Entrepreneurship

MANA 4339/5339 – Entrepreneurship
Exam
Due Date: May 10, 2022
You are required to answer the following questions. Be thorough but brief. No single response
should be longer than one page (12 pt.), and the entire exam should be no longer than six
single-spaced pages.
Please submit a Word version of your completed exam via the course’s Canvas page. Make sure
to note the response number.
Good luck!
1. Briefly outline the key characteristics of a typical entrepreneur. Which of these
characteristics do you think are most important? Why? (5 points)
Bill Hudson was a real craftsman when it came to being a machinist. Bill had learned almost
everything he knew from Hugo Huffman, his first and only employer. Bill Hudson was married
and had three young children. He was 33 years old and had worked for Hugo ever since he
finished his tour in the Army. In 12 years, Bill had polished his skills under the watchful and
critical eye of Hugo Huffman. Hugo was quick to recognize Bill’s talent for the trade. Bill had a
positive learning attitude and displayed a drive for perfection that Hugo admired.
Hugo’s Machine Shop was a successful small business. Its success was primarily based on the
reputation for quality that had been established over its 42 years in operation. Hugo had come
to this country with his new wife, Hilda, in his late twenties. Now the business was a success,
but Hugo remembered the early years when he and Hilda had to struggle. Hugo wanted the
company to continue to produce the highest quality craftsman products possible. On a Friday
evening, he called Bill into his office at closing time, poured him a cup of half-day-old coffee,
and began to talk with him about the future.
“Bill, Hilda and I are getting old, and I want to retire. It has been 42 years of fun, but these old
hands need a rest. In short, Hilda and I would like you to buy the business. We both feel that
your heart is in this craft and that you would always retain the quality that we have stood for.”
Bill was taken back by the offer. He, of course, knew Hugo was getting older, but had no idea
Hugo would retire. Bill and his wife, Anna, had only $4,200 in the bank. Most of Bill’s salary
went for the typical costs of rearing three children. Hugo knew Bill did not have the money to
buy the business in cash, but he was willing to take a portion of the profits for the next 15 years
and a modest initial investment from Bill.
For the past four years, Bill had made most of the technical decisions in the shop. Bill knew the
customers and was well respected by the employees. He had never been involved in the
business side of the operation. He was a high school graduate but had never taken business
courses. Hugo told Bill that even after deducting the percentage of the profits he would owe
under the sales agreement, he would be able almost to double his annual earnings. Bill would
have to take on all the business functions himself because Anna had no business training either.
2a. Which entrepreneurial characteristics does Bill have that may be important to his
success? Which characteristic could lead to his failure? (5 points)
2b. What steps should Bill take to avoid the pitfalls common to a small business? (5
points)
Andrew Sycamore has spent more than ten years in the human resources department of a large
management consulting company. During his tenure, he was often put in charge of training new
recruits, where he arranged for various company managers to address the recruits and teach
them skills important in the workplace. What Andy had noticed was the one skill that was often
the hardest to teach involved problem identification and problem-solving. Even the best
recruits from well-known universities found it hard to assess a situation to determine the
problem and how to develop solutions. In his heart, Andy was an entrepreneur, and he was
dying to quit his corporate job and be his own boss. He was convinced there was a business
opportunity in developing an interactive, online problem identification and problem-solving
tool.
Andy’s idea, which he titled “Nested Learning,” involved software that included a screen where
a scenario was presented to the user, and the user was asked first to identify the problem and
then develop solutions for it. What was unique about “Nested Learning” was that the initial
scenario was specifically written so as not to be sufficient enough to generate a problem. In
other words, the user (or the trainee) had to ask the software questions that would be
responded with additional facts about the situation. Andy argued that problem solvers don’t
get all the facts handed to them initially and that they had to “tease” more out of the situation
to identify the problem.
Andy’s idea was to develop a software prototype with a small number of generic scenarios. He
then hoped to meet with training managers of different companies and “sell” them the idea of
using “Nested Learning” as a better training tool. Once a client agreed to use it, Andy would
then work with the client to develop client-specific scenarios.
