New Venture Development

New Venture Development Exam II Review of Most-Missed Questions Fall 2012

Question 1 • Sam Handwich has $4,000 in accounts payable, $10,000 in long-term debt, $6,000 in cash, $5,000 in inventory, and $10,000 in PPE. What is his current ratio? • 0.36 • 1.0 • 1.5 • 2.75 • Long-term debt is not a current liability • PPE is not a current asset

Question 4 • At the end of 2011, Sam had $400 in inventory. He had $425 in inventory at the end of the preceding year. What is his inventory turnover? • 23.06 • 126.2 • 418.6 • 431.75

Question 7 Assets Liabilities Shareholders’ Equity = + • Therefore, Assets > Shareholders’ Equity • And therefore, 1/assets < 1/se • And: ROE > ROA because SE < assets Return! Return! < Assets Shareholders’ Equity

Question 13 • Carl’s investors want him to reach the break-even point within two months after they make their investment. If Carl doesn’t meet this demand, they will break his legs. How many trucks does Carl need to sell to reach his break-even quantity? • 200 • 400 • 800 • 990

Q13 – Carl’s Truck Factory

Question 19 • Ratios relating changes in inventory, fixed assets, and total assets to changes in sales are called: • operating ratios • horizontal ratios • activity ratios • profitability ratios Types of Business Ratios • Liquidity ratios determine how much of a firm’s current assets are available to meet short-term creditors’ claims. • Activity ratios indicate how efficiently a business is using its assets. • Leverage (debt) ratios indicate what percentage of the business assets is financed with creditors’ dollars. From chapter 4 slides

Question 20 • The ratio of current assets (minus inventory and prepaid items) divided by current liabilities is called the: • equity-to-debt ratio • quick ratio • liquidity ratio • current ratio • Quick, or Acid Test, Ratio:This ratio does not count the sale of the company’s inventory or prepaids. It measures the ability of the firm to meet its short-term obligations without liquidating its inventory. From chapter 4 slides

Question 22 • If a company’s fixed asset turnover ratio (total revenues/average fixed assets) goes below 1.0, which of the following is the most accurate conclusion? • the company is optimizing its use of assets • the company needs to acquire more assets in order to be more effective • the company will likely become a target for acquisition and liquidation • the company’s management needs to take on more long-term debt to improve this ratio VTBC and BBW made revenues worth 3x their fixed assets. If revenues < fixed assets, then company needs new management because its assets are more valuable than the revenues management can create with them

Questions 23 and 26 • A new venture has total assets of $250,000 and total liabilities of $200,000. How much of this company is being financed by other people’s money? • 20% • 75% • 80% • 100% • What ratio reports the percentage of a firm’s assets that are financed by creditors? • Debt-to-equity • Debt-to-total assets • Current • Quick Essentially the same questions

Question 24 • Looking at the horizontal analysis for Vermont Teddy Bear Company, what is the best likely explanation for these ratios? • Management was able to negotiate lower costs relative to revenues because of increases in economies of scale. (this is not what the ratios show) • Management was able to increase revenues at a greater rate than its increase in variable costs (the opposite is true) • Management was not able to control its fixed costs in 2004 (fixed costs) • Management could not realize a proportionate increase in gross profits relative to sales

Question 27 • Using both the partial balance sheet above and partial income statement below, what would most concern you about Vermont Teddy Bear Company’s future performance? • The horizontal ratio for accounts receivable is much higher than the horizontal ratio for total revenues. • The horizontal ratio for accounts receivable is much higher than the horizontal ratio for cost of goods sold. • Cash is increasing at too fast a rate relative to inventories. (more cash with less inventory is not a concern) • The amount of restricted cash is decreasing. (more free cash is good)

Question 30 • Al’s goal for his 2013 fiscal year is to reach a vertical ratio of 10% for his employee wages. Holding wages at their current rate, what does Al need to do to reach this goal? • Decrease his cost of goods sold through economies of scale • Improve his gross profits • Increase his revenues by 50% • Increase his revenues by more than 100% ($36,000/10% = $360,000) ($360,000-$149,000)/$149,000 = 141%

Question 31 • Al’s gross sales and cost of goods sold went up higher than his gross profit. The best explanation for this is: • Al could not adequately control the increase in fixed costs. (fixed cost) • Al’s “buy-one-get-one-free” promotion over the summer (variable revenues and costs) • Al had to incur more total assets to invest in a second store (fixed cost) • Employees get too much of the gross revenues in wages (fixed cost)

Question 32 • Build-A-Bear’s profit margin ratio is less than that of Vermont Teddy Bear’s. This seems curious because Build-A-Bear’s inventory consists of unfinished products, while VTBC’s inventory is finished. What is the best explanation for this situation? • Build-A-Bear has to incur higher operating costs for employees who help kids make stuffed animals.(not part of gross profit equation) • Build-A-Bear has higher profit margins than VTBC because their inventory is unfinished. (BBW does not have higher profit margins than VTBC) • Build-A-Bear likely has to deal with numerous separate suppliers and may not enjoy economies of scale comparable to VTBC.(we discussed this in class last Tuesday) • VTBC’s management is not as talented as Build-A-Bear’s. (the opposite is probably true)

New Venture Development