🔁 Review🛠️ Skill BuilderMultiple choice sections are Review. Case study sections are Skill Builders.
A self-grading practice test for Unit 3 — Business and Personal Finance, Tasks 1–5: 50 questions on saving and savings vehicles, borrowing and credit scores, accounting and finance roles, startup costs and business expenses, and financial capital (debt vs. equity, break-even, and rate of return). Tap an answer to see instantly whether you're right, with an explanation. These are practice questions (not the ones on your real test), so focus on understanding each idea and checking your math.
1. Priya wants $2,400 for a laptop and dorm supplies when she starts college in 15 months. She has already saved $600 toward this goal and expects $300 in graduation gifts that she will add to it. How much must she save each month to reach her goal on time?
Answer: A. Amount still needed = $2,400 − $600 already saved − $300 in gifts = $1,500, and $1,500 ÷ 15 months = $100 a month. Leaving out the gifts gives $1,800 ÷ 15 = $120, leaving out what she has already saved gives $2,100 ÷ 15 = $140, and dividing the full $2,400 by 15 ignores both and gives $160.
2. Jada keeps $5,000 in a savings account that pays 1% interest a year. Over the same year, prices rise about 4%. Which best describes her savings at the end of the year?
Answer: B. Her balance grows by 1% to $5,050, but prices grow by about 4%, so each dollar buys less. Inflation reduces purchasing power, and savings grow in real terms only when the interest rate beats inflation. Inflation doesn't remove dollars from the account, and deposit insurance protects against a bank failing, not against rising prices.
3. Wesley received a $6,000 gift that he plans to use for a home down payment in exactly two years. He won't need the money before then, and he wants a guaranteed interest rate with no risk of losing any of it. Which savings vehicle fits best?
Answer: D. A certificate of deposit (CD) is insured and usually locks in a higher guaranteed rate than a savings or money market account, in exchange for leaving the money alone for a set term, which Wesley can do. A 2-year term matches his timeline; a 5-year CD would charge an early-withdrawal penalty when he needs the money. A money market account's rate isn't locked in, and he doesn't need its easier access. Stocks aren't insured and can lose value.
4. Harold, a retiree, sold his house and deposited all $340,000 in a single savings account in his own name at one FDIC-insured bank. If the bank failed, how much of his deposit would not be covered by FDIC insurance?
Answer: B. The FDIC insures deposits up to $250,000 per depositor, per insured bank, per ownership category, so $340,000 − $250,000 = $90,000 is uninsured. $0 assumes every dollar at an insured bank is covered, $250,000 is the insured amount rather than the uninsured amount, and $340,000 assumes going over the limit cancels all coverage. Harold could protect all of it by spreading the money across more than one insured bank.
5. Which development is a technological factor that would most likely discourage saving?
Answer: C. Fast, easy mobile payments make spending effortless, which works against saving. The recession is an economic factor that pushes people to save more, the tax law is a political factor that rewards saving, and the round-up app is technological but encourages saving.
6. Which person faces a financial barrier to saving rather than a psychological one?
Answer: C. Inconsistent income is a financial barrier: it's hard to commit to a set monthly deposit when pay changes from week to week. The other three are psychological barriers: impulse buying, lifestyle inflation (lifestyle creep), and the pull of instant gratification.
7. Darnell earns $40,000 a year and puts 8% of his pay into his workplace retirement plan. His employer adds 50 cents for every dollar he contributes, but only on contributions up to 6% of his pay. How much does his employer add to his account each year?
Answer: A. The match applies only to the first 6% of pay: 6% × $40,000 = $2,400, and 50% of $2,400 = $1,200. Matching all 8% (50% × $3,200 = $1,600) ignores the 6% cap, $2,400 treats the match as dollar-for-dollar, and $4,400 adds Darnell's own $3,200 to the match. An employer match is free money, which makes it a strong incentive to save.
8. Kayla, 19, has very little credit history. Her credit union will lend her $1,500 at 4% if she pledges the $1,500 in her savings account, or at 11% as an unsecured personal loan. Why is the first rate so much lower?
Answer: A. In a secured loan, the borrower pledges collateral (here, her savings) that the lender can keep if she doesn't repay. That lowers the lender's risk, so it charges a lower rate. No law sets credit union rates by loan size, pledging savings doesn't change her credit score, and the rate difference comes from risk, not from how quickly the loan is repaid.
