 5. Inside large retail stores-Cooperating with large retail store and locating their businesses inside can result in higher foot traffic and potentially offer greater value. 6. Nontraditional locations-Airports, museums, office buildings, churches, casinos, college and university campuses are example of locations that offer a high concentration of potential and qualified customers. 7. Home-based businesses-A total of 24 million, almost 52 percent of all small businesses, and the fastest growing segment. The biggest benefit is the low cost of set up and operations. The disadvantages include interruptions, isolation, and neighborhood and zoning regulations. 8. On the road-Mobile business solutions fit some entrepreneurs location need such as veterinarians, dentist, restaurants, and other businesses that "come to their" customers. 199) What is a business incubator? What can an incubator offer an entrepreneur just starting out? Answer: A business incubator is an organization that combines low-cost, flexible rental space with a multitude of support services. This may include secretarial services, meeting rooms, fax machine, telephone systems, and other operational requirements for its small business residents. The goal of the incubator is to nurture young companies during the volatile start-up period and to help them survive until they are strong enough to go out on their own. Incubators have entry requirements and expectations for graduation. After graduation into the business world, these businesses have a significantly higher success rate than independent small businesses. 200) Briefly explain the fundamental considerations in evaluating an existing building as a location. Utilize the explanation of zoning laws, ergonomics and the Americans with Disabilities Act in your explanation. Answer: Zoning is a system that divides a city or county into small cells or districts to control the use of the land, buildings, and sites. Its purpose is to contain similar activities in suitable locations. Each city has its own ordinances that place restrictions on certain types of business activity altogether. Because of this, entrepreneurs must be familiar with all necessary ordinances in cities where they are considering a building location. The Americans with Disabilities Act requires practically all businesses to make their facilities available to physically challenged customers and employees. In addition, the law requires businesses with 15 employees or more to accommodate physically challenged people in their hiring practices. The law requires business owners to remove architectural and communication barriers when "readily achievable." Although the law allows for a good deal of flexibility in retrofitting existing structures, buildings that are occupied after January 25, 1993, must comply with all aspects of the law. Ergonomics, the science of adapting work and the work environment to complement employees' strengths and to suit customers' needs, is an integral part of a successful design. An ergonomically designed workplace can improve workers' productivity significantly and decrease days lost due to injuries and accidents. 201) Identify and describe the goal/purpose of the three types of manufacturing layouts. Answer: Product layouts consist of an unbroken flow from raw material input or customer arrival to finished goods to customer's departure. This layout is best suited for rigid-flow, high-volume, continuous or mass-production operations, or when service or product is highly standardized. Products are routed along the same fixed path and are usually scheduled by a production rate. This layout does lower material handling costs, simplify tasks, and reduce the amounts in work-in-process inventory, but is characterized by its inflexibility, monotony of job tasks, high investment in specialized equipment, and heavy interdependence of all operations. Process layouts group workers or equipment according to the general function that they perform. They are most applicable when production runs are short, when demand varies, when the costs of holding finished goods inventory are high, or when the service or product is customized. Fixed position layouts are similar to product layouts, but due to bulk or weight, the final product is assembled in one spot. 202) Select six of the features that are important to a lean, efficient manufacturing layout and identify a potential benefit that they may offer the business. Answer: Students are to respond with five of these features and identify at least one benefit. 1. Planned materials flow pattern-efficiency and inventory control 2. Straight-line layout-efficiency 3. Straight, clearly marked aisles-efficiency and safety 4. Backtracking kept to a minimum-efficiency and safety 5. Related operations located close together-efficiency 6. Minimum amount of in-process inventory on hand-cost control 7. Easy adjustment to changing conditions-flexibility 8. Minimum materials handling distances-efficiency and safety 9. Minimum of manual handling of materials and products-efficiency and safety 10. Ergonomically designed work centers-safety and efficiency 11. Minimum distances between work stations and processes-efficiency and safety 12. No unnecessary re-handling of material-efficiency and safety 13. Minimum handling between operations-efficiency and safety 14. Minimum storage-cost and inventory control 15. Materials delivered to production employees just in time-efficiency and cost control 16. Materials efficiently removed from the work area-cost control and safety 17. Maximum visibility-efficiency and safety 18. Orderly materials handling and storage-efficiency 19. Good housekeeping and minimal clutter-safety, efficiency, and cost control 20. Maximum flexibility-adaptability and cost advantages 21. Maximum communications-efficiency and safety Mini-Case 14-1: Hungarian Heaven Mike Pontya has operated a neighborhood restaurant in Cleveland for over 30 years. Mike is planning to move to Arizona because of his health, and has put the business up for sale. The restaurant, which caters to the local trade, is well known in the Hungarian community of Cleveland as having the best authentic Hungarian food in town, but it is not in a traditional restaurant district. The restaurant has parking for 10 cars. Most customers park on the street. In the past, this was not a problem as there was a great deal of walk-in business from the neighborhood. Now, however, a new four-lane highway passes by the front door of the restaurant. There is a stoplight on the corner the restaurant is on to improve access to the highway for drivers emerging from the neighborhood. The flight to the suburbs has taken a heavy toll on the neighborhood. However, the restaurant is still doing well financially. Terry and Judy Kozma are brother and sister who share a love for cooking and a desire to be in the restaurant business. All of their relatives have encouraged them to quit their jobs and buy the restaurant. Terry and Judy were reared two blocks from the restaurant, and both worked part-time for Mike Pontya while in college. 