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Ravenell-Finance1.docRunning Head: FINANCE QUESTIONS 1
FINANCE QUESTIONS 4
Finance Questions
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Finance Questions
Question (A): In your own words, please identify two different stock exchanges in the United States. Describe the similarities and differences between the two stock exchanges. Identify one stock from each of the two stock exchanges.
For this analysis, I choose the New York Stock Exchange (NYSE) and NASDAQ. They are both based in New York.The NASDAQ (National Association of Securities Dealers Automated Quotations) and the NYSE (New York Stock Exchange) share many similarities. They are the facilitators of the stock exchange market’s processes and connecting equities in the U.S and the vast European stock market. They mainly trade cash equities, stock options, fixed incomes as well as exchanging goods that are traded. These exchange centers utilize traffic controllers to ensure that the market is always current. These controllers are instituted to execute specified problems and resultantly making the markets work.
However, these two exchanges have a distinction in the costs needed for investors to get their stocks listed in the specified market. At the NASDAQ, the most expensive price for investment listing is $150,000. Moreover, an investor must part with $60,000 annually as fees. On the other hand, the NYSE has the highest listing price at $250,000 while annual fee is estimated at $50,000. For these reasons, NASDAQ befits cost-effectiveness for more investment (Difference Between, ND). Additionally, the volatility magnitude between the two exchanges also differs. In primary explanation, volatility encapsulates the returns that a company accrues from their investments.The NYSE is famous for its variability that is identified by the jumping of prices up and down while the NASDAQ is known for its high volatility.
For this analysis, I choose Apple Inc. (AAPL) from Nasdaq and MasterCard, Inc. (MA) from the NYSE. As of October, 12 2018 4:00pm EDT, AAPL stock was trading at $221.11 and had gained 3.57%. The stocks beta was 1.27, a PE ratio of 20.12 and an EPS 11.04. As of October, 12 2018, 4:00pm EDT MA stock was trading at $204.22 and had gained 4.99%. The stock had a beta of 0.97, a PE ratio of 45.80 and an EPS of 4.46.
Question (B): Using the two stocks you identified, determine the free cash flow from 2013 & 2014. What inference can you draw from the companies’ free cash flow?
The free cash flow for the two stocks is shown in the table below and a comparison is made for the two stocks.
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Apple Inc (AAPL) Free Cash Flow |
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|
Free Cash Flow |
2014 |
2013 |
|
Operating cash flow |
59,713,000 |
53,666,000 |
|
Capital expenditure |
(9,813,000) |
(9,076,000) |
|
Free cash flow |
49,900,000 |
44,590,000 |
|
MasterCard Incorporated (MA) Free Cash Flow |
||
|
Free Cash Flow |
2014 |
2013 |
|
Operating cash flow |
3,407,000 |
4,135,000 |
|
Capital expenditure |
(334,000) |
(299,000) |
|
Free cash flow |
3,073,000 |
3,836,000 |
|
|
|
|
From the analysis above, it can be seen that Apple Inc. has a higher free cash flow for both of the years as shown by the table above. This could be due to the high income reported by Apple Inc. over the periods and this has enabled the company to collect much inform of cash.
The firm, Apple Inc. has also very high operating cash flows and even though they have very high capital expenditure, the firm has also very high free cash flows.
Question (C): Using the 2016 & 2017 financial statements for both stocks, prepare two financial ratios for each of the following categories: liquidity ratios, asset management ratios, .and profitability ratios. You should have a total of six ratios for each stock, per year. What challenges, strengths, or weaknesses do you see? Please be articulate.
