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Financial Analysis of Stay-a-Night Digital Concierge

Financial Report for Stay-a-Night Digital Concierge

Executive summary

Stay-a-Night Motel has identified a golden opportunity to increase customer experience and quality of service without increasing costs. The motel wishes to leverage on modern technologies that can supplement personal services provided by staff. In line with this, Amazon Echo, a new digital concierge has been identified as key device that will enable the motel leverage on modern technology in provision of services to customers. This project will require installation of Echo devices as well as associated hardware and software requirements. The echo devices will be replaced after every three years during which each of the devices can be disposed at $25. At the end of the three years, the devices will be replaced to last another 3 years. The initial phase of the projected is expected to cost the motel about four million dollars, including the upfront costs and the installation costs. The second phase of the project will cost about 4.4 million dollars in total. The expected rate of return is 24%, which is above the motel’s minimal attractive rate of return of 10%. The project will be able to give positive returns within its first phase. This report recommends Stay-a-Night Motel to invest in the digital devices since there is potential for positive marginal gains from investing in the project.

Financial Analysis of Stay-a-Night Digital Concierge

The application of modern technologies in the hospitality industry has been identified as a major cost cutter through promotion of self service delivery. Leveraging on digital assistance is also key to improving customer experience and satisfaction. The Stay-a-Night Motel has identified the need to acquire a digital concierge dubbed ‘Amazon Echo’ that will act as a personal assistant to guests. Since the motel targets middle-income guests, the new technology should assist in maintaining low operating costs while improving customer experience and quality of service delivered. Amazon Echo can improve customer experience by enabling guests access a variety of services such as transportation arrangements, food delivery, television channel selection, making reservations, and other services commonly required by guests.

Amazon Echo can also provide other services to guests such as self-registration into the motel which will greatly reduce the time taken to check in and out of the motel. This can be made possible by the use of a voice recognition technology that identifies repeat customers based on their voices. Such a device can significantly improve customer experience in the motel. Self-service technology has significantly improved the quality of services not only in the hospitality industry but also in other sectors such as airline bookings, train tickets, concert tickets, and among others. In fact majority of businesses have adopted one or more forms of self-service technology, with great benefits compared to the costs of acquiring the technology. In the banking sector, the use of ATMs and most recently the introduction of mobile money platforms that enables consumers to access their bank accounts on their phone has greatly improved customer experience and reduced long ques in the banking halls. These technologies have been critical in cost reduction efforts in the different areas they are applied.

Stay-a-Night Motel has established its presence in 100 locations, and each having an average of 70 rooms. Therefore, the chain has a total of about 7,000 rooms. The average occupancy rate at any given day is 70% meaning that of the total 7,000 rooms, only an average of 4,900 rooms are occupied at any given day. This translates to an occupancy rate of 49 rooms for each motel. The cost of rent for a room per night is $100. Thus each motel earns a gross revenue of $4,900 before tax. In total, the chain earns gross incomes of about $490,000 per day before tax. The cost incurred by the motel for a room is 55% of the revenue. Each motel thus incurs costs of about $2,695 per day bringing the net revenue down to $2,205 per day. The net revenue earned by the chain per day is $220,500 before tax. The tax rate is 25% and the capital gains rate at 20%. Adjusting for these items will slightly impact the net profit figures.

The introduction of Amazon Echo as a digital concierge is projected to increase the motel occupancy rate by 3%. This will have significant impacts on the net revenue of the motel. In addition, the cost implications of installing maintaining the digital concierge will have a strong impact on the profits of the motel. There is need to establish whether the costs outweigh the benefits especially with regard to the long-run. A 3% increase in occupancy rate will increase the room occupancy rate to 5,110 for the entire motel chain and an average of 51 rooms per each motel. Gross profit for the entire motel chain will increase from $490,000 per day to $511,000 per day which reflects a 4.3 percent increase.

Stay-a-Night Motel expects a high price discount from purchase of Amazon Echo due to the fact that it will acquire the devices in large scale to serve all of its motel chains. The motel expects that installation of the digital concierge will open up marketing opportunities for Amazon since guests will likely develop interest to purchase the devices for their personal use once they enjoy the experience. The motel projects that the wholesale price of the devices will cost $90 each, which is half the marked price of each digital device. Each motel will require 80 devices for full functionality, one for each room plus 10 more to placed inn strategic locations in the motel. The total costs of the Amazon Echo device for each motel is thus $7,200. The cost for the entire chain will thus be $720,000.

The Echo hardware will need replacement every three years. The salvage value of each Echo device is projected to be $25. This means that the salvage value for a single motel will amount to $2000. Additional costs of $1,000,000 will be incurred due to the need for staff training, hardware tweaking, software enhancement, and integration of the digital connections with local events and businesses. Installation costs of $40 apply for each unit. Maintenance costs will average $225,000 monthly. This will be handled by a corporate staff who will be in charge of the system in all motel chains.

The management expects that the benefits of this program far outweighs the costs. One of the major benefits that the program will deliver is improved customer service and experience at all motel chains. Customers will be able to request for room service with ease, make transport arrangements and obtain information about local events. Comparing the service to be delivered by the devices with interpersonal service given by staff, there are relative advantages which constitute speed in delivery, location flexibility, time saving, and a higher sense of control. The management expects that the devices will help reduce the need for more staff since the current staff will able to serve guests quickly and in an easy manner. This will also reduce costs for the motel chain. The installation of these devices will mark a major step towards acquisition and application of modern technologies in the motel chain.

On the other hand, there are a number of disadvantages to using the self-service technology. The motel chain is in a service oriented industry. This means that people value the chain by the quality of service they receive from the staff. Customers expect to be personally attended to or served by the staff. The introduction of the devices will lower interaction between customers and the motel staff. This may lead to lower customer satisfaction especially when majority of services are provided by machines. Second, the devices have certain inherent limitations relating to their performance. For instance, even though customers can be able to make meal requests, they may not be able make special requests such as extra ingredients or need for an additional facility such as a wheelchair. Lastly, personal service remains critical in this industry and is part of customer satisfaction (Coote & Rudd, 2007).

Financial Analysis

The first part of the financial analysis shows the income statement derived from the projected revenues. The income statement shows projected revenues before and after the implementation of the digital devices. These revenues are based on the assumptions made by the management regarding installation of the Echo devices. The averages used regarding room occupancy are based on figures given by the motel management.

 

   Base year Year 1-3 Year 4-6
Revenue 178,850,000 615,536,000 689,449,500
Cost of goods sold (98,367,500) (338,544,800) (384,697,225)
Gross margin 80,482,500 276,991,200 304,752,275
Salary   (8,100,000) (8,100,000)
Depreciation expense   (3,428,650) (3,759,400)
Earnings before interest and tax 80,482,500 265,462550 292,892,875
Tax expense (36,217,125) (66,365,641) (81,552152)
Net income 44,265,375 199,096,909 211,340723
Profit margin on sales 31% 32% 31%

 

The income statement indicates that the motel may earn higher profits when the Echo devices are installed. This is because the devices will increase the occupancy rate of the hotel. Net income in years 1-3 is expected to be $199,096,909 compared to projected net income per annual of $44,265,375 before installation of the devices. Gross profit is projected to increase slightly from $276,991,200 in years 1-3 to $304,752,275 after the introduction of the digital assistant devices. Generally, income will increase slightly after the installation of the digital assistant devices. The projected profit margin on sales is 32 percent inn years 1-3 after the installation of the digital assistant devices. This

The next section contains a cash flow analysis for the motel. A cash flow analysis will help in examining the actual cash flow situation in the motel.

Stay-a-Night Motel Cash Flow Analysis

  Year 0 Year 1-3 Year 4-6
Net income 44,265,375 199,096,909 211,340,723
Depreciation (Add back) 0 3,428,650 3,759,400
Investment   (4,006,900) (4,416,400)
Salvage value   578,250 657,000
Capital gains tax   (231,300) (131,400)
Free cash flow   198,865,609 211,209,323

 

From the above cash flow analysis, it is clear that investing in the digital assistant devices will not cause a cash flow problem in the motel. This is because the motel will still have a positive cash flow balance that it can use to run daily operations. After the installation of the new devices, the motel will still have a positive cash flow balance of $198,865,609 in year 1-3 which it can use to carry out daily operations. The assumption is that costs and revenues will remain relatively the same over the entire period. The cash flow analysis in years 4-6 also gives a positive cash flow balance. This indicates that investing in the digital assistant devices will not cause any cash flow problems to the motel.

Internal rate of return analysis

Stay-a-Night Motel employs a minimum acceptable rate of return (MARR) of 15%. This means that projects can only be accepted if the returns are higher than this rate. The following table gives the minimum rate of return of the digital assistant project as well as the net present values of the returns for a period of 6 years. From the excel worksheet, the internal rate of return is positive. The rate of return for year 1-3 is 23% while that of year 4-6 is 25%. The internal rate of return for the project is above the minimum acceptable rate of return for the motel which has been established as 15%. The average rate of return for the project in the whole duration stands at 24%. As such, the project is worth undertaking since it will yield more returns. The net present value of the project from the worksheet is $333,764. The cash flow obtained from the project will thus exceed the amount of capital that the motel has invested in the project. The project is thus worth undertaking.

The project may bring additional profitability opportunities. The motel will be able to provide local information to guests through various applications installed on the digital concierge devices. The motel can take this opportunity to advertise local events for a small fee to guests and customers. Local businesses can advertise their events or products for a small fee enabling the motel to make some money from that. Additionally, guests will be able to use the digital concierge devices in future to make their motel bookings or other bookings such as airline bookings.

Conclusion

This financial analysis recommends that Stay-a-Night Motel invest in the digital concierge devices. Adoption of this technology will enhance guest experience and improve quality of service at a small cost to the motel. The financial projections indicate that the project may bring an internal rate of return of about 24% which is way above the motel’s minimal attractive rate of return. The net present value also indicates that cash flow projections related to the project will exceed the capital invested. The risk of investing in this project lies in the possibility of reduced customer satisfaction due to loss of personal touch with hotel staff. The management recognizes that the motel industry is service oriented and customers value the motel based on the quality of services provided by staff. As such, the motel does not intend to lay out staff or substitute their role with the digital concierge. The devices will only be meant to supplement the efforts of staff in delivering quality service to guests.

References

Coote, B. A., & Rudd, J. M. (2007). Determining consumer satisfaction and commitment through self-service technology and personal service usage. Journal of Marketing          Management, 22(7), 853-882.

