Entrepreneurship - Final 2015

For study

Multiple Choice Questions:

1) Luisa, the director of human resources, is discussing the duties and responsibilities of a new position and its working conditions with Delmar, the manager over the position. Luisa and Delmar are discussing a:A) job description.B) management audit.C) job specification.D) job analysis.Answer: DDiff: 2 Page Ref: 522-523AACSB: Reflective Thinking

2) A ________ identifies the duties and responsibilities of a position and its working conditions, while a ________ identifies the qualifications required of the job candidate in terms of skills, education, and experience needed.A) job specification; job descriptionB) job description; job specificationC) job analysis; job specificationD) job analysis; job descriptionAnswer: CDiff: 2 Page Ref: 522-523AACSB: Analytic Skills

3) Low capital requirements, cost advantages that are not related to company size, and the lack of brand loyalty are considerations regarding the: A) threat of new entrants to the industry. B) threat of substitute products. C) bargaining power of buyers. D) rivalry among companies competing in the industry. Answer: ADiff: 2 Page Ref: 103AACSB: Analytic Skills

4) The force from the five forces model that considers economies of scale, initial capital requirements, cost advantages relevant to company size, and lack of brand loyalty is the:A) barganinig power of suppliers.

B) threat of new entrants.C) threat of substitute products or services.D) rivalry among companies competing.Answer: BDiff: 3 Page Ref: 104AACSB: Analytic Skills

5) The primary purpose of the five forces matrix is to:A) assign values to each of the five elements.B) provide a graphic.C) list the five forces in rank order.D) assess the five forces as compared to a standard value.Answer: ADiff: 2 Page Ref: 104, Table 4.1AACSB: Analytic Skills

6) The process in which entrepreneurs test their business models on a small scale before committing serious resources to launch a business that might not work is known as:A) business modeling.B) business prototyping.C) business planning.D) product or service feasibility analysis.Answer: BDiff: 2 Page Ref: 105AACSB: Analytic Skills

7) An analysis that determines the degree to which a product or service idea appeals to potential customers and identifies the resources necessary to produce the product or provide the service is refereed to as:A) product or service feasibility analysis.B) business prototyping.C) business plan analysis.D) financial feasibility analysis.Answer: ADiff: 1 Page Ref: 105AACSB: Analytic Skills

8) Conducting ________ research involves collecting data firsthand and analyzing it while ________ research involves gathering data that has already been complied and is available. A) primary; secondaryB) secondary; primaryC) primary; industryD) product; secondaryAnswer: ADiff: 1 Page Ref: 106AACSB: Analytic Skills

9) One form of primary research is:A) to review published articles.B) Internet research.C) library research.D) a focus group.Answer: DDiff: 1 Page Ref: 107AACSB: Analytic Skills

10) The financial feasibility analysis takes these aspects into consideration:A) capital requirements, human resources, and return on investment.B) capital requirements, estimated earnings, and return on investment.C) capital requirements, estimated earnings, and return on sales.D) capital requirements, estimated earnings, and return on owner's equity.Answer: BDiff: 2 Page Ref: 109AACSB: Analytic Skills

11) The final aspect of the financial feasibility analysis combines the estimated earings and the capital requirements to determine the:A) estimated earnings.B) total capital requirements. C) net profit. D) rate of return on the capital invested. Answer: DDiff: 2 Page Ref: 109

For the questions below, consider the following competitive profile matrix:

12) Which of the following statements is true?

A) Overall, Competitor 2 is the strongest of these three companies.B) Your company's most serious weakness is its poor quality.

C) Your company's most vulnerable point against these two competitors is in the area of on-time delivery.D) The most important of the key success factors is location.

Answer: C 13) Which company has the strongest competitive position?

A) Your companyB) Competitor 1C) Competitor 2D) Impossible to tell from the information given

Answer: A

14) Which company has the worst location?A) Your companyB) Competitor 1C) Competitor 2D) Impossible to tell from the information given

Answer: B

15) In terms of quality, which company has the weakest competitive position?A) Your companyB) Competitor 1C) Competitor 2D) Impossible to tell from the information given

Answer: C

16) Which key success factor does the entrepreneur who built this table believe is most important?

