Scribd
Upload
111 views

Tutorial Week 2 Solution

This document contains a tutorial on entrepreneurial finance with questions and answers about key financial metrics like return on assets, asset intensity, asset turnover, profit margins, and ethical scenarios around finding money. The two major components of return on assets are net profit margin and asset turnover. High asset intensity implies a large investment in fixed assets is needed to support revenue growth. Calculating financial ratios like return on assets, profit margins, and asset turnover can help assess venture performance and opportunities. Ethical behavior like returning found money bags or bills to the bank builds trust and is important for entrepreneurial success.

Uploaded by

Xiaohan Lu
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
111 views

Tutorial Week 2 Solution

This document contains a tutorial on entrepreneurial finance with questions and answers about key financial metrics like return on assets, asset intensity, asset turnover, profit margins, and ethical scenarios around finding money. The two major components of return on assets are net profit margin and asset turnover. High asset intensity implies a large investment in fixed assets is needed to support revenue growth. Calculating financial ratios like return on assets, profit margins, and asset turnover can help assess venture performance and opportunities. Ethical behavior like returning found money bags or bills to the bank builds trust and is important for entrepreneurial success.

Uploaded by

Xiaohan Lu
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 13

Entrepreneurial Finance

Tutorial 2
Tharindi Wijesinghe
School of Accounting, Finance and Economics
The University of Waikato

1
Q1: Describe return on assets (ROA).
What are the two major components of
the ROA model?

• The return on assets is a metric calculated by dividing the venture’s net


after-tax profit by its venture total assets and it represents a measure of the
firm’s performance relative to its invested assets. The return on assets
measure can also be viewed in terms of the return on assets (ROA) model
that expresses the return on assets as the product of the net profit margin
and the assets turnover metrics or ratios. This relationship is depicted as
follows:

• Return on Assets = Net Profit Margin x Assets Turnover

• This also can be represented as:


• Net Profit/Total Assets = Net Profit/Revenues x Revenues/Total Assets.

• Thus, the ROA of a venture is equal to its profit margin times its asset
intensity.
Q2: How do asset intensity and asset
turnover differ? What is implied by a
high asset intensity?

• Asset intensity is calculated as total assets divided by


total revenues. Asset turnover is calculated as
revenues divided by total assets. Asset intensity is the
reciprocal of asset turnover and asset turnover is the
reciprocal of asset intensity.

• A high asset intensity implies a large investment in fixed


assets and/or net working capital is needed to support
revenue growth. A high asset intensity also usually
requires large amounts of external financial capital in
order to support revenue growth.
Q3: A venture recorded revenues of $1
million last year and net profit of
$100,000. Total assets were $800,000 at
the end of last year.
A. Calculate the venture’s net profit margin.

• Net Profit Margin: net profit/revenues

• Net Profit Margin = $100,000/$1,000,000 = 10.0%

B. Calculate the venture’s asset turnover.

• Asset Turnover: revenues/total assets

• Asset Turnover: revenues/total assets = $1,000,000/$800,000 = 1.25 times

C. Calculate the venture’s return on total assets.

• Return on Total Assets: net profit/total assets

• Return on Total Assets: net profit/total assets = $100,000/$800,000 = 12.5%


Q4: Following is financial information for
three ventures:

A. Calculate the return on assets (ROA) 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.
Q5: In early 2013, Jennifer (Jen) Liu and Larry Mestas founded
Jen and Larry’s Frozen Yogurt Company, which was based on
the idea of applying the microbrew or microbatch strategy to
the production and sale of frozen yogurt. They began
producing small quantities of unique flavors and blends in
limited editions. Revenues were $600,000 in 2019 and were
estimated at $1.2 million in 2020. Because Jen and Larry were
selling premium frozen yogurt containing premium
ingredients, each small cup of yogurt sold for $3 and the cost
of producing the frozen yogurt averaged $1.50 per cup. Other
expenses plus taxes averaged an additional $1 per cup of
frozen yogurt in 2019 and were estimated at $1.20 per cup in
2020.
A. Determine the number of cups of frozen yogurt sold each year.

• Revenue = Price per unit x units sold, and Revenue / Price per unit =
units sold:

• Units Sold for 2019 = 600,000/3 = 200,000 units

• Units Sold for 2020 = 1,200,000/3 = 400,000 units


Q5: In early 2013, Jennifer (Jen) Liu and Larry Mestas founded
Jen and Larry’s Frozen Yogurt Company, which was based on
the idea of applying the microbrew or microbatch strategy to
the production and sale of frozen yogurt. They began
producing small quantities of unique flavors and blends in
limited editions. Revenues were $600,000 in 2019 and were
estimated at $1.2 million in 2020. Because Jen and Larry were
selling premium frozen yogurt containing premium
ingredients, each small cup of yogurt sold for $3 and the cost
of producing the frozen yogurt averaged $1.50 per cup. Other
expenses plus taxes averaged an additional $1 per cup of
frozen yogurt in 2019 and were estimated at $1.20 per cup in
2020.

