Week 1 Homework Assignment
Exercises/Problems – Chapter 1
1. [Financing Concepts] The following ventures are at different stages in their life cycles. Identify the likely stage for each venture and describe the type of financing each venture is likely to be seeking and identify potential sources for that financing.
A. Phil Young, founder of Pedal Pushers, has an idea for a pedal replacement for children’s bicycles. The Pedal Pusher will replace the existing bicycle pedals with an easy-release stirrup to help smaller children hold their feet on the pedals. The Pedal Pusher will also glow in the dark and will provide a musical sound as the bicycle is pedaled. Phil is seeking some financial help in developing working prototypes.
To me, it appears that Phil Young and Pedal Pushers is in the developmental or start-up phase. There are few places where financing can come from and generally is done with cash from family, friends or the owner(s) themselves. You can also ask potential suppliers or customers for financing as well.
B. Petal Providers is a firm that is trying to model the U.S floral industry after its European counterparts. European flower markets tend to have larger selections at lower prices. Revenues started at $1 million last year when the first “mega” Petal Providers floral outlet was opened. Revenues are expected to be $3 million this year and $15 million next year after two additional stores are opened.
Here, it appears that Petal Providers is a seasoned or established company that is experiencing some rapid growth. Venture capital financing, also referred to as seed financing, is something we might consider at this stage. Many investors will invest money here in hopes of a return due to IPO or trade sale.
Exercises/Problems – Chapter 2
Venture XX Venture YY Venture ZZ
After-tax profit margins 5% 25% 15%
Asset turnover 2 3 1
1. [Financial Ratios and Performance] Following is financial information for three ventures:
A. Calculate the ROA for each firm
ROA = Net Profit Margin x Asset Turnover Ratio
Venture XX = 5% x 2.0 = 0.05 x 2 = 0.10
Venture XX ROA = 0.10 or 10%
Venture YY = 25% x 3.0 = 0.25 x 3 = 0.75
Venture YY ROA = 0.75 or 75%
Venture ZZ = 15% x 1 = 0.15 x 1 = 0.15
Venture ZZ ROA = 0.15 or 15%
B. Which venture is indicative of a strong entrepreneurial venture opportunity?
Based on the seemingly high ROA, it would appear that Venture YY would be indicative of a strong entrepreneurial venture.
C. Which venture seems to be more of a commodity-type business?
Based on the lower ROA, Venture XX seems to be more of a commodity-type business.
E. Use the information in Figure2.9 relating to pricing/profitability and “ “score” each venture in terms of potential attractiveness.
After-Tax Margins Asset Intensity Return on Assets
Venture XX Low Average Low
Venture YY High Average High
Venture ZZ Average Average Average
Mini Case: LearnRite.com Corporation questions. (Pg. 74)
LearnRite has made the following five-year revenue projections:
2011 2012 2013 2014 2015
Revenues ($M) $1.00 $9.60 $30.10 $67.80 $121.40
A. Project industry sales for…