A) QualityB) Service and on-time deliveryC) ConvenienceD) Location

Answer: A

17) A competitive profile matrix:A) identifies a firm's core competencies.B) permits the small business owner to divide a mass market into smaller, more manageable segments.C) allows the small business owner to evaluate her firm against competitors on the key success factors for the industry.

D) creates a road map of action for the entrepreneur in order to fulfill her company's mission, goals, and objectives.Answer: C

Refer to the following break-even Chart to answer the questions below:

18) Line T is the ________ line, while Line S is the ________ line.A) total revenue; total expenseB) total expense; total revenueC) fixed cost; variable costD) variable cost; fixed costAnswer: BDiff: 2 Page Ref: 363AACSB: Analytic Skills

19) The area labeled ________ represents the firm's fixed expenses, while ________ represents its variable expenses.A) Z; WB) X; YC) Y; XD) W; ZAnswer: BDiff: 2 Page Ref: 363AACSB: Analytic Skills

20) The area labeled ________ is the "profit area."A) WB) XC) YD) ZAnswer: DDiff: 2 Page Ref: 363AACSB: Analytic Skills

21) The area labeled ________ is the "loss area."A) WB) XC) YD) ZAnswer: ADiff: 2 Page Ref: 636AACSB: Analytic Skills

22) Which of the following is not one of the vital tasks small business leaders must perform?A) Hire the right employees to the team and constantly improve their skills.B) Create a culture for retaining employees.C) Plan for "passing the torch" to the next generation of leadership.D) Keep flexible and do not be concerned about preparing for the next generation of management.Answer: DDiff: 1 Page Ref: 519AACSB: Analytic Skills

23) Which of the following is true regarding hiring mistakes?A) Hiring mistakes are expensive.B) Companies' informal processes may lead to unpredictable outcomes.C) Small businesses are most likely to make hiring mistakes because they lack the human resources experts and the disciplined hiring procedures large companies have.D) All of the aboveAnswer: DDiff: 2 Page Ref: 520AACSB: Reflective Thinking

24) One of the best sources for prospects for new positions may come from:A) colleges and universities.B) the Internet.C) current employees.D) employment advertisements.Answer: CDiff: 1 Page Ref: 521AACSB: Analytic Skills

25) Which of the following techniques would you not recommend to a company desiring a stronger recruiting strategy?A) Look inside the company first; a promotion from within policy serves as an incentive for existing workers to upgrade their skills.B) Encourage employee referrals; reward employees for successful referrals.C) Ensure that your recruitment efforts are knownwhether in traditional media, the Internet, or on college campuses.D) Avoid hiring retired workers; they too often fail to have anything to offer.Answer: DDiff: 1 Page Ref: 520-522AACSB: Reflective Thinking

26) Posting job openings on the Internet has proven to be:A) a relatively ineffective method of recruiting.B) a cost effective method to attract candidates from other areas.C) an effective method to attract candidates and is relatively expensive.D) problematic for entrepreneurial businesses.Answer: BDiff: 1 Page Ref: 521AACSB: Use of IT

27) A ________ is the process by which a company determines the duties and the nature of the jobs to be filled and the skills and experience required of the people who are to fill them.A) job analysisB) job descriptionC) job specificationD) management auditAnswer: ADiff: 1 Page Ref: 522AACSB: Analytic Skills

28) ________ franchising involves providing the franchisee with a complete business system, with an established name, the building layout and design, accounting systems, and other elements while ________ franchising allows the franchisee to use the franchiser's trade name without distributing the products exclusively under the franchiser's name.A) Product distribution; trade nameB) Trade name; pureC) Pure; trade nameD) Pure; product distributionAnswer: CDiff: 3 Page Ref: 161AACSB: Analytic Skills

29) McDonald's is an example of a ________ franchise.A) conversion formsB) trade name

C) product distributionD) pureAnswer: DDiff: 2 Page Ref: 161AACSB: Reflective Thinking

