Prepare the WACC for each of the two companies, business and finance homework help

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Prepare the WACC for each of the two companies you researched in Week 2.

Develop a 350-word analysis of the following:

  • Compare the two company findings.
  • Analyze the research and calculations to determine in which company you would invest.

 Week 2 submitted document is attached.


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EVALUATING FINANCIAL STATEMENTS Evaluating Financial Statements (Team A) Andrew Harms, Charita Hearn, Olivia Nieto, Adrian Torres, Donna Wetjen, and Christopher Woods FIN/419 10/3/2016 Philip Celestine 1 EVALUATING FINANCIAL STATEMENTS 2 Evaluating Financial Statements The assignment is choosing automotive industry where an analysis of Ford Company and Tesla Company are done for their years ending 2015 as shown below: Price to Earnings Ford Trailing P/E= 18.99 Tesla Trailing P/E= -23.75 Industry average= 7.38 The companies’ recent P/E ratios are obtained and it is evident that Ford is doing well since its ratio is above the industry average. Based on this ratio, it is best to advise others to invest in Ford Company since there is a return over the stock’s price in the market. Gross Margin Formula Gross margin= gross profits/ revenues Ford = 5,793,193/30,013,891 = 0.19302 = 19.3% Tesla EVALUATING FINANCIAL STATEMENTS 3 = 923,503,000/4,046,025,000 = 0.22825 = 22.825% Industry average= 21.77% When comparing the ratio to the industry average, Tesla Company is performing slightly above the industry average whereas Ford is approximately 2% below the market ratio. This means that as much as the companies have posted positive gross profit margins, only Tesla is able to perform above the required industry average. This ratio suggests that during the financial year 2015, it would have been advisable to invest in Tesla Company since it had above industry gross margin thus efficient in the sector. Profit Margin Formula Profit margin = net income / revenues Ford = -1,433,981/30,013,891 = -0.04778 = -4.778% Tesla = -888,663,000/4,046,025,000 = -0.21964 = -21.964% EVALUATING FINANCIAL STATEMENTS 4 Industry average= 3.79% Both companies have reported a negative income a reason why they have negative ratios. The industry average of this ratio is also low of 3.79% an indication that the general automobile sector was not doing well in that particular financial year. These ratios are not good news to the potential investor and current investor in the company. This is because there are no profits for distribution to the members from that year’s operations, it is understood that the industry also reported lower ratio but that is an indication that some companies in that Automobile sector made net profits that are positive for distribution to its members. Current Ratio Formula Current ratio = current assets/ current liabilities Ford = 12,658,729/5,329,909 = 2.375 Tesla = 2,791,568,000/2,816,274,000 = 0.99123 Industry average= 0.32 The current ratio tries to measure liquidity level of the business so that a company is able to fulfil its financial obligations when they fall due. A ratio of one or slightly below one is desirable. However, in that year the industry average went as low as 0.32. This means that the EVALUATING FINANCIAL STATEMENTS 5 companies were generally undergoing liquidity problems but the two companies seem to do well. However, the ratio for Ford is not desirable because it is far above 1 and this may pose opportunity cost problems to the company where the resources could have been otherwise used for other economic activities that would give the company more returns. Tesla company shows that it makes maximum use of its available current assets and thus economical unlike Ford which has excess liquidity. Depending on the type of investor. Such as risk averse, risk neutral and risk taker, one may either go with the one of excess liquidity (risk averse) and another go with low liquidity (risk averse). However, for the risk neutral he or she may go for any company’s stock in the market since they are indifferent to risk posed by liquidity problems. However, based on the ratios, advise an investor to take shares in Tesla Company. Debt to Equity Formula Debt to equity = long term debt/ total shareholders’ equity Ford = 0/7,333,313 =0 Tesla = 2,040,375,000/1,088,944,000 = 1.87372 Industry average= 0.34 EVALUATING FINANCIAL STATEMENTS 6 Ford Company has a ratio of zero meaning that