B. Estimate the dollar amounts of gross profit and net


profit for Jen and Larry’s venture in 2019 and 2020.
Q5: In early 2013, Jennifer (Jen) Liu and Larry Mestas founded
Jen and Larry’s Frozen Yogurt Company, which was based on
the idea of applying the microbrew or microbatch strategy to
the production and sale of frozen yogurt. They began
producing small quantities of unique flavors and blends in
limited editions. Revenues were $600,000 in 2019 and were
estimated at $1.2 million in 2020. Because Jen and Larry were
selling premium frozen yogurt containing premium
ingredients, each small cup of yogurt sold for $3 and the cost
of producing the frozen yogurt averaged $1.50 per cup. Other
expenses plus taxes averaged an additional $1 per cup of
frozen yogurt in 2019 and were estimated at $1.20 per cup in
2020.
C. Calculate the gross profit margins and net profit margins in 2019 and 2020.
• Gross Profit Margin = Gross Profit/Revenues
• Net Profit Margin = Net Profit/Revenues
• Sales=Revenue

• Gross Profit Margin in 2019 = Gross Profit/Sales = 300,000/600,000 = 50%


• Net Profit Margin in 2019 = Net Profit/Sales = 100,000/600,000 = 16.7%

• Gross Profit Margin in 2020 = Gross Profit/Sales = 600,000/1,200,000 = 50%


• Net Profit Margin in 2020 = Net Profit/Sales = 120,000/1,200,000 = 10%
Q5: In early 2013, Jennifer (Jen) Liu and Larry Mestas founded
Jen and Larry’s Frozen Yogurt Company, which was based on
the idea of applying the microbrew or microbatch strategy to
the production and sale of frozen yogurt. They began
producing small quantities of unique flavors and blends in
limited editions. Revenues were $600,000 in 2019 and were
estimated at $1.2 million in 2020. Because Jen and Larry were
selling premium frozen yogurt containing premium
ingredients, each small cup of yogurt sold for $3 and the cost
of producing the frozen yogurt averaged $1.50 per cup. Other
expenses plus taxes averaged an additional $1 per cup of
frozen yogurt in 2019 and were estimated at $1.20 per cup in
2020.

D. Briefly describe what has occurred between the two


years.

• The gross profit margins are the same in the two years
because the “cost of goods sold per unit” stays the same.
However, 2020’s net profit margin declines because of the
increase in the other expenses category.
Q6: Assume that you have just “run-out-of-money” and are
unable to move your “idea” from its development stage to
production and the startup stage. However, you remain
convinced that with a reasonable amount of additional
financial capital you will be a successful entrepreneur. While
your expectations are low, you are meeting with a loan officer
of the local bank in the hope that you can get a personal loan
in order to continue your venture.
A. As you are about to enter the bank, you see a bank money bag lying on
the street. No one is around to claim the bag. What would you do?

• Many entrepreneurs state that high ethical standards are one of a


venture’s most important assets and are critical to long-term success and
value. High ethical standards involve following laws, regulations, and
treating others honestly and fairly. The money, if any, in the money bag
does not belong to you—it is someone else’s property. Most people would
agree that you should turn the money bag in to the bank immediately.

• It is possible, but should not be expected and thus should not be part of
your decision, that your high ethical standards might have an indirect
impact on your being able to obtain a personal loan from the bank to
continue your venture.
Q6: Assume that you have just “run-out-of-money” and are
unable to move your “idea” from its development stage to
production and the startup stage. However, you remain
convinced that with a reasonable amount of additional
financial capital you will be a successful entrepreneur. While
your expectations are low, you are meeting with a loan officer
of the local bank in the hope that you can get a personal loan
in order to continue your venture.

B. Now, let’s assume that what you found lying on the street was
a $100 bill. The thought crosses your mind that it would be
nice to take your significant other out for a nice dinner—
something that you have not had for several months. What
would you do?

• Unless you see someone drop the $100 bill it will be very difficult
to identify the owner of the bill. However, the money does not
belong to you. Most people would agree that you should not just
“pocket” the $100 bill but should make an attempt to find its
owner. Since you are outside the bank, you might enter the
bank, indicate that you found a $100 bill outside the bank, and
enquire whether someone has reported losing a $100 bill.
Q6: Assume that you have just “run-out-of-money” and are
unable to move your “idea” from its development stage to
production and the startup stage. However, you remain
convinced that with a reasonable amount of additional
financial capital you will be a successful entrepreneur. While
your expectations are low, you are meeting with a loan officer
of the local bank in the hope that you can get a personal loan
in order to continue your venture.
C. Now, instead of $100 you “find” a $1 bill on the street. The thought
crosses your mind that you could buy a lottery ticket with the dollar.
Winning the lottery would certainly solve all your financing needs to start
and run your venture. What would you do?
• When the amount of money “found” is very small, such as $1, people
often behave differently than when the amount of money is large. First, it
is virtually impossible to identify the owner unless you saw a specific
person drop the $1 bill. Second, the time and energy involved in trying to
find the rightful owner likely will outweigh the value of the money. Again,
the money is not rightfully yours. Most people would probably say that if
you can’t immediately identify the rightful owner, the $1 becomes “yours.”

• It is up to you to decide whether keeping the $1 bill jeopardizes your own


personal high ethical standards. Purchasing a lottery ticket with the dollar
represents another personal decision.
Thank you
Tharindi Wijesinghe
([email protected])

WWW.WAIKATO.AC.NZ 0800 WAIKATO

11

You might also like