Milestone Three: Portfolio Performance Analysis

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Economics

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Instructions

For this milestone, you will first complete your portfolio by comparing the risk/return trade-off on the investments you are compiling. Then, as part of the beginning of your executive summary, you will describe how your investments performed on both an absolute and a relative basis. You will also assess investment performance for the securities by calculating the portfolio's overall investment performance and briefly note how each security contributed to the portfolio's performance.

This milestone should be submitted as a Word document, 2–3 pages in length.

To complete this assignment, review the rubric document.

Specifically, the following critical elements must be addressed:

II. Portfolio: With your company and market analysis in mind, construct a complete portfolio that includes the following:

D. Compare the risk/return trade-off on the investments. Keep in mind the rates of return for shareholders on the proposed investment portfolio.

III. Executive Summary: Justify your investment strategies in a summary, utilizing your company and market analysis and portfolio for support. Include the following in your justification:

A. Describe how making these investments will position the company to generate an attractive absolute and relative investment performance. Support with examples.

C. Assess investment performance utilizing specific performance measurements.

Critical Elements

Proficient (100%)

Portfolio: Risks/Return

Compares the risk/return trade-off on the investments

Executive Summary: Position

Describes how making these investments will position the company within its industry in the market, supported with examples

Executive Summary: Investment Performance

Assesses investment performance utilizing specific performance measurements

Articulation of Response

Submission has no major errors related to citations, grammar, spelling, syntax, or organization

I also posted the milestone one 3-1 & two 5-1 final as your reference and the data 5-1. Please check them.

