FIN 201 Lecture Notes - Lecture 6: Time Signature, Current Liability, Operating Margin

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erincamel819

20 Sep 2016

School

Quinnipiac University

Department

Finance

Course

FIN 201

Professor

Benjamin Abugri

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Document Summary

Can be seen as a resource because it gives guidance as to what the finances of the company are (assets, liabilities, stockholders equity) A statement of a given date about the resources that are available to the managers of the company. Based on financial statements you can tell a lot of things about a company. Whether it is expanding or contracting: based on what categories are changing you can predict different things about the company and how well they are doing in the market. If common stock increases that means they have more cash and more money because they made money from issuing stock. If net income increases that means the company has more profit which would mean sales went up. Eps- earnings per share net income per share (take the net income and divide by the number of shares per company)

Related Questions

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 companyâs 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 Brinkerâs financial condition as projected for 2014. What are the firmâs 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 companyâs likely future financial performance.

HOME CARE Scenario Type of care provided Scenario Question 1 Question 2 Care in this capacity can range from a short-term to long-term based upon the changing needs of the patient. Patient age can range from pediatric to elderly. Care can be provided in the patientâs private home, group home, or assisted living setting. Medical homes fall into this category and are a new focus of Accountable Care Organizations through the Affordable Care Act of 2010. Review your current budget. Taking this information into account, what are some strategies you would use to identify resources to focus on improving efficiency and meeting customer expectations during this time? What do you see as the biggest financial issues of your organization? Hint: You are a nonprofit organizationâso look at your means of funding and the relationship this has on your ability to treat patients and hire new staff. How will you address this financial issue? In home care, a patient is visited at home by a nurse or nursing assistants with activities of daily living (ADL), wound care, IV therapy, etc. These organizations can be nonprofit or for-profit. A physician supervises the care with the assistance of RNs or LPNs and certified nursing assistants (CNAs). You are a new administrator for a home health agency that is a national nonprofit organization that serves the surrounding Phoenix community. The agency has been recognized for the delivery of on-time quality services for a number of years. It is known to employ only the top staff within the community, but in recent months staffing numbers have dropped dramatically and you, as the agencyâs administrator, have found yourself in a position where your facility is short staffed. You are unable to admit any additional patients unless you are able to have your staff work over time. Budget Considerations Operational Budget â This budget focuses on a broader view of the total operations of the organization in which all departments are reviewed for both their income potential and the costs associated with the work activities used to generate projected revenues. Each department will have its own budget for the managers to follow and on which to base the activities of the department in order to meet its contribution to the total revenues and the associated costs of the organization. Dietary Services â This is a departmental budget focused on the costs and potential reimbursement for the organization. The operation is overseen by a dietitian or nutritionist who is responsible for supplying the nutritional needs of the patients within their care. This department may utilize the services of several consultants or contract this service to an outside organization. Medical Supplies â This budget is focused specifically on the requirement-based services being delivered by the hospital professional, which are often referred to as nondurable disposable items. This budget includes specific items for the surgeon or professional performing the services. These may include such things as oxygen supplies, diabetic supplies, ostomy supplies, bandages, and related supportive items. These items are generally manufactured for one-time use. They are not reused due the inability to sterilize them. The items that are reusable are classified under capital assets and have a use-time identified with the specific piece of equipment. Human Resources â This budget indicates the finances needed to support the organizationâs objectives, from a personnel perspective. Full-time equivalent (FTE) calculations are used to project the personnel budget. These individuals could include nonskilled labors to professional licensed physicians and various job descriptions within the categories. In addition to listing the FTEs, the associated benefits of the FTEs would be projected within this department for each FTE within the organization. This will generally include line items for consultants and temporary positions based on the needs of the organization. Departmental Costs â This budget focuses on the specific department and its overall needs, costs, and potential revenue in relation to the overall goals of the organizationâs strategic plan. The managerâs primary responsibility is to monitor the operational efficiency of the department, including all areas that directly impact and support the generating of revenue for the organization. Managers may be required to present an analysis of the weekly or monthly operational analysis to the Chief Financial Officer of the organization or a lead manager. Vendor/External Suppliers â Health service organizations have special needs and may require certain external items and/or services. Most organizations have projected budgets to include the purchase of supplies and services for outside contractors (vendors) who specialize in installation, monitoring, and the repair of specialized equipment or technology being utilized by the specific health care delivery system. Maintenance/Facility Operations â This departmental budget focuses on the overall upkeep of the building and the related equipment and machines to provide a safe and comfortable environment for both the patients and workers. This budget includes all FTEs and may also include line items for consultants and outside sources based on needs of the facility.