203) What site analysis criteria are relevant to Terry and Judy's evaluation of the restaurant's location? Answer: Although no entrepreneur has a crystal ball for peering into the future to evaluate the long-run value of a site, he can observe general trends. While the restaurant is well established and is financially successful now, Terry and Judy must be concerned about the number of potential customers moving away from the old neighborhood. Restaurants such as these must be close to their clientele, and it appears that Hungarian Heaven's customer base is steadily dwindling. 204) What are the advantages and disadvantages of the restaurant's current location? Answer: Mini-Case 14-2: "It's a Great Location for a Bar" Fred Stanford has just completed bartenders' school in Los Angeles and is ready to build a life for himself. Sunday's paper has an ad in the business opportunities section for a bar in Mesa Verde, Colorado. Fred has heard that the West is a high growth area and the quality of life in Colorado is very good. Fred's best friend, Carl, begins to ask Fred some questions about his new idea. "To begin with, Fred, where is Mesa Verde, Colorado?" Fred decides to call the telephone number in the ad and is put in touch with Ansel King, a business broker located in Pueblo, Colorado. When asked where in Colorado Mesa Verde was, Ansel was prompt to point out that it was only 35 miles from Pueblo on the Interstate and has a population of nearly ten thousand. "Fred, this town is a great location for a bar, and I have just the kind of deal for a young man like you looking to get started." 205) What city-related factors does Fred need to consider when evaluating this community as a location for a bar? Answer: Fred should look at the city's population trends and composition, its laws and regulations (especially those affecting bars), the nature and the extent of competition, the city's attitude toward bars (compatibility with the community), and the public services the city offers. 206) What publications could Fred use to investigate whether or not this is a good region for this bar? Answer: This case study offers students a chance to establish a procedure for analyzing a potential business location. It appears that Fred may be choosing a location by chance instead of by careful analysis. The basic approach is the region of the country, the state in the region, the city in the state, the neighborhood in the city, and the specific site in the neighborhood. A demographic analysis of the area is a good place to begin. Mini-Case 14-3: Custom Cars, Inc. Al and Helen Wise have a love affair with cars. After collecting and restoring cars for a number of years, they decide to form their own "kit car" company. This type of company sells "kits" to people who want to build their own functioning replicas of famous or collectable cars. About 60 percent of their business is selling the kits, 10 percent is conducting classes and seminars on assembling the kits, and the remaining 30 percent is actually building the cars for the customers. Their business has three distinct manufacturing issues. The production of the car kits, the assembly of the custom cars for owners who want them but do not have the time to do the work themselves, and the "assembling and selling" training seminars on how to put the cars together. 207) Explain which manufacturing layout would be best for each of the three manufacturing issues the Wises face. Answer: Kit production: probably the most efficient layout for kit production would be either the product layout or the process layout. Custom car assembly: again, the best layouts for the Wises to consider are the product layout and the process layout. Training seminars: a "hands-on" classroom would be ideal here so that customers can practice what they learn. The Wises should consider including video equipment in their layout to improve their teaching flexibility. Mini-Case 14-4: "We're Moving On Up" Mike and Earl Moore, owners of College Men's Unlimited, have just signed a five-year lease in the new College Town Mall. The new mall is ideally located for their business-a short walk from campus and only two blocks from downtown. The far side of the mall is bounded by the most prestigious homes in the city. It will be opening in five weeks and Mike and Earl are lucky to have such a prime spot. Ray Thomas, their banker, called them last Wednesday with word that the store, which had agreed to take the space they just leased, had canceled. Eighteen months ago when the mall had put this location up for lease, they were not in a financial condition to make a commitment. In the last 18 months, however, business has been exceptional. The city has grown and the college has experienced expanded enrollments. By next Monday morning, Mike and Earl must provide the mall developer with a complete layout for their new store so the developer can assign an emergency work crew to complete the store for the grand opening. College Men's Unlimited is a full-line men's store offering middle- to upper-quality traditional men's wearing apparel. The present location is an old two-story house that Mike and Earl converted into their combination business and living area. The house has 4,000 square feet of area, 3,600 being used for the store, and the rest for a three-room apartment. The new store has a 30-foot front and is 70 feet deep. The mall developer is willing to put up walls for storage and office space wherever they wish. 208) What other considerations should be included in the layout? Answer: This case asks the student to develop the layout for a men's clothing store to be located in a mall location. While student responses will vary, certain general principles should emerge. • Separate selling and nonselling activities. • Locate shopping and specialty goods at the rear of the store. • Place impulse items in high exposure areas. • Store should be well lighted; track lighting could be used to accent clothing and displays. • Pastel colors that do not clash with the merchandise would be wise. • A free-form layout, which offers an informal atmosphere, should be used. • The layout should be spacious and uncluttered. • Those items accounting for the greatest portion of sales volume should be located in the most valuable selling space. • An angled storefront might invite shoppers to enter the store. In addition to functionality and aesthetics, considerations such as ergonomics and accessibility are crucial in designing a layout. These ensure usability and comfort for all users. 209) Assuming that the new store space is 2,100 square feet (30' × 70'), and that the shape is rectangular, draw a layout for the new men's store. What merchandise should be placed where? What size office space and storage is needed? Where should counters be placed? Answer: Student responses will vary and here is one possible store layout. For a 2,100 square feet men's store with a rectangular shape (30 × 70): 1. Merchandise Placement: Place high-demand items near the entrance and along main aisles. Separate sections for casual wear, formal wear, accessories, and shoes. 2. Office and Storage Space: Allocate 150-200 square feet for office and 250-300 square feet for storage, positioned at the back. 3. Counters: Position checkout counters near the entrance/exit for convenience. 4. Fitting Rooms: Place fitting rooms near the center or back to encourage browsing. Test Bank for Essentials of Entrepreneurship and Small Business Management Norman M. Scarborough 9780132666794, 9780273787129, 9780134741086, 9780136109594, 9780133930382