Chapter 2: FROM THE IDEA TO THE BUSINESS PLAN

EXERCISES/PROBLEMS AND ANSWERS

1.

[Basic Financial Ratios] A venture recorded revenues of $1 million last year and a net profit of $
Total assets were $800,000 at the end of the year. Calculate the following ratios using Excel for
the answer cell provided
A. Net profit Margin
B. Asset Turnover
C. Return on Total Assets

Net profit (100000) divided by revenues (1000000) = 1

Revenue (1000000) divided by assets (800000) = 1.25
net profit margin (.1) x asset turnover (1.25) =.125

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

[Financial Ratios and Performance] Following is financial information for three ventures.
Venture XX Venture YY Venture ZZ
5%
15%
25%
2.0
1.0
3.0

After-Tax Profit Margins

Asset Turnover (times)

A. Calculate the return on assets for each firm.

Answer:
Venture XX:
Venture YY:
Venture ZZ:

After-tax
Margins
5%
15%
25%

x
x
x

Asset
Turnover
2.0
1.0
3.0

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

Answer:

Venture ZZ seems to represent a strong entrepreneurial venture opportunity based on a very h

on assets financial measure.

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

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

Answer:
Venture
XX seems
to be TO
more
of aBUSINESS
commodityPLAN
type of business as indicated by a relatively low
Chapter
2: FROM
THE IDEA
THE
assets.
EXERCISES/PROBLEMS AND ANSWERS

D. How would you place these three ventures on a graph similar to Figure 2.10 (see p
Answer:

Venture ZZ would be a Case 1 type of venture opportunity (very high profit margin). However,
ZZs also high turnover would place the venture above the ROA curve (with an ROA of 75% as
Part A.). Venture XX would be a Case 2 type of venture opportunity (low profit margin with a mo
asset turnover) resulting in a ROA of 10% (see Part A). Venture YY would fall between the other
ventures (a relatively high profit margin and a low asset turnover ratio) resulting in an ROA of 1
Part A).
See Return on Assets (ROA) Model below.

Return on Asset Model

High
Case 1
ZZ
Net
Profit
Margin
s

Higher
ROA

Moderate
YY

Low
Low

Moderate
Asset Turnover Ratios

E. Use the information in Figure 2.9 (see page 55) relating to pricing/profitability and
each venture in terms of potential attractiveness.
Pricing/Profitability
Gross margins
After-tax margins
Asset intensity
Return on assets

Venture XX Venture YY Venture ZZ

NA
NA
NA
1
2
3
2
2
2
2
2
3
Total points
5
6
8

[Revenues, Costs, and Profits] In 2010, Jennifer (Jen) Liu and Larry Mestas founded Je
Larrys Frozen Yogurt Company, which was based on the idea of applying the microbre
microbatch strategy to the production and sale of frozen yogurt. They began produci
2
quantities of unique flavors and blends in limited editions. Revenues were $600,000 i
were estimated at $1.2 million in 2011. Since Jen and Larry were selling premium froz

Chapter 2: FROM THE IDEA TO THE BUSINESS PLAN

EXERCISES/PROBLEMS AND ANSWERS
3.
[Revenues, Costs, and Profits] In 2010, Jennifer (Jen) Liu and Larry Mestas founded Je
Larrys Frozen Yogurt Company, which was based on the idea of applying the microbre
microbatch strategy to the production and sale of frozen yogurt. They began produci
quantities of unique flavors and blends in limited editions. Revenues were $600,000 i
were estimated at $1.2 million in 2011. Since Jen and Larry were selling premium froz
containing premium ingredients, each small cup of yogurt sold for $3 and the cost of
the frozen yogurt averaged $1.50 per cup. Other expenses plus taxes averaged an ad
per cup of frozen yogurt in 2010 and were estimated at $1.20 per cup in 2011.
A. Determine the number of cups of frozen yogurt sold each year.

Revenue
Price per unit
Number units sold

$
$

2010
600,000
3.00
200,000

2011
$ 1,200,000
$
3.00
400,000

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

Revenue / price per unit = units sold

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

Revenue
Cost of Goods Sold (COGS) -a)
Gross Profit
Other Expenses Plus Taxes-b)
Net Profit

2010
600,000
300,000
300,000
200,000
100,000

2011
$ 1,200,000
600,000
600,000 [Gross Profit = Revenue m
480,000
$
120,000 [Net Profit = Gross Profit -

(a- Units x COGS per unit = COGS (See number of units in

(b- See problem for formula to calculate OE + taxes.
C. Calculate the gross profit margins and net profit margins in 2011.

2010
2011
50.0% gross profit (600000) divided by revenue
16.7% net profit (120000) divided by Revenue

Gross Profit Margin

Net Profit Margin

Remember: a) Profit margins are expressed as percentages (see pa

b) You should use the numbers from B above.
D. Describe what has happened between the two years (i.e., from 2010 to 2011).

Chapter 2: FROM THE IDEA TO THE BUSINESS PLAN

EXERCISES/PROBLEMS AND ANSWERS

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

4.

[Returns on Assets] Jen and Larrys frozen yogurt venture described in Problem 2 req
investment in bricks and mortar. Initial specialty equipment and the renovation of an
warehouse building in Lower Downtown, referred to as LoDo, cost $450,000 at the be
2010. At the same time, $50,000 was invested in inventories. In early 2011, an additio
$100,000 was spent on equipment to support the increased frozen yogurt sales in 201
information from Problem 3 and this problem to answer the following questions.
A. Calculate the return on assets in both 2011.

