Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
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,
Copyright © 2019 Pearson Education, Inc.
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:
Copyright © 2019 Pearson Education, Inc.
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
Copyright © 2019 Pearson Education, Inc.
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.
Copyright © 2019 Pearson Education, Inc.
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