Appendix

Internal Rate of Return
-4416400
2177201
2271820
2366058
25%
-4006900
1896607
1990846
2085454
23%
Net Present Value
24
-8423300
1896607
1990846
2085454
2177201
2271820
2366058
($333,764.44)
 

 

Appendix 2

Stay-a.Night Projected Income Statement for year 1 to year 6

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Locations 100 105 110 115 120 125 130
Rooms 7000 7350 7700 8050 8400 8750 9100
Occupancy 4900 5145 5390 5635 5880 6125 6370
New Occupancy 4900 5366 5621 5877 6132 6388 6643
Income Statement
Total revenue 186515000 195859000 205166500 214510500 223818000 233162000 242469500
Cost of goods sold 102583250 107722450 112841575 117980775 123099900 128239100 133358225
Gross margin 83931750 88136550 92324925 96529725 100718100 104922900 10911275
Salary 2700000 2700000 2700000 2700000 2700000 2700000
Depreciation 1142883 1142883 1142883 1253133 1253133 1253133
Earnings before interest and tax 84293677 88482045 92686842 96764497 124285967 105158142
Tax 21073419 22120511 23171711 24191124 31071492 26289536
Net income 63220258 66361534 69515131 72573373 75727325 78868606

 

Fiscal Policy

Question

What is the importance of exchange rates?
Who benefits and who loses when a country’s currency appreciates?
Who benefits and who loses when a country’s currency depreciates?
In the long run, what are the major factors that impact exchange rates?
Understanding central banks impact exchange rates, select three central banks and demonstrate/ explain how this occurs.

Sample paper

Fiscal Policy

            Importance of exchange rates

Exchange rates are a major influence on a country performance in international trade. A country’s currency valuation or devaluation and volatility will affect its balance of payment and the overall economic performance. Exchange rates serve the following.

Assist the government in formulating trade policies.

Exchange rates influence the trade policies to be executed in respect to international trade. Long periods of overvalued exchange rates are often associated with an increase in the use of protectionist trade policies, especially anti-dumping (Oatley, 2010). An appreciation in the domestic currency will result to domestic firms losing their competitiveness resulting to formulation of restrictive trade policies.

 Exchange rates influence level of international trade.

Exchange rate volatility will result to a decrease in international trade due to un-certainty and transaction costs that result from the variability in the rates. An appreciation in the domestic currency will result to decreased levels of international whereas depreciation will result to increased levels of international trade.

 Exchange rate affects tourism and decision of investors.

An appreciation in the currency exchange rate will result to decreased tourism into the country whereas a depreciation in the currency will  result to an  increased number of tourist visiting the country .Investors will invest into a country when its currency depreciates in speculation of its appreciation in future.

Beneficiaries and losers when a country’s currency appreciates

Appreciation refers to an increase in the value of a currency in respect to another currency. When a currency appreciates, it is more valuable and therefore buys more of another foreign currency (Abdel-Khalik, 2013). Appreciation in foreign currency results into decrease in the cost of investing in the foreign currency. This in turn results to an increase in the expected returns in the foreign currency. An appreciation translates to imports being cheaper and exports being more expensive. It will help consumers of import since they will obtain good and services at cheaper prices whereas producers of export will be hurt since their commodities will be more expensive. Investors will also benefit in case of an appreciation of the currency in which they have invested. Lenders will also gain, as they will receive more in value in comparison to the amount they lend others (Abdel-Khalik, 2013). The consumers will be the ones to gain whereas the exporters will be the losers. The exporters lose because they receive less money when the foreign currency is converted into local currency.

Beneficiaries and losers when a country’s currency depreciates

A depreciated currency is in which is less valuable and therefore can buy less of foreign products and services. In this particular case, the domestic produced goods and exports are cheaper in comparison to the imports (Abdel-Khalik, 2013). A current depreciation in the domestic currency will result to an increase in the cost of investing in the foreign currency. This will in turn result to a decrease in the expected return in the foreign currency. A depreciation in the currency will be advantageous to the exporters of a product as its products will be cheaper in bother the domestic and foreign market but disadvantageous to the consumers of the imports as they will be more expensive. In this particular case, the investors will be the losers

Major factors that impact exchange rates in the long run

Exchange rates are affected by various different factors in respect to whether it is in the short run or long run. In the long run, movements of the currency is in response to differences in prices which results to long run prices of similar goods being the same. The theory of purchasing power parity is used in explaining the determination of the long run exchange rates. It gains its validity on the law of one price (LOOP) (Boykorayev, 2008). Purchasing power parity holds that, in the long run, prices of identical products or services are the same in different locations. This is based on the principle that exchange rates will adjust to eliminate the arbitrage opportunity of buying cheaper goods or services in one country and selling it at increased prices in another.

Other factors that affect exchange rates in the long run are relative price levels, trade barriers, preferences of domestic verses foreign goods and productivity. Changes in relative price levels affect a country currency in that an increase in prices will result to depreciation in its currency and vice versa. Trade barriers involve the imposition of tariffs and quota in order to restrict trade between countries. By increasing the barriers, a country’s currency appreciates.           Preference for domestic goods verses foreign goods. An increase in demand of domestic goods will result to an appreciation in the domestic currency whereas an increase in demand for foreign goods will result to depreciation in the domestic currency.

Productivity levels of a country. If a country is relatively productive in comparison to another country, its currency appreciates.

                           Central banks impact on exchange rates

The federal reserve bank of New York

It intervenes in the exchange rates by either increasing or decreasing the value of the dollar price over another currency. To increase its value, it buys dollars and sells foreign currency. On the other hand, it decreases value by buying foreign currency and selling dollars. The intervention signals the intended exchange rate movement affecting the behavior of investors in the foreign exchange market. The foreign currencies used in executing the intervention are issued by the Federal Reserve holdings or the exchange stabilization funds from the treasury. The intervention is in conjunction with the central banks of countries whose currencies are being used.

Iceland

The Central Bank of Iceland may intervene directly in the foreign exchange market. In this case, the bank holds the mandate to control exchange rates during periods of inflation (Ilker & Mendoza, 2004). The central bank adjusts exchange rates to fit inflation targets. The Central Bank of Iceland may also intervene when it perceives currency exchange fluctuations as a potential threat to the economic stability of the country.

Bank of Canada

This is the Canadian central bank. The exchange rates in Canada are largely under the influence of external factors. The external factors are those that touch on supply and demand of goods between the country and others. The various external forces include the volume of trade (imports and exports), inflation rates, economic performance, commodity prices in the global market, and other factors. Nonetheless, the bank may step in to control exchange rates under exceptional circumstances (Ilker & Mendoza, 2004).

 

                                                        References

Abdel-Khalik, A. R. (2013). Accounting for risk, hedging and complex contracts. United Kingdom, UK: Loutledge.

Boykorayev, B. (2008). Factors that determine nominal exchange rates and empirical

Evidence of cross-sectional analysis, Aarhus School of Business. Retrieved from:

http://pure.au.dk/portal/files/3262/Bahodir_Boykorayev._Master_thesis.pdf

Ilker, D., & Mendoza, A. (2004). Is there room for foreign exchange interventions under an         inflation targeting framework?: Evidence from Mexico and Turkey. World Bank      Publications.

Oatley, T. (2010). Real Exchange Rates and Trade Protectionism, Business and Politics. 12.

Related:

Government Bonds Markets

Government Bonds Markets

Question

Assume that the U.S. economy just entered into a recession. What can the Federal Reserve do to try to get the economy out of a recession? Among other comments that you may make, please be sure to discuss the following:
Describe the role of the Federal Open Market Committee of the Federal Reserve in the United States, and describe the tools available to the Federal Reserve to influence the nation’s money supply.
Discuss the Federal Reserve’s open-market operations, and the importance of its role. How does another key central bank around the world conduct such operations, and why are they important? What recent open-market operations have the Federal Reserve and another country’s central bank taken?
Explain what happens to the U.S. money supply when the Federal Reserve buys and sells Treasury bonds. Describe in detail how this has affected U.S. banks’ abilities to lend and the overall U.S. economy.
Explain what has happened to the U.S. money supply and economy when another central bank outside the United States has bought and sold U.S. Treasury bonds.
How do you think that you will be personally impacted by the recession?

Sample paper

Government Bonds Markets

It is the dream of every country and government to boost and improve the economy of the country. In most cases, the central banks of different countries are given the duties and the powers to ensure that they increase employment opportunities in the country and keep inflation at its minimum level which is essential to the economic growth and development. However, this is not always the case considering that the economy of any country faces the four economic cycles that include boom, recession, trough, and recovery. During the recession period when the general economic activity and growth starts to slow down, the federal reserve has a duty to formulate and implements policies and strategies that can help to boost the economy to prevent the next stage which is trough when the economy is stagnant and at its lowest point (Rowland, 2010). During the recession period, the gross domestic product of the country, venture spending, limit use, family wage and business benefits falls while there is a rise in the level of unemployment and bankruptcies. This assignment will attempt to establish measures that are at the disposal of the federal reserve and can help to get the economy out of recession.

The federal reserve has several methods and techniques by which it can help to rescue the country’s economy from recession.  Among these methods include the increase or decrease in the interest rates which either encourages or discourages borrowing as per the economic circumstances in the country. Additionally, the reserve can also decide to buy or sell the united states government through the purchase of treasury bill and notes which help to either increase or reduce the amount of money supply in the country this controlling inflation and unemployment which are major contributors to an economic recession (“Framework of Federal Reserve Monetary Control,” n.d). Moreover, the federal reserve can increase the lending for banks, thus providing funds for consumer loans and consequent consumer buying which a major component that helps to drive the economy of a country. Finally, the central bank can help solve the unemployment problem by providing funds at a lower interest which enables ordinary citizens to borrow for investments thus reducing the rate of unemployment in a country.  As more and more people invest, the gross domestic product of the country increase thus boosting the economy.

Considering the importance of the federal reserve to the country, the responsibility of controlling the country’s finances cannot be rested on a few individuals and that is the primary reason for the formation of The Federal Open Market Committee (FOMC). The FOMC is a federal reserve board that determines the direction of the monetary policy,  such as Open Market Operations (OMO) which involves the purchasing and offering of central government securities to control the measure of cash available for use in the nation. The fed regularly sets focuses for the government subsidize rate and afterward leads operations to keep up that rate (Chappell, McGregor, & Vermilyea, n.d).  When there is the need to increase the money supply, the feds purchases the bonds in the open market, thus giving the bondholders more money to spend which is then circulated in the economy. On the other hand,  when there is the need to reduce the money supply the federal reserve sells the federal bonds in the open market by accepting large sums of money from the general public, public and private companies. The sale of the bonds helps reduce the amount of money at their disposal which in turn reduces the amount of money in circulation. Notably, the FOMC has the mandate and responsibility to decide on an objective government subsidize rate by assessing fiscal targets, for example, expansion, loan fees or the trade rates in the country.