30) Benefits of involvement in a franchise experience include:A) management training and support.B) brand name appeal and standardization of goods and services.C) national advertising exposure and financial assistance.D) All of the aboveAnswer: DDiff: 1 Page Ref: 162-163AACSB: Analytic Skills

31) Which of the following is not a potential advantage of franchising for the franchisee?A) Management training and assistanceB) National advertising programC) Centralized buying powerD) Limited product lineAnswer: DDiff: 1 Page Ref: 162-163AACSB: Analytic Skills

32) Franchisers generally do which of the following regarding financial assistance to franchisees?A) Provide direct financing.B) Assist in finding financing and occasionally provide direct assistance in a specific area.C) Waive royalty fees for franchisees not making an adequate profit.D) Franchisers provide no assistance because having or finding financing is a requirement for qualifying for a franchise.Answer: BDiff: 2 Page Ref: 164AACSB: Analytic Skills

33) A significant advantage a franchisee has over an independent business is the participation in the franchisor's ________ largely due to the ________ the franchise offers. A) centralized buying power: buying insightB) centralized buying power; brand protectionC) centralized buying power: economies of scaleD) economies of scale: territorial protectionAnswer: CDiff: 2 Page Ref: 166AACSB: Analytic Skills

34) Some franchisors offer ________ to give existing franchisees the right to exclusive distribution of brand name goods or services within a particular geographic area.

A) territorial protectionB) exclusive rightsC) guaranteed protectionD) exclusivityAnswer: ADiff: 2 Page Ref: 166AACSB: Analytic Skills

35) The primary disadvantage of equity capital is that the entrepreneur:A) must repay it at some point with interest.B) must give up someperhaps mostof the ownership in the business to outsiders.C) experiences the disadvantage of the risk/return tradeoff in the form of higher interest rates.D) B and C aboveAnswer: BDiff: 3 Page Ref: 403AACSB: Analytic Skills

36) The primary advantage of equity capital is:A) its lower interest rate.B) that it is readily available to a large number of entrepreneurs from a variety of lenders.C) that it does not have to be repaid like a loan does.D) that it does not appear on a company's balance sheet.Answer: CDiff: 2 Page Ref: 403-404AACSB: Analytic Skills

37) Entrepreneurs are most likely to give up more equity in their businesses in the ________ phase of their companies than in any other.A) startupB) product developmentC) product testingD) product shippingAnswer: ADiff: 2 Page Ref: 403-404AACSB: Analytic Skills

38) Which of the following is not one of the vital tasks small business leaders must perform?A) Hire the right employees to the team and constantly improve their skills.B) Create a culture for retaining employees.C) Plan for "passing the torch" to the next generation of leadership.D) Keep flexible and do not be concerned about preparing for the next generation of management.Answer: D39) Which of the following techniques would you not recommend to a company desiring a stronger recruiting strategy?

A) Look inside the company first; a promotion from within policy serves as an incentive for

existing workers to upgrade their skills. B) Encourage employee referrals; reward employees for successful referrals.C) Ensure that your recruitment efforts are knownwhether in traditional media, the Internet, or on college campuses.D) Avoid hiring retired workers; they too often fail to have anything to offer.Answer: D40) Low capital requirements, cost advantages that are not related to company size, and the lack of brand loyalty are considerations regarding the:

A) threat of new entrants to the industry. B) threat of substitute products. C) bargaining power of buyers. D) rivalry among companies competing in the industry. Answer: A

41) Which of the following is not one of the Criteria for evaluating venture opportunityA. Industry and marketB. History C. Competitive advantage issuesD. Management team issues

Answer: B

42) Pro Forma Income Statements, is one of the: A. Financial resources B. Marketing resources C. Human ResourcesD. No one from above.

