paper

Running head: MasterCard Incorporated 1

MasterCard Incorporated 2

MasterCard Incorporated

Westcliff University

BUS 550: Financial Management

Professor Salami

December 9 , 2020

Part 1

Business description

MasterCard Incorporated is a well-known payment processing platform and known in the financial industry. The company is well established in over 150 countries worldwide offering different product and services. This paper will thoroughly scrutinize the business ratios, financial statements and stock performance. MasterCard connects consumers, governments, financial institution business and merchants across the globe through its payment network especially payments between banks. The company has been openly traded since their IPO announcement in 2006. It is well-established; with steady growth, positive forecasts, and solid returns for shareholders. Since 2013, the firm’s book value per share has progressively risen since 2008. The company’s payout ratio has risen to 21% as at the end of 2019. This is quite of great benefit to stakeholders.

Despite being promising for potential investors, it begs the question if it’s appropriate and sustainable for MasterCard to have such a positive payout ratio. The company’s net income has been increasing since the 2008 recession, which indicates that the company is in a solid financial position to be increasing their payout ratio in conjunction with net income. Over the last five years, the dividend yield has increased to 74% at the end of 2019. It is projected to increase to 88% by the end of 2020. Although, a favorably high percentage, dividend yield can’t be analyzed without considering the stock price. Not only has the stock price increased significantly over the last 14 years, MasterCard’s total returns are well above the total returns of indices in U.S. growth, dividend leaders, and credit services.

a. Financial statements for MasterCard Incorporated

"Balance Sheet

All numbers in thousands

Period Ending	12/31/2017	12/31/2016	12/31/2015	12/31/2014
Current Assets
Cash and Cash Equivalents	135,701	26,855	64,473	-
Short Term Investments	-	-	-	-
Net Receivables	101,012	89,237	68,518	-
Inventory	34,345	30,444	25,130	-
Other Current Assets	-	-	4,655	-
Total Current Assets	279,028	151,363	168,817	-
Long Term Investments	2,900	-	-	-
Property Plant and Equipment	174,121	153,224	128,078	-
Goodwill	579,446	588,460	56,992	-
Intangible Assets	1,930,388	1,954,343	270,079	-
Accumulated Amortization	-	-	-	-
Other Assets	392	502	19,563	-
Deferred Long Term Asset Charges	-	-	-	-
Total Assets	2,966,275	2,847,892	643,529	-
Current Liabilities
Accounts Payable	49,992	34,083	28,053	-
Short/Current Long-Term Debt	11,268	11,496	9,250	-
Other Current Liabilities	54,810	37,793	36,197	-
Total Current Liabilities	127,851	103,926	92,758	-
Long Term Debt	987,920	993,374	1,193,667	-
Other Liabilities	377,931	519,181	17,225	-
Deferred Long Term Liability Charges	-	-	1,696	-
Minority Interest	342,240	334,192	-37,991	-
Negative Goodwill	-	-	-	-
Total Liabilities	1,493,702	1,616,481	1,303,650	-
Stockholders' Equity
Misc. Stocks Options Warrants	-	-	-	-
Redeemable Preferred Stock	-	-	-	-
Preferred Stock	-	-	-	-
Common Stock	13	13	-622,130	-
Retained Earnings	208,279	-15,618	-	-
Treasury Stock	1,318	-	-	-
Capital Surplus	920,723	912,824	-	-
Other Stockholder Equity	1,318	-	-	-
Total Stockholder Equity	1,130,333	897,219	-622,130	-
Net Tangible Assets	-1,379,501	-1,645,584	-949,201

Figure 1.3

Income Statement

All numbers in thousands

Revenue	12/31/2017	12/31/2016	12/31/2015	12/31/2014
Total Revenue	776,188	727,586	620,815	554,695
Cost of Revenue	449,290	413,429	358,612	320,763
Gross Profit	326,898	314,157	262,203	233,932
Operating Expenses
Research Development	-	-	-	-
Selling General and Administrative	116,033	114,850	94,256	90,983
Non-Recurring	-	-	-	-
Others	381	3,591	4,306	4,468
Total Operating Expenses	589,559	536,977	458,025	416,837
Operating Income or Loss	186,629	190,609	162,790	137,858
Revenue/Income from Continuing Operations
Total Other Income/Expenses Net	4,275	-145,992	-74,030	-56,394
Earnings Before Interest and Taxes	186,629	190,609	162,790	137,858
Interest Expense	-39,174	-67,033	-50,011	-37,447
Income Before Tax	190,904	44,617	88,760	81,464
Income Tax Expense	-67,204	-7,323	-	-
Minority Interest	342,240	334,192	-37,991	-37,991
Net Revenue/Income from Continuing Ops	258,108	51,940	88,760	81,464
Non-recurringgEvents
Discontinued Operations	-	-	-	-
Extraordinary Items	-	-	-	-
Effect of Accounting Changes	-	-	-	-
Other Items	-	-	-	-
Net Income
Net Income	223,897	52,807	84,253	77,197
Preferred Stock And Other Adjustments	-	-	-	-
Net Income Applicable to Common Shares	223,897	-4,404	84,253	77,197
"(YahooFinance.com)