When the federal reserve decides to sell the treasury bills and notes in the open market, the market if often opened even to foreign citizens, countries, and governments.  One of the countries that have been purchasing the united states bond in large quantities is China. However, this sale to foreign countries and governments have negatively affected the value of the United States dollar.  When foreign govern such as China buys these bonds, but later sells them in their country, there is the risk of devaluing the dollar in these countries by having too many dollars in their economy, which in turn increases the interest rates in the United States and substantially affects the stock market.  Therefore, when bonds are sold to a foreign country, there is the risk of collapse of the united states economy if these bonds are not carefully controlled. On the other hand, if not addressed quickly recession can lead to loss of employment, reduction of income and bankruptcy considering that there is little or no money to buy goods and services which are the backbone of economic growth and development of any country (Jenkins, 2013).

From the above research, it is easy to point out that the federal reserve plays an important role in controlling the money supply in the United States, which gives it the power and the ability to boost the economy of the country during a recession period.  Through the sale of government bonds, the federal reserve can either increase or reduce the money supply in the country which in turn affects the inflation, employment and exchange rate which drives the economy.

References

Chappell, H., McGregor, R. R., & Vermilyea, T. A. (n.d.). Committee Decisions on Monetary Policy: Evidence From Historical Records of the Federal Open Market Committee. ICPSR Data Holdings. doi:10.3886/icpsr23860

The Framework of Federal Reserve Monetary Control. (n.d.). The Financial Crisis and Federal Reserve Policy. doi:10.1057/9781137401229.0014

Jenkins, S. P. (2013). The great recession and the distribution of household income. Oxford: Oxford University Press.

Rowland, M. (2010). The new commonsense guide to your 401(k): Rebuilding your portfolio from the bottom up. Princeton, NJ: London.

Related:

Municipal Bond-Financial Institution Regulations

Municipal Bond-Financial Institution Regulations

Question

Locate a U.S. municipal bond. You can use this bond screener to search for a municipal bond. Provide a description of the bond, the bond’s current yield, the bond’s yield to maturity, and the bond’s credit rating. Is the bond an investment-grade bond? How can you tell? Do you think that the bond will experience much interest rate risk? Please justify your decision.
When federal, state, and local governments issue securities, what key roles do they play in the financial markets?
How do these decisions affect you?
Reference Below:
Yahoo! Finance. (2011). Bond screener. Retrieved from http://screener.finance.yahoo.com/bonds.html

Sample paper

Municipal Bond-Financial Institution Regulations

For decades and decades, governments have been known to be the controller and regulators of the money in supply through measures such as the sale and purchase of bonds. A municipal bond is one of these measures and is often offered by governments or one of their agents. Municipal bonds are often issued by governments to provide funds for public development through projects such as roads, schools, recreation facilities and infrastructures (United States, 2008). They are general commitments of the backer or secured by determined incomes. Subsequently, each civil bond has a unique yield to maturity and credit rating. This assignment will attempt to provide a description of description of T. Rowe Price Tax-Free High Yield Fund, the bond’s current yield, the bond’s yield to maturity, and the bond credit rating.

  1. Rowe Price Tax-Free High Yield Fund is positioned among the highest return securities in the united states as it looks for an abnormal state income excluded from government pay charges. As per statistics, no less than 80 percent of the bond’s income is exempted from the government wage charges. However, up to 20 percents of the bond’s pay could be gotten from securities subject to the option least expense. The bond weighted average maturity is expected to exceed fifteen years where dividends are declared daily but distributed monthly. Additionally, it carries an expense ratio of 0.69 and requires a minimum investment of $ 2500. The reserve has had a return of 8.22 % in the previous year, 8.41 % in the course of the last three years, 7.01 % in the course of the last five years, and 5.08 % in the course of last ten years, making it one of the best performing municipal bond in the country (U.S. News and World Report, inc, 2016). The fund has a theoretical development of $10,000 USD. Belowis a rundown of the top possessions related to this security:

 

Security Net Assets
Texas Mun Gas Acquisition & Su Sr 6.25% 1.10%
St John Baptist Parish La Rev Rev 5.125% 1.04%
Tobacco Settlement Fing Corp N Asset 5% 0.97%
Golden St Tob Securitization C Toba 4.5% 0.94%
Salt Verde Finl Corp Sr Gas Re Senior 5% 0.87%
Alachua Cnty Fla Health Facs A Rev Bd 5% 0.84%
Metropolitan Pier & Exposition Bds 5.25% 0.74%
Buckeye Ohio Tob Settlement Fi Toba 6.5% 0.70%
Golden St Tob Securitization C Tobacco S 0.69%
Liberty N Y Dev Corp Rev Rev Bds 5.25% 0.63%

Moreover, research shows that the bond experiences lower risks compared to other kind of bonds as the following table shows. The security will experience a short term interest rate risk because of the past election, which caused instability in the financial market. Normally amid national election, there is instability in security markets, and this would influence this municipal security (“Tax-Equivalent Yield,” n.d). It is anticipated that this bond will keep on showing development in the market and its performance will continue to grow in the long-run.

Roles of Government in Financial Market

At the point when the government puts securities in the financial market, it gives financial specialists and Americans a chance to invest in a sure and well-paying bond compared to other types of securities if they invest wisely. The sale of this bond in the market would influence the entire financial market,  increasing competition and in the process giving me an opportunity to invest in a favorable security. Government securities are always favored, owing to their high returns.

 

References

Tax-Equivalent Yield. (n.d.). SpringerReference. doi:10.1007/springerreference_2666

U.S. News & World Report, inc. (2016). Best graduate schools: Law, business, education, engineering, medicine, nursing and more. Washington, DC: U.S. News & World Report.

United States. (2008). Municipal Bond Fairness Act: Report (to accompany H.R. 6308) (including cost estimate of the Congressional Budget Office). Washington, D.C.: U.S. G.P.O.

Related:

Financial Institutions and Markets

Financial Institutions and Markets

Question

By reviewing the Federal Reserve website https://www.federalreserve.gov/datadownload/Choose.aspx?rel=H15
and/or other relevant resources, refer to the latest 2 changes to the discount rate and  federal funds rate target made by the U.S. Federal Reserve and discuss the following:
How did the stock market indices react to these changes?
How did long-term U.S. Treasury bond yields react to these changes? 
What happens to borrowers, savers, investors, and bank profits inside and outside the United States as these rates change?

Sample paper

Financial Institutions and Markets

The latest 2 changes to the discount rate made by the U.S. Federal Reserve occurred in March 2017 and February 2017. In March 2017, the discount rates increased from the previous 1.25 percent to 1.50 percent (“Federal Reserve,” 2017). The last change had occurred in December 2016 where the discount rate increased from 1.00 percent to 1.25 percent. The discount rate changes had a significant impact to the stock market indices. One of the key impacts is on the Dow Jones Industrial Average. On 30th December 2016, the Dow Jones Industrial Average stood at 19,123.58 while on 1st December 2017, the industrial average increased to 19,191.93 (“MarketWatch,” 2017). On 28th February 2017, the Dow Jones Industrial Average was at 20,812.24. This figure increased slightly to 21,115.55 following the change in discount rate from 1.25 percent to 1.50 percent. In the following week, the Dow Jones Industrial Average figure maintained an average of 21,000.

The discount rate changes had slight impacts to the stock market volumes. The increase of the discount rate on 1st December 2016 caused a decline in stock market volumes from the previous figure of 108,803,146 to lows of 84,921,758 (“MarketWatch,” 2017). However, in March 2017 the change in discount rate slightly increased the stock market volumes from the previous 339,209,839 to 392,823,218 (“MarketWatch,” 2017). The discount rate changes had a slight impact on the Standard & Poor’s 500 Index value. On both occasions, the discount rate changes brought about a slight change reflecting a decrease or an increase in the Standard & Poor’s Index value. On 30th November 2016, the Standard & Poor Index was 2,198.81. This decreased slightly to 2,191.08 on 1st December. This figure increased throughout up to December 22 when it experienced a slight reduction (“MarketWatch,” 2017). The discount rate changes in March resulted in a slight increase in the Standard & Poor Index from 2,363.64 the previous day to 2,395.96 on 1st March 2017.

The discount rate changes had remarkable impacts on the long-term U.S. Treasury bond yields. The increase in discount rates resulted in an increase in the long-term U.S. Treasury bond yields from 2.37 on 30th November 2016 to 2.45 on first December (“U.S. Department of the Treasury,” 2017). The average U.S. Treasury bond yields remained higher than the average figure for November. This indicates that increase in discount rates by the U.S. Federal Reserve increases the long-term U.S. Treasury bond yield. Similarly, the long-term U.S. Treasury bond yield is higher on average in the month of March 2017 compared to the average recorded in February the same year. The increase in long-term U.S. Treasury bond yield reflects the increase the discount rates by the Federal Reserve.

The increase in discount rate increases the cost of borrowing. Borrowers obtain money from commercial banks at higher interest rates. This may reduce the number of internal and external borrowers. The increase in discount rate may not have a significant impact on savers. This is because commercial banks are not likely to adjust their interest rates on savings with increase discount rates and especially in the short run. To the investors, they may incur increased payments especially those having revolving debt. This includes internal and external investors. The bank profits may reduce due to the high cost of borrowing, hence keeping potential borrowers away.

References

Federal Reserve. (2017). Retrieved from       https://www.federalreserve.gov/monetarypolicy/discountrate.htm

MarketWatch. (2017). Retrieved from http://www.marketwatch.com/investing/index/spx/charts

U.S. Department of the Treasury. (2017). Daily treasury yield curve rates. Retrieved from             https://www.treasury.gov/resource-center/data-chart-center/interest-            rates/Pages/TextView.aspx?data=yieldYear&year=2016

Related:

Report of current GDP, the current Federal deficit, the current Federal debt, and the bottom line of the current (last) budget approved by Congress

Report of current GDP, the current Federal deficit, the current Federal debt, and the bottom line of the current (last) budget approved by Congress

Question

Using only.gov Websites report the current GDP, the current Federal deficit, the current Federal debt, and the bottom line of the current (last) budget approved by Congress (surplus or shortage). Note that the fiscal year for the federal government is October 1 – September 31.
What inference can you draw from the numbers collected?

Sample paper

Finance Homework

The government websites shows the current GDP of the United States of America is $ 18.819 trillion in 1st October 2015 – 31st September 2016. In the same period, the current Federal deficit was $0.478 billion and Federal debt $19.5 trillion (Price. 2015). Further, the current budget approved by the congress in 1st October 2015 – 31st September 2016 had a deficit of $0.5 trillion.

The GDP is $18.819 trillion in the period 1st October 2015 – 31st September 2016. This is a GDP growth of 1.4% compared to the period 1st October 2014 – 31st September 2015. It is a good growth but it is not sufficient enough to run the government. Thus, the government should prepare mechanisms necessary to stimulate other sectors of the economy.