3a. What is the value proposition of “Nested Learning?” Is it compelling? (5 points)
3b. How important is a prototype for Andy Sycamore to succeed with his “Nested
Learning?” (5 points)
Copreneurs Ed and Yolanda recently opened a vintage used car lot called Cherry Lane. They sell
antique and collectible cars on consignment for the owners at a fee of 30 percent of the selling
price. The price is further reduced by 10 percent if a particular vehicle is not sold within the first
30 days. One of the first customers convinced Yolanda that this was the only fair thing to do
and provided something for “the cost-conscious buyer,” she offered what she thought was
excellent customer service and implemented the idea.
Ed and Yolanda feel Cherry Lane has an ideal location. It is located adjacent to the city’s
baseball stadium, alongside the freeway in the center of all the other car dealerships. Although
Cherry Lane has significant foot traffic, most people never make offers to buy.
To increase sales, Ed and Yolanda are working on a new marketing strategy that they believe
should be quite different from the “shotgun” approach they have been using over the last few
months.
4a. What is a competitive advantage? Does Cherry Lane have one? If so, what is it? (5
points)
4b. How would you characterize Cherry Lane’s strategy? Is this strategy appropriate? (5
points)
Entrepreneurs create minimal viable products to test a product with real customers as quickly
as possible. Testing a product this way helps determine whether consumers really want the
product, provides feedback from these customers to help improve the product and gathers
hard data that demonstrates the proof of concept many investors want before they fund an
emerging business.
Judson Aikens wanted to start a business but had a good-paying job and was concerned about
taking on too much risk. While brainstorming about possible businesses he could launch, Aikens
came up with an idea for a new dating app. He had observed that it is easy to meet new people
at places like dog parks.
Aikens’s idea was to develop an app called RendezWoof (www.rendezwoof.com) that created a
virtual dog park. “The app would not only connect dog owners with each other, but it would
also connect them with dog-friendly resources around them,” says Aikens. “Using GPS, the
app’s map would populate restaurants with patios and parks convenient to users interested in
meeting up to grab a beer or throw a Frisbee.”
Aikens reached out to an entrepreneur, Ben Dolgoff, who had spoken to one of the
entrepreneurship classes he had taken in graduate school. Ben was an experienced app
developer who had developed and launched several successful apps. After asking Ben to sign a
nondisclosure agreement, Aikens shared his idea. Ben said he thought the app had promise as a
commercially viable product. He suggested that Aikens develop some designs for his idea and
then get back with him. Ben said he might be willing to develop the app in exchange for some
equity in the new business if the idea had promise.
Aikens shared his app idea with a friend who was a graphic designer. She was eager to help him
with the designs and was willing to provide ongoing graphic design services in exchange for
equity.
The next step was for Aikens to work with the graphic designer to develop a wireframe of the
app. A wireframe is a drawing of the various screens that make up an app; it includes the kinds
of information displayed, the functions of the app, and the basic flow from screen to screen.
Aikens took the wireframe designs to Ben, who was eager to move forward.
“This arrangement was very acceptable to me,” says Aikens. “It simultaneously removed the
financial burden of development and provided an experienced go-to consultant I could work
with through the life of the app.”
Aikens formed an LLC and secured the RendezWoof name on all social platforms and for the
Web domain. He opened an Apple developer account and applied for copyrights and
trademarks. Because he is still working his day job, Aikens spends many late nights working
with the developers to improve the app’s user interface and user experience.
Because the goal of the initial version of the app is to gain users and prove the concept,
RendezWoof initially offered the app for free through the Apple Store. Future versions of the
app will have more features, and the company will charge a small fee for the app.
5a. Why would you recommend that an entrepreneur develop a minimal viable product or
a prototype? (5 points)
5b. Can you think of additional market research that Aikens could have done before
developing his product? (5 points)
5c. What are the advantages and disadvantages of offering equity in exchange for work
done on a new product? (5 points)
The inspiration for business ideas may strike entrepreneurs at any time and sometimes comes
from unexpected sources. Many people come up with creative ideas for businesses, but what
sets entrepreneurs apart is their willingness to act on their ideas.