Answer: A 43) The first place an entrepreneur should look for startup capital is:A) a bank.B) a venture capitalist.C) the Small Business Administration.D) his own savings.Answer: D

44) The first place an entrepreneur should look for startup capital is:A) a bank.B) a venture capitalist.C) the Small Business Administration.D) his own savings.Answer: DDiff: 1 Page Ref: 405AACSB: Analytic Skills

45) The largest single source of external equity capital for small businesses is:A) angels.B) venture capitalists.C) Small Business Administration loans.D) the stock market; i.e., "going public."Answer: ADiff: 2 Page Ref: 406AACSB: Communication

46) When looking for an angel, the key is:A) networking.B) waiting until you need the money.C) looking across industries.D) using computer matches.Answer: ADiff: 2 Page Ref: 408-409AACSB: Communication

47) Angles are an excellent source of ________ money, often willing to wait ________ years or longer to cash out their investment. A) immediate; 5B) patient: 7C) long-term; 10D) passive; 20Answer: BDiff: 2 Page Ref: 409AACSB: Analytic Skills

48) The general trend of angel financing is that it has ________ as a source of capital for entrepreneurs over the past 7 years. A) increasedB) stabilizedC) decreasedD) disappearedAnswer: ADiff: 2 Page Ref: 408, Figure 13.1AACSB: Analytic Skills

49) Which of the following is not a characteristic of a typical angel investor?A) Investing money locallyB) Purchasing majority ownership in the companyC) Investing in the startup phase of the companyD) Willing to wait seven years or more to cash out an investmentAnswer: BDiff: 2 Page Ref: 406-409AACSB: Reflective Thinking

50) Before entering into any partnership arrangement, entrepreneurs must consider:A) the partnership will only have an impact on sharing profits.B) what interest rate the partner is expecting.C) the impact of giving up some personal control and sharing profits with others.D) the ramifications of having another person on the payroll.Answer: CDiff: 2 Page Ref: 409AACSB: Communication

True False:

68) Personal criteria, is one the elements to be taken into consideration when evaluating the venture opportunityAnswer: T

69) A “QuickScreen” enables the entrepreneur to conduct a finale review and evaluation of an idea in a short period of time

Answer: F

70) Generally, an industry is more attractive when quality substitute products are not readily available, the prices of substitute products are higher, and buyers' costs of switching products is high. Answer: T

71) A product or service feasibility analysis determines the degree to which a product or service idea appeals to potential customers and identifies the necessary resources.Answer: T

72) Primary research is information that has already been complied and is available for use, often at very reasonable costs or sometimes at no cost to the entrepreneur.Answer: F

73) Capital requirements, estimate earnings, and return on investment are three aspects of the financial feasibility analysis.Answer: T

74) A business plan is a written summary of an entrepreneur's proposed venture, its operational and financial details, its marketing opportunities and strategy, and its managers' skills and abilities.Answer: T

75) The primary purpose of building a business plan is to raise capital.Answer: F

76) A well-prepared business plan forces an entrepreneur to assess the venture's chances of success more objectively.Answer: T

110) Identifying a specific target market is not an essential part of creating a solid business plan for a small company.Answer: F

111) The wise entrepreneur will indicate that there is no real competition for his new business venture, thereby increasing the likelihood that he will gain more interested investors.Answer: F

112) A business plan that fails to assess a company's competitors realistically makes the entrepreneur appear to be poorly prepared.Answer: T

113) Because gathering information on competitors' products or services, strategies, and market share is so difficult, most lenders and investors see the competitor analysis section of the business plan as optional.Answer: F

114) The most important factor in the success of a business venture is the quality of its management, and financial officers and investors weigh heavily the ability and experience of the firm's managers in their financing decisions.Answer: T

31) Pure franchising involves the right to use all the elements of a fully integrated business operation.Answer: T

32) Trade name franchising is a system of franchising in which a franchisee purchases the right to use the franchisor's trade name without distributing particular products under that name. Answer: T

33) Pure franchising involves a system of franchising in which a franchisor sells a franchisee a complete business format and system. Answer: T

34) Before entering a franchise contract, a potential investor should ask, "What can a franchise do for me that I cannot do for myself?"Answer: T

35) When a franchisee buys a franchise, he or she is purchasing the expertise and the business of the franchiser.Answer: T

50) If a franchiser encourages you to sign without reading the agreement, or discourages you from "spending the money on an attorney," this is a warning sign that the franchiser might be dishonest. Answer: T

51) Personal criteria, is one the elements to be taken into consideration when evaluating the venture opportunity

Answer: T

52) A “QuickScreen” enables the entrepreneur to conduct a finale review and evaluation of an idea in a short period of time

Answer: F

53) Generally, an industry is more attractive when quality substitute products are not readily available, the prices of substitute products are higher, and buyers' costs of switching products is high.