From this information, the budget debt is $19.5 trillion. This is a high value and there is need for corrective measures as the national debt is at a treacherous path. This means that the government is borrowing money to finance its budget and the cash cannot be recovered from taxation. To curb the effect of the debt, congress need to establish spending caps, enforce fiscal sustainability, and reduce the government spending before they consider any surge in debt limit.

According to Price (2015), the Federal deficit is $474 billion after subtracting the total expenditure ($3.999 trillion) from total revenue ($3.525 trillion). This means that the amount of money the federal government is getting from taxation and other fund avenues is less than the expenses it is accruing in getting the revenues.

After Congress reviewed the budget, the deficit was $0.5 trillion. This is a large amount of money that the government should find a way to solicit for the fund.  This involves reviewing their tax procedures and mechanisms to ensure that they are sufficient to be able to fetch sufficient revenue to run the government.

References

Price, T. (2015, April). H. Con. Res. 27-114th Congress (2015-2016): Establishing the budget for the United States Government for fiscal year 2016 and setting forth appropriate budgetary levels for fiscal years 2017 through 2025. In https://www. congress. gov.

Related:

Government Budgeting Process at VA

Coca Cola Company & PepsiCo  Financial Statement and Data Analysis

Question

-Can you please inform the writer to notify me what are the two companies he/she selected before he/she starts doing the assignment.

-Please use Profitability financial ratio if possible.

-Select two companies operating in the same industry and download their latest annual reports
(minimum year ending 2014). YOU MUST NOT select Thorntons plc.

Sample paper

Coca Cola Company & PepsiCo  Financial Statement and Data Analysis

Industry Overview

Coca Cola Company and PepsiCo are both in the beverage sector since they produce ready-to-drink beverages. The beverage industry is one of the fastest growing industries in the world and among the earliest industries. This sector includes companies that manufacture both alcoholic and non-alcoholic drinks. The alcoholic segment includes spirits, wine and beer. On the other hand, the non-alcoholic segment includes soft drinks, coffee, bottled pure water, fresh fruit juices and tea (Wells, 2000). Due to the competitiveness in this industry, most companies turn to producing variety of products, improving their distribution channels as well as their marketing strategies in order to expand their businesses.

Although many of the beverages such as tea, wine and beer have existed for centuries, the beverage industry has only evolved over the past few centuries. The beverage sector is one that is highly fragmented as is evident through the numerous manufacturers, different packaging methods, production processes and even the end products. From the 1990s, beverage companies have evolved from local production to corporate giants that serve international markets. The development in this industry was brought about by the adoption of mass production technique that allowed for expansion into international markets (Nolan, 2007). Other factors also brought about development in the industry such as advancements in product packaging and processes that helped increase the shelf-life of products. Other advancements such as refrigerators helped products such as beers to brewed in plenty without the fear of suffering losses.

Company Profile

Coca Cola

The Coca Cola Company was founded and in operation in 1886 in Atlanta, Georgia as a manufacturer, retailer and marketer of syrups and non-alcoholic beverages. One of the best known products of the company is its flagship product Coca-Cola commonly known as Coke. Since 1889, the company has operated as a franchised distribution system within the industry; it is invoked in the production of syrup concentrates and sells it to various bottlers with sole territorial areas all over the world. However, the Coca-Cola Company has its anchor bottler situated in North America.

Coca Cola Company is the owner and marketer of four of the world’s best seller’s top five non-alcoholic beverage brands which are: Fanta, Coca-Cola, Diet Coke and Sprite (Armus, 2005). According to the 2015 annual report, the company now sells beverage products with their trademark to over 200 countries. These beverages account for over 1.9 billion sales of the estimated 58 billion beverage servings consumed all over the world on a daily basis. The company operates on the belief that its success greatly depends on their ability to associate with its consumers by ensuring they provide products that meet their needs and lifestyles.

PepsiCo

PepsiCo Inc is one of the American multinational beverages Company that also manufactures snacks and has its headquarters in Purchase, New York. The company was commenced in 1965 after the merger of two major companies; Pepsi-Cola Company and Frito-Lay. Since then, expansion has occurred within the company from Pepsi to a company providing products that range from beverages to grain-based snacks. Its expansion included the acquisition of two companies Tropicana and Quaker Oats Company in 1998 and 2001 respectively; it saw Pepsi add the Gatorade brand to its portfolio. By 2012, retail sales of PepsiCo brands generated revenue over $ 1 billion for every piece with the products being distributed to over 200 countries. The bottling and distribution is done by PepsiCo together with other licensed bottlers in other parts of the world. The company has developed and grown to be the second largest catering and Beverage Company in the world.

Competition

Over the years, Coca Cola and Pepsi have been great competitors in the beverage industry. Historically, Coca Cola has been considered Pepsi’s major competitor until the year 2005 in December when PepsiCo beat Coca Cola for the first time ever in 112 years in terms of market value. However, in 2009, tables turned with Coca Cola holding a higher market share within the US than Pepsi in sales of carbonated soft drinks. Through mergers, partnerships and acquisitions done by PepsiCo in the year 1990 and 2000, the company’s business has expanded with the inclusion of a wider product base inclusive of snacks, foodstuffs and beverages (McKelvey, 2006). These products have seen the company make a lot to an extent that the mainstream of the revenue has shifted from the sale and production of carbonated drinks.

Corporate Social Responsibility

In an effort to support the wellbeing of its consumers, Coca Cola ensures that it offers reduced, low or completely calorie-free options in over 191 markets in which it operates. In 2014 alone, the company was able to support more than 300 programs for healthy living in over 112 markets. In that same year, Coca Cola foundation together with the company itself gave back to the community $126 million which is approximately 1.3% of its operating income. Through this efforts, the company has managed to support women, children and communities in general lead better, healthier lives.

For the case of PepsiCo, through its vision to deliver top notch financial performance, it has managed to reduce its operational water use by 23% per unit of production which shows great effort in conservation of water. In addition, the company has also recorded 1 billion liter reduction in absolute water use. Due to its high values portrayed in its business operations, Pepsi has been ranked among the World’s Most Ethical Companies by Ethisphere for ten consecutive years (2007-2016) which is a proof of just how much Pepsi value the community which it serves by maintaining high business standards at all times.

Financial Aspects

Revenue Outlook

        The Coca-Cola Company recognizes revenue when the transfer of product to the bottling partners, through a resale or to its direct consumers. The relationship between the parties exists as an agreement where the delivery has been made and price is either fixed or determinable and finally collectability is rationally guaranteed.  The financial year 2015 saw the sales capacity and unit sales case size both grow with a margin of 2 % in comparison with the previous year. Although having had a 2% growth on sales of case the Coca- Cola net profit revenue decreased by a 4% margin which was a $ 1,704 million loss (Cola, 2015).It attributed the loss to the unfavorable impacts on the foreign exchange fluctuations. The United States dollar was at a stronger position than most currencies with the company operations. The gross profit with the company also decreased to 60.5 percent in 2015 a 0.6 decrease from the previous year 2014. It was also I attribute to the foreign exchange loss, although offset by the lower prices on commodity as well as a positive price mix in its areas of operations.

        PepsiCo net revenue as at 2015 stood at 63,056 million a 5 % decrease from the previous year. The total operating profit decreased by 13 % while the operating margin decreased 1.2 percent (PepsiCo, 2015). Unlike the competitor, PepsiCo had a certain operating cost increase. It also acknowledged that unfavorable foreign exchange was a risk factor to the decrease in operating margin. Unlike the Coca-Cola Company its marketing mix did not work for its revenue growth, PepsiCo has an increased cost on advertisement and marketing.

 

Marketing and risk factor

        PepsiCo acknowledges offering of incentives and discounts on various products as a means of marketing. Most of its incentives arrangement is not more than a year, with only incentives such as fountain pouring rights, extending a year. The company advertising and other related marketing expenses increased with $ 0.1 billion and stood at $2.4 billion. PepsiCo also have part marketing as deferred expenses, which are expensed with the ear once utilized. They include media contribution and personal services, promotional materials and production costs of future media advertising. Deferred advertising incurred by PepsiCo is $40 million. The distribution cost which included cost of shipping and handling activities was $ 9.4 billion (PepsiCo, 2015)

         Coca-Cola Company had an increase in its marketing and advertising cost attributed to the investment in strengthening the companies brand and partially offsetting the foreign exchange impact. Selling and distribution expenses with Coca-Cola also reduced in 2015, attributing the reduction on acquisitions and divestitures impacts within the business operations.  The Coca-Cola Company also focused more on marketing spending on consumers facing promotional overheads as well as saving on output and initiatives towards reinvestments. The high risk factor facing both companies if the foreign exchange fluctuations against the constant U.S Dollar, causing losses on both companies on international operations. 

Profitability ratio

The ratio measures the company ability to utilize its resources in the generation of profitable sale within its operations. The ratios include Gross profit Margin, Net Profit Margin, Operating Profit Margin, Return on Equity (ROE) and Return on Assets (ROA). The gross profit margin is an indicator of the percentage of income available to cover both operative and other outflows. The gross profit margin for Coca-Cola stood at 60.53 %, which was a deterioration from the previous year (Cola, 2015). PepsiCo stood at 54.99%, lower than Coca- Cola although an improvement from the previous year.

         The operating profit margin is a representation as operating income divided by revenue. It measures the proportion of companies’ revenue left after expensing on its valuable costs of production. PepsiCo operating profit stood at 13.25 %, while Coca- Cola stood at 19.70% both companies highlighting a decrease from the previous year. Coca-Cola has a higher proportion on income left as compared to PepsiCo.

        The Net profit margin which is an indicator of company profitability margin is a representation of net income against the revenue. It highlights the percentage of revenue within the company after all the expenses have been deducted from the sales. Standing at 16.60% Coca-Cola Company highlighted a slight improvement from the previous year. PepsiCo net profit was at 8.65%, with Coca-Cola almost doubling it figure which was a decrease from the previous year.

        Both companies had an increase in the Return of Equity, PepsiCo stood at 45.73% while Coca-Cola stood at 28.77%. The return on Equity is computed as net revenue against shareholders equity. It is a highlight of the amount of net income returned as a percentage of the shareholders equity. It effectively measures the profit within the corporation though a highlight on how much profits is in generation with the money invested by the shareholders.

 The Return on Assets which is the net income against total company assets for Coca- Cola stood at 8.16 % while that of PepsiCo was at 7.83%, which was a decrease from the previous year. The Return on Asset for Coca- Cola was a slight increase from the previous year. The Return on Assets provides a vivid idea on how most of the managers are effective in utilization of assets in generation of earning. It is clear that both companies Return on Asset falls on the same level although PepsiCo is lower with a slight margin.   

References

Armus, S. (2005). Coca-Cola Company. France and the Americas: Culture, Politics, and History: a Multidisciplinary Encyclopedia, 273.