Billiam Jeans—While Bill Mitchell was a student at Clemson University, he took up an atypical
hobby: tailoring clothing for his friends. Even though he had no formal sewing training, Mitchell
reworked everything from ties and tuxedos to bridesmaid dresses and pants. Mitchell learned
his sewing skills by reverse engineering, taking apart garments to see how they were put
together. After his parents purchased a used sewing machine at a Goodwill store, Mitchell
began making jeans for his friends, and within a year, he had a waiting list of 400 people. That
prompted him to start Billiam (his college nickname) Jeans, a custom-fitted jeans company in
his parents’ basement.
Mitchell’s business continued to grow, which prompted a move to the back of a climbing gym.
He soon outgrew that space, which led him to sell his car to pay for a lease on a 1,600-squarefoot storefront in a hip, historic section in Greenville, South Carolina, a city that a generation
ago was a hub of the textile industry. Today, Mitchell, three employees, and two full-time
interns make custom jeans aimed primarily at men between the ages of 30 and 50 on vintage
cutting tables, rivet presses, and sewing machines that are at least 60 years old and often are
repaired with screwdrivers, prayers, and tweezers, according to Mitchell. The company uses
only one type of denim fabric, raw selvage denim, which is made on 100-year-old Draper looms
in Greensboro, North Carolina, by one of the most renowned mills in the world, Cone Mills. The
supply of this high-quality, finely woven denim fabric is limited, but jeans connoisseurs
appreciate showing off the distinctive weave pattern when they turn up the cuffs on their
custom-fitted jeans, which come in three leg styles and four different colors and start at $200.
Billiam Jeans recently expanded its product line to include women’s jeans, leather belts, and
bracelets. It plans to add denim jackets, denim shorts, and chambray shirts.
Billiam Jeans is an anachronism, blending old-world techniques to make its denim products by
hand and using modern marketing techniques, particularly social media marketing, to build the
Billiam brand. Although sales have grown 330 percent each year for the last three years,
Mitchell has not had to resort to outside financing. Several companies have approached
Mitchell about distributing Billiam jeans internationally, but for now, he is content to have his
company focus on local sales and grow organically.
ZVerse—John Carrington and Kevin Maloney left their corporate careers behind to start ZVerse,
a company in Columbia, South Carolina, that specializes in translating two-dimensional images
into three-dimensional works of art using the latest in 3-D printer technology. Launched in a
business incubator, the entrepreneurs discovered a unique niche when representatives from
the athletic department at Carrington’s alma mater, the University of South Carolina, asked the
company to create a unique gift to present to war heroes at a Salute to the Troops ceremony
during halftime at a football game. Carrington and Maloney used their 3-D printing expertise to
create a three-dimensional replica of the University of South Carolina football stadium that was
so detailed that it included the image of a replay on the jumbo video screen. In the past,
companies that sold stadium replicas to fans purchased them from foreign manufacturers and
had to purchase large volumes of inventory, often 10,000 or more units. ZVerse’s technology
mastery allows the company to produce highly detailed replicas in small production runs,
minimizing the risks that its retail customers take of being stuck with excess inventory. The
sources of the company’s competitive advantage are its speed, flexibility, and focus on
customer service.
Spotting a large potential market, Carrington and Maloney decided not to become just another
3-D printing service company. They negotiated licensing arrangements with 24 major
universities from the Southeastern Conference and the Atlantic Coast Conference to sell
replicas of their stadiums and mascots. ZVerse recently graduated from the incubator where it
was hatched and moved into a large manufacturing facility that allows it to meet the rapidly
growing demand for its unique products. Carrington and Maloney also successfully raised $1
million in venture capital to fuel the company’s next round of growth. In two years, ZVerse’s
workforce grew from 3 employees to 16, and Carrington and Maloney are negotiating deals
with other colleges and universities and NASCAR and Major League Baseball to produce replicas
of race tracks and baseball stadiums. They are also working on licensing their proprietary
process to other companies engaged in 3-D printing.
6a. What benefits do entrepreneurs such as Bill Mitchell, John Carrington, and Kevin
Maloney gain from creating businesses of their own rather than working for someone
else? (5 points)
6b. What risks did these entrepreneurs take on when they started their businesses? (5
points)
6c. Is the way that these entrepreneurs discovered their business opportunities typical?