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Milestone Three Guidelines and Rubric Overview: For your final project, the CEO has asked you, the new investment manager of XYZ Tech Company, to produce an investment analysis report. You will prepare an investment analysis report for the company, portfolio analysis template, a complete portfolio, and a justification of your investment strategies in an executive summary. For this last milestone, due in Module Seven, you will first complete your portfolio by comparing the risk/return trade-off on the investments you are compiling. Then, as part of the beginning of your executive summary, you will describe how your investments performed on both an absolute and relative (index or benchmark) basis. You will also assess investment performance for the securities by calculating the portfolio’s overall investment performance and briefly note how each security contributed to the portfolio’s performance. Prompt: First, review your completed portfolio analysis template to access the financial data you gathered for the securities in your investment portfolio. Forecast each company’s future revenues and earnings growth and analyze the risk and return tradeoff for these investments. In a 2- to 3-page paper, complete your portfolio by comparing the risk/return trade-off of the investments and then, in beginning your executive summary, describe how making these investments will position the company to generate an attractive absolute and relative investment performance and assess investment performance utilizing specific performance measurements. Specifically, the following critical elements must be addressed: II. Portfolio: With your company and market analysis in mind, construct a complete portfolio that includes the following: D. Compare the risk/return trade-off on the investments. Keep in mind the rates of return for shareholders on the proposed investment portfolio. III. Executive Summary: Justify your investment strategies in a summary, utilizing your company and market analysis and portfolio for support. Include the following in your justification: A. Describe how making these investments will position the company to generate an attractive absolute and relative investment performance. Support with examples. C. Assess investment performance utilizing specific performance measurements. Support your responses with the data from the portfolio analysis template and other information you have gathered from the financial resources you have consulted in this course. Be sure to apply instructor feedback on this milestone to your final project. Rubric Guidelines for Submission: The written component of this milestone should be submitted as a Word document, 2–3 pages in length (this includes the start of your executive summary), double-spaced, using 12-point Times New Roman font, one-inch margins, and the latest edition of the APA manual for formatting and citations. Please note that the grading rubric for this milestone submission is not identical to that of the final project. The Final Project Rubric will include an additional “Exemplary” category that provides guidance as to how you can go above and beyond “Proficient” in your final submission. Critical Elements Portfolio: Risks/Return Proficient (100%) Compares the risk/return trade-off on the investments Executive Summary: Position Describes how making these investments will position the company within its industry in the market, supported with examples Executive Summary: Investment Performance Assesses investment performance utilizing specific performance measurements Articulation of Response Submission has no major errors related to citations, grammar, spelling, syntax, or organization Needs Improvement (75%) Compares the risk/return trade-off on the investments, but comparison is incomplete or contains inaccuracies Describes how making these investments will position the company within its industry in the market, but description is cursory, is insufficiently supported, or contains inaccuracies Assesses investment performance utilizing specific performance measurements, but measurements used are inappropriate, or assessment is incomplete or contains inaccuracies Submission has major errors related to citations, grammar, spelling, syntax, or organization that negatively impact readability and articulation of main ideas Not Evident (0%) Does not compare the risk/return trade-off on the investments Value 30 Does not describe how making these investments will position the