6. Finance (25%)

Question 1

Principle # 1 of entrepreurial finance?

Answer 1

Real, human, and financial Capital must be rented from Owners

Question 2

Principle # 2 of entrepreurial finance?

Answer 2

Risk and expected Reward go hand in hand

Question 3

Principle # 3 of entrepreurial finance?

Answer 3

While accounting is the language of business, cash is the currency

Question 4

Principle # 4 of entrepreurial finance?

Answer 4

New venture Financing involves search, negotiation, and privacy

Question 5

Principle # 5 of entrepreurial finance?

Answer 5

A venture’s financial Objective is to Increase Value

Question 6

Principle # 6 of entrepreurial finance?

Answer 6

It is dangerous to assume that people act against their own self-interests

Question 7

Principle # 7 of entrepreurial finance?

Answer 7

Venture character and reputation can be assets or liabilities

Question 8

Cash vs. profit

Which principle, and which accounts are relevant?

Answer 8

Principle 3: while accounting is the language of business, cash is the currency

A company that is profitable can go bankrupt

Sales revenue -Accounts receivable
Expenses -Accounts payable
Depreciation/amortization -not cash
Owners’ equity -cash to use for business?

Question 9

Sales revenue -accounts receivable relation?

Answer 9

if you don’t collect cash from your sales, your income statement will Show Profit, but you will not be able to pay off any debts (no cash)

Question 10

Expenses -Accounts Payable relation?

Answer 10

You have cash on hand, but you actually owe it to the creditors

Question 11

Amortization’s cash/profit relation?

Answer 11

not actually cash but valuation. your house doesn’t rain money when it goes up in value

Question 12

Owners’ Equity in terms of cash/profit

Answer 12

cash to use for business

Question 13

Survival/cash flow breakeven

Answer 13

some new venture show profitability during the startup stage but

Question 14

Breakeven

Answer 14

at cash breakeven, EBDAT=0 and revenues=expenses

Question 15

Drivers

Answer 15

not done

Question 16

Leverage

Answer 16

Often a company has to tradeoff accepting higher fixed costs VCRR (variable cost revenue ratio). they must increase operating leverage

Ex. a firm could buy a new more highly automated piece of machinery (higher fixed costs) to get lower labour and material costs per unit (lower variable costs)

Question 17

Leverage: What do higher fixed costs mean?

Answer 17

higher fixed costs mean more has to be sold to cover them. i.e. higher survival revenue (breakeven)=higher risk BUT…

Question 18

What is the result of lower variable costs?

Answer 18

lower variable costs result in a higher contribution and therefore the return (EBDAT -earnings before depreciation/amortization and taxes) is higher Above breakeven

Principle 2 of entrepreneurial finance: risk and expected reward go hand in hand