Assignment 3

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Ureoreg17

Business Finance

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Directions: Answer the following questions on a separate document. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using the assignment link above.

A. Using the two stocks you selected from Homework #1, identify the Beta for each stock. In your own words, what conclusion can you draw from the stocks’ current and historical beta? If the stock market went up 10% today, what would be the impact on each of your stocks?

B. Using the 2014 financial statements from your stocks above and the equations from your textbook, prepare the Historical Average and Standard Deviation for each stock.

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Running Head: Financial Management 1 Julius Drayton Financial Management: Homework set #1 Strayer University April 14, 2018 Financial Management 2 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 Financial Management 3 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. Financial Management 4 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 Financial Management 5 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% Financial Management 6 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. Financial Management 8 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. Financial Management 9 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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Explanation & Answer

Attached.

When computing the beta of a stock there are three factors that must be taken into account; the risk
free rate, the market rate, and the stock’s rate of return. The American bank under New York stock
exchange has an identified beta of 1.62, with market rate of 7%, a risk free rate of 2% and the stock’s
rate of return is 10.1%.
R = RF + 𝛽 (MR – RF)
10.1 = 2 + 𝛽 (7 – 2)
8.1 = 5𝛽
𝛽 = 1.62
For the ford motors under National Association for Stock dealers Automated has an identified beta
of 0.83, with market rate of 8%, a risk free rate of 2% and the stock’s rate of return is 7%.
R = RF + 𝛽 (MR – RF)
7 = 2 + 𝛽 (8 – 2)
5 = 6𝛽
𝛽 = 8.33
Based on the historical and current rate of return and market rates discussed previously, the beta of the
two stocks has been increasing. Looking at the New York stock exchange market, the beta is more than 1
meaning that the stock price is more volatile than the market rate or the market valu...


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