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b) Ratio analysis |
Formula |
MASTERCARD INC |
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Profitability ratios |
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|
2017 |
2016 |
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Return on Total Assets (ROA) |
Net Income/Total Assets |
|
18.36% |
21.73% |
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Return on sales/ Profit margin |
Net Income / Sales |
|
31.33% |
37.67% |
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Return on equity (ROE) |
Net Income/ Total Equity |
|
71.60% |
71.76% |
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Asset Management Ratios |
|
|
|
|
|
Average collection period |
365x(Average Accounts Receivable/Sales revenue) |
|
134.31 |
121.34 |
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A/R turnover rate |
sales / accounts receivable |
|
3.7 |
4.3 |
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Net working capital turnover |
Sales/Net working capital |
|
3.29 |
2.15 |
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Fixed Asset Turnover |
Total Revenues/Fixed Assets |
|
15.07 |
14.70 |
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Leverage ratios |
|
|
|
|
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Debt ratio |
total liabilities/ total assets |
|
74% |
70% |
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Debt-Equity Ratio |
Total Debt/Total Equity |
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2.90 |
2.30 |
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Times Interest Earned |
EBIT/Total Interest Payments |
|
43.69 |
61.00 |
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Liquidity Ratio |
|
|
|
|
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Current Ratio |
Current Assets/Current Liabilities |
|
1.53 |
1.87 |
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Working Capital |
Current Assets - Current liabilities |
|
3,798,000 |
5,008,000 |
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Total Margin |
Net Income/Sales |
|
31.33% |
37.67% |
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Total Asset Turnover |
Sales/Total Assets |
|
0.59 |
0.58 |
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Equity Multiplier |
Total Assets/Common Equity |
|
3.90 |
3.30 |
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Return on equity (ROE) |
Net Income/ Total Equity |
|
0.716 |
0.718 |
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b) Ratio analysis |
Formula |
APPLE INC |
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Profitability ratios |
|
|
2017 |
2016 |
|
Return on Total Assets (ROA) |
Net Income/Total Assets |
|
12.88% |
14.20% |
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Return on sales/ Profit margin |
Net Income / Sales |
|
21.09% |
21.19% |
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Return on equity (ROE) |
Net Income/ Total Equity |
|
36.07% |
35.62% |
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Asset Management Ratios |
|
|
|
|
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Average collection period |
365x(Average Accounts Receivable/Sales revenue) |
|
26.77 |
27.59 |
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A/R turnover rate |
sales / accounts receivable |
|
12.8 |
13.7 |
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Net working capital turnover |
Sales/Net working capital |
|
8.24 |
7.74 |
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|
|
|
|
|
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Fixed Asset Turnover |
Total Revenues/Fixed Assets |
|
6.79 |
7.98 |
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Leverage ratios |
|
|
|
|
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Debt ratio |
total liabilities/ total assets |
|
64% |
60% |
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Debt-Equity Ratio |
Total Debt/Total Equity |
|
1.80 |
1.51 |
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Times Interest Earned |
EBIT/Total Interest Payments |
|
26.41 |
41.23 |
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Liquidity Ratio |
|
|
|
|
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Current Ratio |
Current Assets/Current Liabilities |
|
1.28 |
1.35 |
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Working Capital |
Current Assets - Current liabilities |
|
27,831,000 |
27,863,000 |
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Total Margin |
Net Income/Sales |
|
21.09% |
21.19% |
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Total Asset Turnover |
Sales/Total Assets |
|
0.61 |
0.71 |
|
Equity Multiplier |
Total Assets/Common Equity |
|
2.80 |
2.51 |
|
Return on equity (ROE) |
Net Income/ Total Equity |
|
0.361 |
0.356 |
MasterCard Inc.
Profitability ratios
Some of the ratios in this category have increased while others have increased. The return on total assets has reduced from 21.73% in 2016 to 18.36% in 2017. The reason is that even though the net income has increased, the firm has invested more in the fixed assets.
The return on sales gas also reduced as the net income has reduced even though the revenues increased. This can has seen by the increase in the interest expense. The ratio decreased from 37.67% to 31.33% in 2016 and 2017 respectively. The return on equity also reduced slightly as the net income reduced even though the equity did reduce.
Asset Management ratios
The average collection period increased from 121.34 days in 2016 to 134.31 days in 2017 to mean that the firm has increased the days it takes to collect its debts. The average turnover rate decreased from 4.3 to 3.7 in 2017 from 2016 to mean that the firm average debtors have increased. The fixed asset turnover has increased from 14.70 in 2016 to 15.07 in 2017 to mean that the firm is using it assets well to generate more income.
Liquidity ratios
The current has decreased from 1.87 in 2016 to 1.53 in 2017 as the firm has decreased more liabilities (current) in s portfolio to acquire the assets. The working capital also reduced as the firm has more current liabilities.
The total assets turnover remained fairly constant as shown by 0.58 in 2016 to 0.59 in 2017.
Apple Inc.
Profitability ratios
The return on total assets has reduced from 14.20% in 2016 to 12.88% in 2017. The reason is that even though the net income has increased, the firm has invested more in the fixed assets.
The return on sales has also reduced as the net income has reduced even though the revenues increased. This can has seen by the increase in the interest expense. The ratio decreased from 21.19% to 21.09% in 2016 and 2017 respectively. The return on equity also reduced slightly as the net income reduced even though the equity did reduce.
Asset Management ratios
The average collection period decreased from 27.59 days in 2016 to 26.77 days in 2017 to means that the firm has decreased the days it takes to collect its debts. The average turnover rate decreased from 13.7 to 12.8 in 2017 from 2016. It means that the firm average debtors have decreased. The fixed asset turnover has increased from 7.98 in 2016 to 6.79 in 2017 to mean that the firm is decreasing the usage in assets well to generate more income.
Liquidity ratios
The current has decreased from 1.35 in 2016 to 1.28 in 201. The firm is reducing the ability to meet the short term liabilities. The working capital also reduced as the firm has more current liabilities. To total margin has also reduced due to the increase in net income at a lower rate. The total assets turnover remained fairly constant as shown by 0.71 in 2016 to 0.61 in 2017.
References
