FI 4020 Study Guide - Quiz Guide: Cash Conversion Cycle, Cash Flow Statement, Cash Flow

Book: Financial management

1. Review the requirements of the Chapter 3 Mini-Case, parts b through j. Then apply those requirements to do an analysis of Brinker International, which is a real company. Don't complete the minicase itself, just Brinker. Do the analysis on the basis of the figures for the most recent year. For part g, use the 2 most recent years. Download 10K financial statements for the most recent year for Brinker. A good source is the company's home page. Also compare the Brinker ratios to the industry averages and commend on significant differences. You'll note that some of the company's ratios you calculate won't agree with those found on the web page. Ratios are calculated in different ways, however, you should use the formulas in the text. Also, you won't find all of the industry averages, but you will find most of them. You'll need the company's stock price for several of the ratios; use the fiscal year end price. The company's stock symbol is EAT.

(Visit Brinker web site) (Links to an external site.)

(Access industry averages) (Links to an external site.)

Note:

All quantitative work must be done in Excel; Word is not acceptable. You can download Brinker's 10K (annual financial statements they send the Securities and Exchange Commission each year) at the following site:

http://phx.corporate-ir.net/phoenix.zhtml?c=119205&p=irol-sec

You then need to take the various items off the financial statements such as Revenues, Inventory, etc. and calculate the ratios to answer the case questions.

b. calculate the 2014 current and quick ratios based on the projected balance sheet and income statement data. What can you say about the company’s liquidity position in 2012, 2013, and as projected for 2014? We often think of rations as being useful 1. To managers to help run the business, 2. To bankers for credit analysis, and 3. To stockholders for stock valuation. Would these different types of analysts have an equal interest in the liquidity ratios?

c. Calculate the 2014 inventory turnover, days sales outstanding, fixed assets turnover, and total assets turnover. How does Brinker utilization of assets stack up against that of other firms in its industry?

d. calculate the 2014 debt ratio, liabilities to assets ratio, times-interest-earned, and EBITDA coverage ratios. How does Brinker compare with the industry with respect to financial leverage: what can you conclude from these ratios:

e. Calculate the 2014 profit margin, basic earning power, return on assets, and return on equity. What can you say about these ratios?

f. Calculate the 2014 price/earnings ratio, price/cash flow ratio, and market/book ratio. Do these ratios indicate the investors are expected to have a high or low opinion of the company?

g. Perform a common size analysis and percentage change analysis. What do these analyses tell you about Brinker?

h. use the extended DuPont equation to provide a summary and overview of Brinker’s financial condition as projected for 2014. What are the firm’s major strengths and weaknesses?

i. What are some potential problems and limitations of financial ratio analysis?

j. What are some qualitative factors that analysts should consider when evaluating a company’s likely future financial performance.

INSTRUCTION: Answer all questions in this section. Each question carries 2 marks. Answer True or False to the following questions.

1. The cash conversion cycle of a firm is the length of time between the actual cash outflow for materials and the actual cash inflow from sales. To calculate this cycle, we need all the information used to calculate the operating cycle plus Days Payables Outstanding (DPO).

2. Net working capital is defined as current liabilities minus current assets.

3. Sales volume and collection period will be affected by a firm's credit policy.

4. Accounts payable, or trade credit, increases net working capital.

5. Efficient cash management is often concerned with speeding up the collection of cheques received and slowing down the payment of cheques issued.

Choose the letter a, b, c, or d that carries the best response.

6. The income statement reports the results of operations during the past year, the most important item being:

Net Income

Interest Expense

Earnings Before Interest and Taxes

Earnings Per Share

7. Which would represent claims against assets in the balance sheet:

Liabilities

Liabilities and stockholders' equity

Common stockholders' equity

Both common and preferred stockholders' equity

8. The two accounts that normally make up the common equity section of the balance sheet are and

accounts payable; accruals

common stock; retained earnings

long-term bonds; common stock

equity; liabilities

9. Accounting profits is different from net cash flow because

Net cash flow includes profits from operations.

