Chapter 20 Venture Capital Firms, Finance Companies,
and Financial Conglomerates
20.1 Multiple Choice
1) A
is a specialized firm that finances young, start-up companies.
A) enture capital firm
!) finance company
C) small-"usiness finance company
#) capital-creation company
Ans$er% A
2) &enture capital firms are usually organized as
A) closed-end mutual funds
!) limited partnerships
C) corporations
#) nonprofit "usinesses
Ans$er% !
') (hich of the follo$ing is not a characteristic feature of enture capital firms
A) *unding +ust one or a small num"er of firms.
!) olding e uity in the firms that are funded.
C) a ing a long-term in estment horizon.
#) ro iding ad ice and assistance to the firms that are funded.
Ans$er% A
/) (hich of the follo$ing is a characteristic feature of enture capital firms
A) #e eloping a portfolio of companies.
!) olding de"t in the firms that are funded.
C) Allo$ing firms to use the funds as they see fit.
#) a ing a short-term in estment horizon.
Ans$er% A
) he largest industry group recei ing enture capital funding is
A) computer soft$are.
!) medical health.
C) computer hard$are.
#) none of the a"o e.
Ans$er% #
3) he source of enture capital funding has
A) shifted from $ealthy indi iduals to pension funds and corporations.
!) shifted from pension funds and corporations to $ealthy indi iduals.
C) decreased since 1440.
#) none of the a"o e.
Ans$er% A
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5) A typical enture capital firm has a
num"er of in estors $ho each
contri"ute a
amount of money to the fund.
A) large6 small
!) small6 large
C) large6 large
#) small6 small
Ans$er% !
7) he 20-year a erage return of enture capital firms has "een a"out
.
A) 0 percent
!) 7 percent
C) 20 percent
#) 100 percent
Ans$er% C
4) he earliest e8amples of finance companies date "ac9 to the "eginning of the 1700s
$hen retailers offered
A) installment credit to customers.
!) "alloon loans to customers.
C) zero-interest loans to customers.
#) all of the a"o e to customers.
Ans$er% A
10) Most automo"ile financing is pro ided "y
A) commercial "an9s.
!) thrifts.
C) finance companies o$ned "y automo"ile companies.
#) finance companies o$ned "y real estate "ro9ers.
Ans$er% C
11) *inance companies
A) are money mar9et intermediaries.
!) "orro$ in large amounts, "ut lend in small amounts.
C) are irtually unregulated.
#) are all of the a"o e.
:) are only ;A) and ;!) of the a"o e.
Ans$er% #
12) Consumer finance companies can "e distinguished from commercial "an9s
"ecause
consumer finance companies
A) often accept loans $ith much higher default ris9 than "an9s $ould.
!) are often $holly o$ned "y a manufacturer that might "e $illing to oferfaora"le
credit terms to sell products.
C) typically offer lo$er interest rates to its loan customers than do "an9s.
#) do all of the a"o e.
:) do only ;A) and ;!) of the a"o e.
Ans$er% :
25'
1') (hich of the follo$ing statements a"out finance companies are true
A) *inance company delin uency rates are usually higher than those for "an9s orthrifts.
!) *inance companies charge higher interest rates than do commercial "an9s.
C) <nterest-rate ris9 is a more serious pro"lem for finance companies than for
"an9s and thrifts.
#) All of the a"o e are true.
:) =nly ;A) and ;!) of the a"o e are true.
Ans$er% :
1/) he three types of finance companies are
A) "usiness, consumer, and retail.
!) "usiness, sales, and consumer.
C) retail, $holesale, and consumer.
#) retail, "usiness, and sales.
Ans$er% !
1 ) =f the types of loans made "y finance companies,
A) consumer loans account for a"out 0 percent of all loans.
!) real estate loans account for a"out /0 percent of all loans.
C) "usiness loans account for a"out
percent of all loans.
#) consumer and real estate loans account for a"out
percent of all loans.
Ans$er% C
13) (hich of the follo$ing statements a"out finance companies are true
A) *inance companies offered loans secured "y accounts recei a"le "efore
commercial "an9s did.
!) *inance companies gained a reputation for "eing more inno ati e than "an9s at
finding $ays to finance small "usinesses.
C) >oans secured "y motor ehicles, $hich include loans to "uy autos for
"usiness use and for resale, are the second most common type of finance
company loan.
#) All of the a"o e are true.
:) =nly ;A) and ;!) of the a"o e.
