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CHAPTER 2
DEVELOPING THE BUSINESS IDEA
True-False Questions
T. 1. For ventures that first get to market or create intellectual property rights, it’s
common to price new products or services at high markups or profit margins.
flows and also performance-oriented as reflected in rapid value creation over
time.
comparable to what they could have earned working for much larger firms.
T. 4. An entrepreneur may start a number of different types of businesses,
including salary-replacement firms, lifestyle firms, and entrepreneurial firms or
ventures.
lifestyles while being paid for doing what they like to do.
living for their owners with growth being a secondary goal.
F. 7. A sound business model is a plan to generate investor interest, make profits,
and grow asset investments.
profits, and produce free cash flows.
to fail.”
T. 10. Best practices of high-growth, high–performance firms applied in the
marketing practices area include “developing new products or services that are
considered to be the best.”
marketing practices area include “preparing detailed monthly financial plans
for the next year and annual financial plans for the next five years.
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T. 12. Best practices of high–growth, high-performance firms applied in the
financial practices area include “preparing detailed monthly financial plans for
the next year and annual financial plans for the next five years.
management practices area include “assembling a management team that is
balanced in both functional area coverage and industry/market knowledge.”
narrow window of opportunity to become a successful business venture.
However being the first to market does not guarantee success.
T. 15. Ideas that are said to be “ahead of their time” are too early to become
viable business opportunities for the inventor or innovator.
feasibility.
opportunities, and threats to determine the business opportunity viability of an
idea.
F. 18. A SWOT analysis focuses on strengths (S), worries (W), opportunities
(O), and treats (T).
business plan.
whether there are unfilled customer needs and the extent to which intellectual
property rights exist.
F. 21. A SWOT analysis should consider the extent of existing competition and
the likelihood of substitute products or services as potential strengths or
opportunities.
commercial potential to produce revenue growth, financial performance, and
value.
abandoned.
T. 24. The VOS Indicator is useful in assessing the commercial potential of a
venture, but should not be used as the sole tool to determine a venture’s fate.
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about a venture’s commercial potential.
to determine potential attractiveness of venture opportunities as business
opportunities.
F. 27. Asset intensity is the net after-tax profit divided by total assets.
needed to generate a dollar in sales.
T. 30. The compound rate of return that equates the present value of the cash
inflows with the initial investment outlay is called the internal rate of return
(IRR).
need for financial capital and finding unique sources for financing a new
venture.
product or providing a service.
F. 33. In a typical business plan, the section covering the management team does
not need to disclose the expertise and experience of the management.
through its lifecycle is known as real options.
businesses, products, or services begins with ideas, then moves to the
preparation of a business plan, and finally ends with a feasibility study.
T. 36. A well-designed entrepreneurial venture bins with an idea that survives an
analysis of its feasibility and results in a business model/plan.
free cash flows.
revenues.
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total assets.
net working capital is needed to support revenue growth.
Multiple-Choice Questions
doing what they like to do are referred to as:
a. salary-replacement firms
b. lifestyle firms
c. entrepreneurial ventures
d. rapid value creation firms
a. salary-replacement or entrepreneurial firms
b. lifestyle or entrepreneurial firms
c. entrepreneurial ventures
d. salary-replacement or lifestyle firms
a. survival, high growth
b. high growth, high performance
c. survival, average performance
d. high, growth, average performance
except?
a. generates revenues
b. makes profits
c. retains all its earnings
d. produces free cash flows
e. all of the above are included
a. generate revenues, make profits
b. make profits, produce free cash flows
c. produce free cash flows for the owners of the venture
d. generate revenues, make profits, and produce free cash flows
sound business model?
a. produce low–cost products
b. generate revenues
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c. make profits
d. produce free cash flows
generated from operations exceeds all of the following except?
a. borrowing costs
b. non-cash depreciation
c. taxes
d. investment in assets
a. the size and timing of its future free cash flows
b. time value of money
c. its net income
d. a and b
e. a and c
command higher prices and margins best describes strong
a. marketing practices
b. financial practices
c. operating practices
d. management practices
following except?
a. provide expertise in the areas of marketing, finance, and operations
b. have successful experience in the venture’s industry and markets
c. work collaboratively with each other
d. share the entrepreneurial spirit
e. in-house accounting, auditing, and tax professionals
except?
a. creating or meeting a customer need
b. has perceived attraction to prospective investors
c. provides an initial competitive advantage
d. is timely in terms of time-to-market
e. offers the expectation of added value to investors
or areas?
a. strengths
b. weaknesses
c. new ideas
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d. opportunities
e. threats
areas? a. strengths
b. weaknesses
c. opportunities
d. threats
e. all of the above
f. a, b, and d
examined in terms of:
a. strengths
b. weaknesses
c. opportunities
d. threats
e. a or b
f. c or d
areas: a. experience/expertise
b. reputation value
c. first mover
d. a and b
e. a, b, and c
a. industry/market considerations
b. pricing/profitability considerations
c. financial/harvest considerations
d. management team considerations
e. location/profitability considerations
parts of the VOS indicator?
