© 2000 John Petroff
|
|
© 2000 John Petroff |
Assignments, Cases & Exercises
Research assignments:
R-8A.1 Following up on research assignment R-3.6, contact several commercial banks and inquire about their commercial loan approval criteria. Report on the role played by available liquid assets in banks' decision to lend.
R-8A.2 Read ratings criteria of bond rating services (such those reported in Chapter 4). Note the role of adequate liquidity for the rating. Read company profile and investor's alerts at investment banks and investment services (such as Value line). Note their perception of importance of liquidity for investors. Contrast these view points with that of bankers in the previous question.
R-8B.1 Use RMA statistics to calculate the cash cycles of all the industries of a given sector (e.g. wholesale trade, construction, transportation). Rank the industries. Determine what component varies the most. Find reasons for the shortest and longest cash cycles.
R-8B.2 Choose twelve companies in the same industry. Calculate their cash cycles. Read annual reports to determine what strategies cause the firms to have longer or shorter cash cycles. Suggest a benchmark and explain your choice.
R-8B.3 Compile data to calculate the average cash cycle of a group of companies in the same industry in a foreign country. Compare that average to American equivalent (e.g. from RMA statistics). Discuss similarity or differences.
R-8C.1 Screen all the industries of a given sector, and identify those with the highest and lowest total working capital (i.e. current assets). For each extremes, determine which components are especially large or especially small. Offer explanations for each. Draw conclusions for recommended company strategies in the sector.
R-8C.2 Return to the twelve firms used in R-8B.3. Calculate the net working capital of each. Establish a correlation between this information and the information from the cash cycle. Study outliers and point out whether they are likely to encounter financial difficulty
R-8D.1 Solicit from a sample of six companies their credit granting criteria. Report on the proportion that use the current ratio as a criterion. Justify their methodology. Point out some possible limitations.
R-8D.2 Canvas major writings on investment analysis. Record all instances where the current ratio is a factor considered in the evaluation of long lived investments (i.e. stocks). Offer reasons for the emphasis on current ratio for investment decision, or the lack thereof.
R-8D.3 Find a source of statistics on the values of current ratio in a country other than the United States of the past 50 years. Find explanations for any changing pattern. Compare to the evolution in the United States discussed in the text.
R-8D.4 If you have access to a bank's loan portfolio and receive permission to conduct an analysis of the portfolio on the condition of not revealing the names of the bank or any borrower. Enter into a schedule the values of all key liquidity ratio by level of performance. Elaborate on the existence of a correlation between given ratios and performance.
R-8E.1 Conduct a similar research on the quick ratio as the one on current ratio in R-8D.1. Draw conclusions about differences.
R-8E.2 Study the financial history of six companies that became bankrupt. Observe and report on the evolution of the current ratio, quick ratio and working capital. Draw conclusions about the ability to predict bankruptcy using these statistics in the six cases.
R-8F.1 Pick twelve companies in
the same industry. Tabulate their cash and marketable securities
holdings relative to total assets and to sales, and the stated
management opinion on cash adequacy. Report the consensus level
of cash and management opinion.
Discuss outliers.
R-8F.2 Construct a mathematical equation for the optimum cash balance. Narrate what historical changes affected various components of the equation to justify the decreasing proportion of cash held by all American businesses reported in the text. If possible run a regression analysis on equation.
R-8F.3 Obtain data on the proportion of cash held by businesses in as many countries as possible (e.g. from OECD, UN, World Bank or national statistical sources). Link the level of cash to economic and cultural aspects of each country.
R-8F.4 From the data in the previous question, take one (or a few) countries that have sufficiently accessible data for the past fifty years. Discuss whether the same decreasing holding of cash is observed in other countries.
R-8G.1 Choose six companies (such as those used in assignment R-8D.1) to study credit and collection effectiveness. Calculate DSO for each and link it to the stated terms offered by the company. For those companies where a significant discrepancy is apparent between DSO and terms offered, search in management's writings for indications of a planned laxity or strict enforcement of credit terms.
R-8G.2 Take three companies in an aggressively expanding industry, and three companies in a stable industry. Compare and contrast the marketing strategies and the quality of the receivables.
R-8G.3 Take three companies whose major activity is subcontracting
(such as in automobile or aircraft manufacturing), and take three
companies serving a diverse clientele. Build a historical profile
of liquidity ratios, and receivables ratio in particular.
Discuss the strategic differences and the consequences on financial
positions.
R-8H.1 Return to the six companies studied in assignment R-8G.3, and conduct a parallel analysis of inventories.
R-8H.2 Research the literature of technological and management methods improvements in handling inventory. Record turning points in history when implementation of improvements became widespread. Obtain statistics on industry inventory ratios and performance over the same periods (for an industry most sensitive to inventory aspects such as wholesale trade). Describe any connection between the two.
R-8H.3 Conduct a historical study of inventory ratios over the past fifty years for a sample of firms (at least three) or an entire industry. Report in particular the effect of switching from FIFO to LIFO and back again during significant flare up of inflation.
R-8H.4 Carry out a comparison of inventory valuation and ratios between high and low inflation countries with the help of samples of similar firms or industry.
R-8H.5 Review accounting and operations research literature relating to inventory management, and report in detail all the instances of potential distortions in inventory measurement. Draw up a list of warnings.
R-8H.6 Choose three firms in an aggressively expanding industry and three firms in a stable industry (both industry must rely on inventory for their revenues, i.e. not services industries). Compare and contrast the marketing strategy based on inventory.
R-8I.1 Choose twelve firms in the same industry. Tabulate their payables ratios. Compare to terms offered. Determine benchmark. Comment on outliers.
R-8I.2 Study the composition of current liabilities (i.e. bank borrowing, trade credit and other current liabilities) as firms encounter financial difficulties by looking at a group of firms that became bankrupt (see assignment R-8E.2) or have problems with paying back loans (see assignment R-8D.4). Draw conclusions and recommendations for analysts.
R-8J1.1 Summarize the guidelines for preparation of Cash Flows Statements issued by IASC and FSAB. Emphasize the motivation for the method of presentation. Study these statements in a sample of six firms. Comment on whether the statements accomplish the intended purpose.
R-8J2.1 Compare the presentation of the Statement of Cash Flow with that of the Sources and Uses of Funds Statement. Explain the improvements.
R-8J3.1 Read and summarize the literature of proponents of free cash flow concept. Discuss whether free cash flow is a cause or a consequence of corporate strength.
R-8J5.1 Research how cash budget are designed to serve different purposes depending on management's needs. Point out the limitations outside analysts would find in them.
Cases for Chapter 8 Liquidity:
Consider the liquidity of Bell Canada Enterprises presented in Case - BCE. Obtain and verify all relevant measures of liquidity, and assess whether such liquidity level is acceptable for most firms. What is special about Bell Canada and telecommunication companies, that explains this liquidity picture?
Study the liquid position of Panamco in Case
- PB. Is liquidity one of the strengths of Panamco in 1999?
Review what brought this situation. Would you as a banker continue
to extent credit to Panamco? Would you increase the line of credit?
Comment whether Panamco commercial position in its markets and
political risk in the countries it serves have an impact on your
decisions.
Study the evolution of components of current assets of LaCrosse
Footwear, Inc. in Case - BOOT.
Use industry statistics as a basis for your evaluation (such as
those in RMA or those cited in this text). Determine to what extent
the level of inventory and accounts receivable is part of an intended
strategy or the result of unforeseen circumstances. Comment on
whether a high current ratio would be indicative of strength in
the present instance.
| Previous: Questions |
|
Next: Comments |