Running Head: Financial Management
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Julius Drayton
Financial Management: Homework set #1
Strayer University
April 14, 2018
Financial Management
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QUESTION ONE
The two stocks that I identify in the united states stock exchanges are the New York Stock
Exchange and the National Association for Stock dealers Automated (NASDAQ). These are
some of the largest stock exchanges in the United States and they deal with a large volume of
stock exchanges on daily basis. New York Stock exchange was established in 1792 while
National Association for Stock dealers Automated was established 1971. The New York Stock
Exchange has been in the stock market for a longer period than National Association for Stock
dealers automated. The similarity is that they both trade stocks on behalf of a client or a
company. The distinguishing difference between these two stock exchanges is that New York
has its operation in broker buying and selling for its clients and companies basically in the
exchange floor, while the National Association for Stock dealers Automated has its operations
over the internet or through use of telephone. The stock traded by New York Stock Exchange is
the Bank of America. On the other hand, the stock traded by National Association for Stock
dealers Automated is Ford motors.
QUESTION TWO
Free cash flow is determined as follows;
FCF = operating cashflow – capital expenditures
The free cash flow for 2013 = 92,817 million
The free cash flow for 2014 = 30,795 million.
Inference drawn from Bank of America FCF for 2013 and 2014
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It is clear that the free cash flow for 2013 was much higher than that of 2014. This is because the
company had a negative amount relating to other operating expenses of 6,279,000 which was not
separately revealed. The additional cash flow from operations were positive and thus resulted in
the company have options of using the free cash flow in 2014. Another reason is that the
company had negative amount in loans of 830,000 while in 2013 the loan amount was positive
(12,019,000). Despite the fact that Bank of America had negative figures from its operations, the
company operates efficiently, and they have a good base in terms of profits attributable to
shareholders. The reason why the company might be carrying debt is to increase return on
investments. Additionally, the company can decide to issue more dividends, take more
acquisitions and also repurchase shares.
Ford motors FCF for 2013 and 2014
According to data retrieved from Marketwatch.com, the FCF for 2013 = 25.59B-12.9B =
12.69B. The FCF for 2014 = 24.68B – 14.54B = 10.14B.
Inference drawn
The cash flows for both years for the company were positive as well as their deferred taxes
figures. The deferred taxes benefits the company in the sense that it can be used to pay the
current return investments in the future, thus allowing the company’s assets grow without present
tax consequences. In 2013 and 2014 the company experienced a change in the receivables as
well as the working capital. The change in working capital changed from 1.06B in 2013 to 2.82B
in 2014 meaning that the company will continue with its business operations.
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QUESTION THREE
Bank of America
Liquidity ratios
current assets
Current ratio = current liabilities
Quick ratio =
current assets−inventories
current liabilities
2013
657,700,000
Current ratio = 602,010,000 = 1.1
Quick ratio =
657,700,000−630,000
602,010,000
= 1.09
2014
652,305,000
Current ratio = 636,084,000 = 1.03
Quick ratio =
652,305,000−444,000
636,084,000
= 1.02
The current ratio tells us how a company is able to pay its short term obligations. Any ratio that
is below 1 shows that the company is unable to pay its short term obligations. Bank of America
current ratio decreased from 2013 to 2014.
On the other hand the quick ratio tells us how much of liquid assets the company has for each
dollar worth of current liability. For both years the company has enough to cover for its current
liabilities because the ratio is above 1. But the ratio has decrease in 2014.
Management ratios
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total debt
Debt ratio = total assets
total debt
Debt to equity ratio = total common equity
2013
243,139,000
Debt ratio = 2,104,539,000 = 15.6%
243,139,000
Debt to equity ratio = 153,458,000 = 1.58
2014
236,764,000
Debt ratio = 2,144,287,000 = 11%
236,764,000
Debt to equity ratio = 151,042,000 = 1.57
The debt ratio tells us how much the company is dependent in terms of money borrowed. Lower
percentage show the company is independent.
On the other hand the debt to equity ratio for Bank of America is average meaning that the
company has been financing their growth with debt and equity evenly distributed.
Profitability ratio
Profit margin ratio =
net profit
net sales
× 100
net income
ROA = average assets
2013
5,520,000
Profit margin ratio = 83,619,000 × 100 = 6.6%
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5,520,000
ROA = 2,104,539,000 = 0.3%
2014
15,910,000
Profit margin ratio = 79,804,000 × 100 = 19.94%
15,910,000
ROA = 2,144,287,000 = 0.74%
The profit margin ratio tells us how much the company earns for every dollar with of sale. The
profit margin has increased from 2013 through 2014. While the return on assets tell us how much
the company gets for every dollar worth of asset investment. The return on assets has also
increased from 2013 through 2014.
Ford Motors
Liquidity ratios
current assets
Current ratio = current liabilities
Quick ratio =
current assets−inventories
current liabilities
2013
42,457,000
Current ratio = 37,003,000 = 1.147
Quick ratio =
42,457,000−7,708,000
37,003,000
= 0.9390
2014
40,442,000
Current ratio = 40,108,000 = 1.0083
Financial Management
Quick ratio =
7
40,442,000−7,866,000
40,108,000
= 0.8122
The current ratio tells us how a company is able to pay its short term obligations. Any ratio that
is below 1 shows that the company is unable to pay its short term obligations. Ford current ratio
decreased from 2013 to 2014.
On the other hand the quick ratio tells us how much of liquid assets the company has for each
dollar worth of current liability. For both years the company does not have enough to cover for
its current liabilities.
Management ratios
total debt
Debt ratio = total assets
total debt
Debt to equity ratio = total common equity
2013
177,429,000
Debt ratio = 203,905,000 = 87%
Debt to equity ratio =
177,429 ,000
26,122,000
= 6.7949
2014
185,269,000
Debt ratio = 210,443,000 = 88%
Debt to equity ratio =
185,269,000
24,805,000
= 7.469
The debt ratio tells us how much the company is dependent in terms of money borrowed. Lower
percentage show the company is independent.
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On the other hand the debt to equity ratio for Ford is higher meaning that the company has been
aggressive in financing their growth with debt.
Profitability Ratio
Profit margin ratio =
net profit
net sales
× 100
net income
ROA = average assets
2013
7,373,000
Profit margin ratio = 149,558,000 × 100 = 4.9%
7,373,000
ROA = 203,905,000 = 3.6%
2014
4,596,000
Profit margin ratio = 151,800,000 × 100 = 3%
4,596,000
ROA = 210,443,000 = 2.18%
The profit margin ratio tells us how much the company earns for every dollar with of sale. The
profit margin has decreased from 2013 through 2014. While the return on assets tell us how
much the company gets for every dollar worth of asset investment. The return on assets has also
decreased from 2013 through 2014.
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References
Opler, T., & Titman, S. (2013). The determinants of leveraged buyout activity: Free cash flow
vs. financial distress costs. The Journal of Finance, 48(5), 1985-1999.
Altman, E. I. (2008). Financial ratios, discriminant analysis and the prediction of corporate
bankruptcy. The journal of finance, 23(4), 589-609.
Data source for Bank of America: https://ca.finance.yahoo.com/quote/BAC/financials?p=BAC
Data source for Ford motors: https://ca.finance.yahoo.com/quote/F/financials?p=F
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