Explain. (5 points)
After spending several years in the advertising and publishing industries, Janelle Regotti wanted
to be her own boss. She decided that buying a business would be the best route for her. After
several months looking for the right business, Regotti found a promising business, Guide
Publishing, for sale for $500,000. This northeastern Ohio company distributes a quarterly
resource guide aimed at senior adults. However, Regotti had very little in savings and few
assets to pledge as collateral, and she knew she would be unlikely to get a bank loan. Working
with the business broker, Regotti convinced the seller to provide financing for 90 percent of the
purchase price: Regotti came up with $50,000, and the seller agreed to finance the $450,000
balance over 10 years, with quarterly payments at 6 percent annual interest. Regotti also
promised the seller that two years after the purchase, she would apply for a bank loan
guaranteed by the Small Business Administration. She promised that if she got the loan at that
point, she would pay the loan balance to the seller in full.
Like Janelle Regotti, many other potential business buyers, especially young people recently out
of college, have not accumulated enough wealth to purchase an existing business, even though
it may be the ideal opportunity. That’s the position in which Alex Livingston and his business
partner, Eddie Santillan, found themselves. The recent college graduates found a facilities
maintenance firm for sale by the Baby Boomer founder, who was ready to retire. The company
had a long track record of solid financial performance, but there was no way Livingston and
Santillan could afford the multi-million-dollar price tag. The enterprising aspiring entrepreneurs
approached a private investor group with a business plan for improving and expanding the
company and received an equity investment equivalent to 25 percent of the purchase price.
With the equity infusion in hand, Livingston and Santillan approached the Exchange Bank in
Santa Rosa, California, and received a loan guaranteed by the Small Business Administration for
55 percent of the purchase price. Finally, they convinced the seller to provide financing for the
remaining 20 percent of the purchase price. Today, because of their financing creativity,
Livingston and Santillan are successful business owners.
Finding the financing to make a business purchase can be challenging, but financing the
purchase of an existing business usually is easier than financing a business start-up, where the
risks are much higher. Many business buyers find that the seller is an ideal source of funding.
Although most sellers prefer to finance less than 50 percent of the purchase price, some are
willing to finance a greater percentage, especially for the right buyer. Jeremy Bragg had worked
at River City Coffee for several years when the owner decided to sell. Bragg and his business
partner, Regi Ott, convinced the owner to accept their $10,000 down payment and finance the
remaining 86 percent of the $70,000 purchase price.
Buyers who rely on seller financing typically need good credit scores and must be prepared to
convince the seller that they will be successful business owners. A realistic business plan
showing how the new owner intends to maintain or enhance the company’s success and
generate sufficient cash flow to keep the business growing while paying the seller’s loan is
essential. In addition, buyers who rely on seller financing lose some bargaining power when
negotiating a deal.
7. Suppose that you and a friend have recently graduated from college when you
discover the ideal business for sale by the founder, who is ready to retire. The asking
price is $550,000, but you and your friend have only $15,000. Put together a brief plan
for assembling the remaining balance needed to purchase this business. (5 points)
Corbin-Pacific Inc.—Peter Corbin has always loved motorcycles. The founder of Corbin-Pacific
Inc., a company based in Hollister, California, still holds the land-speed record, 165 miles per
hour, for an electric motorcycle. At 65, Corbin is ready to retire and sell his business, which
makes custom seats, saddlebags, fenders, and other motorcycle accessories, preferably to
another cycle enthusiast. Listed at $11.5 million, Corbin-Pacific employs 115 workers, including
six managers with at least ten years of experience, in its 82,000-square-foot factory (which also
is for sale) and generates annual sales of $14.7 million, down from $16.5 million two years ago.
The sales decline occurred after the company had to fire several undocumented employees.
About 75 percent of the 41-year-old business’s sales are direct to end customers, mainly
through its Web site, and the remaining 25 percent are to motorcycle dealers.
The company’s cash flow declined from $2.73 million two years ago to $722,000 today. CorbinPacific incurred losses in the last two years but has now returned to profitability.
The purchase price includes 1,500 fiberglass seat molds for every major brand and model of
both street and off-road motorbike and intellectual property in 82 patents and copyrights.
Corbin asks $9 million for the patented seat molds, $1.5 million for machinery and equipment,
and $719,000 for inventory. Motorcycle sales in the United States have increased 75 percent
over the last decade, and Corbin-Pacific is well known to motorcycle enthusiasts from coast to
coast and counts celebrities such as Arnold Schwarzenegger and Jay Leno as customers. Corbin
says that he is willing to stay on to work with the new owner for up to two years to ensure a
smooth transition.
