APS234F_2019_ENTREPRENEURSHIP AND SMALL BUSINESS_E

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Al UNIVERSITY OF TORONTO FACULTY OF APPLIED SCIENCE AND ENGINEERING FINAL EXAMINATION, December 13, 2019, 6:30W - 9:00pm Faculty-Wide Program APS234 - ENTREPRENEURSHIP AND SMALL BUSINESS Examiner: J.C. Paradi Please write your Department's code (ECE, MIE etc.) on the LEFT upper corner of the first examination book CANDIDA TES MAY BRING TO THE EXAM/NAT/ON AND USE ANY BOOKS, NOTES OR OTHER PRINTED OR WRITTEN MA TERIAL;ANY TYPE OF CALCULATOR MAYBE USED. LAPTOP COMPUTERS, TABLETS, CELL PHONES, OR ANYTHING THAT CAN COMMUNICATE WITH OTHERS OR THE INTERNET ARE NOT PERMITTED!! There are 12 questions in this examination and you must complete all of them. The exam looks very long, but it is not, IF YOU DON'T WRITE VOLUMES of prose. If you know your material, it is a breeze! Keep the answers crisp and to the point. The examination is based on the case we had already distributed but also copied on the next page, plus some independent items. You have had the case for some time now, so you should know what it is about. You may re-read it to remind yourself of the details. Please start each question (but not sub questions), on a separate Page. The questions are designed to test your understanding of the principles taught, not your ability to turn out volumes of prose. All questions can be answered in point form or in one or two sentences, as applicable, and therefore do not require verbose text. READ THE QUESTIONS CAREFULLY before starting to answer them!! YOU CAN KEEP THE EXAMINATION PAPER AND DATASH EET Page 1 of 8

A P234 Exam Business Case, 2019 This is a case based Exam!!! We had provided this case to you in advance so that you could read it carefully and digest it. Perhaps a short review would be useful before you start answering any questions! Matcha the Power TeaTM. Background Two students in an entrepreneur wannabee class met, Emily Alexander and Joshua Park. Emily was from the Department of Kinesiology and has a passion for nutrition. The top of her interest is sports and other good drinks. In fact, she had formulated a tea-based drink but it needed some specialized container and process to make sure the drink retained its best taste and nutritional value. She was at a loss on how to create a container and system suitable for her product. Joshua was enrolled in the same entrepreneurship class; he was completing his Mechanical Engineering degree. He was, naturally, interested in things mechanical and was working on his Capstone project, which was to design a liquid container with a special lid closing mechanism. He reached his goal and was about to build a prototype. The startup Needless to say, Emily and Joshua found common ground and quickly agreed that their compatible skills could result in a formal agreement to partner up and exploit what they saw as a significant business opportunity. They consulted their professor and she encouraged them to go ahead and pursue the opportunity. So, they formed a partnership and started to work together. Emily settled on her recipe for the drink, based on a special type of green tea - Matcha Green Tea Powder. It tastes sweet and is an Organic Jasmine Green Tea Matcha. But she added some other nutritional ingredients that she kept secret. Joshua's container's key aspect was the aluminum bottle closing mechanism - it was a unique idea. Soon, they started to work on this project they named Matcha the Power TeaTM ("MPT") and promptly trade marked the name. It was thirst quenching, nutritious, refreshing and was full of flavonoids. Joshua's product was a bottle cap equipped with a nitrogen-pressurized chamber that was able to store fresh ingredients and instantly mix them into the bottle once the cap is turned; this was his Capstone project. He envisioned the cap being used to make shelf-stable versions of cocktails and other drinks that would normally have to be freshly mixed. Plus, the cap's function produced a striking visual effect when opened and closed that he felt would attract customers. But now he was using this invention to sell the MPT. The container was fully recyclable and could be bought in the retailers' store. The development The partners realized that their invention, for which they have filed a patent application, gives them an opportunity to sell the drink all over North America and perhaps world-wide. Their goal is to become the world's best Power drink. Their first step is going to be to open a manufacturing plant in the GTA to distribute their MPT to supermarkets in Toronto where they can easily reach the large, health conscious Millennials and sell the dry version or sell them fully blended, ready to drink. Once they have established a relationship with one grocery chain they can distribute the product to all of their supermarkets throughout Canada and then replicate the process in the United States, a few years later. Their target price for MPT drinks was $4.20 at the store but $2.40 to their distributors, supermarkets and other very large customers. They estimated sales of 250,000 units to large customers but they won't have any retail sales at this point of their business. Their business plan shows that they will need at least one manufacturing plant in Eastern Canada, one in Western Canada, and in 2 or 3 years, five in the United States covering the major population regions to start: Page 2 of 8

