Assignment 1
Library Research Assignment
Locate a publicly traded U.S. company of your choice. Then, calculate the following ratios for the company for 2014 and 2015:
• Liquidity Ratios
o Current ratio [current assets / current liabilities]
o Quick ratio [(current assets - inventory) / current liabilities]
• Asset Turnover Ratios
o Collection period [accounts receivable / average daily sales]
o Inventory turnover [cost of goods sold / ending inventory]
o Fixed asset turnover [sales / net fixed assets]
• Financial Leverage Ratios
o Debt-to-asset ratio [total liabilities / total assets]
o Debt-to-equity ratio [total liabilities / total stockholders' equity]
o Times-interest-earned (TIE) ratio [EBIT / interest]
• Profitability Ratios
o Net profit margin [net income / sales]
o Return on assets (ROA) [net income / total assets]
o Return on equity (ROE) [net income / total stockholders' equity]
• Market-Based Ratios
o Price-to-earnings (P/E) ratio [stock price / earnings per share]
o Price-to-book (P/B) ratio [market value of common stock / total stockholders' equity]
You are now ready to interpret the ratios that you have calculated. If a ratio increased from 2014 to 2015, why do you think that it increased? Is it a good or bad sign that the ratio increased? Please explain.
If a ratio decreased from 2014 to 2015, why do you think that it decreased? Is it a good or bad sign that the ratio decreased? Please explain.
If a ratio was unchanged from 2014 to 2015, why do you think that it was unchanged? Is it a good or bad sign that the ratio was unchanged? Please explain.
Assignment 2
After engaging in a dialogue with your colleagues on valuation, you will now be given an opportunity to apply principles that were presented in this phase. Using a Web site that provides current stock and bond pricing and yield information, complete and analyze the tables illustrated below. Your mentor suggests using a Web site similar to this one.
To fill out the first table, you will need to select 3 bonds with maturities between 10 and 20 years with bond ratings of "A to AAA," "B to BBB" and "C to CC" (you may want to use bond screener at the Web site linked above). All of these bonds will have these values (future values) of $1,000. You will need to use a coupon rate of the bond times the face value to calculate the annual coupon payment. You should subtract the maturity date from the current year to determine the time to maturity. The Web site should provide you with the yield to maturity and the current quote for the bond. (Be sure to multiply the bond quote by 10 to get the current market value.) You will then need to indicate whether the bond is currently trading at a discount, premium, or par.=
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Bond
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Company/
Rating
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Face Value (FV)
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Coupon Rate
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Annual Payment (PMT)
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Time-to Maturity (NPER)
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Yield-to-Maturity (RATE)
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Market Value (Quote)
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Discount, Premium, Par
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A-Rated
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$1,000
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B-Rated
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$1,000
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C-Rated
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$1,000
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• Explain the relationship observed between ratings and yield to maturity.
• Explain why the coupon rate and the yield to maturity determine why the bonds would trade at a discount, premium, or par.
• Based on the material you learn in this Phase, what would you expect to happen to the yield to maturity and market value of the bonds if the time to maturity was increased or decreased by 5 years?
In this step, you have been asked to visit a credible Web site that provides detailed information on publicly traded stocks and select 1 that has at least a 5-year history of paying dividends and 2 of its closest competitors.
To fill up the first table, you will need to gather information needed to calculate the required rate of return for each of the 3 stocks. You will need to calculate the risk-free rate for this assignment. You will need the market return that was calculated in Phase 2, and the beta that you should be able to find on the Web site.
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Company
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5-year Risk-Free Rate of Return
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Beta (ß)
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5-Year Return on Top 500 Stocks
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Required Rate of Return (CAPM)
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To complete the next table, you will need the most recent dividends paid over the past year for each stock, expected growth rate for the stocks, and the required rate of return you calculated in the previous table. You will also need to compare your results with the current value of each stock and determine whether the model suggests that they are over- or underpriced.
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Company
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Current Dividend
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Projected Growth Rate (next year)
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Required Rate of Return (CAPM)
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Estimated Stock Price (Gordon Model)
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Current Stock Price
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Over/Under Priced
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In the third table, you will be using the price to earnings ratio (P/E) along with the average expected earnings per share provided by the Web site. You will also need to compare your results with the current value of each stock to determine whether or not the model suggests that the stocks are over- or underpriced.