Answer: T

54) The primary purpose of building a business plan is to raise capital. Answer: F

51) The franchisee turnover rate is the rate at which franchisees leave a franchise system. Answer: T

52) A good method for evaluating a franchiser's reputation is to interview existing franchise owners about the operation.Answer: T

53) One of the first lessons in franchising is, "Do your homework before you get out your checkbook."Answer: T

54) Most franchisees are better educated, more sophisticated, have more business acumen, and are more financially secure than those of just 20 years ago. Answer: T

55) Capital requirements, estimate earnings, and return on investment are three aspects of the financial feasibility analysis.Answer: TRUE

56) Venture capital firms rarely take an active role in managing the business in which they invest.Answer: FALSE

57) The business plan is valuable because it:

Helps determine the viability of the venture in a designated market. TRUE

114) A company that is experiencing rapid expansion has similar capital requirements as those of a fledgling business.Answer: T

115) While equity capital represents the personal investment of the owner(s) of a business and does not have to be repaid, debt capital is a liability that must be repaid with interest in the future.Answer: T

116) Entrepreneurs are most likely to give up more equity in their businesses in the startup phase than in any other.Answer: T

117) Unlike equity financing, debt financing does not require an entrepreneur to dilute her ownership interest in the company.Answer: T

58) Lenders are not really interested in the venture’s ability to pay back the debt.Answer: False

59) The most important factor in the success of a business venture is the quality of its management, and financial officers and investors weigh heavily the ability and experience of the firm's managers in their financing decisions.

Answer: TRUE

60) Pure franchising involves the right to use some of the elements of a fully integrated business operation.ANSWER: False

118) After an entrepreneur invests his own money for startup, he or she will typically seek additional financing from friends and family next.Answer: T

120) If an entrepreneur needs a relatively small amount of money to launch a company, angels are a primary source of funds.Answer: T

124) Angels are not a good source of financing for entrepreneurs seeking relatively small amounts of money, as they typically do not make investments of less than $1 million.Answer: F

125) Private investors look to earn the return on their investments in a business through the increased value of the business, not through dividends and interest.Answer: T

126) An option for acquiring equity capital is for the entrepreneur to take on partner(s); however, it is important that he consider the impact of giving up some personal control over operations and of sharing profits with others.Answer: T

Direct Questions:

145) The marketing strategy section is a vital part of any business plan. What issues should it address?Answer: The issues the marketing plan should address are the answers to these questions?∙ Who are my target customers and what are their demographics?∙ Where do they live, work, and shop?∙ How many potential customers are in my trading area?∙ Why do they buy and what needs/wants drive their purchase decisions?∙ How can my business meet those needs/wants better than my competitors? Knowing my customers needs, wants, and habits, what should be the basis for differentiating my business in their minds?

146) Discuss the Main “Pricing Strategies” that can be adopted in the market when introducing a new product. (3 pts)

Answer: a- Skimming Prices

Price skimming is a product pricing strategy by which a firm charges the highest initial price that customers will pay. As the demand of the first customers is satisfied, the firm lowers the price to attract another, more price-sensitive segment.

b- Penetration Pricing

A strategy adopted for quickly achieving a high volume of sales and deep market penetration of a new product. Under this approach, a product is widely promoted and its introductory price is kept comparatively low.This strategy is based on the assumption that (1) the product does not have an identifiable price-market segment, (2) it has elasticity of demand (buyers are price sensitive), (3) the market is large enough to sustain relatively low profit margins, and (4) the competitors too will soon lower their prices

c- Status Quos Pricing

Marketing approach that aims at keeping things as they are by not trying to grab a larger market share, thus avoiding  direct and expensive confrontation with the competitors.

