MCS asks that analysts review the financial health of the client’s business by completing ratio...

Question

MCS asks that analysts review the financial health of the client’s business by completing ratio analysis. Frank explains that Choice Hotels has an aggressive strategy to grow revenues and stock price. The company does this by accepting ratios that might be outside normal industry ranges.

Ratio analysis is an analytical tool for understanding financial results and trends over time, and for providing key indicators of organizational performance. Typically, ratios are calculated by using data from the income statement, balance sheet, and statement of cash flows. This information can be found in the 10-K Document. MCS uses a customized worksheet to report ratio calculations, results, analysis, and recommendations for clients.

Financial ratios are used for many types of businesses in various industries. For a hospitality business such as Choice Hotels, you have selected a set offinancial accounting ratiosthat aremost appropriate for the client.

Frank stops by your office to give a few pointers:

Dialogue with Frank Marinara

“Choice Hotels would like us to look at their balance sheet and provide them with guidance on what they should or should not do to better manage their assets.

“Balance sheet ratios like thefixed-asset turnover ratioare commonly used in thevaluation of inventory,” he adds. Other balance sheet ratios includeworking capital.”

Your ratio calculations should be completed in the Ratio Analysis worksheet in theProject 2 Excel Workbook.

Complete the workbook with data from the Income Statement, Balance Sheet, and Statement of Cash Flows worksheets. As part of your analysis of Choice Hotels’ strategy, you will also need to answer a few questions in the worksheet.

When you have finished, submit the workbook to the submission folder located in the final step of this project.

When you have completed Step 2, proceed to Step 3, where you will discuss accounting ethics.

Choice Hotels requires high levels of integrity, honesty, and transparency in the development of financial reports. They must ensure compliance with the standards articulated by international bodies like theFinancial Accounting Standards Board,Generally Accepted Accounting Principles(GAAP), and theInternational Financial Reporting Standards (IFRS)Board.

Before 2002 and prior to SOX there were a number of high profile frauds in public companies. Enron, WorldCom, Tyco, and Sunbeam come to mind. These companies had CEOs prosecuted for fraud under mail fraud and securities laws.

In 2002 SOX became law. During the following 8 to 10 years, Congress and dozens of accountants claimed that SOX had dramatically increased the penalties for fraud. That was true in theory but not in the real world.

Since SOX became law in 2002, only one CEO, Richard Scrushy, has been prosecuted under SOX. He was acquitted!

None of the CEOs who participated in mortgage securities fraud during the 2008 financial crisis, went to jail or even get prosecuted.

Calendar Invite

Event:MCS Special Retreat: Ethics in Focus

Location:Executive Room

Meeting Organizer:Elisa Izuki

The managing director, Elisa Izuki, would like you and your team of MCS consultants to develop an appreciation for ethical accounting standards and the need for objectivity in your analysis. With that in mind, she invites all the consultants working on the Choice Hotels project to an offsite company retreat. During the retreat, a considerable amount of time is devoted to a discussion of topics related to accounting ethics.

Assuming you and your colleagues are attending the retreat, go to the Accounting Ethics Discussion, and complete the following tasks:

Discuss why integrity, honesty, and transparency are essential in financial reporting. Give credit to any sources or real-world examples you use to support your statements.

GAAP are the general rules, regulations, and guidelines that accountants in the United States follow to ensure their practices are legal and ethical. Explain to your colleagues why GAAP is so useful. Give credit to any sources or real-world examplesyou use to support your statements.

Later in the week, after you are back in your office, you have a follow-up discussion with your MCS colleagues in an effort to summarize the key lessons you have learned from your discussion on ethics in finance and accounting at the past weekend’s retreat. Respond to your colleagues' original discussion posts and give credit to any sources you use to support your statements.

During Week 4, submit one original posting of at least 250 words in the Accounting Ethics Discussion by Saturday andany responses to other discussion participants that add new information by Tuesday.SeeMBA discussion guidelines.

When you have finished Step 3, proceed to Step 4, where you will present your recent findings from Steps 1 to 3 in an executive summary.

Your busy second week on the job isn’t over yet. After a busy morning of ad hoc team meetings, you’re greeted in your office with a phone call from Frank.

Phone Call from Frank

“Hi again. I’ve got news about our client.

“ExxonMobil is looking to send a report to all company franchised gasoline stations. I’m going to need an executive summary based on the analysis you’ve done for this client so far on Cal’s Exxon. Also, thisexecutive summary, along with citations for any sources you use, should be about one page long.

“Thanks again!”

Post your executive summary in the submission folder located in the final step of this project.

When you have completed Step 5, proceed to Step 6, where you will submit all work for Project 1.