b. My evaluation of MasterCard future performance

I did assess the important and relevant ratios for MasterCard, I was able to conclude that the company’s sound financial position makes the business worthwhile for investment. I examined and analyzed various data that illustrates MasterCard’s overall growth from 2007 to 2019. From the information I analyzed, I can indicate that net income, revenue and earnings per share have increased respectively. These values offer potential investors the opportunity to understand MasterCard’s strengths and abilities. For example, the company’s 2019 revenue was $10,776 billion which was a 10% increase from the previous year’s sales. Whereas, net income was $4,059 billion in 2019; this is a 6% increase from the following year’s net income. MasterCard’s 2016 earnings per share (EPS) was valued at $3.69 with a 10.15% increase from 2018. As shown, the company is growing and increasing annually, which indicates that the business is improving efficient and effectiveness.

c. The company's stock rate of return and the index’s rate of return estimate beta of the corporation

The company’s current ratio is valued at 1.84, which shows that the company can pay both short and long-term obligations. The firm’s CA should be at least 1.5, which means that the company has a healthy current ratio. MasterCard’s debt to equity ratio is 0.92, which illustrates that for every dollar of equity the business borrows 0.92 times. For every dollar MasterCard has a higher stock value than its competitors, which is discussed in detail below. This shows that the company has a solid book value per share due to its ability to issues so many stocks annually. Since 2007, the book value per share has increased by 3.44%. This indicates that MasterCard has a good level of safety for each individual share after all debts are paid. In terms of working capital, MasterCard is doing remarkably well, due to the fact it has increased by 2.703 since 2007 to 2019. This show that MasterCard is more invested in current assets because it exceeds current liabilities by a significant margin. The business’ return on investment capital percentage is 41.23% which shows MasterCard’s efficient of investment and measures the amount of return relevant to the cost. Visa, however, has a yearly ROI of 10.7%, which is strong indicator that MasterCard is a more effective and worthwhile investment for the future.

d. The risk-free rate of return as the annual interest rate of US treasuries

Given the evaluation and analysis of the business’ past performance and financials, it can be concluded that investing in MasterCard is beneficial (Good). Due to our examination of the company’s stock, financial statements, and company practices, we predict that potential investors can expect to reap high returns on investment. On that note, I assign 56% to Good, 36% to Normal, and 8% to Bad business situations for MasterCard based on the evaluation.

I. Analysts’ Target Stock Prices (Low, Average, High) from Yahoo Finance are:

Low = 161.64, Average = 191.98, High = 274.36,

Good: (161.4-112.6)/112.6

1-0.4326=0.5674

Normal: (191.982-117.6)/117.6

1- 0.6325= 0.3675

Bad: (274.36-141.8)/141.8

1-0.9349=0.0651

II. Expected return

Current Stock Price:	A $149.56
Business Condition	Probability	Possible Price	Possible Return	Prob. x Possible Return
Good (High Price)	0.5674	182.4	69.198	39.26
Normal (Avg. Price)	0.3675	116.67	28.668	10.535
Bad (Low Price)	0.0651	83.74	3.64	0.237
Expected Return				2904/100= 50.03% annually

Estimating the stock’s beta and annual required of return

SUMMARY OUTPUT
Regression Statistics
Multiple R	0.536547
R Square	0.267306
Adjusted R Square	0.275863
Standard Error	0.057709
Observations	60
ANOVA
	df	SS	MS	F	Significance F
Regression	1	0.071928	0.071928	22.36644	1.48E-05
Residual	58	0.186522	0.003216
Total	59	0.258451
	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%
Intercept	0.010234	0.007711	1.327082	0.189682	-0.0052	0.02567
Ret_sp	1.073694	0.271433	4.729317	1.48E-05	0.740361	1.827026

Beta of MasterCard = 1.07

Required rate of return formula (rcase firm) = rf (free rate of return) + (rm (market rate of return) – rf (free rate of return)) x beta case firm.