Revenue 2011 2012 2013

Donations 50,000 55,000 75,200

Grants and Foundations 100,000 80,500 125,780

Government Grants 947,280 878,000 695,120

Interest Expense 6,050 8,000 10,000

Total 1,103,330 1,021,500 906,100

Expenses 2011 2012 2013

Health Center 2,482,845 2,558,265 2,668,951

Administrative Staff 100,000 110,000 125,000

Professional Staff 80,000 100,000 150,000

Family/Youth Services 214,888 210,987 230,985

General Management/Admin140,000 152,000 159,000

Total 3,017,733 3,131,252 3,333,936

Budget Spreadsheet

International Research Journal of Applied Finance ISSN 2229 â 6891

Vol. VI Issue â 8 August, 2015 Case Study Series

A Stock Valuation Case: An Application of the âMethod of Comparablesâ for Macyâs Shares

Halil D. Kaya* ,Julia S. Kwok

Abstract

The primary focus of this case is the application of the âMethod of Comparablesâ in the estimation of the value of a security. An investment decision will be made based on the comparison of the selling price and the estimated value. A security will be good for purchase if the estimated value is higher than the market price. This method utilizes basic financial ratios that are commonly provided by financial web sites. First, using Yahoo Finance website, the pricing, sales, book value of equity and shares outstanding data are collected for both the target firm and the competitor firms. Then, the pricing multiples (i.e. price earnings ratio, price to sales ratio and price to book ratio) of the competitors are calculated. After that, those multiples along with the target firmâs earnings, sales, book value and shares outstanding data are used to estimate target firmâs share value. The case also examines the impact of treating ânegativesâ in the data. Students will learn that replacing negative earnings with zeros tend to induce less bias in target firmâs value estimation than excluding the ânegativeâ data altogether.

Introduction

March 14, 2015 was a sunny day. Mary took advantage of the nice weather to have lunch at the Mall. On her way back to work, she walked by Susanâs investment office. Susan was Maryâs college roommate. They both liked shopping together to find new fashionable clothes. Looking at her watch, Mary realized she had half an hour to spend. She thought she would drop by and say hello to Susan.

The Performance of Macyâs

âHi, Susan, how are you?â How is your business?â said Mary. Susan was a recent finance graduate. Susan replied, âI am doing fine. Thank you. After so many years, the market is still recovering from the mortgage crisis; many investors have been buying back stocks that they have sold during the crisis. What are you up to?â âI want to start my investment in securities, too. I have a couple thousand dollars, would Macyâs be a good stock to invest in now? That was our favorite store to shop among all of the department stores,â Mary exclaimed. She added, âAlso, I read from Motleyâs Foolâs article on Macyâs today about its earnings per share growth for the last 16 quartersâ (Zahid Waheed, 2014).

In response to Maryâs questions, Susan checked the monthly adjusted returns of Macyâs in Yahoo Finance. She found that, since March 2010, Macyâs stock price had an average annual increase of 23.5% over the last 5 years. The stock rose from $19.98 to $57.38. Susan then told Mary that Macyâs was indeed a growing stock. She added that its success could be attributed to the omni-channel integration, e-commerce and magic selling strategies which allowed merging of sales channels, online shopping and better customer care. Since investment strategy 101 is to buy low, and sell high, given Macyâs stock price had been going up, Susan was not sure whether Macyâs was currently overvalued or undervalued by the market.

The Method of Comparables

Susan remembered her class lecture on the two types of valuation of stocks, namely absolute and relative evaluation. The absolute evaluation focuses on finding the intrinsic value of the security based on fundamentals. That involves more complicated models of discounting cash flows from dividends, operations and residual income.

On the other hand, relative evaluation is quick and easy to use. It assumes two similar securities should sell for one price in an efficient market, i.e. âLaw of One Price.â So an analyst can estimate its stock price by multiplying target companyâs specific earnings, sales and equity value data by the earning, sales and equity âper shareâ financial multiples of its competitors.

Since Mary was not familiarized with financial models, Susan decided to use the easy-toperform-and-analyze âComparables Methodâ to estimate the relative value of Macyâs stock.

The Financial Data

Dillards, JC Penney and Nordstrom were selected as competitors of Macyâs as they were all in retail department store business. Susan would need some financial data regarding these companies. She went to SECâs (i.e. Securities and Exchange Commission) website and downloaded these companiesâ most recent balance sheet and income statement data. Out of those statements, she knew that she would need the EPS (i.e. earnings per share), the sales number, the number of outstanding shares, and the book value of equity. She also knew that she would need the current share price for each company. After some work, she had found all the necessary information to run the analysis. Below were the data that she had gathered:

All data are in US$ except for the number of outstanding shares. The share price as of March 15, 2014 is shown in the first column. The âEarnings per shareâ is shown in the second column. The third column reports the book value of equity. The last column shows the number of outstanding shares.

Firm	P ($)	EPS ($)	Sales ($)	BV of equity ($)	# of shares
Macy's	58.58	3.93	27,931 mil.	6,249 mil.	378.3 mil.
Dillard's	90.61	7.10	6,532 mil.	1,992 mil.	45.6 mil.
JC Penney	8.71	-5.57	11,859 mil.	3,087 mil.	249.3 mil.
Nordstrom	61.33	3.77	12,166 mil.	2,080 mil.	194.5 mil.

The Decision

Susan thinks that the following steps would be necessary to perform the analysis:

1.Based on the data above, calculate Sales per share, BV of equity/share values of all firms. Note that EPS is directly given.

2.Calculate P/E, P/Sales, and P/B for all of Macyâs competitors based on the data obtained.

3.Find the average of the P/E, P/Sales, and P/B multiples for the three competitors.

4.Multiply those averages calculated in step 3 with Macyâs EPS, Sales per share, and BV of equity/share values, respectively to get three value estimates for Macyâs shares.

5.The average of the three estimates would then be Susanâs best estimate of Macyâs value per share.

answer # 1-5 please

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FIN 201 Lecture Notes - Lecture 6: Time Signature, Current Liability, Operating Margin

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