company within its industry in the market 30 Does not utilize performance measurements to assess investment performance 30 Submission has critical errors related to citations, grammar, spelling, syntax, or organization that prevent understanding of ideas 10 Total 100% Apple (AAPL) Stock 2016 2017 2018 Revenues Cost of Goods Sold Selling, General & Administrative Expenses Research and development Operating Income Net Interest Expenditure Pre-Tax Income Taxes Net Income 2E+11 1E+11 1E+10 1E+10 6E+10 1E+09 6E+10 2E+10 4E+10 2E+11 2E+11 4E+10 1E+10 3E+10 1E+09 3E+10 8E+09 2E+10 2E+11 2E+11 4E+10 1E+10 3E+10 1E+09 3E+10 9E+09 2E+10 Earnings Per Share 7.8385 Shares Outstanding 5E+09 2019 2020 2021 2.4E+11 1.7E+11 4.1E+10 1E+10 3.2E+10 1.5E+09 3E+10 9E+09 2.1E+10 3E+11 2E+11 4E+10 1E+10 3E+10 1E+09 3E+10 1E+10 2E+10 3E+11 2E+11 4E+10 1E+10 4E+10 1E+09 3E+10 1E+10 2E+10 3.5441 3.6933 3.84845 4.1712 4.3455 5E+09 5E+09 5.5E+09 5E+09 5E+09 Apple (AAPL) Bond Firm Debt & Coverage Ratios Debt/Assets Debt/Equity Current Assets/Current Liability EBITDA/Interest Debt/EBITDA Cash Flow Ops/Total Debt Intrinsic value in 2021 Dividend (2013) Dividend (2018) Rate of return (discounted cash flow model) 0.27 0.59 1.35 0.34 1.23 0.76 Ind Avg 0.46 0.40 4.05 -0.67 2.26 0.35 Base Average Ceiling $ 24.14 $ 28.97 $ 36.21 1.88 2.52 -1.5118 Caterpillar (CAT) Stock 2016 2017 2018 2019 2020 2021 Revenues Cost of Goods Sold Selling, General & Administrative Expenses Research and development Operating Income Net Interest Expenditure Pre-Tax Income Taxes Net Income 4E+10 3E+10 5E+09 2E+09 3E+09 5E+08 2E+09 192000 2E+09 4E+10 3E+10 7E+09 2E+09 5E+09 5E+08 5E+09 1E+09 3E+09 4E+10 3E+10 7E+09 2E+09 5E+09 5E+08 5E+09 1E+09 3E+09 4E+10 3E+10 7E+09 2E+09 6E+09 5E+08 5E+09 2E+09 4E+09 5E+10 3E+10 7E+09 2E+09 6E+09 5E+08 6E+09 2E+09 4E+09 5E+10 3E+10 8E+09 2E+09 6E+09 5E+08 6E+09 2E+09 4E+09 Earnings Per Share 4.2612 5.6369 5.8866 6.1462 6.6863 6.978 Shares Outstanding 6E+08 6E+08 6E+08 6E+08 6E+08 6E+08 Caterpillar (CAT) Bond Firm Debt & Coverage Ratios Debt/Assets Debt/Equity Current Assets/Current Liability EBITDA/Interest Debt/EBITDA Cash Flow Ops/Total Debt Intrinsic value in 2021 0.49 1.74 1.22 8.17 8.90 0.15 Ind Avg 0.55 0.90 1.97 5.25 8.37 7.58 Base Average Ceiling $ 38.77 $ 46.52 $ 58.15 Consolidated Edison (ED) Stock 2016 2017 2018 2019 2020 2021 Revenues Cost of Goods Sold Selling, General & Administrative Expenses Research and development Operating Income Net Interest Expenditure Pre-Tax Income Taxes Net Income 1E+10 8E+09 2E+09 0 2E+09 7E+08 9E+08 7E+08 2E+08 1E+10 9E+09 2E+09 0 2E+09 7E+08 9E+08 3E+08 7E+08 1E+10 9E+09 2E+09 0 2E+09 7E+08 1E+09 3E+08 7E+08 1E+10 1E+10 2E+09 0 2E+09 7E+08 1E+09 3E+08 7E+08 1E+10 1E+10 2E+09 0 2E+09 7E+08 1E+09 4E+08 8E+08 1E+10 1E+10 2E+09 0 2E+09 7E+08 1E+09 4E+08 9E+08 Earnings Per Share 0.5651 2.1684 2.3205 2.4788 2.808 2.9857 Shares Outstanding 3E+08 3E+08 3E+08 3E+08 3E+08 3E+08 Consolidated Edison (ED) Bond Firm Debt & Coverage Ratios Debt/Assets Debt/Equity Current Assets/Current Liability EBITDA/Interest Debt/EBITDA Cash Flow Ops/Total Debt Intrinsic value in 2021 0.33 1.03 0.89 5.25 4.29 0.22 Ind Avg 0.35 1.55 1.25 6.03 4.10 0.21 Base Average Ceiling $ 16.59 $ 19.90 $ 24.88 Northern Trust (NTRS) Stock 2016 2017 2018 2019 2020 2021 Revenues Cost of Goods Sold Selling, General & Administrative Expenses Research and development Operating Income Net Interest Expenditure Pre-Tax Income Taxes Net Income 5E+09 2E+09 2E+09 0 3E+08 3E+08 2E+09 4E+08 1E+09 5E+09 3E+09 8E+08 0 6E+08 3E+08 3E+08 9E+07 2E+08 5E+09 4E+09 9E+08 0 7E+08 3E+08 3E+08 1E+08 2E+08 5E+09 4E+09 9E+08 0 7E+08 3E+08 3E+08 1E+08 2E+08 6E+09 4E+09 9E+08 0 7E+08 3E+08 4E+08 1E+08 3E+08 6E+09 4E+09 9E+08 0 8E+08 3E+08 4E+08 1E+08 3E+08 Earnings Per Share 5.2528 0.9083 0.9863 1.0675 1.2364 1.3276 Shares Outstanding 2E+08 2E+08 2E+08 2E+08 2E+08 2E+08 Northern Trust (NTRS) Bond Firm Debt & Coverage Ratios Debt/Assets Debt/Equity Current Assets/Current Liability EBITDA/Interest Debt/EBITDA Cash Flow Ops/Total Debt Intrinsic value in 2021 0.0669 0.99 0 1.3863 21.995 0.1855 Ind Avg 0.083 0.97 9.23 0.2587 51.338 0.1395 Base Average Ceiling $ 7.38 $ 8.85 $ 11.06 Macy's (M) Stock 2016 2017 2018 Revenues Cost of Goods Sold Selling, General & Administrative Expenses Research and development Operating Income Net Interest Expenditure Pre-Tax Income Taxes Net Income 3E+10 2E+10 8E+09 0 2E+09 4E+08 2E+09 6E+08 1E+09 3E+10 2E+10 5E+09 0 4E+09 0 4E+09 1E+09 3E+09 3E+10 2E+10 5E+09 0 4E+09 0 4E+09 1E+09 3E+09 