9. Terrell needs $300 before payday, so he takes a two-week payday loan with a $45 fee and no credit check. When it's due he can't repay, so he renews it twice, paying a new $45 fee each time, and then repays the $300. How much did Terrell pay in fees?
Answer: C. He paid the original fee plus two renewal fees: 3 × $45 = $135, which is 45% of the $300 he borrowed, in about six weeks. $45 counts only the first fee, $90 counts only the two renewals, and $435 adds in the $300 he repaid, which was the loan itself, not a fee. Payday loans offer quick cash with no credit check, and very high fees are the price.
10. After losing her job, Monique can't keep up with the payments on four credit cards. Which statement about her options is accurate?
Answer: A.Bankruptcy is a legal proceeding that eliminates some debts and sets a structured repayment plan for others, but it seriously damages credit, so it comes last. Debt consolidation combines several debts into one loan that she still has to repay, credit counseling is usually an early step rather than something that follows bankruptcy, and a debt management plan restructures her payments rather than stopping them.
11. Lorenzo has a 780 credit score and has never missed a payment. He applies for a $25,000 loan, but his current debt payments already use up 55% of his monthly income. Why might the lender still deny the loan or charge a higher rate?
Answer: A. Creditworthiness is more than a score. Lenders also look at capacity, whether a borrower's income can handle another payment, and with 55% of his income already going to debt, a new payment could stretch Lorenzo too thin. On the 300–850 FICO scale, 780 is well above the roughly 700 that is generally considered good, lenders use scores for all kinds of credit, and having some debt is normal when it is managed well.
12. Which pairing of a consumer protection law with a problem it addresses is correct?
Answer: B. The Fair Credit Reporting Act requires accurate credit reports and lets you dispute errors, such as an account you never opened. Denying credit because of religion violates the Equal Credit Opportunity Act, and the Truth in Lending Act requires lenders to clearly disclose the APR and loan terms. Each wrong choice attaches a real law to a different law's problem.
13. Carmen has an extra $200 a month to put toward debt while she keeps paying every minimum. She owes $4,800 on a credit card at 22% APR, $9,500 on a car loan at 7%, and $700 on a 0% store furniture plan that her regular payments will finish in 10 months. Where should the extra $200 go to save the most on interest?
Answer: D. Paying down the highest-interest debt first saves the most money, because every extra dollar sent to the 22% card avoids the most interest. The car loan's balance is bigger, but its rate is much lower. The furniture plan charges no interest, so paying it early saves nothing, and splitting the money sends part of it to cheaper debt.
14. Each person below could afford the monthly payments on a $900 purchase. Which situation makes the strongest case for borrowing rather than waiting to save?
Answer: D. Borrowing makes the most sense for a need that is urgent or helps you earn income, such as training required for a job, when the payments are affordable. Concert tickets are a want even when the payments fit, the TV can wait for a few months of saving, and unclear terms are a reason not to borrow at all.
15. Gabriela is buying a $13,000 used car. Offer A: pay $1,000 down and borrow $12,000, repaid with 48 monthly payments of $290. Offer B: pay $4,000 down and borrow $9,000 at a lower rate, repaid with 48 monthly payments of $210. How much less interest does she pay with Offer B?
Answer: B. Interest = total repaid − amount borrowed. Offer A: 48 × $290 = $13,920, and $13,920 − $12,000 = $1,920. Offer B: 48 × $210 = $10,080, and $10,080 − $9,000 = $1,080. Offer B saves $1,920 − $1,080 = $840. $3,840 compares total repaid ($13,920 − $10,080) without accounting for the $3,000 less she borrows with Offer B, $80 is only the difference in monthly payments, and $1,080 is Offer B's interest, not the savings.
16. At Ridgeline Appliances, which task would most likely be handled by the finance department rather than the accounting department?
Answer: A. The finance department analyzes the data that accounting compiles and recommends strategy, such as how to pay for an expansion. Recording transactions, preparing financial statements, and making sure taxes are filed correctly are all jobs of the accounting department. Accounting keeps score; finance uses the score to plan.
17. An accountant at Bayside Inns, a hotel chain, prepares a monthly report for hotel managers comparing each location's cleaning and laundry costs so they can plan staffing. In this role she is working as a:
Answer: D.Managerial accountants give financial information to managers inside the business for planning and decisions, like staffing. Financial accountants prepare the formal statements that outside stakeholders, such as investors and lenders, rely on. Nothing in her report involves investigating fraud or filing taxes.
