978-0134741086 Chapter 12 Part 2

Leverage ratios measure the relationships between financing supplied by a firm’s owners

and by its creditors.

4. What lessons concerning the use of debt financing can entrepreneurs learn from

Charles Kuhn’s experience? (LO 3) (AACSB: Reflective thinking)

5. Assume the role of a small business banker. Suppose that Kuhn were to

approach you for a bank loan to refinance his debt. Which financial ratios would

you be most interested in? Why? What advice would you offer him? (LO 3)

(AACSB: Application of knowledge)

a marketing plan, and to consider other forms of non-debt financing until the business is in

a better financial position.

6. Assume the role of a small business counselor. What advice would you offer him

to insure the long-term survival of Kopp’s Cycle? (LO 3) (AACSB: Application of

1. Assume the role of Shelly Edison. Using the financial statements for Eden’s

Garden, calculate the 12 ratios covered in this chapter. (LO 4) (AACSB:

Application of knowledge)

RATIO FORMULA RATIO

2. Do you see any ratios that, on the surface, look suspicious? Explain. (LO 4)

(AACSB: Analytical thinking)

It is difficult to assess this without knowing information about the industry itself. Initially,

Chapter 12, Page 198

You Be the Consultant: “All Is Not Paradise in Eden’s

Garden: Part 2”

1. Analyze the comparisons you have made of Eden’s Garden’s ratios with those

from Bizminer. What red flags do you see? (LO 4) (AACSB: Analytical thinking)

2. What might be causing the deviations you have observed? (LO 4) (AACSB:

3. What recommendations can you make to the Edens to improve their company’s

financial performance in the future? (LO 4) (AACSB: Application of knowledge)

1. Calculate Anita’s break-even point without the expansion plans. Draw a break–

even chart. (LO 5) (AACSB: Application of knowledge)

First, calculate the contribution margin:

Chapter 12, Page 199

Anita’s break-even point is 339,565 units without expansion.

2. Compute the break-even point, assuming that Anita decides to expand her

business. (LO 5) (AACSB: Application of knowledge)

Calculate the contribution margin:

Given New Sales: $495,000 + $102,000 = $597,000

346,625 units to break-even.

3. Do you recommend that Anita expand her business? Explain. (LO 5) (AACSB:

Application of knowledge)

At first glance, Anita should be discouraged from expanding. Students may note however

12-1. How should a small business manager use the 12 ratios discussed in this

chapter?

(LO 3) (AACSB: Reflective thinking)

12-2. Outline the key points of the 12 ratios discussed in this chapter. (LO 4)

(AACSB: Reflective thinking)

8. Average-payable-period ratio – Measures the number of days it takes a company

12-3. What signals does each of the 12 ratios give a business owner? (LO 4)

(AACSB: Reflective thinking)

By themselves, these ratios are snapshots of a company’s financial position at a single

instant; however, by examining these trends over time, an entrepreneur can detect gradual

Chapter 12, Page 201

Leverage ratios measure the financing supplied by a firm’s owners against that

supplied by its creditors; they are a gauge of the depth of a company’s debt.

Operating Ratios help an entrepreneur evaluate a small company’s overall

performance and indicate how effectively the business employs its resources.

Profitability Ratios indicate how efficiently a small company is being managed and

provide information about a company’s ability to use its resources to improve its

bottom line.

12-4. Describe the method for building a projected income statement and a

projected balance sheet for a beginning business. (LO 2) (AACSB: Reflective

12-5. Why are pro forma financial statements important to the financial planning

process? (LO 2) (AACSB: Reflective thinking)

No entrepreneur should launch a business without first creating a sound financial plan and

Part 5: Case Studies

The following cases complement lecture and assignments for the topics presented in this

chapter.

 Case 5: Intertech Construction Corporation

 Case 6: Bluffton Pharmacy – Part 1

Part 6: Online Videos and Podcasts

These online videos may enhance class discussion and provide additional insight for the

chapter topics.

Chapter 12, Page 202

 Top Mistakes Newbie Entrepreneurs Make on Financial Projections 4:34 minutes

http://www.youtube.com/watch?v=ZZPMRAeRwf8

 Desperately Seeking Finance I 9:40 minutes

http://www.youtube.com/watch?v=3uuzC5MEAHY

 Desperately Seeking Finance II 6:57 minutes

http://www.youtube.com/watch?v=Z71dl3lZdvU

 Financial Ratio Analysis 12:17 minutes

http://www.youtube.com/watch?v=0kcdFHWcXjw

 Break Even Analysis 6:10 minutes

http://www.youtube.com/watch?v=Du07z79T-Js

Links to additional online resources are available on the companion Web site at