FI 512 Week 1 Answer Key
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 ...view middle of the document...
0 times 1.0 times 3.0 times
A. Calculate the return on assets for each firm.
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?
Venture ZZ 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/Profitability Venture XX Venture YY Venture ZZ
Gross margins NA NA NA
After-tax margins 1 2 3
Asset intensity 2 2 2
Return on assets 2 2 3
Total points 5 6 8
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 operating expenses are estimated to be $3 million in 2011 and $5 million in 2012, respectively. However, during the third year operating cash flow breakeven should be reached. Net profit margins are expected to average 10 percent per year beginning in year 3. Investment in bricks and mortar is largely in the form of warehouse facilities and a computer system to handle orders and facilitate the distribution of inventories. After considering the investment in inventories, the asset intensity or turnover is expected to average about two times per year.
LearnRite estimates that venture investors should earn about a 40 percent average annual compound rate of return and sees an opportunity for a possible initial public offering in about six years. If industry consolidation occurs, a merger might occur even sooner.
The management team is headed by...