Cola, C. (2015). Annual financial Report 2015. Form 10-k.

McKelvey, S. M. (2006). Coca-Cola vs. PepsiCo-A” Super” Battleground for the Cola Wars? Sport Marketing Quarterly, 114.

Nolan, P. Z. (2007). The Beverage Industry. In The Global Business Revolution and the Cascade Effect. Palgrave Macmillan UK.

PepsiCo. (2015). Annual Financial Report 2015. Form 10-k.

Wells, B. H. (2000). Carbonated-Beverage Industry. Journal (American Water Works Association), 860-864.

 

Appendices

 

Gross profit margin

Coca-Cola

Gross profit margin = Gross profit ÷ Net operating revenues * 100
= 100 × 26,812 ÷ 44,294 = 60.53%

PepsiCo.

Gross profit margin = Gross profit ÷ Net revenue * 100
= 100 × 34,672 ÷ 63,056 = 54.99%

 

Operating Profit Margin

Coca-Cola

Operating profit margin = Operating income ÷ Net operating revenues * 100
= 100 × 8,728 ÷ 44,294 = 19.70%

PepsiCo.

Operating profit margin = Operating profit ÷ Net revenue * 100
= 100 × 8,353 ÷ 63,056 = 13.25%

 

 

Net Profit Margin

Coca-Cola

Net profit margin = Net income attributable to shareowners of The Coca-Cola Company ÷ Net operating revenues * 100
= 100 × 7,351 ÷ 44,294 = 16.60%

 

PepsiCo

Net profit margin = Net income attributable to PepsiCo ÷ Net revenue * 100
= 100 × 5,452 ÷ 63,056 = 8.65%

 

Return on Equity

Coca-Cola

ROE = Net income attributable to shareowners of The Coca-Cola Company ÷ Equity attributable to shareowners of The Coca-Cola Company * 100
= 100 × 7,351 ÷ 25,554 = 28.77%

 

PepsiCo

ROE = Net income attributable to PepsiCo ÷ Total PepsiCo shareholders’ equity * 100
= 100 × 5,452 ÷ 11,923 = 45.73%

 

Return on Assets

Coca-Cola

ROA = Net income attributable to shareowners of The Coca-Cola Company ÷ Total assets * 100
= 100 × 7,351 ÷ 90,093 = 8.16%

PepsiCo

ROA = Net income attributable to PepsiCo ÷ Total assets * 100
= 100 × 5,452 ÷ 69,667 = 7.83%

 

COCA-COLA

Balance Sheet

USD $ in millions

Dec 31, 2015 Dec 31, 2014 Dec 31, 2013 Dec 31, 2012 Dec 31, 2011
Cash and cash equivalents 7,309  8,958  10,414  8,442  12,803 
Short-term investments 8,322  9,052  6,707  5,017  1,088 
Cash, cash equivalents and short-term investments 15,631  18,010  17,121  13,459  13,891 
Marketable securities 4,269  3,665  3,147  3,092  144 
Trade accounts receivable, less allowances 3,941  4,466  4,873  4,759  4,920 
Inventories 2,902  3,100  3,277  3,264  3,092 
Prepaid expenses and other assets 2,752  3,066  2,886  2,781  3,450 
Assets held for sale 3,900  679  2,973 
Current assets 33,395  32,986  31,304  30,328  25,497 
Equity method investments 12,318  9,947  10,393  9,216  7,233 
Other investments 3,470  3,678  1,119  1,232  1,141 
Other assets 4,207  4,407  4,661  3,585  3,495 
Property, plant and equipment, net 12,571  14,633  14,967  14,476  14,939 
Trademarks with indefinite lives 5,989  6,533  6,744  6,527  6,430 
Bottlers’ franchise rights with indefinite lives 6,000  6,689  7,415  7,405  7,770 
Goodwill 11,289  12,100  12,312  12,255  12,219 
Other intangible assets 854  1,050  1,140  1,150  1,250 
Noncurrent assets 56,698  59,037  58,751  55,846  54,477 
Total assets 90,093  92,023  90,055  86,174 79,974

 

Current Liabilities               26,930  32,374  27,811  27,821  24,283 
Long-term debt,excluding current maturities 28,407  19,063  19,154  14,736  13,656 
Other liabilities 4,301  4,389  3,498  5,468  5,420 
Deferred income taxes 4,691  5,636  6,152  4,981  4,694 
Noncurrent liabilities 37,399  29,088  28,804  25,185  23,770 
Total liabilities 64,329  61,462  56,615  53,006  48,053 
Common stock, $0.25 par value 1,760  1,760  1,760  1,760  880 
Capital surplus 14,016  13,154  12,276  11,379  11,212 
Reinvested earnings 65,018  63,408  61,660  58,045  53,550 
Accumulated other comprehensive loss (10,174) (5,777) (3,432) (3,385) (2,703)
Treasury stock, at cost (45,066) (42,225) (39,091) (35,009) (31,304)
Equity attributable to shareowners of The Coca-Cola Company 25,554  30,320  33,173  32,790  31,635 
Equity attributable to noncontrolling interests 210  241  267  378  286 
Total equity 25,764  30,561  33,440  33,168  31,921 
Total liabilities and equity 90,093  92,023  90,055  86,174 79,974

 

 

Income statement

USD $ in millions

12 months ended Dec 31, 2015 Dec 31, 2014 Dec 31, 2013 Dec 31, 2012 Dec 31, 2011
Net operating revenues 44,294  45,998  46,854  48,017  46,542 
Cost of goods sold (17,482) (17,889) (18,421) (19,053) (18,216)
Gross profit 26,812  28,109  28,433  28,964  28,326 
Selling, general and administrative expenses (16,427) (17,218) (17,310) (17,738) (17,440)
Other operating charges (1,657) (1,183) (895) (447) (732)
Operating income 8,728  9,708  10,228  10,779  10,154 
Interest income 613  594  534  471  483 
Interest expense (856) (483) (463) (397) (417)
Equity income, net 489  769  602  819  690 
Other income (loss), net 631  (1,263) 576  137  529 
Income before income taxes 9,605  9,325  11,477  11,809  11,439 
Income taxes (2,239) (2,201) (2,851) (2,723) (2,805)
Consolidated net income 7,366  7,124  8,626  9,086  8,634 
Net income attributable to non-controlling interests (15) (26) (42) (67) (62)
Net income attributable to shareowners of The Coca-Cola Company 7,351  7,098  8,584  9,019  8,572

 

PEPSICO

Income Statement        (Figures in thousands)

Revenue 12/26/2015 12/27/2014 12/28/2013
Total Revenue 63,056,000 66,683,000 66,415,000
Cost of Revenue 28,384,000 30,884,000 31,243,000
Gross Profit 34,672,000 35,799,000 35,172,000
Operating Expenses
Research Development
Selling General and Administrative 24,885,000 26,126,000 25,357,000
Non Recurring 1,359,000 1,359,000 1,359,000
Others 75,000 92,000 110,000
Total Operating Expenses
Operating Income or Loss 8,353,000 9,581,000 9,705,000
Income from Continuing Operations
Total Other Income/Expenses Net 59,000 85,000 97,000
Earnings Before Interest and Taxes 8,412,000 9,666,000 9,802,000
Interest Expense 970,000 909,000 911,000
Income Before Tax 7,442,000 8,757,000 8,891,000
Income Tax Expense 1,941,000 2,199,000 2,104,000
Minority Interest 107,000 110,000 110,000
Net Income From Continuing Ops 5,452,000 6,513,000 6,740,000
Non-recurring Events
Discontinued Operations
Extraordinary Items
Effect Of Accounting Changes
Other Items
Net Income
Net Income 5,452,000 6,513,000 6,740,000
Preferred Stock And Other Adjustments
Net Income Applicable To Common Shares 5,452,000 6,513,000 6,740,000

 

 

 

Balance Sheet     (Figures in thousands)

Period Ending 12/26/2015 12/27/2014 12/28/2013
Current Assets
Cash And Cash Equivalents 9,096,000 6,134,000 9,375,000
Short Term Investments 2,913,000 2,592,000 303,000
Net Receivables 6,437,000 6,651,000 6,954,000
Inventory 2,720,000 3,143,000 3,409,000
Other Current Assets 1,865,000 2,143,000 2,162,000
Total Current Assets 23,031,000 20,663,000 22,203,000
Long Term Investments 2,311,000 2,689,000 2,623,000
Property Plant and Equipment 16,317,000 17,244,000 18,575,000
Goodwill 14,177,000 14,965,000 16,613,000
Intangible Assets 13,081,000 14,088,000 16,039,000
Accumulated Amortization
Other Assets 750,000 860,000 1,425,000
Deferred Long Term Asset Charges
Total Assets 69,667,000 70,509,000 77,478,000
Current Liabilities
Accounts Payable 13,507,000 13,016,000 12,533,000
Short/Current Long Term Debt 4,071,000 5,076,000 5,306,000
Other Current Liabilities
Total Current Liabilities 17,578,000 18,092,000 17,839,000
Long Term Debt 29,213,000 23,821,000 24,333,000
Other Liabilities 5,887,000 5,744,000 4,931,000
Deferred Long Term Liability Charges 4,959,000 5,304,000 5,986,000
Minority Interest 107,000 110,000 110,000
Negative Goodwill
Total Liabilities 57,744,000 53,071,000 53,199,000
Stockholders’ Equity
Misc. Stocks Options Warrants -145,000 -140,000 -130,000
Redeemable Preferred Stock
Preferred Stock
Common Stock 24,000 25,000 25,000
Retained Earnings 50,472,000 49,092,000 46,420,000
Treasury Stock -29,185,000 -24,985,000 -21,004,000
Capital Surplus 4,076,000 4,115,000 4,095,000
Other Stockholder Equity -13,319,000 -10,669,000 -5,127,000
Total Stockholder Equity 12,068,000 17,578,000 24,409,000
Net Tangible Assets -15,190,000 -11,475,000 -8,243,000

Case study of Amazon and Wal-Mart-Financial Statement & Data Analysis

 

Case study of Amazon and Wal-Mart-Financial Statement & Data Analysis

Question

Select two companies operating in the same sector and download their latest annual reports (minimum year ending 2014). You must not select Thorntons plc.Financial statements must be prepared using International Financial Reporting Standard IFRS.References should follow the APA 6th Edition referencing system.

Sample paper

A comparative case study of Amazon and Wal-Mart-Financial Statement & Data Analysis

Introduction

Walmart and Amazon have been two competitive retail business company over the years. An analysis of the two companies over a ten-year horizon highlights Walmart on a better provision of value on its stocks than Amazon. It is in attribute to the uniform dividend payout and growth on its share price.