Earnings Per Share 3.2582 Shares Outstanding 3E+08 2019 2020 2021 3E+10 2.1E+10 5.2E+09 0 4E+09 0 4E+09 1.2E+09 2.8E+09 3E+10 2E+10 5E+09 0 4E+09 0 4E+09 1E+09 3E+09 3E+10 2E+10 5E+09 0 4E+09 0 4E+09 1E+09 3E+09 7.8038 8.1159 8.44055 9.1158 9.4804 3E+08 3E+08 3.3E+08 3E+08 3E+08 Northern Trust (NTRS) Bond Firm Debt & Coverage Ratios Debt/Assets Debt/Equity Current Assets/Current Liability EBITDA/Interest Debt/EBITDA Cash Flow Ops/Total Debt Intrinsic value in 2021 0.37 1.65 1.34 8.96 2.24 0.26 Ind Avg 0.29 0.92 1.19 9.64 1.90 0.13 Base Average Ceiling $ 52.67 $ 63.20 $ 79.00 Running head: 1 [Title Here, up to 12 Words, on One to Two Lines] 2 [Title Here, up to 12 Words, on One to Two Lines] Company and market analysis: Industry trends The selected companies to potentially form part of the investment portfolio are Apple, Caterpillar, Consolidated Edison, Northern Trust and Macy’s. These companies are among the strongest in their respective industries. In this regard, Apple, Caterpillar, Consolidated Edison, Northern Trust and Macy’s are among the most relevant companies in the telecommunications industry, automobile and truck industry, energy and utility industry, the investment and securities industry, and the retail industry, respectively. These industries have shown a relatively strong performance in the past years. For example, the automobile and truck industry has kept steady growth in the past decade, in significant part due to the result of the expansion of multiple companies into the Chinese market (Plunkett et al., 2018a). They also present very promising expectations. For instance, financial experts have estimated that the revenue of the telecommunications industry will increase by $6.5 trillion by the end of 2018 as the industry keeps attracting more and more customers (Plunket et al., 2018b). As one of the most important companies, the expected industry growth will enable the selected companies to increase their volume of sales, and hence the profitability, on the short run, thus being a promising approach towards the obtention of a high return on the portfolio. Such a positive trend is especially important considering how the analysis carried out comparing the companies with their respective industry averages indicates the strength and better performance of these companies. Among the five selected industries, and taking the collected information into account, the best performant sector would be the telecommunication industry. The fact that the world is 3 currently experiencing a boom in the establishment of new wireless connections and the sales of the devices necessary to establish such relationships represent the ideal scenario for the financial growth of any company operating in the industry. In this regard, customers expect that the volume of sales will continue to increase at an exponential rate shortly, as long as such boom trend remains (Plunkett et al., 2018b). On the other hand, the automobile and truck industry shows a comparative advantage over the remaining three sectors. In this case, the expansion of several companies into the Chinese market and the constant development of more effective machinery products to use in agriculture and construction represent a favorable scenario for companies like Caterpillar. Portfolio: Assets As stated previously, all five markets are expected to show positive results in the near future. Moreover, most financial experts recommend portfolio diversification as one of the best approaches to minimize the risk. From this standpoint, it is recommendable to maintain all five companies as integrant parts in the portfolio. However, considering the identified absolute and comparative advantages, and noting the expected outstanding financial performance of companies like Apple, it is advisable that the portfolio weighs such assets to reflect the observed trends. In this regard, a possible weight allocation would assign a weight of 40% to Apple assets, a 30% to Caterpillar assets, and a 10% to Consolidated Edison, Northern Trust and Macy’s assets, respectively. The weighted portfolio will enable the investor to obtain a high return at a reduced risk on the long run. 4 Portfolio: Securities Companies like Apple have shown a steady positive trend in their volume of sales in the past years. Moreover, as outlined the market previously shows a highly optimistic scenario in which the company would potentially benefit from the existing wireless boom. The fact that nearly everybody wants to own a device to be able to connect