Ans$er% #
15) (hich of the follo$ing statements a"out finance companies are true
A) *inance companies ha e gained a reputation for "eing more inno ati e than
"an9s at finding $ays to finance small "usinesses.
!) >oans secured "y automo"iles are the most common type of finance company
loan.
C) !ecause finance companies are irtually unregulated, they charge lo$erinterest
rates than do commercial "an9s.
#) All of the a"o e are true.
:) =nly ;A) and ;!) of the a"o e are true.
Ans$er% A
25/
17) !usiness finance companies pro ide specialized forms of credit to "usinesses "y
ma9ing loans and purchasing accounts recei a"le at a discount6 this pro ision of credit
is called
A) discounting.
!) factoring.
C) refinancing
#) spar9ing.
Ans$er% !
14) *irms might sell accounts recei a"le to finance companies
A) to o"tain uic9 cash.
!) to a oid the cost of funding a credit department.
C) "ecause they don?t $ant to spoil their relationships $ith customers o er "ill
collection hassles.
#) for all of the a"o e reasons.
Ans$er% #
20) !usiness finance companies specialize in leasing "ecause
A) it ma9es repossession of an asset easier.
!) the lessee is often not re uired to ma9e as large an up-front payment as is
usually re uired on a loan to purchase.
C) the finance company might capture ta8 "enefits if the firm leasing the asset
does not ha e income to offset $ith depreciation.
#) of all of the a"o e.
:) of only ;A) and ;!) of the a"o e.
Ans$er% #
21) !usiness finance companies pro ide
A) factoring.
!) e uipment that can "e leased.
C) chec9ing accounts.
#) all of the a"o e.
:) only ;A) and ;!) of the a"o e.
Ans$er% :
22) <n a
arrangement, the finance company pays for the car dealership?s
in entory of cars recei ed from the manufacturer and puts a lien on each carfinanced.
A) factoring
!) floor plan
C) roll o er leasing
Ans$er% !
25
2') Consumer finance companies
A) ma9e loans to consumers $ho cannot o"tain credit from other sources.
!) are o$ned "y separate corporations or "an9s.
C) charge high interest rates "ecause their loans are high ris9.
#) do all of the a"o e.
Ans$er% #
2/) Consumer finance companies
A) charge lo$ interest rates on consumer loans.
!) ma9e relati ely safe loans "ecause finance companies re uire high le els ofcolateral.
C) pro ide small retailers $ith @pri ate la"el credit card ser ices.
#) do all of the a"o e.
:) do only ;A) and ;!) of the a"o e.
Ans$er% C
2 ) *inance companies that ma9e loans to purchase items from a particular retailer
ormanufactureare called
A) retail finance companies.
!) sales finance companies.
C) consumer finance companies.
#) corporate finance companies.
Ans$er% !
23) BMAC is an e8ample of a
A) capti e finance company.
!) corporate finance company.
C) floor plan finance company.
#) "usiness finance company.
Ans$er% A
25) *inance companies are far less regulated than "an9s and thrifts "ecause
A) its depositors are e8clusi ely large institutional in estors.
!) there are no regulations on su"sidiaries of a "an9 holding company.
C) there are no depositors to protect.
#) there are fe$ cases of finance companies failing.
:) the capital-to-total-assets ratio of finance companies is relati ely strong
compared to that of "an9s and thrifts.
Ans$er% C
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27)
statutes
A) allo$ consumers to declare "an9ruptcy $hile still retaining o$nership of many
of their assets.
!) re uire finance companies to disclose the annual percentage rate charged on
loans.
C) impose restrictions on finance companies? a"ility to collect on delin uent
loans.
#) set a ceiling on interest rates that can "e charged on finance company loans.
:) only ;A) and ;!) of the a"o e.
Ans$er% #
24) *inance companies are re uired "y truth in lending regulations to disclose the
annual percentage rate charged on loans. his regulation is 9no$n as
A) Degulation E.
!) Degulation F.
C) Degulation .
#) Degulation C.
Ans$er% !
'0) Degulations designed to protect consumers in their dealings $ith finance
companies
include
A) truth in lending legislation.
!) usury statutes.
C) "an9ruptcy statutes.
#) all of the a"o e.
:) only ;A) and ;!) of the a"o e.
Ans$er% #
'1) he primary asset of a typical finance company is its
A) commercial paper.
!) reser es for loan losses.
C) loan portfolio.
#) "an9 loans.
Ans$er% C
'2) =n a erage, finance companies ha e a
capital-to-assets ratio.