Over the forty years, Walmart has been in operation; its dividend payout has been increasing. Currently, its dividend yield is at 3.03 %. Its price earnings ratio which ranges between 13.3 -18.2 over past decades highlight share worth investing in the long term. Over the next two years, Walmart plans to put $2.5 B investment in employment and $ 2 B in the electronic commerce industry. The investment will have an adverse impact on it earning, although it will yield significant returns after the two years of operation. Walmart is highly resourceful not only on infrastructure but also capital. The customer outreach gets support from the buyer`s power and a management team that’s fully focused to grow the firm into a model combining brick-and-mortar store with the electronic commerce.

Amazon.inc has had incomparable triumph over the years, over the past decade the company has its share of ups and downs. From an investment perspective, the current investment strategies on international market investment and expansions programs such as Prime Now and Logistics have placed it in an attractive position on the market. The launch of Prime will cushion Amazon on its less yielding products such as Fire Phone and Amazon Destination. By the year 2020, Amazon is estimated to grow up to $46 B from its current position of $ 7B.

  1. BUSINESS MODEL

2.1 Walmart

 Walmart is placed in the market as a discounting retailing company operating chains of stores, supermarkets, warehouse and the famous Sam’s Club it also runs websites such as samsclub.com and Walmart.com. Its operations within the 27 countries are under different names, in the U.S it operates as Walmart and Asda in the UK, forming the major markets. On the minority market it operates in Seiyu located in Japan and India has Best Price. Operating over 11000 retail units and e-commerce platform it operates big within the retailer industry and employees a large group, a recognition earned over a long period in operation.

Its core strategy is to be a price leader, invest in differentiating on access, be competitive on assortment and deliver a great experience. Under the leadership of Doug McMillon as the current president Walmart upholds on its mission statement as a move for improving people live through enabling saving of money. It strategies on bringing its stores together, passing its everyday low cost to its customers as a control on its expenses

2.2 Amazon Inc.

Amazon has grown within the retail industry to become the world largest online retailer. The growth is attributed to its extension in the global presence and not only focusing its operation in North America. Within the marketplace, it operates websites such as amazon.com, in the UK as Amazon co.uk, Amazon.inc, amazon co.jp and Amazon de (Research, 2016). Amazon Company started as a book retailer operating online, diversifying into sale of other products and sales categories over the years and developing its business model along with its growth. Its inventory is maintained and sold through two platforms commission based platform on third party retailers and its online platform. Subscription within Amazon is through prime services as well as a small electronic product line. Prime offers a variety of content such as music, web series, and videos. It has also expanded its Logistics; it is in an aim to shrink its dependency on some operations

First trading shares in 1996 after establishment in the year 1994 by Jeff Bezos who is the current board chair and CEO of the company, later reincorporated in 1996. It holds a mission to become Earth`s most client-centric company. It is guided by its four core principles and aims at becoming a consumer-centric company. To achieve this, it improves its principles: a customer obsession, a passion for invention, an excellence commitment to its operations and thinking on the long term goal.

  1. Operating characteristics

    3.1     Revenue Outlook

Just marked its 20th anniversary Amazon has strategically gained a market share within the United States and in the UK and India as minority share contributors. Most of its investments go towards growth through raising of debt and utilization of retained earnings. The company since inspection has never released any dividends as it fails to focus its growth strategy on profits. In the fiscal year 2015 it generated $107.0 billion in sales. Of total revenue generated the North America share was $ 63.7 billion representing 59% of the total. The International market generated $35.4 billion at 33% of the total. The rest $7.9 billion a 7% share of the total was contributed by the Amazon Web Service (AWS) division. 2015 thus became the first year for Amazon to split its revenue segment share (Amazon., 2015).

Walmart-the world`s largest retailer during the fiscal year of 2015 with a revenue of $485.7 billion, comprising mainly of $482.23 billion net sales. The sales distributed among its major three segments: Walmart United States, Sam`s Club and the Walmart International, The U.S segment had net sales of $288.0 billion, Walmart International segment operating in 26 countries outside U.S has net sales worth $136.2 billion. The Sam`s club operating as a membership-only warehouse club and as samsclub.com contributed $58.0 billion of the net sales. The major segment contributing to its revenue includes Grocery at 56%, Health and Wellness segment at 11%, the Entertainment stood at 10%, Hardline and Apparel were at 16% and Home was at 7%. (Walmart, 2015) The company trades as “WMT.” at the (NYSE) New York Stock Exchange.

    3.2 Competitive factor

The two companies have grown within the years to a competitive market but still manage to be the two leading giants. Its brick and motor stores allows Walmart to stand out among competition and will continuously be the most preferential retail store for most homes.  There store to provide an attribute that beats Amazon in its retail market as customers get a physical experience permitting them to have a feel and touch of the products, immersed in brand experiences and sales contacts engagement. Moreover to the physical distribution through stores, Walmart is aggressively investing in e-commerce platforms and better customer experience through sales improvement, operations, and customer services. Through programs such as EDLP focusing commitment to price leadership and price philosophy which lowers prices to customers on a daily basis.  EDLC controls expenses thus saving on costs and passed to customers. Walmart distribution facilities consist of 102 operational self-owned, two under by third party operator’s ownership, six leased properties, and 24 under third party lease.

Amazon acknowledges competition from single entrance company to alliances. Walmart as a competitor falls on the online, offline and multichannel retailer. As on Amazon competitive edge are publishes on its online store, the web search engine along with social networks. In an aim to beat the competition, it’s in adoption of new and improved technologies which include search, web attributes and computing services infrastructure. Thus Amazon can lock in customers with potential and with restrictive terms, devote its technological resource on, structure, fulfillment, and adverse marketing.

3.3. Risk factor

The number one and most common factor faced by the two companies is on exchange loss. With both companies trading on the international market, the loss is inevitable. The retail industry is not limited to the local economic and political risk. Other risks within the industry include government regulation, business licensing and limited fulfillment and technology infrastructure. Walmart further in its 2015 report acknowledges that data and privacy risk, as well as supply chain and third party risk, may also affect the retail business operations.

4 Employees

Due to the seasonal factor Amazon employee’s dropped to 230,800 on full time during the 2015 financial year. To curb the falling employee number Amazon opted for independently contracted contractors and temporary personnel to supplement its workforce (Amazon., 2015). Employee relation with the company is maintained at a suitable level. Walmart has approximately 2.2 million employees worldwide. It also maintains a large number of associates in each operational year. The company maintains its relationship with its associates is good (Walmart, 2015).

  1. Investment strategies

Over the 2015 financial year, Walmart investors faced a dilemma due to the short-term investment strategy and adoption to environmental changes within the retail industry. On the same year, the company issued a negative guidance, highlighting unpredictable business performance merits, revenue was low as operational cost rose. The expenses increase was forecasted to be by $1.2 B and $1.5B in the fiscal year 2016 and 2017 respectively. Further disappointment on the Walmart investor was due to its additional capital expenditures of $ 23.4B on store improvement and a $2 B electronic commerce investment over the coming years since 2015. The investors got skeptic about the company’s future low-cost over the 2015 financial year selling the stocks they held causing a 40% stock loss of its value over the past years. Its strong basics and statement of financial position along with an enduring strategy well laid out by the management has enabled the company to become a compelling factor on a ten-year investment horizon. Currently, the company offers existing permission allowing value investors to purchase a premium dividend thus paying stock at a very lucrative price (Walmart, 2016).

Investments within Amazon are directed towards technological advancement.  The company believes that technological progress improves their customer interaction on the internet as speeds have improved as well as cutting down on processing costs.  To gain a larger market share the Amazon digital platform has provided a membership service with the inclusion of more than video streaming. The platform is a multi-product incorporating free shipping and two free delivery.

  1. Ratio Analysis

Profitability ratios

Measures the ability of the business to generate considerable profits from its shareholders, communicating the financial performance of the business. The gross profit margin ratio highlights the revenue as a percentage available to cover not only operations but also other expenditures, Amazon Gross profit stood at 33.04 % an improvement from 2014, while Walmart was at 24.58% which was a deterioration from 2014 financial year. Operating profit margin is calculated as operating income divided by revenue; Walmart had a higher operating profit at 5 .04% a drop from 2014 compared to 2 % for Amazon which was a growth from 2014 that was less than 1%. The Net profit margin is calculated as the net income as a factor of revenue, Amazon stood 0.56 % while Walmart was at 3.07% highlighting an almost stable margin on the net profit margin. The Return of Equity after tax stood at 18.24% for Walmart and 4.45% for Amazon, highlighting a wide margin between the two companies. Although Walmart had dropped 2% from the previous year, Amazon grew with the 2% from 2% on the previous year. The return on asset for Amazon stood at 0.91% while that of Walmart stood at 7.36%.

Conclusion

Walmart has potential to develop distribution centers and small integrated store hybrids reducing its costs on operations over coming years. Enabling Walmart competes against Amazon supply channel and vast networks on delivery providing closeness to clients. Amazon earning continue to shrink against Walmart’s revenue as it spends more on capital expenditure. Walmart further utilizes scale and price competitiveness to ease its transition into the multi-channel distribution. Defiantly Amazon needs to replicate Walmart model, transforming itself into a multi-channel retail distributor. As the two companies invest within the market will see a change in its profitability ratio as they grow their sales and revenues.

References

Amazon. (2015). Annual Report . . SEC Form 10-K, 1-78.

https://www.sec.gov/Archives/edgar/data/1018724/000101872416000172/amzn-20151231x10k.htm

Research, Z. I. (2016, Octomber 28). AMZN: AMAZON.COM INC Stock Quote & Analysis – Zacks.com. Retrieved from Zacks: http://www.zacks.com/stock/quote/AMZN

Walmart. (2015). Annual Report . S. E. C. form 10K, 14-16.

https://www.sec.gov/Archives/edgar/data/104169/000010416915000011/wmtform10-kx13115.htm

Walmart, I. (2016, Octomber 28). Walmart strategy drives growth and sustainable returns, Plans $20 billion share. Retrieved from Walmart, Inc., : http://news.walmart.com/news-archive/2015/10/14/walmart-strategy-drives-growth-andsustainable-returns-plans-20-billion-share-repurchase-program-over-two-years.