Harshit · Accepted Answer

Instructions
Choice Hotels 10-K
In Project 2, you will learn how to access US Securities and Exchange Commission public information about companies. You will also learn how to complete a horizontal analysis and to calculate and analyze ratios. 
Start by looking up the 10-K for Choice Hotels (CHH) for year 2018 on the SEC website.  Follow these steps:
	1. Go to www.SEC.gov.
	2. At the top on the right, click Company Filings.
	3. In the fast search box, enter the Ticker Symbol for Choice Hotels, CHH.	
	4. Click Search
	5. EDGAR search results will appear.  Notice the name and address for Choice Hotels. Also notice the box that reads Filter Results: Filing Type. Enter "10-K" and click Search.
	6. You should see a 10-K with a filing date of 2019-02-26. This is the latest available at the time this project was developed.
	7. There are two available formats of this 10-K data, and we will use the Documents to answer the questions. You will use the data provided in the worksheets to complete the Ratio Analysis and to answer related questions.
	8. Complete the horizontal analysis of financial statements by filling in each grey box.
	9. Answer all questions on each tab in this workbook.
	10. Explain the significance of your ratio calculations.
Note: Quarterly Financial Statements are not audited. Only annual financial statements are audited by a public accounting firm.
Choice Hotels 10-K
In Project 2, you will learn how to access US Securities and Exchange Commission public information about companies. You will also learn how to complete a horizontal analysis and to calculate and analyze ratios. 
Start by looking up the 10-K for Choice Hotels (CHH) for year 2019 on the SEC website.  Follow these steps:
	1. Go to www.SEC.gov.
	2. At the top on the right, click Company Filings.
	3. In the fast search box, enter the Ticker Symbol for Choice Hotels, CHH.	
	4. Click Search
	5. EDGAR search results will appear.  Notice the name and address for Choice Hotels. Also notice the box that reads Filter Results: Filing Type. Enter "10-K" and click Search.
	6. You should see a 10-K with a filing date of 2020-03-02. This is the latest available at the time this project was developed.
	7. There are two available formats of this 10-K data, and we will use the Documents to answer the questions. You will use the data provided in the worksheets to complete the Ratio Analysis and to answer related questions.
	8. Complete the horizontal analysis of financial statements by filling in each grey box.
	9. Answer all questions on each tab in this workbook.
	10. Explain the significance of your ratio calculations.
Note: Quarterly Financial Statements are not audited. Only annual financial statements are audited by a public accounting firm.
10-K Document Questions
Read pages 4 and 5 in the 10-K.  This is the overview of the business. Use the 2018 and 2019 SEC 10-K reports to answer the following questions:
1. Discuss Choice Hotels’ business model.
Answer: Choices Hotel International is one of the largest hotels in the world which offers Hotel franchisor 14 brands. The company is well known for its construction and development of the hotels as well live conversion brands at developer primary points. As choice Hotel International is a franchise the primary source of income for it is franchise fees. The franchise fees can further be bifurcated into two parts which is initial fee and a variable royalty, marketing and reservation system fees which is based on the the the cross room revenues of that particular franchise. The company focuses on continuous improvement of the performance of the franchisees.
2.  On page 5, there is a sentence that reads in part, "Historically, we have returned value to our shareholders in two primary ways:"
What are the two ways?
Answer: 
Buy back of shares and Dividends
3. Choice Hotels is a company that has grown to over $1 billion in assets in 2018.  So $100 million is a big number for Choice.  How much did Choice Hotels pay as a Special Dividend in 2012?
Answer:  Approx $600 million
Note:
The Business section continues to page 23, where the Risk section begins.  A consultant would be well advised to read all of both sections.  The items in 10-K Risk section are designed to give full disclosure.
Of more interest is a section starting on page 37:
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations. (MD&A)
This is where management tells shareholders what happened and why.  
The following questions apply to the MD&A.
