Essay of Bs

2226 Words Dec 9th, 2012 9 Pages
Chapter 2

FROM THE IDEA TO THE BUSINESS PLAN
EXERCISES/PROBLEMS AND ANSWERS 1. Following is financial information for three ventures: Venture XX Venture YY Venture ZZ After-tax Profit Margins 5% 15% 25% Asset Turnover 2.0 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
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Use information from Problem 2 and this problem to answer the following questions.

A. Calculate the return on assets in both 2005 and 2006. Total Assets 2005 = Warehouse + Inventory = $450,000 + $50,000 = $500,000 Total Assets 2006 = Warehouse + Inventory + Additional Capital Expenditure = $450,000 + $50,000 + $100,000 = $600,000

Return on Assets (ROA) = Net Profit/Total Assets
ROA for 2005 = 100,000/500,000 = 20%
ROA for 2006 = 120,000/600,000 = 20%

B. Calculate the asset intensity or asset turnover ratios for 2005 and 2006.

Asset Intensity = Assets Turnover = Revenues/Total Assets
Asset Turnover Ratio for 2005 = 600,000/500,000 = 1.20
Asset Turnover Ratio for 2006 = 1,200,000/600,000 = 2.00

C. Apply the ROA Business Model to Brandie’s frozen yogurt venture.

ROA Business Model = Net Profit Margin x Asset Turnover Ratio
ROA for 2005 = 16.67% x 1.2 = 20%
ROA for 2006 = 10% x 2.0 = 20%

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

The Returns on Assets were the same in the two years because the company’s Net Profit Margins went down due to the increased operation expenses while Asset Intensity went up due to additional capital expenditure on equipment.

E. Show how you would position Brandie’s frozen yogurt venture in terms of the relationship between net profit margins and asset turnovers depicted in Figure 2.8.

In relation to Figure 2.8,

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