Indiana Machine Shop—This Indiana machine shop is one of approximately 21,000 nationwide
that fabricate, press, bend, and drill custom metal products. The sellers, a machinist, and his
wife started the company with hand-operated machines. Still, as the business grew, they
invested in computerized numerical control (CNC) equipment that increased productivity and
allowed them to design custom products and build prototypes quickly and efficiently. The
company, which now employs 65 people, generated sales of $8.2 million last year and earned a
net income of $625,000, with an EBITDA of $757,150. The company has a diversified customer
base and fabricates various products, from wheelchair lifts to livestock feeding systems. Both
sales and profits have a strong history of growth. A team of experienced managers is in place
and willing to work for the new owner.
An analysis of other machine shop sales shows that the typical price is 5.4 times EBITDA. The
owners, both in their mid-40s, are asking $5.3 million for this machine shop, saying that they
are ready to move on to other business opportunities. The asking price includes machinery and
equipment valued at $2,675,000, real estate at $957,000, and inventory at $750,000.
8a. Assume the role of a prospective buyer for these two businesses. How would you
conduct the due diligence necessary to determine whether they would be good
investments? (5 points)
8b. Do you notice any “red flags” or potential problems in either of these deals? Explain.
(5 points)
8c. Which techniques for estimating the value of these businesses would be most
beneficial to a prospective buyer of these companies? Are the owners’ asking prices
reasonable? (5 points)
Although opening a franchise is not a “sure thing,” franchising’s immense popularity is due, in
part, to the support, experience, and training that franchisors provide their franchisees. Many
would-be entrepreneurs believe that franchising reduces their risk of failure and see it as the
key to their success. Large, established franchises have systems that have been replicated
thousands of times and allow franchisees to follow a formula for success that the franchisor has
worked out over many years. Many small franchisors don’t have the benefit of learning from
the mistakes of setting up thousands of outlets to fine-tune their business systems. Some
franchisors build their business models on fads that will fade, while others tap into meaningful
trends. Some of these small franchises have the potential to become tomorrow’s franchise
giants; others will fall by the wayside. What factors increase the probability that a new
franchise will succeed?
Unique concept. To be successful, a franchise must offer a unique concept that registers with
customers by solving a problem or making their lives better or easier and gives the company a
competitive edge in the marketplace.
Effective and efficient system. Successful franchisors have developed a system that enables the
business to operate smoothly and efficiently. They also work constantly to improve the system.
New franchisors whose goal is to sell franchises rather than to focus on ensuring franchisees’
success by providing them with a well-functioning system are more likely to fail.
Replicable system. Not only must a franchise system be effective and efficient, it also must be
replicable. The ideal franchise system is easily teachable to franchisees.
Experience. To be able to provide franchisees with an efficient, effective system, a franchisor
must have experience in the industry and must have built a successful operation as an
independent business owner before starting to sell franchises.
Powerful marketing. Successful franchisors understand the importance of building recognition
for their brands and devote proper resources to protecting their brand names and building
recognition for them among customers.
BurgerFi—nearly half of all consumers eat a hamburger at least once per week, and many
“better burger” franchises, such as Five Guys Burgers and Fries, Wayback Burgers, Mooyah,
Smashburger, and others, have capitalized on the opportunity to sell premium burgers to
hungry customers. In a typical year, Americans eat more than 9 billion burgers. In the United
States, hamburger restaurants generate $70 billion in annual sales. In 2010, restaurateur John
Rosatti noticed that one of the best-selling items on his full-service restaurant’s menu was its
burgers, and in 2010, Rosatti partnered with Lee Goldberg to open two BurgerFi restaurants in
southern Florida. BurgerFi features 100 percent pure Angus beef patties with no hormones or
antibiotics, made-from-scratch fries, double-battered onion rings, Kobe beef hot dogs, fresh
toppings, local craft beers, and wine. Two years later, BurgerFi began selling franchises, and
business partners Jim Pagano and Henry Talerico were the company’s first franchisees. Pagano
had owned several businesses during his career, including an auto dealership, and decided that
the time was right to get into the restaurant business. By being the first franchisee in the
BurgerFi system, Pagano and Talerico were able to have their choice of territories. They entered
into an area development agreement with BurgerFi to open multiple units in Orlando and
Gainesville, Florida.
