Financial Analysis Exercise In Tutorial Library

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TITLE: Financial Analysis Exercise

CLASS / COURSE: Financial Analysis

QUESTION DESCRIPTION:

 

Financial Analysis Exercise IV

Part A: Weighted Average Cost of Capital (WACC) Worksheet

Here again is the formula for WACC. For simplicity the term for preferred stock has been removed:

 

 

1.     Go to http://thatswacc.com/and enter the ticker symbol for the stock you selected and click on the tab entitled “Calculate WACC.”

2.     Complete the following table.

Cost of debt, iD

1.34%

Corporate tax rate, TC

24.79%

Total debt, D

27,362,000,000

Total equity, E

204,790,000,000

Total value of the firm, V

232,152,000,000

Beta, β 

.069

Return on the market, iM

11.00%

Risk-free rate, iF

3.00%

WACC

7.61%

Per http://thatswacc.com/faccs.phpthe components of the WACC equation are calculated using the following financial data:

From the balance sheet:

Period ending 

Last Fiscal Year

Last Fiscal Year -1

Last Fiscal Year -2

Short term debt + Current portion of  long term debt (CMLTD)

  6,778,000

4,168,000

11,236,000

Long Term Debt

 

 

21,846,000

21,932,000

23,931,000

Total debt, D

28,624,000

26,100,000

35,167,000

 

 

 

From the income statement: 

Period ending 

Last Fiscal Year

Last Fiscal Year -1

Last Fiscal Year -2

Interest expense

 

368,000

402,000

673,000

Income before tax

 

19,723,000

18,138,000

16,715,000

Income tax

 

4,890,000

4,713,000

4,381,000

Other data: 

Firm’s current market capitalization (intraday sock price ∙ shares outstanding)

197.32B

163.84

1.19B

Firm’s beta, β

.69

Return on the market, iM

Assume 11%

Risk-free rate, iF

Assume 3%

The calculations in the table are based on the following:

1.     Total debt, D, is the sum of Shortterm debt + CMLTD + Long Term Debt

2.     Total equity, E, is the firm’s current market capitalization = current stock price times the number of shares outstanding

3.     Total value of the firm, V, equals Total debt, D, + Total equity, E

4.     Cost of debt, iD, = Interest pd in most recent fiscal yr/(Sum of total debt in last two fiscal yrs/2) 

                                                    i.     = Interest expense/Average debt

5.     Corporate tax, Tc, the firm’s corporate tax rate = Sum of prior three fiscal yrs’ Income tax expense/ Prior three yrs’ Income before tax

6.     Firm’s cost of equity,

 

(Source: http://thatswacc.com/faccs.php)

 

Financial Analysis Exercise IV

Part B: Dividend Payout and Growth Ratios Worksheet

Recall from Module 1 the following two ratios:

Internal growth rate= (ROA ∙ RR) / [1-(ROA ∙ RR)]                                       (Eq. 3-30)

where RR = Retention ratio = (Addition to retained earnings)/Net income                     (Eq. 3-31)

–       The internal growth rate measures the amount of growth a firm can sustain if it uses only internal financing (retained earnings)

Sustainable growth rate= (ROE ∙ RR) / [1-(ROE ∙ RR)]                                 (Eq. 3-33)

–       If the firm uses retained earnings to support asset growth, the firm’s capital structure will change over time, i.e., the share of equity will increase relative to debt

–       To maintain the same capital structure managers must use both debt and equity financing to support asset growth

–       The sustainable growth rate measures the amount of growth a firm can achieve using internal equity and maintaining a constant debt ratio

–       The sustainable growth rate can alternatively be calculated as follows:

= PRAT/(1- PRAT)

where P = Profit margin = operating efficiency = Net income/Sales

           R = RR = Retention ratio

           A = Asset turnover = efficiency in asset use = Sales/Assets

           T = Assets-to-equity ratio = financial leverage = Assets/End of Period Equity

      1. For the firm selected for Part A, calculate its internal growth rate for the last fiscal year:   

   

=  (ROA ∙ RR) / [1-(ROA ∙ RR)]

       =

 

 

 

 

 

 

 

2. Calculate the firm’s sustainable growth rate for the last fiscal year:   

 

=  (ROE ∙ RR) / [1-(ROE ∙ RR)]

=

 

 

 

 

 

 

 

 

Confirm that your calculation above can also be completed with the following equation:

Sustainable growth rate =  PRAT/(1- PRAT)

where P = Profit margin = operating efficiency = Net income/Sales

           R = RR = Retention ratio

           A = Asset turnover = efficiency in asset use = Sales/Assets

           T = Assets-to-equity ratio = financial leverage = Assets/End of Period Equity

 

P

 

R

 

A

 

T

 

Product of P∙R∙A∙T

 

 

 

 

 

 

 

 

3. Consider your results for parts A and b. Discuss the growth prospects of the firm. Can the firm finance its growth internally? If not, how would you suggest it finance it? Consider the impact of its growth, however financed, on its WACC. 

 

 

 

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SUBJECTS / CATEGORIES:
1. Finance
2. Financial Management
3. Investment and Portfolio Management

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