147) State the Six Mistakes that you should avoid f you want to buy a Franchise (3pts)Answer: Mistake 1: Following your passion….. make sure you have a passion for the business Mistake 2: Buying a HOT Franchise….. buy a franchise that best fits you! Mistake 3: Overestimating the Franchise Model… buy a franchise and expect to work hard.Mistake 4: Underestimating costs and capitals… double your estimate of capital required Mistake 5: Not conducting Franchisee reviews… talk with franchisees not on the “list”! Mistake 6: Lacking Sales and Marketing Skills….create a strategy to fill this gap!

148) The marketing strategy section is a vital part of any business plan. What issues should it address? (3pts)

Answer: The issues the marketing plan should address are the answers to these questions?∙ Who are my target customers and what are their demographics?∙ Where do they live, work, and shop?∙ How many potential customers are in my trading area?∙ Why do they buy and what needs/wants drive their purchase decisions?∙ How can my business meet those needs/wants better than my competitors? Knowing my customers needs, wants, and habits, what should be the basis for differentiating my business in their minds?

149) What are the advantages and the disadvantages of using break-even analysis?Answer: As a key component in a sound financial plan, the advantages of break-even analysis include its ability to analyze costs and expenses so an entrepreneur can calculate the minimum level of activity required to keep the firm in operation. These techniques can then be refined to project the sales needed to generate the desired profit. Break-even analysis is a simple and useful screening device. Business owners can also employ nonlinear break-even analysis using a graphical approach.Disadvantages of break-even analysis include limitations such as the analysis can be too simple to use as a final screening device because it ignores the importance of cash flows. In addition, the accuracy of the analysis depends on the accuracy of the revenue and expense estimates, and the basic assumptions pertaining to break-even analysis may not be realistic for some businesses. These assumptions include: that fixed expenses remain constant for all levels of sales volume; variable expenses change in direct proportion to changes in sales volume; and changes in sales volume have no effect on unit sales price. In addition, break-even analysis does not take into consideration the time value of money.Diff: 2 Page Ref: 363-364AACSB: Reflective Thinking

Case Study :

The Need for a Plan

Twenty-three year-old Shirley Halperin had just been kicked off the staff of her college newspaper, when she launched Smug magazine with just $1,700 in personal savings, $7,000 in donations, and a $10,000 loan, co-signed by her father Eli Halperin who helped her get a line of credit.

The ten-issues-a-year publication is targeted at music fans in the 16-to-30-year-old age group with well-written stories "about musicians that matter plus bands you haven't even heard of yet," says Halperin. It covers the alternative-music scene between the musical Mecca’s of New York City and Philadelphia. Her enthusiasm for her subject has spilled over to the writers, editors, designers and photographers who now total 30, and continue to contribute without pay. They donate their talents for such incentives as by-lines, photo credits, college internships, job experience, free tickets to concerts, free CDs, and other things. Halperin cuts costs whenever possible and her frugality enables her to keep start-up costs low she runs Smug out of her Gramercy Park apartment with two roommates.

Smug charges $1,000 per ad. Competitive publications like Village Voice, Spin, and the Aquarian Weekly charge between $7,000-$29,700 for a similar ad. Halperin says that her budget ads are designed specifically for smaller bands with a regional following that have not hit the big time yet. "It doesn't make sense for baby bands to advertise in the bigger publications until awareness of them rises," she says.

In less than 18 months, Smug's circulation went from 5,000 to 20,000, its readership expanded to 60,000 and advertising revenues climbed from zero to $15,000 per month. After publishing its fourth issue, Smug beat out its larger, more established competitors to win a prestigious local music award. Readers rave about the quality of the magazine's writing, its design and photography; however, Smug's continued success is not guaranteed. Half of all magazines fail the first year, and those that don't take five years to break-even. If Smug succeeds, it can look forward to attractive profit margins of between 15-30 percent.

Halperin is very good at knowing what music people are listening to and what people want to read about; however, she is quick to admit that finance is not one of her strong points. Another concern is cash flow; at the end of its first year, $7,500 of Smug's and $70,000 in revenues were still in accounts receivables. Although she started Smug without a business plan, she now realizes she needs one to raise the $500,000 necessary to take the magazine "to the next level." She needs the money to upgrade the newsprint to semi-glossy paper stock, and most importantly, to pay her staff. She wants the plan to reflect her business philosophy: "Every year circulation should go up, your pages should go up, and your ad revenues should go up."

