Homework Set4
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AssignmentSet1..docRunning Head: ASSIGNMENT SET 1 1
11
Running Head: ASSIGNMENT SET 1 2
Homework Assignment Set 1: Chapters 1, 2, &3
Name
University
FIN 534 Financial Management
Professor
15 April 2019
The stock exchange is an electronic platform where stock brokers and traders can buy and sell securities; such as shares and bonds. In the United States; there are various stock exchanges; such as the New York Stock Exchange (NYSE) and National Association of Securities Dealers Association Quotation (NASDAQ).According to Lincy (2016), the New York Stock Exchange is the leading stock exchange in the world trading securities for approximately 2800 countries in the world. The Stock exchange has employed brokers who bring buyers and sellers of securities to transact through the New York Stock Exchange on the floor. National Association of Securities Dealers Association Quotation (NASDAQ) is a global market place for buying and selling financial securities in the United States.
According to Ojoo (2017), both New York Stock Exchange (NYSE) and National Association of Securities Dealers Association Quotation (NASDAQ) have various similarities; such as, they trade securities that include bonds and shares, they are both found in the United States. Additionally, both New York Stock Exchange (NYSE) and National Association of Securities Dealers Association Quotation (NASDAQ) have differences; such as, NASDAQ purely trades via electronic system whereas NYSE trades via both the automated system and the floor through brokers. The NYSE operates in auction market whereas NASDAQ operates in dealers market.
New York Stock Exchange (NYSE) trades the Tata motors Stock whereas National Association of Securities Dealers Association Quotation (NASDAQ) trades Amazon stock.
FINANCIAL RATIOS of NASDAQ
AMAZON COMPANY
a) Liquidity Ratios
1. Current ratio
Current assets = 75101000
Current liabilities = 68391000
Current ratio =
Thus; current ratio = = 1.098
2. Quick ratio
Inventory = 17174000
Current asset = 75101000
Current asset – inventory = 75101000 – 17174000 = 57927000
Current liabilities = 68391000
Quick ratio = = 0.846
Assumption
The working capital ratio: The working capital is 1.09 which is more than 1.00. Thus, the company is able can meet its short-term obligations as and when they fall due. Therefore, Amazon Company can finance its growth, and that is why it has remained to be an outstanding company. The Quick ratio is 0.84 which is rounded off to 1.00. The company can finance its current liabilities using its current assets. Amazon Company can utilize its current assets to fund current obligations. It can, therefore, pay shareholder's dividends and expand its business. Refer to the excel spreadsheet.
b) Profitability ratio
Return on equity: in 2017 it was 12.91%, and in 2016 it was 14.52%. The yield on equity measures the ability of companies' equity holders to earn a return on their equity investments. Thus in 2016, the companies' equity holders earned the highest return followed in the year 2017. The highest return on equity is attributed to a return with higher margins and an increase in asset size.
Return on asset: in 2017 it was 2.83%, and in 2016 it was 3.19%. The yield on asset shows the effectiveness of a company in utilizing assets to generate sales and ultimately profits. Additionally, the return on asset also sums up the net profit which is obtained from deducting all costs, expenses, and tax from sales. Thus, in 2016, the company was able to utilize assets to generate sales effectively and in turn, earned a higher profit.
c) Asset Management ratio
1. Stock turnover
Stock: 2017 = 16047000
2016 = 11461000
Average stock = 16047000 + 11461000 = = 13754000
Cost of sales = 111934000 + 88265000 = 200199000
Stock turnover = = 14.56
Since the stock turnover is positive, the company has the ability to convert its stock into sales and in turn earn profit.
2. Fixed asset turnover
Sales = 177866000 + 135987000 = 313853000
Total fixed asset = 48866000 + 29114000 = 77980000
Fixed asset turnover = = 4.02
Since the fixed asset turnover is positive, the company has the ability to convert its fixed assets into sales.