18. Crunchwell Snacks, whose stock is publicly traded, had a strong year selling chips but took a large loss on an energy-bar line it has now discontinued. The CEO suggests reporting only the chip results to investors. Why isn't this acceptable?
Answer: D. Publicly traded U.S. companies follow GAAP (Generally Accepted Accounting Principles), the rules and standards for financial reporting, and must report negative information as well as positive so investors aren't misled; discontinuing the energy-bar line doesn't erase its losses. The accounting department, not finance, prepares the financial statements. Tax rules govern what a company owes in taxes, not what it reports to investors. Managerial accountants serve managers inside the company; financial accountants prepare the statements that outside investors use.
19. Yuki owns a dog-grooming salon and applies for a bank loan to open a second location. Why does the bank ask for her financial statements from the past two years?
Answer: B. Lenders use a business's financial records to judge its performance and its ability to repay. Past statements can't prove that a new location will be profitable, they don't replace the rest of a credit check, and setting prices is the owner's decision, not the bank's.
20. Nina, 30, inherited $40,000 and wants advice on investing it for retirement in a way that fits her goals and her comfort with risk. Which professional best fits her need?
Answer: D. A financial adviser gives professional investing advice tailored to a client's situation and attitude toward risk. A CPA is a state-licensed accountant who helps with taxes and compliance, a forensic accountant investigates fraud, and a credit counselor helps people manage debt.
21. Ten Tips Nail Studio is listing its costs to open. Which one is an initial expense rather than a one-time expense?
Answer: C.Initial expenses are paid at launch and then keep recurring once the business operates, like rent. Equipment and furniture, renovation such as new plumbing, and business registration are one-time expenses, paid once to get the business ready to open.
22. Gearhouse Bikes buys bicycles from manufacturers and resells them in its store. Which cost belongs in its cost of goods sold (COGS)?
Answer: C. For a retailer, COGS is the cost of the merchandise it buys to resell. Cashier wages, advertising, and store rent are operating expenses, the costs of running the business day to day. They help sell the bikes, but they aren't the cost of the bikes themselves.
23. Shield Pest Control's monthly costs include: technicians' wages for service visits, $12,000; pest-control products used at customers' homes, $1,800; fuel for trucks driving to customers, $900; office rent, $2,000; receptionist's salary, $2,800; online ads, $700; and scheduling software, $150. What is its monthly cost of sales?
Answer: B. For a service business, cost of sales is the direct cost of delivering the service: the technicians' labor, materials used on the job, and travel to customers. $12,000 + $1,800 + $900 = $14,700. $13,800 leaves out the fuel, $17,500 also counts the receptionist, who supports the office rather than delivering the service, and $20,350 adds every cost, including operating expenses like rent, ads, and software.
24. Barkery Bites makes boxed dog treats. Its fixed costs are $3,200 a month, and its variable costs are $6 per box. Last month it made 800 boxes, for total costs of $8,000. If it makes 1,000 boxes next month, what will its total costs be?
Answer: C. Fixed costs stay the same as output changes; variable costs rise with output. $3,200 + ($6 × 1,000) = $3,200 + $6,000 = $9,200. $10,000 scales last month's whole $8,000 up by 25%, treating every cost as variable; $8,000 treats every cost as fixed; and $6,000 leaves out the fixed costs.
25. Oakline Furniture, a retail store, pays its salespeople a 5% commission on every sale. How is this cost best classified?
Answer: B. Commissions pay for the selling effort, not for buying or making the furniture, so they are an operating expense. Because they rise as sales rise, they are a variable cost. Rising with sales is what tempts people to call commissions COGS, but a cost can be variable without being part of COGS.
26. Hollis Hardware pays $2,400 a year for property insurance. When a fire causes $150,000 in damage, the insurance company pays the claim. How can the insurer afford to do this?
Answer: A. Insurance spreads risk: thousands of businesses pay premiums, only a few suffer large losses in any year, and the pooled money pays those claims, so no single business bears a loss it can't survive. Government deposit insurance (FDIC) protects bank deposits, not insurance companies; an insurance payout is not a loan; and no realistic premium increase would add up to $150,000.
27. Keisha's startup budget for Iron Pulse Fitness includes $36,000 to cover three months of rent, payroll, and utilities after the gym opens. Why include this money in the amount she raises before opening?
Answer: D. A working-capital reserve keeps a new business running while revenue builds, so it is often counted when estimating how much startup money is needed. Rent, payroll, and utilities are recurring operating expenses, not one-time costs; a reserve is cash set aside, not COGS; and no rule ties the reserve to the cost of equipment.
