1. A quantitative measure of trade-offs, and the highest value that is surrendered when a decision to invest funds is made is called:

_______________________

2. The practice of selling accounts receivable to improve liquidity of a business is called:

__________________________

3. When negotiating the purchase or sale of a business, a common methodology used for establishing a value of the business is a multiple of EBITDA. What does the acronym "EBITDA" stand for?

E _____________________

B _____________________

I _____________________

T _____________________

D _____________________

A _____________________

4. When deciding to launch an entrepreneurial business, which type of financial statement forecasts do you think would be the most important and most useful in determining the amount of owner investment and loans necessary to finance the business at the outset?

________________________

5. Inventory turnover is an important financial ratio in managing any business. What is the formula? (Show numerator and denominator).

_________________________

6. The accounting equation that verifies the accuracy of the entrepreneur's balance sheet is:

__________________________________

7. Jack has his new ATM business up and running. Customer interest has been high. He has employed several experienced sales people in hopes of a rapid expansion. Jack has negotiated a deal with the manufacturer where the cost of the ATM machines will be $2,000 each. He has estimated freight and delivery expenses to be $200 and has allowed $400 for installation labor. He thinks the machines will sell for $5,000 each. He holds training sessions for the sales personnel and gives them wide latitude to negotiate with customers, particularly those who purchase large volumes. Sales were brisk over the first few months, but Jack sensed that the salesmen were allowing too many discounted deals. When he began to analyze the numbers for the first six months, he found that the actual sales prices were averaging about $4,350. Moreover,

the installation labor turned out to be $75 higher per unit than he had planned. What was Jack's planned and actual gross profit margin percent for the first six months?

Planned______________________ Actual ________________________

8. Rhyan has owned and operated Antilles Spice, a specialty restaurant in Boca Raton, for the past three years. Business has been good and he wants to expand into Fort Lauderdale and Miami. He develops a new detailed business plan and approaches two local investors about financing the expansion. These investors are not interested in equity ownership in restaurant businesses, but they agree to loan Rhyan $250,000, with the two new locations pledged as collateral. The investors realize that cash flow is important during the formative stages of new restaurants, so they structure the terms of the loan to help Rhyan with his cash flow. The annual interest rate will be 7.5% and the interest will compound monthly over the 4-year term of the loan. However, there will be no monthly payments; the note will be a so-called "balloon" note with the full

amount of principal and interest due at the end of four years. In planning his cash flow for Antilles Spice, how much money will Rhyan need to set aside for the retirement of this indebtedness at the end four years?

$____________________________

9. Tom decides to open a small Italian wine store in an affluent South Florida neighborhood. He will be an absentee owner and has hired Vinnie as the store manager. He has agreed to pay Vinnie a fixed salary of $75,000 per year. Vinnie has hired two additional permanent employees at $30,000 each. The store has operating expenses for rent, utilities, advertising, etc. that occur regardless of the sales level; the pro-forma financial statements show that these expenses will run about $8,750 per month. In addition, Tom will have to borrow money to finance a necessarily

large inventory, and he estimates interest on these loans will be $1,000 per month. Tom has a connection in Italy and has negotiated what he thinks is a great deal - a blended wine cost of $52.20 per case of 12 bottles, including freight, across all types and varieties. His market studies indicate the sales prices for the majority of wine sold in popular wine shops in South Florida range from $8.00 to $50.00 per bottle. Tom carefully studies these industry reports and his projections. He figures the sales price at his store will average $16.50 per bottle. He knows that the store must achieve a minimum sales level before breaking even, and he knows that breakeven

needs to happen fast before he runs out of cash. So he sets weekly sales targets for Vinnie. How many bottles of wine must the store sell per week in order for the business to break even?