) Northeast-Boston, New York, Washington; Southeast-Georgia, Florida; Gulf Coast-Texas, Louisiana; Southwest-California; Northwest-Washington, Oregon. Each plant will cost USD $5 million to build and USD $3 million per year to operate including the cost of distribution. Each plant will produce 300,000 bottles of the drink. Their plan is to open one plant per year beginning in the GTA. Financing Since the business does not yet generate enough revenue to finance their needs they plan to seek external financing. In addition to equipment loans, mortgages and $500,000 that they can manage from their own resources, they will need to raise $5,000,000 from an equity investor. The investor will receive 40% ownership of the business leaving the two with 30% each. Page 3 of 8

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MARKS Review the case above carefully before you start answering the questions. Note that all questions, except 1 and 2 are based directly on this case unless otherwise noted in the question. So ensure, where applicable, that your answers are pertinent to the case!! (6) Question 1 - Informed Businessperson: All successful business people keep informed about their own industry's progress and how their company fits into the environment. Just as important, however, is the general awareness of what is going on in the economy, political events, stock markets, value of the Canadian dollar, new legislation, takeovers, mergers, business failures, etc. It is a requirement for every student to read the business press every day as part of the course. The following questions refer to events that are widely reported in the press during the past 3 months of 2019. (1 Mark Each) What important political event has taken place in Canada recently? What was a recent news item which resulted in a large controversy about some famous people? Who is the Premier of Alberta? What is impeachment? Who was the young person that shook the climate change world? Do you think that the Federal carbon tax will be successful in Canada reaching it's GHG reduction goals? Answer only YES or NO. Page 4 of 8

(9) Question 2. - The Entrepreneur Start each question on a new page!! Entrepreneurs make their companies a success, so their characteristics are of interest to us. Please respond to the questions below with no more than 1/2 page of text, but in some cases a few words will get you full marks, so don't waste time on useless volume of prose. Are entrepreneurs born to be one or can we train anyone to be one? Some people insist on one or the other. Take the one you believe is the truth and support it with a few sentences. If you support it well, either choice will receive full marks. (3 Marks) Entrepreneurs are the "motors" of our economies. People will agree that they are different from others. We identify three types of people here: Employee - working for a large or medium sized company Professional Manager - an experienced person working in a corporate environment, managing people. Entrepreneur- a person defined in the lectures. Your job is to identify which one of these 3 types of individuals would most likely have the trait shown in the following list of traits. To do this, construct a table (as shown below) with the headings of people types, write down in the left margin the Trait letters from the list below and then mark an X under the people type. Note that only one choice (X) in allowed in each row. (1 Mark for every 4 right answers). Here is an example: Type Employee Manager Entrepreneur A B C x etc. Traits: A Concrete thinker B Initiative C Inertia D Risk taking E Little Innovation F Occasional intuitive thinker G Controlled, ordered life style H Reward for performance I Structured work place J Risk averse K Innovative L Intuitive thinker M Income dependency N Status Quo 0 Active life style P Dynamic workplace Q Takes little risk R Some initiative S Comfortable life-style T Wealth conservation U Captured, varied workplace V Wealth creator X Profit and income dependency Page 5 of 8

(8) Question 3. - (All answers to be brief!!) Start this question on a new page!! Consider the differences between large and small (SME) incorporated firms. Matcha the Power TeaTM is an SME. Give 6 advantages for an MPT over very large firms such as Nestle Tea and others. Write one sentence for each advantage that shows you understand what it means. (marks 4) Estimate the age (give a +1- range) of the two MPT entrepreneurs; they are likely Millennials. So what are the special traits of millennial entrepreneurs? And explain one of those traits in detail. (marks 4) (6) Question 4-- (All answers to be brief!!) Start this question on a new page!! Explain either why Canadian businesses are successful or not successful as R&D leaders in the world. Is MPT an R&D oriented company? Briefly explain. (marks 2) While Canada is a large country, the population is small (35 million) yet we are leaders in a few hi- tech areas. Pick one and explain why. (marks 2) What systems (not the name of a firm just the functionality) should the MPT partners devise for an internet based customer support system? (marks 2) (9) Question 5 - (All answers are to be brief, no more than a few sentences!!) START A NEW PAGE FOR EACH QUESTION Value creation is a fundamental activity in all businesses. Explain what value has MPT created in this business? (marks 3) Is this business a High-potential business? Yes or No but support you decision in a couple of lines of sentences (marks 3 Does MPT have a long term Plan? (marks 3) (7) Question 6 - (All answers are to be brief, no more than a few sentences!!) DID WE SAY: START THIS QUESTION ON A NEW PAGE!!! Is MPT a manufacturing business? Support your answer with some facts. (marks 3) We know that the internet is a major influence in business now. Help out the partners in MPT by providing a short list (5 or more) of what they need to do to maximize their promotion opportunities on the Internet. A point form answer is good here. (marks 4) (10) Question 7— (All answers are to be brief, no more than a few sentences!!) DID WE SAY: START THIS QUESTION ON A NEW PAGE!!! Name two types of risk that MPT is exposed to, and explain how you might mitigate those risks. (4 marks) Do you think these two partners are well matched or not for a successful future? Pick one or the other view (Yes or No) and explain briefly why you decided on this answer. (marks 6) (11) Question 8 - (All answers are to be brief, no more than a few sentences!!) Start this question on a new page!! Both Emily and Joshua are innovative people. They already innovated a number of products. Which one, or more, of the 8 innovation triggers was in play when they did this? (4 marks) The partners are already planning to expand from Canada to the U.S. Explain what changes they have to make in operations so that they could reduce shipping charges to countries outside of North America. Be brief! (marks 4) If they were to expand their export business, which of the best 3 (three) from the following list of issues would apply to them if they were asked: "What's in it for us?" What would best fit as answers (marks 3) - just list the numbers: Higher profits are available. Lower unit production costs due to increased volume Page 6 of 8