FINANCIAL RATIOS OF NEW YORK STOCK EXCHANGE
TATA MOTORS
a. LIQUIDITY RATIO
1. Current ratio
Current assets = 85238.74
Current liabilities = 125937.96
Current ratio = (Current liability)/ (Current assets)
Thus; current ratio = 85238.74/125937.96 = 0.6768
2. Quick ratio
Inventory = 35085.31
Current asset = 85238.74
Current asset – inventory = 85238.74 –35085.31 = 50153.43
Current liabilities = 125937.96
Quick ratio =50153.43 / 125937.96= 0.398
Since the current ratio is 1, the Tata Motors has the ability to meet its short term obligations as they fall due.
b. ASSET MANAGEMENT RATIO
1. Stock turnover
Stock: 2017 = 35085.31
2016 = 32655.73
Average stock =35085.31 + 32655.73= 67741.04/2 = 33870.52
Cost of sales = 111934.5 + 88265.1 = 200199.6
Stock turnover = 200199.6/ 33870.52= 5.91
Since the stock turnover is positive, Tata Company has the ability to convert its stock into sales to earn a profit.
2. Fixed asset turnover
Sales = 40910100 + 40848000 = 81758100
Total fixed asset = 10028500 + 10118400 = 20146900
Fixed asset turnover =81758100 / 20146900= 4.05
Since the fixed asset turnover is also positive, the company has the ability to turn fixed assets into sales.
c. PROFITABILITY RATIO
1. Net profit margin
Sales = 40910100+40848800 = 81758900
Net profit = 958400+1462800 = 2421200
Net profit margin = 2421200/81758900 = 0.0296*100%=2.96%
The company has the ability to control its production operating and financing costs.
2. Operating profit margin
Operating profit=34288.11
Sales= 37376.86
Operating profit margin = 34288.11/37376.86 * 100% = 91.7
The Company is efficient in controlling cost to generate profits from sales.
FREE CASH FLOW
Amazon Company
Net operating profit after tax
EBIT = 9030000
(1-T) = 1-30% =0.7
NOPAT = 9030000 * 0.7 = 6321000
Net operating working capital
Operating current assets = 105978000
Operating current liabilities = 101699000
NOWC = 4279000
Total net operating capital
Net operating working capital = 4279000
Operating long-term assets = 108734000
TNOC = 113013000
Net investment in operating capital
Total net operating capital this year = 113013000
Net operating capital last year = 102078000
NIOC = 10935000
Free Cash Flow
Net operating profit after tax = 6321000
Net investment in operating capital = 10935000
FCF = -4614000
Since the free cash flow of Amazon company is negative; the company does not have the ability to pay interest to debt holders and repurchase stock from shareholders.
TATA MOTORS
Net operating profit after tax
EBIT = 155.81
(1-T) = 1-30%=0.7
NOPAT = 155.81*0.7=109067
Net operating working capital
Operating current assets = 5305.38
Operating current liabilities = 13334.13
NOWC = -8028.75
Total net operating capital
Net operating working capital=-8028.75
Operating long-term assets = 2081234
TNOC = 12783.59
Net investment in operating capital
Total net operating capital this year = 12783.59
Net operating capital last year =10750.77
NIOC = 2032.82
Free Cash Flow
Net operating profit after tax = 109067
Net investment in operating capital = 2032.82
FCF = 107034.18
Since the free cash flow of Tata Motors is positive, the company has the ability to pay dividends to shareholders and also repay its debts.
Strength and weakness
Tata Motors Company
Strengths
1. Since the current ratio is 1, the Tata Motors has the ability to meet its short term obligations as they fall due.
2. Since the stock turnover is positive, Tata Company has the ability to convert its stock into sales to earn a profit.
3. Since the free cash flow of Tata Motors is positive, the company has the ability to pay dividends to shareholders and also repay its debts.
Amazon Company
Strengths
1. The working capital is 1.09 which is more than 1.00. Thus, the company is able can meet its short-term obligations as and when they fall due.
2. Since the stock turnover is positive, the company has the ability to convert its stock into sales and in turn earn profit.
3. Since the fixed asset turnover is positive, the company has the ability to convert its fixed assets into sales.
Weakness
Since the free cash flow of Amazon Company is negative; the company does not have the ability to pay interest to debt holders and repurchase stock from shareholders.
Reference
Lincy, G. R. M., & John, C. J. (2016). A multiple fuzzy inference systems framework for daily stock trading with application to NASDAQ stock exchange. Expert Systems with Applications: An International Journal, 44(C), 13-21.
Ojo, M., & DiGabriele, J. A. (2017). Value Relevance of Accounting Information in Capital Markets: The New York Stock Exchange. In Value Relevance of Accounting Information in Capital Markets (pp. 30-58). IGI Global.
