THE UNIVERSITY OF NORTH CAROLINA AT GREENSBORO

							          THE UNIVERSITY OF NORTH CAROLINA AT GREENSBORO
              Joseph M. Bryan School of Business & Economics
                  Department of Business Administration

                                MGT 470 – Fall 2002
                                Exam II – Take Home
                                    17 Oct 02

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Multiple Choice (3 points per question) – mark the best answer for each question
(highlight your response, change the text color, etc.).
1. The product life cycle concept means that small businesses must:
     a) constantly be involved in product innovation.
     b) track demographic and psychographic trends carefully.
     c) create both place and time utility if they are to survive.
     d) use a market penetration strategy if they are to be successful.

2. Mark’s target income in his business for the upcoming year is $78,500. The
   company’s gross profit margin averages 32.6% of sales, and its total operating
   expenses run 24.7% of sales. To achieve his target income, sales of Mark’s company
   should be:
   a) $148,773.
   b) $993,671.
   c) $317,814.
   d) $1,271,348.

3. The Last Hole, a small golf shop, sponsors a hole-in-one contest in a golf tournament
   to raise money for charity. Anyone scoring a hole-in-one on #16 wins a complete set
   of clubs; the golfer closest to the pin on #16 wins a golf wardrobe. The Last Hole is
   the subject of several reports and stories in the local media. This is an example of:
   a) sales promotion.
   b) advertising.
   c) personal selling.
   d) publicity.

4. An above average inventory turnover indicates that the business:
   a) Has an illiquid inventory.
   b) Is healthy, with a salable inventory.
   c) Needs to review its pricing policies.
   d) Has below average performance and is facing bankruptcy if not corrected quickly




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5. Given the following data on Port Royal, Inc.:
   Net sales = $927,641      Gross profit = $301,483          Net profit = $48,457
   Total assets = $203,869           Total liabilities = $74,325
   Port Royal's debt-to-net worth ratio is:
   a) 0.36:1.
   b) 0.08:1.
   c) 1.57:1.
   d) 0.57:1.

6. Depreciation is:
   a) the difference between the total sources available to the owner and the total uses
      of those assets.
   b) listed as a source of funds because it is a non-cash expense, deducted as a cost
      of doing business.
   c) the owner’s total investment at the company’s inception plus retained earnings.
   d) creditors’ total claims against the firm’s assets.

7. A high debt ratio:
   a) Gives a small business more borrowing capacity.
   b) Means that creditors provide a large percentage of the company’s total financing.
   c) Decreases the chances that creditors will lose money if the business is liquidated.
   d) Decreases the creditor’s interest in the business.

8. __________ typically lead(s) sales; ____________ typically lag(s) sales.
   a) Production; receivables
   b) Collections; purchases
   c) Receipts; production
   d) Purchases; collections

9. ABC, Ltd. Improves it’s average collection period from 6.1 times to 7.3 times per year
   (assume 365 days for an accounting period); what is the effect on their cash flow
   cycle?
   a) Cash flow cycle increases by 1.2 times
   b) Cash flow cycle increases by 10 days
   c) Cash flow cycle decreases 1.2 days
   d) Cash flow cycle decreases 10 days

10. In a _______________ advertising program, a group of similar businesses forms a
    "syndicate" to produce "generic" ads that allow the individual businesses to dub in
    local information.
    a) cooperative advertising
    b) shared advertising
    c) direct advertising
    d) integrated marketing

11. The least patient part of a small businesses financial statements is/are:
    a) Current liabilities.
    b) Fixed assets.
    c) Gross profit.
    d) Owner equity.




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12. Topkin Corporation estimates its fixed cost for producing an industrial chemical to be
    $123,000 for the upcoming year. Variable costs are $8.60 per gallon, and the selling
    price per gallon is $10.00. Approximately how many gallons must Topkin sell to
    break even?
    a) 4,393
    b) 12,300
    c) 8,787
    d) Cannot be determined from information given.

13. The reward for investing in a successful start-up usually comes in the form of:
    a) Regular dividends paid annually.
    b) The appreciation of the company’s value.
    c) Significant interest payments, made quarterly.
    d) The satisfaction of having succeeded in helping a small business grow.