4. What happened on February 1, 2018?  Hint: You may find it useful to read Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Answer: On 1st February 2018 the choice Hotel purchased WoodSpring suites at brand acquiring their 239 hotels with 28680 rooms operating in more than 35 states in US. This led to an increase in the franchising revenue by $29.5 million, the operating income increased by $8.1 million and the income before taxes increased by $1.1 million in the year 2018 the income statement also include an impairment of non franchising Goodwill of $4.3 million and alone valuation allowance charge of $2.8 million.
5.  Which 3 of the risks in Item 1A are the most significant? Explain your reasons for selecting them.
Answer: Out of all the risk factors involved in Item 1A the top 3 item which are most significant are as follows: 
1. The financial condition of franchisees and travel related companies; and the company has its primary income from the franchise series from the hotels, if the financial condition of those franchisees are not good the overall earning of the company will significantly reduce. 
2.Changes in exchange rates or economic weakness in the United States (affecting domestic travel) and internationally could also unfavorably impact future results: As many franchises of the company are located at International locations if the value of dollar depreciates in terms of other currencies the overall income of the company would decrease. 
3. The costs and administrative burdens associated with compliance with applicable laws and regulations, including, among others, franchising, lending, privacy, marketing and sales, licensing, labor, climate change, employment and regulations applicable under the Office of Foreign Asset Control and the Foreign Corrupt Practices Act; the most risky factor for any business is to the cost that the company has to bear. Therefore the cost becomes the most risky factor if it increasing.
Income Statement
							(New-Old)/Old		(New-Old)/Old
		Horizontal Analysis	12 Months Ended
		Consolidated Statements of Income - USD ($) in Thousands	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017	$ Change 2018 to 2019	% Change 2018 to 2019	$ Change 2017 to 2018	% Change 2017 to 2018
		REVENUES:
		Royalty fees	$388,151	$376,676	$341,745	$11,475.00	3.05%	$34,931.00	10.22%
		Initial franchise and relicensing fees	$27,489	$26,072	$23,038	$1,417.00	5.43%	$3,034.00	13.17%
		Procurement services	$61,429	$52,088	$40,451	$9,341.00	17.93%	$11,637.00	28.77%
		Marketing and reservation system	$577,426	$543,677	$499,625	$33,749.00	6.21%	$44,052.00	8.82%
		Owned Hotels	$20,282	$0	$0	$20,282.00	100.00%	$0.00	0.00%
		Other	$40,043	$42,791	$36,438	-$2,748.00	-6.42%	$6,353.00	17.44%
		Total revenues	$1,114,820	$1,041,304	$941,297	$73,516.00	7.06%	$100,007.00	10.62%
		OPERATING EXPENSES:
		Selling, general and administrative	$168,833	$170,027	$165,821	-$1,194.00	-0.70%	$4,206.00	2.54%
		Depreciation and amortization	$18,828	$14,330	$6,680	$4,498.00	31.39%	$7,650.00	114.52%
		Marketing and reservation system	$579,139	$534,266	$479,400	$44,873.00	8.40%	$54,866.00	11.44%
		Owned Hotels	$14,448	$0	$0	$14,448.00	100.00%	$0.00	0.00%
		Total operating expenses	$781,248	$718,623	$651,901	$62,625.00	8.71%	$66,722.00	10.23%
		Impairment of goodwill	-$3,097	-$4,289	$0	$1,192.00	-27.79%	-$4,289.00	100.00%
		Gain on sale of assets, net	$100	$82	$257	$18.00	21.95%	-$175.00	-68.09%
		Operating income	$318,642	$318,474	$289,653	$168.00	0.05%	$28,821.00	9.95%
		OTHER INCOME AND EXPENSES, NET:
		Interest expense	$46,807	$45,908	$45,039	$899.00	1.96%	$869.00	1.93%
		Interest income	-$9,996	-$7,452	-$5,920	-$2,544.00	34.14%	-$1,532.00	25.88%
		Loss on extinguishment of debt	$7,188	$0	$0	$7,188.00	100.00%	$0.00	0.00%
		Other (gain) loss	-$4,862	$1,437	-$3,229	-$6,299.00	-438.34%	$4,666.00	-144.50%
		Equity in net (income) loss of affiliates	$9,576	$5,323	$4,546	$4,253.00	79.90%	$777.00	17.09%
		Total other income and expenses, net	$48,713	$45,216	$40,436	$3,497.00	7.73%	$4,780.00	11.82%
		Income before income taxes	$269,929	$273,258	$249,217	-$3,329.00	-1.22%	$24,041.00	9.65%
		Income taxes	$47,051	$56,903	$126,890	-$9,852.00	-17.31%	-$69,987.00	-55.16%
		Net income	$222,878	$216,355	$122,327	$6,523.00	3.01%	$94,028.00	76.87%
		Basic earnings per share:
		Basic earnings per share (in dollars per share)	$4.00	$3.83	$2.16	$0.17	4.44%	$1.67	77.31%
		Diluted earnings per share (in dollars per share)	$3.98	$3.80	$2.15	$0.18	4.74%	$1.65	76.

MCS asks that analysts review the financial health of the client’s business by completing ratio analysis. Frank explains that Choice Hotels has an aggressive strategy to grow revenues and stock price....

Dialogue with Frank Marinara

Calendar Invite

Phone Call from Frank

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