 

Appendices

Amazon Ratio calculation

Gross profit margin = 100 × Gross profit ÷ Net sales
= 100 × 35,355 ÷ 107,006 = 33.04%

Operating profit margin = 100 × Income from operations ÷ Net sales
= 100 × 2,233 ÷ 107,006 = 2.09%

Net profit margin = 100 × Net income (loss) ÷ Net sales
= 100 × 596 ÷ 107,006 = 0.56%

ROE = 100 × Net income (loss) ÷ Total stockholders’ equity
= 100 × 596 ÷ 13,384 = 4.45%

ROA = 100 × Net income (loss) ÷ Total assets
= 100 × 596 ÷ 65,444 = 0.91%

Walmart ratio calculations

Gross profit margin = 100 × Gross profit ÷ Net sales
= 100 × 117,630 ÷ 478,614 = 24.58%

Operating profit margin = 100 × Operating income ÷ Net sales
= 100 × 24,105 ÷ 478,614 = 5.04%

Net profit margin = 100 × Consolidated net income attributable to Walmart ÷ Net sales
= 100 × 14,694 ÷ 478,614 = 3.07%

ROE = 100 × Consolidated net income attributable to Walmart ÷ Total Walmart shareholders’ equity
= 100 × 14,694 ÷ 80,546 = 18.24%

ROA = 100 × Consolidated net income attributable to Walmart ÷ Total assets
= 100 × 14,694 ÷ 199,581 = 7.36%

Google Inc Financial Analysis

Ethical Implications of takeovers: A Financial Manager’s Story

Question

Discuss the issues facing Lisa when challenging existing policies and procedures of the
acquired company from both ethical and professional perspectives.
Hint: The discussion should take the form of an essay including introduction and
conclusion with maximum 1000-1500 words; you MUST cover the following points in the
essay: (1 Mark for the introduction and conclusion)
• Identify any ethical issue(s) involved (if any). (1 Mark)
• Identify the stakeholders involved in any ethical issue (if any). (1 Mark)
• Identify the alternative courses of actions that Lisa could take. (1 Mark)
• Identify the best course of action would you advise Lisa to take. (1 Mark

Answer

Ethical Implications of takeovers: A Financial Manager’s Story

Ethics can be defined as the various conceptions of right or wrong that individuals hold in relation to conduct. Ethical values are of great importance especially within the organizational context. Various ethical issues in organizations create complex situations for managers making it difficult to make correct decisions. Ethical issues mostly impact the internal stakeholders of the organization such as managers and the employees. This paper will analyze the ethical issues involved during acquisitions through the review of a case study.

Identify ethical issues involved

One of the major ethical issues facing Lisa Micheals was that the Prestige Fragrance Company did not conform to the generally accepted accounting principles and standards. During her analysis of the company’s financial records, there appeared to be gross misstatements in the acquired company’s records. For instance, she noticed a high proportion of “Other Assets” in the company’s financial statements. Upon a closer look at the company’s financial statements, Lisa Michaels noted that some of the marketing expenses were recorded as assets rather than as expenses. The ethical issue in this case was whether the acquired company’s financial statements represented a fair and an accurate view of the company’s financial position. In addition, some employees of the acquired company such as Mr. Anderson were not happy of the acquisition since he would now be forced to work in a smaller division of the larger company.

Other ethical dilemmas surround Lisa Michaels revelations concerning the financial statements of Prestige Fragrance Company. Lisa Michaels was in a dilemma on whether to issue the company with an unqualified audit report. If she issued the report, she would have to pursue the matter further through in-depth audit analysis. Since this was a new acquisition, there were bound to be tension between the employees of the two companies.  Conducting audits on the acquired company would probably raise issues in the relationship between the two companies and especially the employees. The acquired company’s team may probably develop mistrust and increase tension between the two factions. Furthermore, Lisa Micheals was not sure if she would find any substantial details if she pressed further on the issue. Lisa also felt there was misuse of funds in the acquired company especially through exorbitant print and television advertisements.

Stakeholders involved in any ethical issue

Various stakeholder groups may be affected by ethical issues in businesses. There are two types of stakeholders; internal stakeholders and the external stakeholders. Internal stakeholders are those who have a direct connection or interest with the organization. Employees, management and shareholders are good examples of internal stakeholders. Outside stakeholders are people who have limited interest in the company. Outside stakeholders include local communities, the government, special interest groups, trade unions, and the public in general. Internal stakeholders are highly involved in ethical issues. For instance, the employees and those in upper management have a critical role to play when it comes to ethical issues. Employees contribute skills and expertise to the organization, while the shareholders contribute money and capital.

In the case study, internal stakeholders are deeply involved in the ethical issues. Lisa and Jeffery Anderson are directly involved in the ethical issues affecting the two organizations. Lisa is the Finance Manager of the global conglomerate acquiring while Jeffrey Anderson is the Controller at Prestige Fragrance Company. Lisa was also worried that she could not be able to prove her case before the Chief Financial Officer in the acquired company. The Chief Finance Officer is part of the management team. Outside stakeholders are not involved in ethical issues in this case, although in certain circumstances the impacts of ethical issues may also be felt by the outside stakeholders.

Identify the alternative courses of actions that Lisa could take

There are a number of alternative actions that Lisa could take. Ethical decision making simply involves choosing among a set of alternatives the best one which is in consistence with the outlined ethical principles (Zerbe, Härtel, & Ashkanasy, 2008). In ethical decision making, individuals should carefully analyze all the issue at hand and opt for the best ethical approach, even though the cost of such an action may be high. Ethical decision making is guided by consciousness, commitment and competency. Consciousness refers to the general awareness regarding the decisions to make. Individuals should be able to employ their moral convictions to daily behavior. Commitment is the will to follow the right course regardless of the cost. Competency involves the ability to evaluate the evidence or information presented concerning the ethical issue at hand. Competency also involves the ability to come up with alternative solutions and to assess the consequence of each action to be taken (Ferrel & Ferrell, 2014).

Any alternative actions that Lisa should take should be both effective and ethical. They should be effective in the sense that they should achieve the intended goals and objectives. The actions she opts to take should accomplish her major goals. In line with this, Lisa’s alternative course of action could be to involve the relevant stakeholders in a meeting in order to discuss the issues identified in the financial statements of the acquired company. This could provide her with a clear direction to take without causing distrust and resentment especially from the acquired team. Another possible course of action is to personally talk with relevant individual employees of the acquired company in order to get an understanding of how things were run in the company. For instance, she could talk to the CFO as well as other employees prior to making the final decision. Lastly, she could also hold training sessions where she could explain to both the company’s employees about the potential benefits of the acquisition and the need to strengthen the internal controls.

Identify the best course of action you would advise Lisa to take

The best course of action for Lisa to take is to hold meeting with relevant stakeholders from both companies where she would have the opportunity to highlight the issues observed. The meeting would give her the opportunity to present her findings about both of the company’s financial controls and outline the required standards. The meeting would also give all employees from both companies the opportunity to come up with suggestions on handling the issues raised in the report. It is worth noting that meetings provide the best chances for developing supportive relationships between various individuals. A meeting will provide Lisa with the much needed opportunity to convince the team from Prestige Fragrance Company of the need to develop proper controls in the face of an acquisition. A meeting will also provide each individual with the opportunity to air their views. She will also be able to obtain vital feedback from all the members. Due to these and other benefits, engaging the entire team through a meeting would the best course of action for Lisa to take.

In conclusion, ethical issues often present ethical dilemmas that make the decision making process difficult for managers. Internal stakeholders play a big role in ethical issues affecting organizations. When ethical issues emerge, the stakeholders involved must make appropriate decisions. Ethical decision making involves choosing among a set of alternatives the best alternative which is in consistence with the outlined ethical principles.

References

Ferrel, O. C., & Ferrell, J. F. (2014). Business Ethics: Ethical Decision Making & Cases. Boston:             Cengage Learning.

Zerbe, W. J., Härtel, C. E. J., & Ashkanasy, N. M. (2008). Emotions, ethics and decision-making.             London: Emerald/JAI.

Related

Google Inc Financial Analysis

Google Inc Financial Analysis

Question

Prepare an eight- to ten-page fundamental financial analysis (excluding appendices, title page, abstract, and references page) that will cover each of the following broad areas based on the financial statements of your chosen company:a.Provide a background of the firm, industry, economy, and outlook for the future.b.Analyze the short term liquidity of the firm.c.Analyze the operating efficiency of the firm.d.Analyze the capital structure of the firm.e.Analyze the profitability of the firm.f.Conclude with recommendations for the future analysis of the company (trend analysis).

Answer

Google Inc Financial Analysis

Abstract

Google Inc. is one of the largest technology companies in the world. The company provides various products and services to customers. Originally providing internet search services to computer users, the company has diversified to include software and hardware products in the recent period. The overall purpose of this study is to evaluate the financial health of the company and evaluate its future prospects. Through a detailed examination of its financial statements, it will be possible to describe the company’s financial health as well as its future prospects. The study takes into consideration various ratios relating to liquidity, operating efficiency, capital structure, and profitability ratios. The major findings of the study indicate that Google is currently in good financial health. This is after a thorough examination of the various financial ratios. This is explained in more details in the report below. Further, the study indicates that Google needs to diversify its revenue base to overcome stiff competition from a variety of sources.

Google Inc. Financial Analysis

Google Inc. is an American multinational company that specializes in technology and internet-related products and services. The company has its headquarters in Mountain View, California. Its core operations include managing online search requests, cloud computing, online advertising, building software and hardware, and other activities. The company commenced operations in 1998. The pioneering developers are Larry Page and Sergey Brin, who established the company together while they were students at Stanford University. Since its inception, Google Inc. has continued to experience growth and exert dominance in the market especially as the world’s most popular search engine. The company went public in 2004 through an IPO offer to the public. In 2006, Google acquired YouTube through purchase of its stock. Nonetheless, YouTube continued to operate as a separate entity from Google. In 2015, Google became part of Alphabet Inc., a holding company, in an effort to restructure Google.

Background

Google Inc. is in the technology industry. The company began operations as an online search firm. Currently, the company offers over 50 technology-related products and services to consumers worldwide. The most notable technology products and services are in the line of e-mail, online search, software, mobile phones, tablet computers, and cloud services (Alphabet Inc., 2016). Specifically, these include YouTube/video, Gmail, Google Books, Google Earth, Google Chrome, Android operating system, and Google Apps. Each of these products is in use by more than one billion users each month. The company primarily earns revenue from various sources including AdSense Google Network, Google Website, cloud service, hardware, digital content, and advertising (Alphabet Inc., 2016). Advertising involves performance and brand advertising.

Google faces competition from various sources in the technology industry. Search engines and information service providers search as Yahoo, Bing, Baidu, Yandex, Seznam, and Naver are competing with Google for customers (Alphabet Inc., 2016). Google is also facing competition from e-commerce websites, job query websites, travel query websites, and health query websites. The most popular e-commerce websites are Amazon and eBay. Social networks also compete with Google in terms of advertising. The traditional advertising media such as radio, television, billboards, and others also offer stiff competition for advertisements (Alphabet Inc., 2016). Companies that provide enterprise cloud services such as Microsoft and Amazon also offer competition to the technology giant. Projections into the future indicate that Google could be headed for tough times as revenue sources may decline. This is due to increasing competition, availability of multiple online advertising platforms, and declining rate of user adoption of the company’s products.

