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EXERCISES/PROBLEMS AND ANSWERS

1.

A. Net profit Margin Net profit (100000) divided by revenues (1000000) = 10%B. Asset Turnover Revenue (1000000) divided by assets (800000) = 1.25/1C. Return on Total Assets net profit margin (.1) x asset turnover (1.25) =.125

2.

Venture XX Venture YY Venture ZZAfter-Tax Profit Margins 5% 15% 25%Asset Turnover (times) 2.0 1.0 3.0

A. Calculate the return on assets for each firm.

Answer:Venture XX: 5% x 2.0 = 10%Venture YY: 15% x 1.0 = 15%Venture ZZ: 25% x 3.0 = 75%

B. Which venture is indicative of a strong entrepreneurial venture opportunity?

C. Which venture sees to be more of a commodity type business?

D. How would you place these three ventures on a graph similar to Figure 2.10 (see page 58)?

Chapter 2: FROM THE IDEA TO THE BUSINESS PLAN

[Financial Ratios and Performance] Following is financial information for three ventures.

After-tax Margins

Asset Turnover

Return on Assets

Answer:

Venture ZZ seems to represent a strong entrepreneurial venture opportunity based on a very high return on assets financial measure.

Answer:

Venture XX seems to be more of a commodity type of business as indicated by a relatively low return on assets.

Answer:

Venture ZZ would be a Case 1 type of venture opportunity (very high profit margin). However, Venture ZZ’s also high turnover would place the venture above the ROA curve (with an ROA of 75% as calculated in Part A.). Venture XX would be a Case 2 type of venture opportunity (low profit margin with a moderate asset turnover) resulting in a ROA of 10% (see Part A). Venture YY would fall between the other two ventures (a relatively high profit margin and a low asset turnover ratio) resulting in an ROA of 15% (see Part A).

See Return on Assets (ROA) Model below.

[Basic Financial Ratios] A venture recorded revenues of $1 million last year and a net profit of $100,000. Total assets were $800,000 at the end of the year. Calculate the following ratios using Excel formulas in the answer cell provided

Note: Problem 2 below is solved as an example. For the remaining problems, you should use Excel formulas to answer the questions. (Year 2010 is completed for you to see the appropriate formulas for you to use to solve year 2011.) You should put your formulas in the highlighted yellow cells. Remember for some answers, you will insert numbers and for some answers, you will insert a formula that will appear as a number/percentage/fraction. For all answers that require a calculation, you must insert an Excel formula so that your calculations can be verified. Please use the Excel formulas inserted for year 2010 as examples.

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EXERCISES/PROBLEMS AND ANSWERSChapter 2: FROM THE IDEA TO THE BUSINESS PLAN

Return on Asset ModelHigh

Case 1ZZ Higher

ROA

ModerateYY

XX Case 2

LowLow Moderate High

E. Use the information in Figure 2.9 (see page 55) relating to pricing/profitability and "score"each venture in terms of potential attractiveness.

Pricing/Profitability Venture XX Venture YY Venture ZZGross margins NA NA NAAfter-tax margins 1 2 3 Asset intensity 2 2 2 Return on assets 2 2 3

Total points 5 6 8

3.

A. Determine the number of cups of frozen yogurt sold each year.

2010 2011Revenue $ 600,000 $ 1,200,000

Answer:

Venture ZZ would be a Case 1 type of venture opportunity (very high profit margin). However, Venture ZZ’s also high turnover would place the venture above the ROA curve (with an ROA of 75% as calculated in Part A.). Venture XX would be a Case 2 type of venture opportunity (low profit margin with a moderate asset turnover) resulting in a ROA of 10% (see Part A). Venture YY would fall between the other two ventures (a relatively high profit margin and a low asset turnover ratio) resulting in an ROA of 15% (see Part A).

See Return on Assets (ROA) Model below.

NetProfit

Margins

Asset Turnover Ratios

[Revenues, Costs, and Profits] In 2010, Jennifer (Jen) Liu and Larry Mestas founded Jen and Larry’s Frozen Yogurt Company, which was based on the idea of applying the microbrew or microbatch strategy to the production and sale of frozen yogurt. They began producing small quantities of unique flavors and blends in limited editions. Revenues were $600,000 in 2010 and were estimated at $1.2 million in 2011. Since Jen and Larry were selling premium frozen yogurt containing premium ingredients, each small cup of yogurt sold for $3 and the cost of producing the frozen yogurt averaged $1.50 per cup. Other expenses plus taxes averaged an additional $1 per cup of frozen yogurt in 2010 and were estimated at $1.20 per cup in 2011.

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EXERCISES/PROBLEMS AND ANSWERSChapter 2: FROM THE IDEA TO THE BUSINESS PLAN

Price per unit $ 3.00 $ 3.00 Number units sold 200,000 400,000

Remember these formulas: Revenue = Price per unit x units soldRevenue / price per unit = units sold

B. Estimate the dollar amounts of gross profit and net profit for Jen and Larry's venturein 2011.

2010 2011Revenue $ 600,000 $ 1,200,000 Cost of Goods Sold (COGS) -a) 300,000 600,000 Gross Profit 300,000 600,000 [Gross Profit = Revenue minus COGS]Other Expenses Plus Taxes-b) 200,000 480,000 Net Profit $ 100,000 $ 120,000 [Net Profit = Gross Profit - Other Exp]

(a- Units x COGS per unit = COGS (See number of units in A above.)(b- See problem for formula to calculate OE + taxes.