a. industry/market considerations
b. pricing/profitability considerations
c. financial/harvest considerations
d. management team considerations
a. venture opportunity screening indicator
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b. viable opportunity statement indicator
c. venture only success indicator
d. viable assessment screening indicator
a. industry/market considerations
b. pricing/profitability considerations
c. financial/harvest considerations
d. management team considerations
e. all of the above
f. a, b, and d
considered a:
a. a low score
b. an average score
c. a high score
d. a very, very high score
a. 0.00-0.99
b. 1.00-1.66
c. 1.67-2.33
d. 2.34-3.00
the interviewer prepares a subjective assessment and indicates one of the
following except for:
a. natural commercial potential
b. high commercial potential
c. average commercial potential
d. low commercial potential
a. gross profit
b. gross profit margin
c. net profit
d. net profit margin
e. cost of goods sold
a. gross profit
b. gross profit margin
c. net profit
d. net profit margin
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have been deducted from the firm’s revenues is called
a. gross profit
b. gross profit margin
c. net profit
d. net profit margin
e. cost of goods sold
a. net after-tax profit divided by total assets
b. net profit margin times asset turnover
c. net cash flow divided by total assets
d. both a and b
e. both a and c
a. increases ROA
b. decreases ROA
c. has no effect on ROA
d. may raise or lower ROA, depending on how it affects revenues.
a. revenues divided by net profit times the asset turnover
b. net profit margin times the equity multiplier
c. net profit margin times asset turnover
d. net profit divided by total assets multiplied by the asset turnover
venture investors after all of the following except?
a. net cash flows
b. operating cash outflows
c. financing and tax cash flows
d. investment in assets needed to sustain the venture’s group
e. net increase in debt capital
flows to:
a. venture investors
b. creditors
c. the entrepreneur
d. a and b
e. a and c
f a, b, and c
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information: revenues = $50,000; net profit margin = 20%;
gross profit margin = 70%
a. $40,000
b. $35,000
c. $15,000
d. $10,000
financial information: cost of goods sold = $30,000; net profit = $17,000;
asset turnover = 1.6; return on assets 32%
a. $85,000
b. $72,000
c. $55,000
d. $38,000
financial information: revenues = $500,000; net profit = $70,000; and asset
turnover = 2.00 times.
a. 10%
b. 14%
c. 20%
d. 28%
e. 34%
following financial information: revenues = $500,000; net profit = $70,000;
and asset turnover = 2.00 times.
a. $100,000
b. $250,000
c. $375,000
d. $500,000
e. $650,000
financial information: revenues = $500,000; return on assets = 20%; and asset
turnover = 2.00 times.
a. $10,000
b. $25,000
c. $50,000
d. $60,000
e. $75,000
financial information: net profit = $60,000; assets turnover = 1.5 times; and
return on assets 30%.
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a. $300,000
b. $500,000
c. $800,000
d. $1,000,000
e. $1,200,000
information: net profit = $22,000; revenues = $132,000; return on assets 30%.
a. .05
b. .56
c. 1.8
d. 20
stage frequently begins with the preparation of a business plan. The business
plan is a written document that describes the proposed venture in all of the
following terms except:
a. the proposed product or service opportunity
b. the accounting data for the last five years
c. current resources available to the venture
d. financial projections
a. executive summary
b. business description
c. marketing plan and strategy
d. disclosure of pending litigation
e. operations and support
plan, all of the following should be included except:
a. income statements and balance sheets
b. statement of cash flows
c. past and present dividend per share information
d. breakeven analysis
e. funding needs and sources
a. management team
b. financial plans and projections
c. risk and opportunities
d. timeline and milestones
e. initial public offering information
a. generate revenues, make profits
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b. make profits, produce free cash flows
c. produce free cash flows for creditors and owners of the venture
generate revenues and produce free cash flows
finding unique sources for financing a new venture is referred to as:
a. mezzanine financing
b. financial bootstrapping
c. seed financing
d. startup financing
product or service opportunity, current resources, and financial projections is
called a:
a. financial plan
b. business plan
c. entrepreneurial plan
d. survival plan
performance firms, which of the following practices was not included?
a. marketing practices
b. financial practices
c. management practices
d. production/operations practices
products, or services, which one of the following is not considered a
component?
a. ideas
b. feasibility
c. business plan
d. harvest of venture
a. bootstrapping option
b. financial option
c. survival option
d. real option
a. size and timing of its future free cash flows (to equity)
b. level of its past revenues
c. prior losses and expenses
d. all of the above
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a. generating ideas
b. analyzing the feasibility of ideas
c. producing business models/plans
d. only a and c above
e. a, b, and c above
venture performance. The baseball term used to reflect a total loss of an
investment is:
a. home run
b. single
c. strikeout
d. double
a. total assets divided by total revenues
b. total revenues divided by total assets
c. calculated the same as asset turnover
d. one-half of the asset turnover
a. .80 times
b. 1.00 times
c. 1.25 times
d. 1.50 times