Purchasing a BurgerFi franchise requires an investment of $460,000 to $995,000, including
$37,500 for the franchise fee. Prospective franchisees must have a net worth of $1 million, with
$500,000 of liquid capital. Franchisees also agree to pay an ongoing royalty of 5.5 percent of
their gross sales. BurgerFi requires at least one member of a franchise group to have prior
experience operating a restaurant (preferably multiple restaurants). BurgerFi (the name comes
from its founders’ desire to lead the “Burgerfication” of the United States) plans to have 300
locations across the United States in four years.
The premium burger market is getting crowded, and operating a successful restaurant is
extremely challenging. Owners often struggle to keep food and labor costs under control,
counteract constant employee turnover, and cope with long hours. Franchisees, however,
benefit from affiliating with a recognized brand, relying on an established business system, and
leaning on support from an experienced franchisor.
9a. What are the advantages and disadvantages of purchasing an outlet from a small
franchisor? (5 points)
9b. Suppose that one of your friends is considering purchasing a BurgerFi franchise and
asks your opinion. What advice would you offer him or her? (5 points)
Victory Auto Service and Glass, founded in 1997 by Jeff Matt, built its base of loyal customers
with strong personal relationships. Personal customer service is at the heart of Victory Auto’s
business model. The company has five locations and a mobile auto glass service in the
Minneapolis, Minnesota, metro area.
As the business grew from its first location, Matt found that maintaining the personal
relationships with his customers, which was the core of his company’s success, became more
difficult to maintain. Matt decided to turn to social media to complement face-to-face
connections with Victory Auto’s customers and sought the help of Stephanie Gutierrez, a
communications specialist and loyal customer, to help create a social media strategy for Victory
Auto.
Gutierrez experimented with various social media tactics until she found a strategy that
supported the personal connection with customers that Matt relied on to build his company.
Facebook is the heart of Victory Auto’s social media strategy. When Gutierrez developed the
company’s Facebook page, at first, she posted longer articles with links to articles about cars.
However, these posts did not seem to register with the typical customer. Then she took the
time to think like the business’s average customer: car owners who were not necessarily
interested in cars. Customers typically interact with Victory Auto because they have to, not
because they want to. Instead of creating a page with information on cars, Gutierrez adds posts
related to traffic, commuting, and travel that everyone who owns a car would be interested in
reading. She posts much shorter text entries that are written in a personal style with many
photos.
The second major aspect of Victory Auto’s social media strategy involves YouTube videos.
Gutierrez developed several short videos that are geared toward people who do not know
much about cars. The videos on Victory Auto’s YouTube channel include short how-to videos
and tours of its various store locations around Minneapolis. Its most popular video is one that
shows how to top off windshield wiper fluid!
Matt believes that success in the auto service business is based on trust and that trust is built
by getting to know the people who work at Victory Auto. Many of the social media posts are
about employees of Victory Auto, focusing on their birthdays, other celebrations, and day-today casual interactions while at work. About 20 percent of Victory Auto employees are active
on Facebook. When they become Facebook and sometimes even personal friends with
customers, they are encouraged to share photos on Facebook. These photos can then be
tagged to help build more traffic to the Victory Auto Facebook page.
Victory Auto Glass uses social media to promote various charities, including Mothers Against
Drunk Drivers and Toys for Tots. A local charity that Victory Auto is heavily involved with is
Free2Be, which provides auto care and donated cars for economically disadvantaged people in
Anoka County, Minnesota. Volunteers with Free2Be can use the repair bays at Victory Auto free
of charge to repair donated cars. Victory Auto also gives free or discounted car repairs for
people helped by the Free2Be program. Gutierrez posts some of these stories on the company’s
Facebook page to help promote the charity.
Victory Auto has seen significant returns on its investment in social media:
• Since implementing its social media strategy, the company has opened two of its five
locations.
• Most of the customers of the two newest locations heard about Victory Auto from word
of mouth or online.
• More than 60 percent of fans and people “talking about” the company’s Facebook page
are female.