C. Calculate the gross profit margins and net profit margins in 2011.

2010 2011Gross Profit Margin 50.0% gross profit (600000) divided by revenue (1200000) =50%Net Profit Margin 16.7% net profit (120000) divided by Revenue (1200000) = 10%

Remember: a) Profit margins are expressed as percentages (see page 67).b) You should use the numbers from B above.

D. Describe what has happened between the two years (i.e., from 2010 to 2011).

4.

A. Calculate the return on assets in both 2011.

2010 2011Warehouse $ 450,000 $ 450,000 Inventory 50,000 50,000

Answer:The firm doubled there Revenue and gross profit; however, there net profit was increased very little due to the extra expenses for 2011.

[Returns on Assets] Jen and Larry’s frozen yogurt venture described in Problem 2 required some investment in bricks and mortar. Initial specialty equipment and the renovation of an old warehouse building in Lower Downtown, referred to as LoDo, cost $450,000 at the beginning of 2010. At the same time, $50,000 was invested in inventories. In early 2011, an additional $100,000 was spent on equipment to support the increased frozen yogurt sales in 2011. Use information from Problem 3 and this problem to answer the following questions.

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EXERCISES/PROBLEMS AND ANSWERSChapter 2: FROM THE IDEA TO THE BUSINESS PLAN

Additional Capital Expenditure 0 100,000 [Add Equipment purchased in 2011]Total Assets $ 500,000 $ 600,000 Return on Assets (ROA) 20% 20%

Remember: ROA = Net Profit/Total Assets (see page 58).

B. Calculate the asset turnover ratio for 2011.

2010 2011Asset Turnover 1.20 2.00

Remember: Asset Turnover = Revenues/Total Assets (see page 58).

C. Apply the ROA Business Model to Jen and Larry's frozen yogurt venture (see page 58).

2010 2011Net Profit Margin 16.7% Net profit (120000) divided by revenue (1200000) =10%Asset Turnover 1.20 2.0 (calculated earlier)Return on Assets (ROA) Model 20.0% 20.0%

Remember: ROA Business Model = Net Profit margin * Asset Turnover (see page 58).

D. Briefly describe what has occurred between the two years.

E. Describe how you would position Jen and Larry's frozen yogurt venture in terms of the relationship between net profit margins and asset turnovers depicted in Figure 2.10.

5.

Note: The textbook suggests that a high score for asset turnover is associated with ratio of revenues to total assets exceeding 3 (that is, 3 dollars of revenue for 1 dollar of assets). Asset turnover ratios less than 1 would get a low score.

Answer:Over the two yeas the firm has experieced growth and kept all of the factors of finance similar (ratio) except for the other costs. But due to the other costs there net profit is much lower than it could've been.

Answer:I would categorize it as moderate to high for asset turnover and low to moderate on the net profit margins.

[VOS Indicator Screening] Jen Liu and Larry Mestas are seeking venture investors to help fund the expected growth in their Frozen Yogurt venture described in Problems 3 and 4. Use the VOS Indicator guidelines presented in Figures 2.8 and 2.9 to score Jen and Larry’s frozen yogurt venture in terms of the items in the pricing/profitability factor category. Comment on the likely attractiveness of this business opportunity to venture investors.

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EXERCISES/PROBLEMS AND ANSWERSChapter 2: FROM THE IDEA TO THE BUSINESS PLAN

2010 Potential-a) 2011 Potential-a)Gross Margin 50.0% Average 50.0% Average I think that it will attract some investors but it is not the greatest venture. Like the chart says it is average and in its second year its approaching below average in some fields.Net Profit Margin (After-Tax) 16.7% Average 10.0% AverageAsset Turnover 1.2 Average 2.0 AverageReturn on Assets (ROA) 20.0% Average 20.0% Average

(a- Indicate: High, Average, or Low.

6.

A. As you are about to enter the bank, you see a bank money bag lying on the street. No one isaround to claim the bag. What you you do?

B. Now, let's assume that what you found lying on the street was a $100 bill. The thought crosses yourmind that if would be nice to take your significant other out for an expensive dinner -- somethingyou have not done for several months. What would you do?

C. Now, instead of $100 you "find" a $1 bill on the street. The thought crosses your mind that youcould buy a lottery ticket with the dollar. Winning the lottery would certainly solve all your

[VOS Indicator Screening] Jen Liu and Larry Mestas are seeking venture investors to help fund the expected growth in their Frozen Yogurt venture described in Problems 3 and 4. Use the VOS Indicator guidelines presented in Figures 2.8 and 2.9 to score Jen and Larry’s frozen yogurt venture in terms of the items in the pricing/profitability factor category. Comment on the likely attractiveness of this business opportunity to venture investors.

[Ethical Issues] Assume that you have just “run-out-of-money” and are unable to move your “idea” from its development stage to production and the startup stage. However, you remain convinced that with a reasonable amount of additional financial capital you will be a successful entrepreneur. While your expectations are low, you are meeting with a loan officer of the local bank in the hope that you can get a personal loan in order to continue your venture.

Answer:I would pick it up and try to find the owner. If I was unable to I would ask the bank for assistance finding the owner.

Answer: I would try to find the owner if the owner is not around I think I'd probably keep it.

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EXERCISES/PROBLEMS AND ANSWERSChapter 2: FROM THE IDEA TO THE BUSINESS PLAN

financing needs to start and run your venture. What would you do?

Answer:

I would do the same as before if I found the owner I would gladly give it back but if the owner was not around I would keep it. (But I personally probably wouldn't buy a lottery ticket with it.)

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I think that it will attract some investors but it is not the greatest venture. Like the chart says it is average and in its second year its approaching below average in some fields.

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I think that it will attract some investors but it is not the greatest venture. Like the chart says it is average and in its second year its approaching below average in some fields.