Warehouse
Inventory
Additional Capital Expenditure
Total Assets
Return on Assets (ROA)

2010
450,000 $
50,000
0
500,000 $
20%

2011
450,000
50,000
100,000 [Add Equipment purchase
600,000
20%

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

B. Calculate the asset turnover ratio for 2011.
2010
1.20

Asset Turnover

2011
2.00

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

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

C. Apply the ROA Business Model to Jen and Larry's frozen yogurt venture (see page 5

2010
2011
16.7% Net profit (120000) divided by revenue (
1.20 2.0 (calculated earlier)
20.0%
20.0%

Net Profit Margin

Asset Turnover
Return on Assets (ROA) Model

Chapter 2: FROM THE IDEA TO THE BUSINESS PLAN

EXERCISES/PROBLEMS AND ANSWERS
Remember: ROA Business Model = Net Profit margin * Asset Turnover (see page 58).

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

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

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

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

5.

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

2010
Potential-a)
50.0%
Average
16.7%
Average
1.2
Average
20.0%
Average

Gross Margin
Net Profit Margin (After-Tax)
Asset Turnover
Return on Assets (ROA)

2011
50.0%
10.0%
2.0
20.0%

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

6.

[Ethical Issues] Assume that you have just run-out-of-money and are unable to mov
idea from its development stage to production and the startup stage. However, you
convinced that with a reasonable amount of additional financial capital you will be a s
entrepreneur. While your expectations are low, you are meeting with a loan officer of
bank in the hope that you can get a personal loan in order to continue your venture.
5

[Ethical Issues] Assume that you have just run-out-of-money and are unable to mov
idea from its development stage to production and the startup stage. However, you
convinced that with a reasonable amount of additional financial capital you will be a s
entrepreneur.
While
your
are
low, you are meeting with a loan officer of
Chapter
2: FROM THE
IDEA
TOexpectations
THE BUSINESS
PLAN
bank
in
the
hope
that
you
can
get
a
personal
loan in order to continue your venture.
EXERCISES/PROBLEMS AND ANSWERS

A. As you are about to enter the bank, you see a bank money bag lying on the street.
around to claim the bag. What you you do?

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

B. Now, let's assume that what you found lying on the street was a $100 bill. The thou
mind that if would be nice to take your significant other out for an expensive dinner you have not done for several months. What would you do?
Answer: I would try to find the owner if the owner is not around I think I'd probably

C. Now, instead of $100 you "find" a $1 bill on the street. The thought crosses your m
could buy a lottery ticket with the dollar. Winning the lottery would certainly solve all
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 own
around I would keep it. (But I personally probably wouldn't buy a lottery ticket with it.)

r and a net profit of $100,000.

ratios using Excel formulas in

enues (1000000) = 10%

ets (800000) = 1.25/1
ver (1.25) =.125

ms, you should use Excel

the appropriate formulas for
hted yellow cells. Remember
nsert a formula that will
a calculation, you must
lease use the Excel

e ventures.

=
=
=

Return on
Assets
10%
15%
75%

pportunity?

ty based on a very high return

d by a relatively low return on

d by a relatively low return on

Figure 2.10 (see page 58)?

margin). However, Venture

h an ROA of 75% as calculated in
ofit margin with a moderate
ll between the other two
ulting in an ROA of 15% (see

XX

Case 2

High

Ratios

g/profitability and "score"

Mestas founded Jen and

plying the microbrew or
hey began producing small
s were $600,000 in 2010 and
lling premium frozen yogurt

Mestas founded Jen and

plying the microbrew or
hey began producing small
s were $600,000 in 2010 and
lling premium frozen yogurt
$3 and the cost of producing
es averaged an additional $1
up in 2011.

and Larry's venture

s Profit = Revenue minus COGS]

Profit = Gross Profit - Other Exp]

e number of units in A above.)

te OE + taxes.

) divided by revenue (1200000) =50%

divided by Revenue (1200000) = 10%

percentages (see page 67).

m B above.

010 to 2011).

was increased very little due to

d in Problem 2 required some

e renovation of an old
450,000 at the beginning of
ly 2011, an additional
yogurt sales in 2011. Use
ng questions.

Equipment purchased in 2011]

page 58).

ssets (see page 58).

ated with ratio of revenues to

s). Asset turnover ratios less

enture (see page 58).

divided by revenue (1200000) =10%

10

er (see page 58).

rs of finance similar (ratio)

uch lower than it could've been.

enture in terms of the

ed in Figure 2.10.

derate on the net profit margins.

ture investors to help fund

oblems 3 and 4. Use the VOS
and Larrys frozen yogurt
gory. Comment on the likely

Potential-a)
Average
I think that it will attract some investors but it is not the greatest venture. Like the char
Average
Average
Average

are unable to move your

age. However, you remain
ital you will be a successful
h a loan officer of the local
ue your venture.
11

are unable to move your

age. However, you remain
ital you will be a successful
h a loan officer of the local
ue your venture.

ying on the street. No one is

he bank for assistance finding

$100 bill. The thought crosses your

expensive dinner -- something

think I'd probably keep it.

ht crosses your mind that you

certainly solve all your

t back but if the owner was not

cket with it.)

12

13

14

15

16

atest venture. Like the chart says it is average and in its second year its approaching below average in some fie

17

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19

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elow average in some fields.

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