Verizon Financial Statements Calculations

Your final assignment consists of 20 open ended questions. Verizon (VZ) is the company you will use and you will need to use their 2020 financial statements to answer many of the questions. Most questions are worth 4 or 5 points. Question #19 is worth 10 points, for a total of 100 points. You must show ALL work and formulas that you use.

For questions 1-6, you will use the following information:

· risk free rate: 1.75%

· expected rate of return for the market: 9.5%

· Beta of VZ: 0.85

· VZ total debt, interest and shares issued can be found in VZ financial statements

· assume market value of all debt is 100% of face(par) value.

· tax rate is 20%

· VZ stock price: $55

· initial investment: 4,500,000

· year 1 cash flow:  1,100,000

· year 2 cash flow: 1,200,000

· year 3 cash flow: 1,350,000

· year 4 cash flow: 1,550,000

· year 5 cash flow: 1,750,000

BASED ON THIS INFORMATION CALCULATE THE FOLLOWING (5 points each)

1. cost of equity

2. after tax cost of debt

3. weighted average cost of capital (WACC)

4. net present value of the investment (NPV)

5. internal rate of return of the investment (IRR)

6. payback period of the investment

For questions 7-13, use the appropriate information given for questions 1-6.  Also refer to the VZ financial statements and calculate the following ratios;

(5 points each)

7. Current ratio

8. Debt equity ratio

9. Times interest earned

10. Inventory turnover ratio

11. Return on equity (ROE)

12. After tax (net) profit margin

13. Price Earnings Ratio

14. VZ currently has a 10-year bond priced at 983.21 with a 6.35% semi-annual coupon. VZ wants to issue a new 10-year bond at par bond with a face value of $1000. Calculate the coupon of the new bond. (4 points)

15.  VZ shares have declined significantly to 26.90. What is the required rate of return if the next dividend will be $1.38 and the projected growth rate decreases to 2.5%? (5 points)

16.  VZ is considering two additional higher risk projects with a required rate of return of 12%. Based on the following cash flows which project should VZ chose and why? (4 points)

Year   Project 1 cash flow               Project 2 cash flow

0           -320,000                               -260,000

1             115,000                                   35,000       

2             159,000                                   58,000

3             132,000                                 249,000

17.  What is the 4-year geometric average return for VZ stock given the following returns: 11.4%, 6.2%, -0.7% and -3.3% (4 points)

18.  Determine the expected return of VZ if the risk-free rate moves to 4.05%, the beta increases to 1.32, and the broad equity market is projected to return 12.72% (4 points)

19.  What is the cash cycle of VZ given this new additional information: (10 points)

Account                                 2018 end balance            2019 end balance

Inventory                                    186,000                            194,000

Account receivables                     42,000                              45,000

Account payables                         58,000                              52,000

Net sales (2019 all credit)                              764,000                            

Cost of goods sold (2019)                              517,000

20. Inflation has averaged 2.8% over the past 4 years. During this time, US Corporate Bonds have produced returns of 6, 3, 2 and 4 percent, and international equities have produced annual percentage returns of 15, 7, 4 and 18 over the same 4-year period. What is the average real return for international stocks and US corporate bonds? (4 points)