1- Write a memo to Shirley Halperin explaining what topics she should include in her business plan.

Answer: In their memos, the students should somewhat incorporate the uniqueness of each business plan as well as the importance of Ms. Halperin's personal input into the process. Suggested topics should include the following elements:∙ Executive Summary∙ Mission Statement∙ Company History∙ Business and Industry Profile∙ Business Strategy∙ Description of Products/Service∙ Marketing Strategy∙ Competitor Analysis∙ Description of Management Team∙ Plan of Operation∙ Forecasted or Pro Forma Financial Statements∙ Loan of Investment Proposal

2- What advice would you offer Halperin when she begins to use her business plan to locate capital?

Answer: The students should stress the importance of having the business plan as "perfect as possible" when she uses the business plan to obtain capital. It is also important that students understand the importance of a business plan that is aesthetically pleasing and free from errorsthe plan should have the look of a polished professional presentation parcel that details the company's past, present, and future goals. The following guidelines should be recommended as Ms. Halperin tries to locate potential investors for her enterprise:∙ Be enthusiastic, not emotional∙ Gain investors attention up front∙ Use creative visual aides∙ Hit the highlights∙ Don't get too technical∙ Close by reinforcing∙ Be prepared for questions∙ Follow up with each potential investor

In addition to the "showmanship" necessary for a good presentation, Ms. Halperin needs to have solid information concerning the 5 C's of credit, as this will ultimately be used to judge her worthiness for the necessary loan.Diff: 3 Page Ref: 121-122AACSB: Reflective Thinking

3- If Shirley Halperin approached you as a potential investor, what questions would you ask her? Explain. Would your answer change the content of the memo in question #1 above? If so, how?

Answer: Several concerns should be addressed by the students. For example, how will the change from an all-volunteer staff with low advertising rates and minimal overhead transition smoothly to "the next level?" How is Ms. Halperin qualified to go to the "next level?" Why are

accounts rewarded at $7,500? How does this affect the magazine currently? Are Ms. Halperin's growth projections feasible? If so, how? Has she conducted any type of market research to support her beliefs? These questions should all be covered by the suggestions for topics in # 1.Mini-Case 6-1: Pipe Dreams

Ralph Emerson thought he'd been a librarian long enough, and when the opportunity arose to open a small tobacco, pipe, and cigar shop in the newly renovated downtown business district, he was ready to act. Pipe Dreams is a franchiser of smoke shops, and was founded eight years ago by a noted tobacconist in New York City. The concept for the shops is simple, yet sophisticated. It is simple in the sense that the shops sell only tobacco-related products, but sophisticated in the breadth and quality of the inventory they carry. Each franchise, depending on size, is stocked with inventory selected by the company's founder. The franchiser finances the shop's initial inventory. The franchisee is expected to create a decor within predetermined standards that Pipe Dreams establishes. Each franchisee must attend a three-day workshop, outlining the fundamentals of tobacco blending, the merchandising of pipes and cigars, and the techniques of successful business operation.

The franchise contract requires the franchisee to contribute 1.5 percent of gross revenue to a national advertising campaign. According to the contract, Pipe Dreams will finance the required fixtures for the store for ten years. In addition, the franchiser supplies all inventory at very favorable prices because it purchases in large quantities.

Ralph knows he can buy tobacco products from a variety of wholesalers. He also has some ideas on what would make a tobacco shop successful in this town. Ralph knows that Pipe Dreams franchisees have had a high success rate in the past.

64) Help Ralph make a decision by outlining the advantages and the disadvantages of a franchise arrangement.Answer: This chapter outlines the advantages and disadvantages of franchise arrangements. The case suggests that the Pipe Dreams franchise (like many franchises) offers the entrepreneur a greater chance of success than "starting from scratch."Diff: 2 Page Ref: 162-170AACSB: Reflective Thinking

65) Assuming that Ralph has adequate capital, would you recommend that he invest in the franchise or open his own tobacco shop? Why?Answer: Given Ralph's lack of experience in business, generally, and in managing a tobacco shop, specifically, it probably is wise for him to take the franchise option. Once he learns the business and gets established, he could explore the possibility of terminating the franchise relationship.Diff: 2 Page Ref: 162-170AACSB: Reflective Thinking

Mini-Case 13-1: "Where do I go now ...?