14. Sunny Bright’s, The Tanning Parlor, is in the middle of its busy season. The hiring of
    extra help, some unexpected repairs on equipment, etc., has led to a shortage of
    operating capital. What type of financing would Sunny most likely use in this
    situation?
    a) Line of credit
    b) Floor planning
    c) A discounted installment contract
    d) An asset-based loan

15. A good resource for discovering primary financial information about most any type of
    business/industry is:
    a) OSHA
    b) SBA
    c) Thomas Register
    d) RMA

16. Janis Reardon is in the process of launching a craft shop. Her biggest supplier,
    Lothrop's Craft Supply, agrees to sell her the inventory she needs to stock her store
    on a delayed payment schedule. Janis is using what type of financing?
    a) Line of credit
    b) Floor planning
    c) Trade credit
    d) Asset-based borrowing

17. Which of the following is an example of a local effort to support small business
    development through a revolving loan pool:
    a) Greensboro Venture Capital Fund
    b) Piedmont Angel Network
    c) Triad Entrepreneurial Initiative
    d) Self Help Credit Union

18. Which of the following is an effective way to trim overhead?
    a) Leasing inventory
    b) Accelerating accounts receivable
    c) Establishing zero balance accounts
    d) Negotiating fixed loan payments to coincide with company cash flow




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19. The most commonly used method of establishing an advertising budget for a small
    business is:
    a) a percentage of sales.
    b) spending what competitors spend.
    c) objective-and-task method.
    d) what is affordable.

20. As a general rule, an entrepreneur needing $72,000 to launch a business venture
    should expect to provide how much?
    a) $70,000-$72,000
    b) $18,000-$22,000
    c) $42,000-$48,000
    d) $32,000-$36,000




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SHORT ANSWER 10 points per question (ANSWER ONLY 2 QUESTIONS!!!!!!)

1. Your small firm is considering using print media, specifically, newspapers and
   magazines for an advertising campaign. Explain the advantages and disadvantages
   of each of these media.

2. What does a break-even analysis tell the small business owner? Describe the steps
   used in calculating it. What is the difference between a break-even point in dollars
   versus one in units?

3. Create a credit and collection policy for a privately owned small bookstore/café
   which has a number of customers who buy pastries on account and numerous
   customers with standing book orders that they pay on once a month.




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ESSAY (20 points, ONLY ANSWER 1 QUESTION!!!!!!)
1. Golden Company
From the information below, prepare a monthly cash budget for the next quarter
(October – December) for the Golden Company.

                     October          November       December
Sales                $750,000        $800,000       $900,000
Manufacturing costs   450,000         480,000        540,000
Operating expenses    225,000         240,000        270,000
Capital expenditures     .......       60,000           .......

Golden Company expects 25% of its sales to be in cash, and of the accounts receivable,
70% will be collected within the next month. Depreciation, insurance, and property taxes
comprise $25,000 of monthly manufacturing costs and $10,000 of the operating
expenses. Insurance and property taxes are paid in February, June, and September.
The rest of the manufacturing costs and operating expenses will be paid off, one-half in
the month in which incurred and the rest in the following month. The current assets on
October 1 are made up of:

                Cash, $70,000
                Marketable securities, $50,000
                Accounts receivable, $600,000 ($450,000 from September, $150,000 from
                 August) and current liabilities include $60,000, 6%, 90-day note payable
                 due October 18
                Accounts payable of $200,000 for September manufacturing expenses
                Accrued liabilities of $100,000 for September operating expenses.

    Dividends of $1,000 should be received in November. An income tax payment of
    $50,000 will be made in November. The firm's minimum cash balance is $20,000.




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2. Jim Bowden, owner of Bowden Brake Service, is planning 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, Jim computes
   fixed expenses to be $168,000 while variable expenses (including cost of goods sold)
   are $572,000. Jim is worried that the new cost structure may damage his ability to
   produce a profit, so he wants to perform a quick break-even analysis for the
   upcoming year.

    a) Help Jim compute the break-even point for his brake service.

    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 financing
    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'll perform a ratio analysis for the business if he gives you a brake job.
    Jim provides you with the financial statements that follow.

    b) Refer to the following income statement and balance sheet. Prepare a ratio
       analysis for Bowden Brake Service (calculate the ratios listed in part c).

    c) Using the following industry statistics for firms like Jim's, explain and interpret
       what these ratios mean.

               Current ratio                                  1.4:1
               Quick ratio                                    0.7:1
               Debt ratio                                     0.4:1
               Debt-to-N/W ratio                              1.9:1
               Average inventory turnover                       NA
               Average collection period                21.22 days
               Net sales-to-total assets                      2.8:1
               Net sales-to-working capital                   5.8:1
               Net profit on sales                            9.0%
               Net profit to equity                         22.2%

     d) Were the bankers correct? Do you think Jim should expand the business? In
        your discussion be sure to talk about what things can Jim control that would
        make the business stronger.




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                                 Bowden Brake Service
                                    Income Statement
                              Year Ended 31 December 200X

__________________________________________________________________________

Net Sales                                                       $780,000
Costs of Goods Sold:
     Beginning Inventory                          104,000
     Purchases                                    526,480
Goods available for Sale                          630,000
Ending Inventory                                  134,000
 Cost 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                                                        $60,000
                                                                  ======

                                Bowden Brake Service
                                    Balance Sheet
                                  31 December 200X
__________________________________________________________________________

        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

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Long-Term Liabilities:
        Long-term loan                                           $325,000
Owner's Equity, Jim Bowden                                         130,000
Total Liabilities and Net Worth                                    $520,000
                                                                   =======
________________________________________________________________________




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