Short Term Liquidity of the Firm

The short-term liquidity of the company concerns the ability of the company to service its short-term obligations, including the current portion of the long-term liabilities. Short-term liquidity is critical in evaluating whether the company holds the ability to service debts, including the long-term liabilities. The evaluation of the short-term liquidity risk involves the analysis of the operating cycle of the company. If a firm has high cash inflows compared to the cash outflows, it stands a higher change of being able to clear short-term liquidities. It is possible to evaluate the short-term liquidity of the firm using three key ratios: current ratio, quick ratio, and cash ratio.

The current ratio indicates the firm’s ability to settle current liabilities using current assets. A higher current ratio indicates that the firm is in a better position to settle current liabilities using current assets. Generally, the current ratio value falls at 2 or more than two. A current ratio figure of below 1 indicates the firm is not able to settle current liabilities using current assets. The current ratio is given by: Current ratio = current assets/current liabilities. From the annual report, Google had total current assets worth $105,408, 000 and total current liabilities worth $16,756,000 (Alphabet Inc., 2016). Current ratio = 105,408,000/16,756,000 = 6.29. The current ratio of 6 indicates that Google has six times current assets compared to the current liabilities. As such, the company can be able to settle its current liabilities using current assets.

The other measure of short-term liquidity is the quick ratio, also known as acid test. The quick ratio is a better measure of short-term liquidity because it evaluates the firm’s ability to settle short-term liabilities without having to sell its inventories. In other words, the quick ratio evaluates the firm’s ability to settle short-term liability using the most liquid assets. The calculation of quick ratio follows the following formula: Quick ratio = (current assets – inventories)/current liabilities. Thus quick ratio = (105,408 – 268)/16,756 = 6.27. This ratio means that Google has $6.27 of liquid assets for every $1 of the current liabilities. This means it is easy for the company to settle its current liabilities without having to sell inventory.

The other measure of short-term liquidity is cash ratio. The cash ratio is a comparison of the company’s cash and cash equivalents and its current liabilities. The cash ratio utilizes the most liquid current assets while ignoring others including the cash receivables. It shows the company’s ability to pay current liabilities at the particular period without having to liquidate other assets. The formula for cash ratio is: Cash ratio = (cash equivalents + marketable securities)/current liabilities. The cash ratio for Google is: cash ratio = 86,333/16756 = 5.15. The results indicate that Google can be able to settle its current liabilities using cash equivalents and marketable securities only. Google has $5.15 of cash equivalents and marketable securities for every $1 of its current liabilities.

Operating Efficiency of the Firm

The operating efficiency of the firm involves measures to determine its utilization of assets as well as management efficiency. Operating efficiency helps in evaluating the utilization of assets by the firm (Rich, Jones, Mowen, & Hansen, 2013). It helps in informing the management the efficiency of asset utilization by looking at how fast the firm converts the assets into sales. As such, efficiency ratios help in examining the relationship between the firm’s assets and sales or the cost of goods sold. There are three main efficiency ratios. These are total asset turnover, receivables or debtors turnover, and inventory or stock turnover. By calculating efficiency ratios, it will be possible to tell how well Google is managing various resources in the course of generating revenues.

Total asset turnover is an efficiency ratio that measures the company’s ability to generate sales with regard to the total investment made in the total assets (Rich, Jones, Mowen, & Hansen, 2013). The calculation of total asset turnover involves making comparisons of the total assets and the net sales of the company. The ratio shows the company’s efficiency in using its assets to generate sales. The formula for total asset turnover is as follows: total asset turnover = net sales/average total assets (Rich, Jones, Mowen, & Hansen, 2013). Total asset turnover = 90,272/167497 = 0.54. This means that for every 1 dollar the company invests as assets, the company obtains $0.54 as revenues. However, it is worth noting that the asset turnover ratio may differ according to the industry. For instance, asset turnover ratio tends to be higher in the retail industry.

The inventory or stock turnover ratio indicates how many times stock is replaced within a year. It helps in telling how quickly goods are sold (Rich, Jones, Mowen, & Hansen, 2013). A low inventory turnover indicates the company is having weak sales, hence excess inventory. On the other hand, a high ratio indicates that the company is having high sales. The formula for calculating inventory turnover is as follows: Inventory turnover = sales/average inventory. The average inventory is calculated as follows: average inventory = (opening inventory + closing inventory)/2. Google’s average inventory is (491 + 268)/2 = 379.5. Inventory turnover = 35,138/379.5 = 92.6. This indicates that Google moved inventory over 92 times a year. By dividing 365 by the inventory turnover, it is possible to see that the inventory is on hand approximately for 3.9 days.

Receivables or debtors turnover ratio highlights the firm’s effectiveness in advancing credit and collecting the accumulated credit as debt (Rich, Jones, Mowen, & Hansen, 2013). It helps in assessing the effectiveness of the firm in utilizing its assets. The receivables or debt turnover ratio is calculated as follows: Debt turnover ratio = net credit sales/average accounts receivable. Debt turnover ratio = 26,064/14,137 = 6.39. The average duration for the accounts receivable is (365/6.39) = 57 days. This means it takes an average 57 days to clear the accounts receivable. The company should reevaluate its credit policy and aim at reducing the average duration to 30 days.

Capital Structure of the Firm

The capital structure of a firm concerns how the firm finances operations and drive growth. A firm may use various sources of fund to finance operations or growth such as issuing of bonds, common stock, retained profits, and among others (Palepu, 2007). Firms may apply a combination of capital structures to finance operations and growth. For instance, the firm may apply short-term and long-term debt, preferred equity, common equity, and including others. The capital structure of the firm comprises of debt and equity. When the amount of debt is significantly high, the firm may present a risk to investors due to the higher possibility of the firm being unable to cater for the current portion of debts. The firm may prefer debt to equity because debt provides tax advantages to the firm (Palepu, 2007). In addition, debt allows the firm to retain total ownership. Financing through equity requires that the firm give up a share of the ownership as determined by the amount of equity. The major benefit of equity is that the firm does not have to pay interest when it makes losses.

The debt-to-equity ratio is key in evaluating the capital structure of the firm. This ratio compares the firm’s total liabilities against the shareholder equity (Palepu, 2007). In other words, the debt-to-equity ratio provides an analysis of the percentage of capital structure financed through debt and that financed though equity. Debt-to-equity ratio is calculated as follows: Debt-to-equity ratio = (Current debt + non-current debt)/shareholders’ equity. Debt-to-equity ratio = 28,461/139,036 = 0.20. The debt-to-equity ratio is below 1, meaning that the company mainly relies on equity to finance operations. Google may consider increasing the portion of debt since it is cheaper to finance operations using debt rather than equity.

Another important ratio is the debt-to-capital ratio. This ratio measures a firm’s application of financial leverage by making comparisons with the total capital and the obligations it is facing (Palepu, 2007). The debt-to-capital ratio shows how the firm applies debt in financing operations with regard to its total capital. Debt-to-equity ratio is calculated follows: Debt-to-capital ratio = total debt/(total debt + shareholder equity) = 28,461/(28,461 + 139,036) = 0.17 or 17 percent. As such, it would be safer to invest in this company since it has a lower debt-to-capital ratio. A company having a high debt-to-capital ratio may face problems with repaying the debt since this could be an indication that the debt exceeds total capital in the company.

Profitability of the Firm

Profitability ratios enable the management to analyze the firm’s earnings and expenses (Gibson, 2012). The firm’s profitability determines its ability to meet operational costs and reward the investors who include the owners and the shareholders. Profitability is one of the critical measures of business success. Profitability is the reward that business owners expect at the end of the financial year (Gibson, 2012). The management is constantly looking for ways to improve profitability. Various profitability ratios can assist managers in evaluating the returns made by the business. Profitability ratios can help in determining the attractiveness of the business to investors. The most popular profitability ratios include return on equity (ROE), gross profit margin, and return on assets.

ROE measures the total returns made by the firm as a percentage or fraction of the shareholder equity. In other words, ROE measures the total returns in terms of profits associated with every dollar committed by the shareholders in form of equity (Gibson, 2012). The formula for ROE is as follows: ROE = Net income/shareholder equity. ROE = 19,478/139036 = 0.14 or 14 percent. This indicates that each dollar of stockholder equity (common stockholders) generates $0.14 worth of net income. A return on equity of 14 percent indicates that the company does not generate high returns for the common stockholders. This is a cause for concern among the management.

Gross profit margin enables the management to evaluate the percentage of income available to cater for operating expenditures. Gross profit margin reveals the amount of money left after the company settles operating costs and expenditures (Gibson, 2012). The formula for calculating gross profit margin is as follows: Gross profit margin = gross profit/revenues x 100 = 55,134/90,272 x 100 = 61%. This figure indicates that 61 percent of the income is available for operations, debt repayment, expansion, payment to shareholders, and for other expenditures. Return on assets (ROA) is a measure of the firm’s profitability in relation to its assets. It measures the efficiency of the management in utilizing assets to yield profits (Gibson, 2012). The formula is as follows: ROA = net income/total assets = 19,478/167,497 = 11.63%. This indicates that the yield on the assets is 11.63 percent of their total value.

Conclusion

Google Inc. is one of the most profitable technology companies in the world. The company is primarily involved in managing online search requests, cloud computing, online advertising, building software and hardware, and other activities. The financial analysis indicates that Google has a strong financial health in various sectors. In particular, the company shows strength in its profitability, capital structure, liquidity levels, and performance. There is need to conduct valuation in order to determine what the firm is worth. Valuation can enable investors know the relative worth of making an investment in the firm. The trend analysis indicates that an increasing number of users are individuals are turning to online world for advertising. Google can take advantage of this to earn higher advertising revenues. Another trend is the use of multiple devices to access the internet and including Google company products. Lastly, Google is set to reap big from non-advertising activities in the future such as Google Play, Google Cloud, and hardware products.

 

References

Alphabet Inc. (2016). Alphabet Inc.: Form 10-K. United States Securities and Exchange   Commission. Retrieved from

Gibson, C. H. (2012). Financial reporting and analysis. Boston, MA: Cengage Learning.

https://abc.xyz/investor/pdf/20161231_alphabet_10K.pdf

Palepu, K. G. (2007). Business analysis and valuation: IFRS edition, text only. London:    Thomson Learning.

Rich, J., Jones, J., Mowen, M., & Hansen, D. (2013). Cornerstones of Financial Accounting.        Boston, MA: Cengage Learning.

 

Appendices

  1. Alphabet Inc. CONSOLIDATED STATEMENTS OF INCOME (In millions, except per share amounts
  2. Alphabet Inc. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In millions)

Retrieved from https://abc.xyz/investor/pdf/20160331_alphabet_10Q.pdf

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