28. Harbor Print Co., a profitable sign maker, wins a $90,000 order from a hotel chain that will pay 60 days after delivery. Filling the order requires $35,000 for materials and overtime right away, more than Harbor has in cash. Why might Harbor seek outside financial capital?
Answer: D. Even a profitable business can face a cash-flow gap when it must pay suppliers and workers before customers pay. Outside capital, such as a line of credit, bridges that gap. The order should add to profit rather than cause a loss, borrowing isn't required to keep good credit, and outside money costs something: interest on a loan or ownership given to investors.
29. Leah starts a jewelry business using $8,000 of her savings and a personal credit card instead of seeking investors. What is the main tradeoff of this approach?
Answer: C. This is bootstrapping: funding a business from the founder's own resources. Leah keeps 100% ownership, but if the business struggles she loses her savings and still owes the credit card balance, with interest. Giving up ownership comes with equity financing, which she avoided.
30. Samir's robotics startup needs $15,000. Which source would require neither repayment nor giving up ownership?
Answer: B.Grants and pitch-competition prizes don't have to be repaid and don't cost any ownership, but they are competitive and take time to win. An angel investor receives shares, which are ownership. A loan from family must still be repaid even at 0% interest, and an SBA-backed loan is debt that must be repaid with interest.
31. Elijah buys a corporate bond issued by an airline. He buys it through a broker from another investor, not from the airline itself. What is Elijah's relationship to the airline?
Answer: D. A bond is a loan to the company that issued it, so a bondholder is a lender who earns interest. Bonds can be resold in the secondary market, and whoever owns the bond now receives the interest and the principal at maturity. Owning stock, not bonds, makes someone a part owner.
32. Ava bought shares of a shoe company for $40 per share. During the year, she received $3 per share in dividends. Exactly one year after buying, she sold the shares for $50 each. What was her rate of return?
Answer: D. Rate of return = (income + capital gain) ÷ price paid = ($3 + $10) ÷ $40 = $13 ÷ $40 = 32.5%. Because she held the shares exactly one year, this is an annual rate. 25% counts only the capital gain ($10 ÷ $40), 7.5% counts only the dividends ($3 ÷ $40), and 26% divides by the $50 selling price instead of the $40 she paid ($13 ÷ $50).
33. Diego paid $2,000 for a corporate bond that pays $80 in interest each year. He collected three years of interest and then sold the bond for $1,900. What was his total rate of return over the three years?
Answer: B. Income = 3 × $80 = $240, and the capital loss is $2,000 − $1,900 = $100. Rate of return = ($240 − $100) ÷ $2,000 = $140 ÷ $2,000 = 7%, a total for all three years, not a yearly rate. 12% ignores the $100 loss, 17% adds the loss as if it were a gain, and 4% counts only one year's interest.
34. Lather Lane sells soap gift sets for $40 each. Each set uses $10 of materials and $6 of packaging. Its fixed costs are $6,000 a month. How many sets must it sell each month to break even?
Answer: C. Break-even units = fixed costs ÷ (price − variable cost per unit) = $6,000 ÷ ($40 − $16) = $6,000 ÷ $24 = 250 sets. 200 forgets the packaging ($6,000 ÷ $30), 150 ignores variable costs entirely ($6,000 ÷ $40), and 375 divides by the variable cost instead of by what each sale leaves over ($6,000 ÷ $16).
35. Mateo is pitching Golden Crust Bakery to a bank for a $60,000 loan to buy new ovens. Which addition to his pitch would most reduce the bank's risk?
Answer: A.Collateral gives the lender something of value to claim if the loan isn't repaid, which directly lowers its risk. A bank lends to earn interest and be repaid, so an ownership stake answers an equity investor's question, not a lender's. An unrealistic projection hurts credibility, and a good story is a hook, not risk reduction.
Questions 36–40 refer to the following.Andre Coleman, 23, is an HVAC apprentice who takes home $3,200 a month; his essential expenses (rent, food, utilities, insurance, and phone) are $2,000 a month. He has $1,200 in savings and owes $2,700 on a credit card with a $3,000 limit and a 24% APR, and his credit score is 671. Next year he plans to borrow $15,000 for a used work truck, repaid over 48 months. His credit union posts these rates for that loan:
Credit score
APR
Monthly payment ($15,000, 48 months)
720 and above
6%
$352.28
660–719
9%
$373.28
600–659
14%
$409.90
Below 600
19%
$448.50
36. Andre wants an emergency fund equal to three months of his essential expenses. If he adds $400 a month to the savings he already has, how many months will it take him to reach that goal?