___________bottles

Hint: be sure to use same time periods (i.e., weekly, monthly, annual) and same units of measure (i.e., bottles, cases)

10. Tom is pleased to know where the breakeven point is, but his business objective is not breaking even; he's in this deal to make money - hopefully a lot of money. He has invested his personal savings, as well as other family members' money, and he plans to be spending quite a bit of his time monitoring the operations. If the business is sufficiently profitable, he may open another store. He's looking to take out $7,500 per month as a salary for himself. Although the store manager is appropriately focused on individual bottle sales, Tom thinks more in terms of cases, since he has the primary supplier contacts, and that's the way they communicate. So, he recalculates. What is the weekly sales quantity (in cases) that will be necessary in order for Tom

to pay himself a salary and reach a point where he can start to make a profit?

________ cases

11. Gina's wholesale musical instrument business was open seven days a week in 2013. Business was good. She had credit sales that averaged $68,500 per month during the last year. Miscellaneous cash sales amounted to another $2,200 per month. She had $159,895 in accounts receivable at 12/31/13. Accounts receivable had increased by almost 20% over the year, from a balance of $133,413 at the beginning of the year. Despite the steady increase, receivables over 30 days old dropped from $31,650 at the beginning of the year to $21,200 at 12/31/13. She wrote off $7,250 as bad debts during the year. Gina's days sales outstanding (DSO) at year-end was:

_____________________

12. Tatiana has been working on her business plan and has been carefully assessing cash flow requirements for her business. She's starting a brand-new business and has limited access to capital. She owns the land and building where the business is located and has decided to seek a mortgage to help finance the operations. She consulted her local bank, which has agreed to a $200,000 mortgage, bearing interest at 6%. After thorough research and study, her projections include the following data for the first year of operations: Sales - $800,000; cost of sales -$540,000; operating expenses - $110,000; average inventories - $100,000; and average accounts receivable - $120,000. The mortgage will require only the payment of interest for the first three

years and then, beginning in the fourth year, require full amortization payments at the beginning of each month for the next 10 years. What will Tatiana's income statement show as net income before taxes in her first year of operations?

$______________________

13. You have joined up with two partners, George and Joe, to start a new computer equipment distributorship. Each partner invested $50,000, and you have been elected to actively manage the business. George is not active in the business, but he is really focused on the numbers. He has questioned you intensely on the financial statements you presented at the end of the first year. These statements show current assets of $620,000 (which includes $247,585 in delinquent receivables). Inventory has averaged $75,000 over the course of the year, but has been growing recently and is now up to $95,000 on the year-end balance sheet. The balance sheet also shows the following amounts: accounts payable of $160,000; accrued expenses of $65,000; $35,000 in

short-term bank borrowings; a warehouse building with a depreciated cost of $371,000; and a mortgage of $258,000 which is due in one balloon payment on December 31, 2018. The financial statements indicate that stockholders' equity at year-end was $473,000. George is concerned. He tells you he thinks the current ratio is out of line, at least in his mind. You listen to him carefully, take another look at the statements and compute the current ratio. What is it?

_____________________

14. Since opening your new retail business, you have found yourself steadily diversifying your product offering and thereby expanding your inventory - a practice commonly referred to as line extension. Cash is running short and you realize that you need to get better control of your inventory to avoid a disastrous liquidity squeeze. So, you begin to take a hard look at your numbers. Inventory at the recent year-end totaled $163,000. Your sales projections for the coming year are $120,000 per month. Your estimated gross profit margin is 40%. Experts in your industry have advised you that inventory turnover levels in your business should be at least 6.0. You've decided to target that level. What should be your targeted monthly inventory level

in order to keep your turnover rate at least 6.0?

$_____________________

15. Jose purchased 635 shares of common stock in Tworoger Technologies, Inc. six years ago for$23.40 per share, or $14,859. His financial advisor thinks the stock has peaked and has advised him to sell his shares. The current price is $39.75 per share, which would yield Jose more than $25,000 in cash. Jose calculates his profit as $10,382, or an average of about $1,730 per year over the six-year period. If he decides to sell the stock for $39.75 per share, what will be his rate of return, assuming interest is compounded annually?