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Balanced production schedule, smooth out seasonal fluctuations in business. Create new markets and gain repeat orders Less reliance on the cyclical Canadian economy Increased productivity, larger volumes, better utilisation of employee and machine resources Increase their competitiveness in Canadian markets, as they learn while exporting. Potential tax advantages Opportunity to extend product life cycles. Usually much higher sales prices are possible. (9) Question 9— Financial Statements. START A NEW PAGE FOR EACH QUESTION Explain the difference between the Cash Flow statement and the Profit & Loss statement. (3 Marks) The Current Ratio is Current Assets/Current liabilities. What would you do to improve this ratio? (3 Marks) What is IFRS? Why was this invented? (3 Marks) (10) Question 10— Financial Information. START ANEW PAGE FOR EACH QUESTION There are financial data on the last page in this exam for Matcha the Power Tea TM. Create the: Balance Sheet. (4 Marks) Income Statement. (4 Marks) (C) Calculate the Net Income after taxes if your tax rate is 22%. (2 Marks) (6) Question 11 - Financial analysis. NEW PAGE FOR EACH QUESTION (a) Briefly define "Vertical Analysis" and calculate the % value of Current Assets based on Total Assets. (2 Marks) b) Calculate the Inventory Turnover for MPT based on the given data as if inventories were the same this year as last year. (2 Marks) Define P/E multiple briefly. (2 Marks) (9) Question 12 - Financing - Raising Money. Start this question on a new page!! One way they might be able to raise funds is to issue some Debt. What are the criteria for the lender to be comfortable that MPT will be able to pay the interest on the bond and repay the bond in the time specified? (3 marks) What happens when MPT issues new shares to outside shareholders? For example, since Emily and Joshua each start off owning 50% of MPT, after the investment is received what percentage of the company would remain for each of the two of them? And, how many shares would each of the now 3 shareholders have? (3 marks) If they sold the company for more than the net worth of it, what would be the profit called? And how does the CRA treat this income? (3 marks) DON'T FORGET TO KEEP THE EXAMINATION PAPER AND DATASHEET GIVEN Page 7 of 8

Financial Data for Matcha the Power Tea TM - YOU CAN TEAR THIS OFF FOR EASIER REFERENCE General ledger data for Matcha the Power Tea TM for its year ended on December 31, 2018 Accounts Payables 22,400 Accounts Receivable 78,200 Advertising 5,900 Bank & Credit Card Fees 3,868 Bank Loan - Long Term 160,000 Bookkeeping 2,970 Buildings (net of depreciation) 290,000 Common Stock 250,000 Cash in Bank 32,800 Depreciation 13,000 Entertainment & travel 13,670 Income Tax rate 38% Insurance 3,220 Interest Expenses 10,240 Inventories 59,000 Labour 223,500 Legal & Professional Services 2,250 Licenses - (Business and property) 6,240 Mortgage Payable 256,000 Plant And Equipment (net of depreciation) 283,000 Prepaid Expenses 1,900 Printing, Postage, and Stationery 1,760 Property Taxes Payable 12,300 Rent 14,500 Retained Earnings Revenues 600,000 Utilities 6,250 Thanks for the opportunity to teach you this past term. I find it always a great way to learn from my students. It is fun for me and I work hard to make it fun for you too. So have a wonderful Christmas season and a fabulous 2020 Page 8 of 8

APS234F_2019_ENTREPRENEURSHIP AND SMALL BUSINESS_E

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