A) 12 percent
!) 10 percent
C) 4 percent
#) 7 percent
Ans$er% A
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'') he primary source of income for finance companies is
A) interest income from its loan portfolio.
!) income from leasing cars and truc9s.
C) interest income from commercial paper.
#) income from loan origination fees.
Ans$er% A
'/) *inance companies? total assets ha e sho$n steady gro$th e8cept in the
A) early 1470s, $hen interest rates increased sharply.
!) mid 1470s, $hen defaults on consumer de"t rose sharply.
C) late 1470s, $hen legislation that supported the re i al of the commercial
"an9ing industry $as passed.
#) early 1440s, $hen a recession caused a dip in "usiness loans.
:) mid and late 1440s, $hen gro$th in the assets of commercial "an9s $as ery
strong.
Ans$er% A
' ) *inancial conglomerates "egan
A) $hen rudential <nsurance Company ac uired !ache Gecurities.
!) $hen Merrill >ynch made a cash management account a aila"le to its
customers.
C) $hen Citicorp merged $ith the ra elers Broup.
#) $hen Gears added Cold$ell !an9er Deal :state and #ean (itter to its
holdings of Allstate <nsurance Company and Allstate >ife <nsurance Company.
:) $hen ra elers <nsurance merged $ith Galomon Gmith !arne y.
Ans$er% !
'3) =ne goal of creating a financial conglomerate is to achie e economies of scope,
$hich reflect
A) sa ings achie ed through increased size.
!) sa ings that come from cutting +o"s.
C) sa ings that come from larger issues of "onds and stoc9s to finance operations.
#) re enues that come from offering a product in many locations.
:) re enues that come from offering many products in one location.
Ans$er% :
'5) An e8ception to the rule that financial conglomerates tend to fail is
A) Beneral :lectric Capital Ger ices.
!) Gears.
C) Citigroup.
#) ra elers.
:) Hero8.
Ans$er% A
257
'7) Beneral :lectric Capital Ger ices does not o$n
A) one of the ma+or in estment "an9s.
!) one of the largest commercial "an9s.
C) one of the leading suppliers of pri ate-la"el credit cards.
#) one of the largest property and casualty reinsurers.
Ans$er% !
20.2
rue *alse
1) &enture capital firms reduce ris9 "y in esting in only a fe$ companies $hich can
"e
carefully monitored and nurtured.
Ans$er% *A>G:
2) <n estors in enture capital firms e8pect to profit uic9ly from their in estment.
Ans$er% *A>G:
') A "alloon loan re uires the "orro$er to ma9e a single large payment at the loan?s
maturity to retire the de"t.
Ans$er% D :
/) *inance companies face se eral types of ris9. he greatest is li uidity ris9.
Ans$er% *A>G:
) Iot until the Breat #epression did commercial "an9s "egin competing for loans
secured "y accounts recei a"le.
Ans$er% D :
3) (hen finance companies pro ide credit to "usiness firms "y purchasing theiraccounts
recei a"le at a discount, the credit is referred to as a floor plan.
Ans$er% *A>G:
5) Gales finance companies ma9e loans to consumers to purchase items from a
particular retailer or manufacturer.
Ans$er% D :
7) A sales finance company, also called a capti e finance company, is o$ned "y the
manufacturer to ma9e loans to consumers to help finance the purchase of the
manufacturer?s products.
Ans$er% D :
4) Capti e finance companies often offer interest rates "elo$ those of "an9s to
increase sales.
Ans$er% D :
254
10) Compared to commercial "an9s and thrifts, finance companies are hea ily
regulated.
Ans$er% *A>G:
11) *inance companies allocate a portion of their income each period to an account to
"e used to offset losses, called the reser e for loan losses.
Ans$er% D :
12) *inancial conglomerates are firms offering a ariety of financial ser ices under
one
um"rella.
Ans$er% D :
20.' :ssay
1) (hat niche in the financial system do enture capital firms fill
2) o$ do enture capital firms o ercome the pro"lem of information asymmetries
that accompany start-up firms
') :8plain $hy sales finance companies might offer loans at "elo$ mar9et interest
rates.
/) (hy ha e finance companies "een more inno ati e than commercial "an9s and
thrifts
) :8plain the ad antages to "oth firms and finance companies $hen finance
companies lease "usiness e uipment to firms.
3) :8plain ho$ economies of "oth scale and scope confer ad antages that financial
conglomerates might en+oy.
5) (hat types of ris9 do finance companies face that commercial "an9s do not (hat
types of ris9 do commercial "an9s face that finance companies do not
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