it is not taking advantage of debt to leverage itself. On the other hand, unlike Ford which is equity based, Tesla is not as it make use of both debt and equity to finance its activities. However, the company is leveraged too much thus posing itself to dangers of losing control and in the event of bankruptcy or possible liquidation then it remains with nothing for the stockholders. This trend is bad for the company since the industry average is 0.34, far much from Tesla’s 1.87372. Based on this ratio, I would invest in Tesla Company because it has taken advantage of leverage by making use of debt in its capital structure. This is good as it has diversified its sources of capital and also takes advantage of tax shield on its profits since interest expense is tax allowable unlike dividends that the company is taxed first then distribute it to its members to be taxed again thus being double taxed. Return on Assets Formula Return on assets = net income/ total assets Ford = -1,433,981/12,778,424 = -0.11222 = -11.222% Tesla = -888,663,000/8,092,460,000 = -0.109814 = -10.9814% EVALUATING FINANCIAL STATEMENTS 7 Industry average= 3.57% Both companies are not doing well. The ratios are negative implying that they both made losses in that financial year. However, the average return on asset in the industry was a record positive of 3.57% meaning that as much as Tesla and Ford were making losses, other companies in the same Automobile sector were making profits. The ratios are an indication that both companies are doing badly in the market place. This is despite an industry average of positive 3.57%, meaning that other companies are able to have positive returns on the assets. This makes me not choose any company during that year since they would have resulted into the loss of my stocks’ value yet other companies in the same industry are posting positive returns. Return on Equity Formula Return on equity = net income/ total shareholders’ equity Ford = -1,433,981/7,333,313 = -0.19554 = -19.554% Tesla = -888,663,000/1,088,944,000 = -0.81608 = -81.608% Industry average= 10.17% Both companies performed poorly and posted a negative net income. This has made their returns on equity to be negative as well. Tesla is performing badly compared to Ford since it is eating too much of its equity. For every 100 dollar invested in Tesla, about 81 dollars are lost due to losses made. On the other hand, for every 100 dollars invested in Ford Company, about 20 EVALUATING FINANCIAL STATEMENTS 8 dollars is lost. This is despite the industry average where investment of 100 dollars in form of equity gives a return of about 10 dollars. The companies need to streamline its operations so that it makes returns to its equity holder. I cannot buy any stocks in the two companies if I were to base it on return on equity. Decision to buy or sale the shares of the two companies Generally, the two companies are not performing well especially from the last year’s 2015 financials. Both companies posted losses in the year meaning that dividends were unlikely paid in that year. However, looking at the prospects of the company and their 2016 performances, Tesla is a perfect choice of the two companies to consider especially if someone does not intend to buy and sell them any time soon. EVALUATING FINANCIAL STATEMENTS References Automobile company. (2016, September 30). Retrieved from Tesla Website: https://www.tesla.com/ Ford company. (2016, September 30). Retrieved from Ford Web Site: http://www.ford.com/ Yahoo Company. (2016, September 30). Retrieved from Finance Web Site: https://finance.yahoo.com 9
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Explanation & Answer

Attached.

Running Head: BUSINESS FINANCE

1

Business Finance
Name
Course
Tutor
Date

BUSINESS FINANCE

2

Weighted Average Cost of Capital
Weighted average cost of capital is obtained by taking the formula below
WACC= E/(E+D)*Cost of equity+ D/(E/D)*Cost of debt*(1-tax rate)
Where,
E = equity
D= debt
1. TELSA COMPANY
From the values obtained in week 2, debt stood at $2,040,375,000.
The company’s equity stood at $1,088,944,000
Step 1. Calculate the weighted average for equity and debt.
a) Weight of equity = E / (E + D = $1,088,944,000 / ($1,088,944,000 + $2,040,375,000) =
0.3480
b) Weight of debt = D / (E + D) = $2,040,375,000 / ($2,040,375,...


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I was struggling with this subject, and this helped me a ton!

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