Non-cash items are not included in the accounting profits

Net-cash flows take account of all non-cash items

Accounting profits overlooks depreciation and taxes

10. Which of the following represents an investing cash outflow?

An increase in holdings of stocks of other companies

A decrease in accounts payable

A decrease in gross property, plant and equipment

A decrease in accumulated depreciation

11. Which group of ratios show the combined effect of liquidity, asset management and debt on operating results?

Liquidity ratios

Debt ratios

Coverage ratios

Profitability ratios

13. You are given the following cash flows. What is the present value (t = 0) if the discount rate is 12 percent?

14. You invest $5,000 today. You will earn 8% interest. How much will you have in 4 years? (Pick the closest answer.)

15. You are buying your first house for $220,000 and are paying $30,000 as a down payment. You have arranged a 30-year mortgage loan With a 7% nominal interest rate and monthly payments. What are the equal monthly payments you must make?

Answer True or False to each of the next five (5) statements.

1. Treasury Bills are issued through competitive bidding process at discount from par.

2. In the capital market both short term and long term securities are traded, whereas only short term securities are traded in the money market.

3. Free cash flow represents the amount of money available to the firm, after it has met all operating needs and paid for investments in net fixed assets.

4. Three ratios of liquidity are net working capital, current ratio and acid - test ratio

5. The income statement represents changes within a time period, while the balance sheet reflects levels as at a particular period.

Choose the letter a, b, c, or d that carries the appropriate response:

6. _______________ Serve as intermediaries channelling the savings of individuals, businesses, and governments into loans and investments.

(a) Financial markets

(b) Financial institutions

(c) Securities Exchanges

(d) OTC markets

7. Of the following group of ratios, which would show the combined effect of liquidity, asset management and debt on the overall operating results?

(a) Liquidity ratios

(b) Debt ratios

(c) Coverage ratios

(d) Profitability ratios

8. XYZ Company Ltd. has EBIT of $1,500,00 million and a 15% tax rate. It had $270,000 in depreciation expenses with a $250,000 increase in working capital. It had another $170,000 in capital expenditures. What is its free cash flow?

(a) $1,125,000

(b) $ 2,850,000

(c) $ 1,950,000

(d) $ 1,500,000

9. Fast Cash Limited charges 1 percent (%) per week on their loans. Assume there are exactly 52 weeks in a year. What is the effective annual rate?

(a) 55.36%

(b) 67.77%

(c) 69.98%

(d) 57.35%

10. _________________ is an annuity that provides its holder with payment dollars at the beginning of each year.

(a) An annuity due

(b) A warrant

(c) A perpetuity

(d) An ordinary annuity

11. All of the following statements about bonds are true, except one. Choose the false statement.

(a) If the value of a bond, B_o, is less than its par value, the bond is selling at a discount.

(b) Bonds with short maturities will have less interest rate risk than bonds with longer maturities and equal features.

(c) As market interest rate increase bond prices increase.

(d) The discount rate of a bond is synonymous with the bond's required return.

12. The present value of a bond's _____________________________ determines the value of the bond.

(a) Dividend

(b) Coupon payment and maturity value

(c) Coupon payment

(d) Maturity value

13. If the returns on one asset move in the same direction as the returns on another asset then the asset are:

(a) Positively correlated

(b) not correlated

(c) negatively correlated

(d) perfectly positively correlated.

14. Another term for non-diversifiable risk is:

(a) Systematic risk

(b) non- systematic risk

(c) firm specific risk

(d) both b and c

15. All of the following statements about stock valuation are true, except one. Choose the false statement.

(a) It is easier to value stock than it is to find the value of bonds.

(b) The value of a share of stock depends on the cash flows investors can expect to by owning that stock

(c) The dividend valuation model assets that dividends continue being paid forever.

(d) The present value of a stock's dividend determines the value of the stock.