Answer: A. Goal = 3 × $2,000 = $6,000. He still needs $6,000 − $1,200 = $4,800, and $4,800 ÷ $400 = 12 months. 15 months ignores the $1,200 he already has, 18 months adds that $1,200 to the goal instead of subtracting it, and 21 months bases the fund on take-home pay (3 × $3,200 = $9,600) instead of essential expenses.
37. At his current credit score, how much total interest would Andre pay over the life of the truck loan?
Answer: B. A 671 score falls in the 660–719 tier. Total repaid = $373.28 × 48 = $17,917.44, and total interest = $17,917.44 − $15,000 = $2,917.44. $17,917.44 is the total repaid, not the interest; $1,350 is 9% of $15,000, only one year's interest on the full amount; and $5,400 charges 9% on the full $15,000 for all four years, ignoring that each payment shrinks the balance.
38. If Andre raises his score to 720 or above before he borrows, how much less total interest would he pay than at his current score?
Answer: C. At 720 and above: $352.28 × 48 = $16,909.44, so interest = $16,909.44 − $15,000 = $1,909.44. At his current tier, interest = $17,917.44 − $15,000 = $2,917.44. He saves $2,917.44 − $1,909.44 = $1,008.00, the same as paying $21 less each month for 48 months. $21 is only the monthly difference, $252 counts just one year of it, and $1,909.44 is the interest he would still pay at the better rate.
39. Which step would most likely help Andre reach a score of 720 or higher before he applies?
Answer: A. Andre is using 90% of his limit ($2,700 ÷ $3,000). Amounts owed, or credit utilization, makes up about 30% of a FICO score, so paying the balance down is the most direct fix. Opening new accounts adds new credit, which lenders see as risky. The Fair Credit Reporting Act lets him dispute errors, but an accurate balance stays on his report. Savings balances aren't part of a credit score.
40. Andre is tempted to use all $1,200 of his savings to pay down the card. What is the strongest reason to keep some of it?
Answer: C. Paying down a 24% card is smart, but an emergency fund is what keeps the next car repair or medical bill from going right back on that card at high interest. A savings account earns far less than 24%, credit cards don't charge a fee for paying early, and interest is charged on any balance carried past the due date, not just on new purchases.
Questions 41–45 refer to the following.Tasha Greene is launching Ember Ridge Hot Sauce. She will make and bottle the sauce in a rented kitchen used only for production and sell it online for $9 a bottle, and she plans to make and sell 2,000 bottles a month. Her cost estimates:
Cost
Amount
Before opening
Kettles, bottling machine, and shelving
$9,200
Business registration and food-safety permits
$800
Legal fees to set up the business
$1,000
First month's kitchen rent plus a security deposit
$4,200
First batch of peppers, vinegar, spices, and bottles
$1,500
Launch ads on social media
$900
Each month once open (2,000 bottles)
Rent for the production kitchen
$2,100
Peppers, vinegar, and spices ($2 per bottle)
$4,000
Bottles, caps, and labels ($1 per bottle)
$2,000
Salary of the cook who makes and bottles the sauce
$3,000
Online store subscription
$150
Liability insurance
$250
Social media ads
$600
Part-time bookkeeper
$500
41. What is the total of Ember Ridge's initial expenses, as opposed to its one-time expenses?
Answer: B. Initial expenses are paid at launch and continue once the business is running: first month's rent and deposit ($4,200) + first batch of ingredients and bottles ($1,500) + launch ads ($900) = $6,600. $5,700 treats the launch ads as one-time, but marketing continues every month. $11,000 is the one-time expenses (equipment, permits, and legal fees), and $17,600 is all of the startup costs.
42. At 2,000 bottles a month, what is Ember Ridge's monthly cost of goods sold (COGS)?
Answer: C. COGS includes every cost of producing the sauce: kitchen rent $2,100 + ingredients $4,000 + bottles, caps, and labels $2,000 + the cook's salary $3,000 = $11,100. $9,000 leaves out the kitchen rent, but this kitchen is used only for production, so its rent is like factory rent, which counts as COGS (rent for an office or store would be an operating expense). $6,000 counts only ingredients and packaging, and $12,600 also adds the $1,500 of operating expenses (online store, insurance, ads, and the bookkeeper).