___________%

16. Giana has been dollar cost averaging into a mutual fund for the past 12 years. She started out with a lump sum of $12,000. At the end of every month she added the profit from her apartment building, which was $1,200 per month. Interest was compounded monthly. If she has enjoyed an annual return of 12.12%, what is her fund worth today?

$_________________

17. Marlene has been planning to build and open a spiffy new restaurant in South Florida. Her pro forma financial statements reflect significant start-up costs ($45,000), heavy remodeling expenditures ($50,000) and several months of losses before she begins to turn a profit. She worries a bit about the risk. She then comes across an established restaurant for sale in Palm Beach County that looks very promising. The owner is terminally ill and has said he will sell the entire business, including the land, building and inventory for $500,000. Marlene doesn't have that kind of money; she only has $75,000. So, she starts shopping around for capital. Through a friend, she is introduced to a private investor, a wealthy gentleman who seems to admire her

entrepreneurial instincts and wants to help. He makes an offer to loan Marlene $425,000, secured by the entire business. Marlene is not a sophisticated financial person, so the investor tries to make the deal simple. He says, "You just pay me $5,000 at the end of every month, just as though you were paying rent. After 10 years, I'll cancel the debt and you owe me nothing. That's it." On the surface, this proposition sounds reasonable to Marlene, but she decides to try and calculate the imbedded cost of money included this proposition. What is the annual interest rate she will be paying the investor?

___________%

18. Marlene decides to take the investor's offer. She buys the business and begins paying the $5,000 monthly payments to the investor. Shortly thereafter, she realizes what a bargain she found. She's learned that, because of its excellent location, the land and building alone are worth more than she paid for the entire business. She reads that mortgage rates are very attractive these days. She then begins to wonder if she could refinance the business with a bank, pay off the investor, get some of her own investment back fairly soon and lower her monthly payment - all at the same

time. An appealing thought! So, she approaches a local bank. The bank has the property appraised and agrees to a mortgage of $450,000, which would allow Marlene to pay off the investor and reduce her equity investment in the business by $25,000. The bank loan would be repayable over 20 years with interest at 4.75%, compounded monthly. Payments are due at the end of each month. Intuitively, she thinks there will be a substantial savings in the monthly payments she is required to make. But she's not quite sure and asks you to help her with the financial calculations. What will be the amount of her monthly mortgage payment?

$______________

19. A local attorney has unfortunately learned that he has been seriously conned by Bernie Madoff for many years. The attorney invested $400,000 with Madoff 18 years ago and had been led to believe that his annual return was averaging 13%. Because this sounded like a terrific investment, he let his money ride every year and made no withdrawals over the 18-year period. He was provided statements of his account at the end of each month and decided to reinvest the "earnings" in the fund. He bragged to his friends about "this guy I know" and actually introduced some of them to Madoff as well. Suddenly, and without any notice, he was stunned to learn that Madoff was conducting a massive fraudulent Ponzi scheme and that he had lost all his money -

funds he had counted on for retirement. Actually, he was planning to begin drawing down on the investment at the rate of $10,000 per month when he retired at age 65 on July1, 2014. How much money did the attorney think he had in his account before he learned of the fraud?

$_______________________

20. Break-even point is the point where revenues equal the total of all expenses, including cost of goods sold. Why is the break-even point relevant?

21. It is very important for any new business to carefully monitor cash flow. What are some specific tools (statements and ratios) used to do this? List at least 3 examples.

22. When presenting a business plan to potential investors, what are the most critical points to highlight? List at least 3 examples.

23. What is the time value of money, and why is it important?

24. Why is it helpful to compare select financial metrics with companies in the same or similar industry?

25. Why is it important for all entrepreneurs to have a basic understanding of financial statement analysis, and cash flow?

BONUS QUESTION

How does a business plan benefit the entrepreneur?