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 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.
Since the venture is still in the idea stage and searching for prototype capital, the venture would be classified in the development stage. While in this stage, the venture will be making efforts to obtain seed financing, which typically comes from the entrepreneur’s assets or from family and friends.
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.
Since the venture has already established sizable revenue and is in the process of growing its venture by opening new stores, the firm has just entered the rapid growth stage.
2. [Financial Ratios and Performance] Following is financial information for three ventures:
Venture XXVenture ZZ Venture YY
After-tax Profit Margins5% 15%25%
Asset Turnover2.0 times1.0 times 3.0 times
A. Calculate the return on assets for each firm.
Venture XX: 5% x 2.0 = 10%
Venture ZZ: 15% x 1.0 = 15%
Venture YY: 25% x 3.0 = 75%
B. Which venture is indicative of a strong entrepreneurial venture opportunity?
Venture YY seems to represent a strong entrepreneurial venture opportunity based on a very high return on assets financial measure.
C. Which venture seems to be more of a commodity type business?
Venture XX seems to be more of a commodity type of business as indicated by a relatively low return on assets.
E.Use the information in Figure 2.9 relating to pricing/profitability, and “score” each venture in terms of potential attractiveness.
Pricing/ProfitabilityVenture XXVenture ZZVenture YY
Return on assets223
MINI CASE: LEARNRITE.COM CORPORATION
LearnRite.com offers e-commerce service for children’s “edutainment” products and services. The word edutainment is used to describe software that combines “educational” and “entertainment” components. Valuable product information and detailed editorial comments are combined with a wide selection of products for purchase to help families make their kids’ edutainment decisions. A team of leading educators and journalists provide editorial comments on the products sold by the firm. LearnRite targets highly educated, convenience oriented, and value conscience families with children under the age of 12, estimated to be about 35 percent of Internet users. The firm’s warehouse-distribution model results in higher net margins, as well as greater selection and convenience for customers, when compared to traditional retailers. Gross profit margins are expected to average about 30 percent each year. Because of relatively high marketing expenditures aimed at gaining market share, the firm is expected to suffer net losses for two years. Marketing and other...