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January 13, 2013
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.
Pedal Pushers is in the Start Up Stage. The business is still just a thought or an idea. It will have to overcome the challenge of market acceptance. At this stage of the business, Phil Young has to focus on matching the business opportunity with his idea.
Start Up stage companies have no proven market. The business has to rely on cash from owners, friends and family. Other potential sources include suppliers, customers, government grants and banks.
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.
Petal Providers is in a Growth Stage. Revenues and customers are increasing with many new opportunities and issues. The biggest challenge with growth is the constant range of issues bidding for more time and money. Effective management is required and a possible new business plan to cater to the American economy.
Better accounting and management systems will have to be set-up. Companies at growth may get finances from Banks, profits, partnerships, and leasing options.
1.[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 last year.
A. Calculate the venture’s net profit margin.
Profit margin of 10% (Net Income / Revenue)
B. Calculate the venture’s asset turnover.
Asset Turnover of 125% (Revenue / Assets)
C. Calculate the venture’s return on total assets.
Return on Total Assets of 12.5% (Net Income / Assets)
2.[Financial Ratios and Performance] Following is financial information for three ventures:
After-tax profit marginsAsset turnover
VENTURE XX5%2.0 times
VENTURE YY25%3.0 times
VENTURE ZZ15%1.0 times
A. Calculate the ROA for each firm.
Net Profit Margin x Asset Turnover = Return on Assets
VENTURE XX 10%
B. Which venture is indicative of a strong entrepreneurial venture opportunity?
VENTURE YY, The lower the profit per dollar of assets, the more asset-intensive a business is.
C. Which venture seems to be more of a commodity-type business?
VENTURE XX , The higher the profit per dollar of assets, the less asset-intensive a business is. All things being equal, the more asset-intensive a business, the more money must be reinvested into it to continue generating earnings.
E. Use the information in Figure 2.9 relating to pricing/profitability and “score” each venture in terms of potential attractiveness.
VENTURE XX Low
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