to the rest of the world through the Internet implies that the company's sales will continue to increase in the future. Moreover, the high quality of Apple products and the stable customer relationship established by the company ensures that the new customers acquired as a result of such wireless boom will remain using the company's products. As such, it is possible to expect that such an increase in sales will be sustainable in the long run. As shown in table A.1, the company shows a generally better performance than the industry average. For example, Apple seems to be highly efficient at using its assets as indicated by the fact that the debt to assets ratio is substantially lower than the industry average. The calculated intrinsic value of Apple stocks taking these data into account and the observed trend in the historical financial results of the company ranges between $24.14 and $36.21, being the average intrinsic value estimated of $28.97. Portfolio: Rates of return The annual rate of return of Apple stocks in the past year has been of 27.53%, which is substantially higher than the rate of return of the reference market (SP500, 5.76%), once more illustrating the outstanding financial performance of the company (Yahoo Finance, 2018). Moreover, the company shows a 3-year monthly beta coefficient of 1.27, indicating slightly higher volatility in the stock price as compared to the variability of the reference market index 5 (Yahoo Finance, 2018). Additionally, as illustrated from the graph shown in figure A.1, the company’s stock price has increased substantially in the past five years. The calculated annual rate of return as per the discounted cash flow model, on the other hand, would be of -1.51%, calculated considering that the dividend growth rate is lower than the revenue growth rate. 6 References Plunkett, Jack W., Plunkett, M. B., & Snider, I. J. (2018a). Automobile Industry Introduction. Automobiles & Trucks Industry. Retrieved November 3, 2018, from http://www.plunkettresearchonline.com. Plunkett, Jack W., Plunkett, M. B., & Snider, I. J. (2018b). Introduction to the Telecommunications Industry. Telecommunications Industry. Retrieved November 3, 2018, from http://www.plunkettresearchonline.com. Yahoo finance. (2018). Apple Inc. Retrieved November 3, 2018, from https://finance.yahoo.com/quote/AAPL/key-statistics?p=AAPL 7 Table A.1. Comparison of the performance of Apple stocks with the industry average Firm Ind Avg Debt & Coverage Ratios Debt/Assets 0.27 0.46 Debt/Equity 0.59 0.40 Current Assets/Current Liability 1.35 4.05 EBITDA/Interest 0.34 -0.67 Debt/EBITDA 1.23 2.26 Cash Flow Ops/Total Debt 0.76 0.35 Figure A.1. Apple stock price in the past five years Running head: MILESTONE ONE: COMPANY PROFILE Milestone One: Company Profile 1 MILESTONE ONE: COMPANY PROFILE 2 Milestone One: Company Profile Financial markets Five-year performance of the domestic economy relative to the financial markets The economic theory suggests a strong relationship between the performance of the financial market and the country’s economy. In this regard, the announcement of a large purchase or sale of government bonds has a strong influence on both the country’s gross domestic product and consumer price index, as per the results obtained by Weale and Wiedalek (2016). Moreover, a prosperous economy increases the sales of companies, which will thus be more appealing to potential investors. From this point of view, it is possible to expect that the financial markets will mirror the major economic events taking place. As such, it is possible to use the analysis of the financial statements of some of the country's most important companies to obtain information about the country's economy. The US economy will likely continue to increase at a rate ranging between 1 and 5% in the next five years (Weale & Wiedalek, 2016). This growth rate is in good agreement with the forecasted 4% growth of the company’s revenues. Specific market performance data based on the asset valuation model inputs The application of the different asset valuation models to the forecasted financial performance of the selected companies indicates that the various markets will show a mixed performance in the short run. In this sense, it is noteworthy how the forecasted earnings per share of companies like Apple or Northern Trust will tend to decrease as per the analysis carried out. In contrast, the earnings per share of companies like Caterpillar, Consolidated Edison or Macy's will likely increase