FI 512 Week 2 Answer Key
Chapter 3
1. [Business Organization and Intellectual Property] Phil Young, founder of the Pedal Pushers Company, has developed several prototypes of 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 glow in the dark and will provide a musical sound as the bicycle is pedaled.
Phil plans to purchase materials for making the product from others, assemble the products at the venture’s facilities, and hire product sales representatives to sell the Pedal Pushers through local retail and discount stores that sell children bicycles. Phil will need to purchase plastic pedals and extensions, bolts, washers and nuts, reflective material, and a “micro-chip” to provide the “music” when the bicycle is pedaled.
A. How should Phil organize his new venture? In developing your answer consider such factors as amount of equity capital needed, business liability, and taxation of the venture.
Phil’s proposed business is not likely to be very capital intensive. That is, little investment will be required for equipment and a production facility. The investment in inventories can probably be kept relatively low. Thus, organizing as a proprietorship will probably work due to a need for relatively low amounts of equity capital. Being taxed as a proprietorship also may be advantageous. Of course, the major advantage to Phil by choosing to organize as a corporation is to limit his liability to his business investment. If Phil has substantial personal assets, organizing as a corporation would help protect these assets in the event the business fails.
The Business plan on Small Business Setup Legal Structure
PLANNING FOR SUCCESS Planning is a key factor in the success of any business, and conversely, the failure to plan adequately is one of the fastest routes to business failure. There are many considerations that an entrepreneur must decide such as: type of business, legal structure, permits and licenses, market planning, business plan, location, organization management planning, business telephone ...
B. Phil is concerned about trying to protect the intellectual property embedded in his Pedal Pusher product idea and prototype. How might Phil consider protecting his intellectual property?
Possible ways to protect his intellectual property might include: applying for a utility patent to protect his product; a utility patent to protect his design; and a trademark to protect his company name.
Chapter 5
8. [cash conversion Cycle] Castillo Products Company, described in Problem 7, improved its operations from a net loss in 2009 to a net profit in 2010. While the founders, Cindy and Rob Castillo, are happy about these developments, they are concerned with trying to understand how long the firm takes to complete its cash conversion cycle in 2010. Use the financial statements from Problem 7 to make your calculations. Balance sheet items should reflect the averages of the 2009 and 2010 accounts.
A. Calculate the inventory-to-sale conversion period for 2010.
Inventory-to-Sale Conversion Period = Avg. Inventory/Avg. Daily COGS = (($400,000 + $500,000)/2)/($900,000/365) = 182.50 days
B. Calculate the sale-to-cash conversion period for 2010.
Sale-to-Cash Conversion Period = Avg. Receivables/Avg. Daily Sales = (($200,000 + $280,000)/2)/($1,500,000/365) = 58.40 days
A. Calculate the purchase-to-payment conversion period for 2010.
Purchase-to-Payment Conversion Period = (Avg. Payables + Avg. Accruals)/Avg. Daily CGS = (($130,000 + $160,000)/2 + ($50,000 + $70,000)/2)/($900,000/365) = 83.14 days
The Term Paper on Eco-Products, Inc.
... illustrate the working capital problem faced by Eco-Products. CCC Calculations: Inventory-to-Sale Conversion Period (Inv. CP): 2005 Inv. CP = 361,906/(2,584,326/365) = 361,906/7,080. 4 ... double the amount of assets needed for 2008. Additional assets can be financed in part through the generation of net profits or income ...
B. Determine the length of the Castillo Product’s cash conversion cycle for 2010.
Length of the Cash Conversion Cycle = (Inventory-to-Sale Conversion Period) + (Sales-to-cash Conversion Period) – (Purchase-to-Payment Conversion Period) = 182.50 days + 58.40 days – 83.14 days = 157.76 days
9. [ROA Model and Expenses Related to Sales] Use the financial statements data for the Castillo Products presented in Problem 7.
A. Calculate the net profit margin in 2009 and 2010 and the sales-to-total-assets ratio using yearend data for each of the two years.
Net profit margin 2009: -$65,000/$900,000 = -7.22% Net profit margin 2010: $75,000/$1,500,000 = 5.00% Sales-to-total-assets 2009: $900,000/$1,000,000 = .900 Sales-to-total-assets 2010: $1,500,000/$1,200,000 = 1.250
B. Use your calculations from Part A to determine the rate of return on assets in each of the two years for the Castillo Products.
Rate of return on assets 2009: -7.22% x .900 = -6.50% Rate of return on assets 2010: 5.00% x 1.250 = 6.25%
C. Calculate the percentage growth in net sales from 2009 to 2010. Compare this with the percentage change in total assets for the same period.
Percentage growth in net sales: ($1,500,000 – $900,000)/$900,000 = 66.67% Percentage change in total assets: ($1,200,000 – $1,000,000)/$1,000,000 = 20.00% D. Express each expense item as a percentage of net sales for both 2009 and 2010. Describe what happened that allowed Castillo Products to move from a loss to a profit between the two years.