=Risk free rate = 3%

Beta of the stock = 1.07

Market rate of return = 3% + 1.07% (6%) = 9.42%

Therefore the required return of the stock is 9.42%

Based on the equation the concept of required return as it is used by investors to decide on the minimum amount an investor can decide to invest on the stock based on the level of risk. The required return for a stock with a higher beta relative to the market should have been higher since it is necessary to compensate investors for the added level of risk associated with the investment. An investor can also use the required returns for ranking the assets and eventually make the investment as per the ranking and include them in the portfolio. In other words the higher the expected return the better the asset.

e. the annual rate of interest

i. Comparing the required rate of return 9.42% and expected return 50% indicates that the stock is underpriced.

ii. Analysis of technical data can effectively educate investors on potential rewards and risks associated with the investment in MasterCard Incorporated.  MasterCard’s initial public offering occurred on May 25, 2006. This date marks MasterCard’s transition to a new corporate governance and publicly traded ownership structure. At this time, MasterCard stocks were traded on the New York Stock Exchange under ticker symbol MA for $4.28. The stock’s history of return has increased rapidly since 2006, at a current stock value of $149.56. Given this information, the MA shares have increased by 3,494% in the last 11 years. Therefore, if an individual invested $5,000 in MasterCard stocks in 2006; their shares would be worth $174,718.62 today. However, the MA shares have been subject to minor fluctuations in the past, such as the eight-month 44% stock price decrease during the 2008 recession. This economic recession highly affected the global stock market due to loss in employment and income.

Part 2

Within the last five years, the MA stocks have increased by approximately $23 per year. MasterCard’s lowest growth, within this timeframe, was in 2018, due to the stock market pullback on August 25th. This plunge was a result of an oil price drop that decreased investment and financially affected many companies in the United States. In the last twelve months, MA has grown exponentially, increasing by approximately 46%. This is may be attributed to recent positive press releases that have created effective public relations. This includes MasterCard’s recent partnership with MLB to offer fans a Stand up To Cancer message during the World Series. MasterCard also received praise for launching a “Grow Your Biz Contest” to support small businesses. Nonetheless, the company’s Relative Strength Index (RSI) is valued at 67.42. This indicator evaluates the momentum and strength of a security’s recent price performance. Traditionally, values over 70 indicate that a stock is overbought and overvalued which can result in a pullback. Therefore, the MA stock is increasing at a desirable rate. MasterCard’s competitors, which include Visa, American Express and PayPal, all have lower stock prices than MA. The company’s stock continues to grow each year with a $48.94 increase since December 30th of 2019. However, Visa, their main rival, has current stock price valued at $111.97 which is $40.77 off from MasterCard’s current stock price. Lastly, the company’s current price to book ratio is 25.03, because the company’s stock is $149.56 and the book value per share is $6.10

Reference

“Mastercard Inc A.” MA Mastercard Inc A Key Statistics | Morningstar, 27 Nov. 2017, 

Lahiri, Diptendu. “Mastercard to Buy Back Shares Worth $4 Billion.” Reuters, Thomson Reuters, 6 Dec. 2016, 

Mastercard Long-Term Debt & Capital Lease Obligation (MA), www.gurufocus.com/term/Long-Term+Debt/MA/Long-Term-Debt--Capital-Lease-Obligation/Mastercard-Inc.

“MA Balance Sheet.” NASDAQ.com

“Mastercard Shares Outstanding:” YCharts, 27 Nov. 2017, ycharts.com/companies/MA/shares_outstanding. “Mastercard Incorporated (MA) Earnings Per Share.” NASDAQ.com, 27 Nov. 2017,  “Visa Inc Class A.” V Visa Inc Class A Key Statistics | Morningstar, 27 Nov. 2017, 

“Mastercard Incorporated Common Stock Historical Stock Prices.” Mastercard Incorporated Common Stock (MA) Historical Prices & Data - NASDAQ.com,

“MA Historical Prices | Mastercard Incorporated Stock.” Yahoo! Finance, Yahoo!, 27 Nov. 2017, 

“MA : Summary for Mastercard Incorporated.” Yahoo! Finance, Yahoo!, 27 Nov. 2017, 

“MA Stock Price - Mastercard Inc. Stock Quote (U.S.: NYSE).” MarketWatch, 

“We've Been Making History for 50 Years.” Mastercard History & Key Milestones

By. “Mastercard and MLB Deliver In-Stadium Augmented Reality Experience at 2017 World Series.” MarketWatch, 30 Oct. 2017

By. “Technical Research on Credit Services Equities -- SLM Corp., American Express, LendingClub, and Mastercard.” MarketWatch, 15 Nov. 2017

“Mastercard Inc A.” MA Mastercard Inc A Stock Upcoming and Historical Dividends

and Splits