shortly. Considering how these companies are among the leaders in their MILESTONE ONE: COMPANY PROFILE 3 respective industries, it is possible to predict that the market will show a similar trend to the forecasted one. Impact of the five-year and current macroeconomic data on asset prices Such a relationship arises from the link existing between the sales of a company, the overall financial results, and the resulting appeal on investors, which will tend to buy or sell the company's stocks. In this regard, this strong relationship existing between the domestic economy and the country's financial market can potentially justify the use of the financial market trend as a predictor of the future performance of the domestic economy. Such a claim focuses on the fact that the most relevant financial crises in the past had been preceded by a rapid decrease in the financial markets (Duca, 2007). As a result, the domestic economy relative to the financial markets may be estimated to remain relatively stable. In this sense, the forecasted earnings per share of the different companies show both an increasing and a decreasing trend, indicating that even while there will be variations in the relative importance of the various industries, the economy as a whole will experience small variations shortly. Company valuation Analysis of the company’s financial items and key ratios According to the study carried out, the target companies show a generally better financial performance than their respective industry averages. In this sense, the attached Excel file illustrates how the companies usually have higher efficiency in handling their debt through either generating higher cash flow or a more effective cost control strategy than the industry average. For example, companies like Apple have a substantially lower debt to EBITDA ratio and higher MILESTONE ONE: COMPANY PROFILE 4 operating cash flow to debt ratio than the industry average, such that the company is more capable of repaying its debt if compared to other companies operating in the same industry. The intrinsic value of assets One common approach used to estimate the intrinsic value of stocks takes into account the earnings per share of the stock. In this regard, Amiri et al. (2016) propose the use of the ratio between the forecasted earnings per share and a coefficient k as a useful tool to estimate the intrinsic fair value of any stock. For this purpose, Amiri et al. (2015) suggest the use of 0.18, 0.15, and 0.12 as reasonable estimates for the rate for the estimation of the base, average, and ceiling prices of the companies, respectively. Applying such rule, the intrinsic value of the selected assets in 2021 would be: Base price (k = 0.18) Average price (k = 0.15) Ceiling price (k = 0.12) Apple $24.14 $28.97 $36.21 Caterpillar $38.77 $46.52 $58.15 Consolidated Edison $16.59 $19.90 $24.88 Northern Trust $ 7.38 $ 8.85 $11.06 Macy’s $52.67 $63.20 $79.00 Stakeholders Key stakeholders The key stakeholders of the company’s financial portfolio are the managers and employees, as they will benefit from the possibility of gaining access to the profits derived from such investment portfolio. MILESTONE ONE: COMPANY PROFILE 5 Common stakeholders The common stakeholders, on the other hand, will be the investors that have purchased the company’s stocks. In this sense, the higher profitability on the long run will indirectly benefit the company’s stakeholders. MILESTONE ONE: COMPANY PROFILE References Duca, G. (2007). The relationship between the stock market and the economy: experience from international financial markets. Bank of Valletta Review, 36(3), 1-12. Amiri, A., Ravanpaknodezh, H., & Jelodari, A. (2016). Comparison of stock valuation models with their intrinsic value in the Tehran Stock Exchange. Marketing and Branding Research, 3(1), 24-40. Apple. (2018). Annual Report. Retrieved October 10, 2018, from https://investor.apple.com/investor-relations/financial-information/default.aspx Caterpillar. (2018). Annual Report. Retrieved October 10, 2018, from https://www.caterpillar.com/en/investors/reports.html Consolidated Edison. (2018). Annual Report. Retrieved October 10, 2018, from http://phx.corporate-ir.net/phoenix.zhtml?c=61493&p=irol-reportsannual Macy’s. (2018). Annual Report. Retrieved October 10, 2018, from http://www.macysinc.com/ir/ Northern Trust. (2018). Annual Report. Retrieved October 10, 2018, from https://www.northerntrust.com/about-us/investor-relations/annual-report 6
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