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Company
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Estimated Earning
(next year)
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P/E Ratio
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Estimated Stock Price (P/E)
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Current Stock Price
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Over/Under Priced
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After completing the 3 tables, explain your findings and why your calculations coincide with the principles related to bonds that were presented in the Phase. Be sure to address the following:
• Explain the relationship observed between the required rate of return, growth rate and the dividend paid, and the estimated value of the stock using the Gordon Model.
• Explain the value and weaknesses of the Gordon model.
• Explain the how the price-to-earnings model is used to estimate the value of the stocks.
• Explain which of the 2 models seemed to be the most accurate in estimating the value of the stocks.
• Based on the material that you learn in this Phase, what would you expect to happen to the value of the stock if the growth rate, dividends, required rate of return, or the estimated earnings per share were to increase or decrease? Be sure to explain each case separately.
Note: You can find information about the top 500 stocks at this Web site.
References
S&P 500 index chart. (2014). Retrieved from the Yahoo! Finance Web site: https://finance.yahoo.com/echarts?s=%5egspc+interactive#symbol=^gspc;range=1y;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=;
Yahoo! Finance. (n.d.). Retrieved from https://finance.yahoo.com/
Be sure to document your paper with in-text citations, credible sources, and a list of references used in proper APA format.
Assignment 3
Your next assignment as a financial management intern is to apply the knowledge that you acquired while engaging in the cost of capital discussion that you had with your colleagues. In this task, you will be calculating the weighted cost of capital for a firm using the book value of the components and the concepts presented in this phase.
Using the most current annual financial statements from the company you analyzed in Phase 1, determine the percentage of the firm's assets that are currently be financed with debt (total liabilities), preferred stock, and common stock (common equity). It is very possible that your firm will have very little or no preferred stock, so in this class, the percent would be "zero." Your ratios should add up to 100%. You will also need to calculate the firm's average tax rate using the income tax expense divided by the firm's income before taxes. Use the following tables:
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Company
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Total Assets
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Total Liabilities
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Total Preferred Stock
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Total Common Equity
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Dollar Value
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% of Assets
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Company
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Income before Tax
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Income Tax Expense
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Average Tax Rate (%)
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The first component to determine is the cost of debt. You mentor suggests using the Web site that you used in the previous Phase to find the pretax yield-to-maturity of a bond with at least 5 years left before maturity. Using the following table, calculate the firm's after-tax cost of debt:
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Yield to Maturity
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1 - Average Tax Rate
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After-tax Cost of Debt
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Now you will need to calculate the cost of preferred stock. You can use the following table:
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Annual Dividend
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Current Value of Preferred Stock
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Cost of Preferred Stock (%)
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To calculate the cost of common equity, you can use the CAPM model. Using current stock data, the yield on the 5-year treasury bond, and the return on the market calculated in Phase 2, you can calculate the cost of common equity using the following table:
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5-year Treasury Bond Yield
(risk-free rate)
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Stock's Beta
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Return on the Top 500 Stocks (market return)
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Cost of Common Equity
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Now, you can use the cost and ratios from above to calculate the firm's weighted average cost of capital (WACC) using the following table:
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After-Tax Cost of Debt
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Cost of Preferred Stock
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Cost of Common Equity
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WACC
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Unweighted Cost
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Weight of Component
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Weighted Cost of Component
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• After completing the required calculations, explain your results in a Word document, and attach the spreadsheet showing your work. Be sure to explain the following:
o How would you expect the weighted average cost of capital (WACC) to differ if you had used market values of equity rather than the book value of equity, and why?
o What would you expect would happen to the cost of equity if you had to raise it by selling new equity, and why?
o If the after-tax cost of debt is always less expensive than equity, why don't firms use more debt and less equity?
o What are some of the advantages and disadvantages of raising capital by using debt?
o How would "floatation costs" impacted the WACC, and how could they have been incorporated in the formula?
Note: You can find information about the top 500 stocks at this Web site.