• Victory Auto became a certified female-friendly auto repair shop with AskPatty, a
Website that provides automotive advice for women.
• The company estimates that 50 to 60 percent of its customers are female, far above the
industry average.
• Victory Auto has more than 1,200 “likes” on its Facebook page.
10. Identify at least three lessons that entrepreneurs can learn from Victory Auto’s use of
social media. (5 points)
Extra Credit
One day while you are in Bowden Brake Service getting your brakes repaired, Jim storms into
his office, slamming doors and shouting about the local financial institutions. After a few
minutes of building your courage, you approach Jim and ask him what the problem is. He
shouts, “It’s the financial institutions in this town! Not one of them will lend me the money I
need to expand my business. They all said I needed to take a closer look at my financial position
before I consider expanding. One of them said something about ratio analysis. I know a lot
about cars and brakes, but what is ratio analysis?”
You tell Jim you will perform a ratio analysis for the business if he gives you a free brake job. Jim
provides you with the following financial statements.
Bowden Brake Service
Income Statement
Year Ending December 31, 2021
Net Sales $780,000
Costs of Goods Sold:
Beginning Inventory $104,000
Purchases 526,480
Goods Available for Sale $630,480
Ending Inventory 134,400
Costs of Goods Sold 496,080
Gross Margin $283,920
Operating Expenses:
Rent 24,000
Insurance 5,250
Advertising 6,000
Travel 2,500
Interest 72,750
Taxes (Property, etc.) 2,500
Salaries & Admin. Expenses 97,000
Utilities 12,500
Supplies 1,360
Total Operating Expenses $223,860
Net Profit $60,060
Bowden Brake Service
Balance Sheet
December 31, 2021
Assets
Current Assets:
Cash $20,000
Accounts Receivable 10,000
Notes Receivable 5,000
Inventory 134,400
Total Current Assets $169,400
Fixed Assets:
Land 147,000
Machinery 73,000
Equipment 160,800
Less Accumulated Depreciation (30,200) 203,600
Total Fixed Assets 350,600
Total Assets $520,000
Liabilities & Owner’s Equity
Current Liabilities:
Accounts Payable 40,500
Notes Payable 20,200
Accrued Salaries Payable 4,300
Total Current Liabilities: 65,000
Long-term Liabilities: Long-term Loan 325,000
Total Liabilities $390,000
Owner’s Equity, Jim Bowden $130,000
Total Liabilities and Net Worth $520,000
11. Refer to the income statement and balance sheet. Prepare a ratio analysis for Bowden
Brake Service. In addition, use the following industry statistics for firms like Jim’s to
explain and interpret what these ratios mean. (5 points)
Current ratio 1:4:1
Quick ratio 0:7:1
Debt ratio 1:8:1
Debt-to-net worth ratio 1:9:1
Average inventory turnover N/A
Average collection period 21.22 days
Net sales-to-total assets 2.8 percent
Net sales-to-working capital 17.2 percent
Net profit on sales 9.0 percent
Net profit to equity 22.2 percent
Jim Bowden, the owner of Bowden Brake Service, plans to expand his six-year-old brake service
to include tune-ups and tire services. Based on budget estimates for the upcoming year, Jim
expects net sales to be $825,000 with a cost of goods sold of $530,000 and total operating
expenses of $210,000. From the budget he created, Jim computes fixed expenses to be
$168,000, while variable expenses (including cost of goods sold) are $572,000. Jim is concerned
that the new cost structure may damage his ability to produce a profit, and he wants to
perform a break-even analysis for the upcoming year to gain insight.
12. If Jim were to reduce his fixed costs by 10 percent by eliminating a middle
management position, what benefit would that be to him and the company? What
would his new contribution margin be? (5 points)
Jim Bowden has been operating his business for some time now and thinks it is time to grow
and expand. To compute the cost of expanding his existing business, Jim Bowden makes the
following estimates:
Adjacent lot $40,000
Metal prefab building 25,000
Hydraulic lifts 15,000
Tools and equipment 9,000
Parts and inventory 5,000
Additional operating expenses 55,000
TOTAL $149,000
13. Explain to Jim the possible (and realistic) sources of capital for expansion. Where
would you recommend that he go for the funds he needs? Why? (5 points)