Christine Hernandez is in the process of launching a restaurant. Christine has never owned her own restaurant before, but she has worked for two of the best restaurants in town. Starting out as a hostess, Christine developed a special knack for the business and quickly worked her way up to the job of manager. Her 18 years of experience have given her a solid foundation for running her own restaurant. Christine has worked with a counselor at a nearby Small Business Development Center and a counselor from the Service Corps of Retired Executives to prepare a business plan. She asked two other consultants and an accountant to review the plan and incorporated their suggestions into the finished product. When Christine took her plan to her bank, however, the bank turned down her loan request of $165,000, citing the venture as "too risky, given the failure rate of restaurants." The bank acknowledged her experience as "a major asset," but said that it "could not expose itself to such risks in its portfolio." Christine heard the same story from three other banks.

Christine is confident in her ability to manage her own restaurant successfully, and she is determined to get the financing she needs to launch it.

212) What might Christine do to convince a bank to lend her the money she needs to launch her company?Answer: Christine has discovered the disadvantage of approaching banks for loans to finance startup ventures: They are typically very conservative in their lending practices. Unless she finds a bank targeting small businesses as its primary customers, she is likely to get the same response from other bankers.Christine should consider equity sources such as friends and family members, partners, and private investors (angels). However, raising equity capital will require her to give up some of the ownership in her business, something she may not be willing to do.

213) Review the various loan programs under the Small Business Administration designed to help finance businesses like Christine's. Which of these programs would most likely help Christine get the capital she needs?Answer: Christine should seek out a bank that is an SBA preferred lender to explore the possibility of getting a loan guarantee under the SBA's 7(a) loan program. With her experience in the business and a solid business plan, she would stand a good chance of getting the financing she seeks.Diff: 3 Page Ref: 432-438AACSB: Analytic Skills

214) What other sources of capital would you suggest that Christine explore?Answer: Other sources of debt capital are another possibility. Christine could approach her stockbroker if she has an investment portfolio, her insurance company (for a policy loan), friends and relatives (careful!), a state agency, or the SBA. Since she has already been turned down by four banks, Christine may be able to quality for an SBA loan guarantee, especially given her experience in the restaurant business.Diff: 3 Page Ref: 420-429

AACSB: Reflective ThinkingMini-Case 13-2: Bowden Brake Service

Jim Bowden has been operating his business for some time now and thinks it is time to grow and expand. To compute the cost of expanding his existing business, Jim Bowden makes the following estimates:

Adjacent lot $40,000Metal prefab building 25,000Hydraulic lifts 15,000Tools and equipment 9,000Parts and inventory 5,000Additional operating expenses 55,000TOTAL $149,000

215) Classify Jim's expansion estimates into the three categories of capital: (a) fixed capital requirements, (b) working capital requirements, and (c) growth capital requirements.Answer: Fixed capital requirements:

Adjacent lot $40,000Metal prefab building 5,000Hydraulic lifts 15,000Total $80,000

Working capital requirements:Tools and equipment 9,000Parts and inventory 5,000Total $14,000

Growth capital requirements:Additional operating expenses $55,000

Diff: 3 Page Ref: 403-404AACSB: Reflective Thinking

216) Explain to Jim the possible (and realistic) sources of capital for expansion. Where would you recommend that he go for the funds he needs? Why?Answer: To meet his fixed capital requirements, Jim should approach banks, savings and loan associations, insurance companies, and the SBA. It is doubtful that venture capitalists would be interested in an investment in a brake repair business. Jim may be able to find equity financing in the form of a partner or a wealthy angel.Jim could seek working capital at banks, savings and loan associations, the SBA, and suppliers.Diff: 3 Page Ref: 420-429AACSB: Reflective Thinking