43. Tasha is considering making 3,000 bottles next month instead of 2,000. Which statement about her costs is accurate?
Answer: A. Only ingredients and packaging ($3 a bottle) are variable. Kitchen rent and the cook's salary are part of COGS but are fixed. COGS goes from $11,100 to $2,100 + $3,000 + ($3 × 3,000) = $14,100, up $3,000, or about 27%, which is less than 50%. Ember Ridge's operating expenses are all fixed monthly amounts, and total costs do rise, because the variable costs rise.
44. While working, the cook burns his hand on a kettle and misses three weeks of work. Which type of insurance is designed to cover his medical bills and part of his lost wages?
Answer: B.Workers' compensation covers employees who are injured or become ill because of their work. Liability insurance covers harm the business causes to others, such as a customer who gets sick, property insurance covers damage to the business's buildings and equipment, and life insurance pays out when the insured person dies.
45. Tasha has only $12,000 saved toward her startup costs. Which change would do the most to lower the amount she needs before opening?
Answer: A. Equipment is her largest startup cost ($9,200 of $17,600), and buying used equipment is a common way to cut it. Cheaper peppers could trim only part of the $1,500 first batch, which also covers vinegar, spices, and bottles. The bookkeeper is a monthly cost after opening, not part of the money needed before opening, and a higher price changes revenue, not costs.
Questions 46–50 refer to the following.Lucia Delgado's company, Paddle Fold, makes folding kayaks that sell for $600 each. Each kayak costs $400 in materials and production labor, and the company's fixed costs are $72,000 a year. To keep up with growing orders, Lucia needs $80,000 for a second molding machine. She has two offers:
Offer
Amount
Terms
Community bank loan
$80,000
9% interest ($7,200) paid each year; the full $80,000 repaid at the end of year 5; the new machine pledged as collateral
Angel investor
$80,000
20% ownership of Paddle Fold
46. Lenders and investors both want to know a company's break-even point. Before Lucia takes either offer, how many kayaks must Paddle Fold sell each year to break even?
Answer: C. Break-even units = fixed costs ÷ (price − variable cost per unit). Each kayak leaves $600 − $400 = $200 to cover fixed costs, so $72,000 ÷ $200 = 360 kayaks. 180 divides by the $400 variable cost instead of by the $200 each kayak leaves over, 120 divides by the $600 price and ignores variable costs, and 760 adds the $80,000 machine to a year's fixed costs ($152,000 ÷ $200); she hasn't bought it yet, and a machine is a one-time purchase, not a cost that repeats every year.
47. Which statement correctly compares the two offers?
Answer: D. With debt financing, the business must pay interest and repay the principal no matter how sales go, but the lender gets no ownership. With equity financing, there are no required payments, but the investor owns 20% and shares in future profits and control. The 9% is an interest rate, not an ownership share, and an investor who buys shares isn't repaid if the business fails; she can lose her whole investment.
48. Suppose Lucia takes the angel's offer. Paddle Fold pays the angel $4,000 in dividends in each of the next two years, and at the end of year 2 she sells her stake to another investor for $100,000. Which best describes her rate of return?
Answer: A. Rate of return = (income + capital gain) ÷ price paid = ($8,000 + $20,000) ÷ $80,000 = 35%. That is the total for the whole two years, not a yearly rate; the formula gives an annual rate only when an investment is held exactly one year. 30% counts only one year of dividends, and 25% counts only the capital gain.
49. Which statement about the risk and return for the two funders is most accurate?
Answer: D. The angel bears more risk: she gets no guaranteed payments and could lose everything if Paddle Fold fails, so she needs a higher potential return to justify the risk. The bank earns set interest every year, and the machine pledged as collateral lowers its risk further, which is why it accepts 9%. The angel's money is tied up at least as long as the bank's, the same dollar amount can carry very different risk depending on the terms, and lower risk (like collateral) goes with a lower expected return, not a higher one.
50. Lucia decides to pitch the angel investor. Which addition to her pitch would best reduce the investor's risk?
Answer: B.Signed orders are evidence of real demand, which makes Lucia's projections believable and lowers the investor's risk. Cutting the price to $500 would shrink what each kayak leaves over from $200 to $100, so Paddle Fold would need to sell twice as many kayaks to break even, which adds risk. An equity return can't honestly be promised because it depends on how the business performs, and a list of features describes the product without showing that anyone will buy it.
