DISCUSSION QUESTIONS CHAPTER 5
1. Describe the types of financial ratios and other financial performance measures that are used during a venture's successful life cycle. Who are the users of financial performance measures?
The financial ratios used during a venture's succesful life cycle are: cash burn rate and liquidity ratios, financial ratios, conversion periodratios, leverage ratio and profitability and efficency ratios. This ratios are used by business angels and venture capitalists that are likely to invest in your venture. On the next table it shows each stage in a detail way each of this information:
2. What are financial ratios and why are they useful?
The financia ratios show the relationship between two or more financial variables orbetween financial variables and time. They are useful because they summarize financial data and simplify comparison between the company itself or with other firms in the industry.
3. What are the three types of comparisons that can be made when conducting ratio analyses?
Trend analysis, cross-sectional analysis and industry comparable analysis.
4. What are the meanings of the terms “cashbuild” and “cash burn”? How do we calculate net cash burn rates?
Cash build is the amount of money that comes from net sales less the increase in receivales. Cash burn is the amount of money a venture spends in operating, financing expenses and investment in assets.
5. How is the current ratio calculated and what does it measure? How does the quick ratio differ from the current ratio?
Thecurrent ratio measures the margin of current assets over current liabilities. It is calculates by dividing: avarage current assets/ avarage current liabilities. It differes with the quick ratios, because quick ratio substracts the inventories. The inventories are least likely to be rapidly converted into cash.
6. Describe how a firm's net working capital (NWC) is measured and how theNWC-to-total-assets ratio is calculated. What does this ratio measure?
The NWC is measured by: current assets minus current liabilities, it is the dollar amount of the cushion betweeen assets and liabilities. The NWC-to-total-assets ratio is calculated: (avarage current assets - current liabilities) / avarage total assets.
7. What is meant by a venture's operating cycle? Also, describe the cash conversioncycle (C3).
The venture's operating cycle measures the time it takes to purchase materials, assemble the products, book the sale and collect on it. The cash conversion cycle is the inventory-to-sale and the sale -to cash conversion period minus purchase-to- payment.
8. What are the three components of the C3? How is each component calculated?
9. Briefly explain how changes in theconversion times of the components of the C3 can be interpreted.
If your time of inventory-to-sale and the sale-to-cash are high but your purchase-to-payment is high too, it can level it and the impact positively on the C3.
10. What is the meaning of leverage ratios? What ratios are used for relating total debt to a venture's assets and/or its equity?
Leverage ratios indicate the extent to which theventure has used debt and its ability to meet debt obligations. The ratios that are used to relate total debt to assets and/or equity are: total debt-to-total assets, equity multiplier, debt-to- equity ratio, current-liabilities-to-total assets, interest coverage, fixed-charge coverage.
11. What is the importance of the relationship between a venture's current liabilities and its total debt?The relationship between this two is that current liabilities could be thats if this two increase, the financial leverage and risk incases too
12. Describe the two types of coverage ratios that are typically calculated when trying to assess a venture's ability to meet its interest payments and other financing-related obligations.
* Interest coverage ratio is calculated represent the Most...
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