homework

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.

The two different stock exchanges in the United States are the National Association of Securities Dealer Automated Quotation (NASDAQ) and the New York Stock Exchange (NYSE). The physical setting of both stock exchanges is the New York City. The NYSE has narrowed down to the floor traders that complete stock exchange in an auction market contrary to the NASDAQ exchange whose operations are specialized mainly to the automated trading as a dealer’s market. The NASDAQ was set in the year 1971 while the NYSE was set up a year later. These two constitute of the biggest stock exchanges globally with a sum of roughly 4700 companies in their midst. The fees for NYSE are relatively high compared to that of NASDAQ. NYSE is likely to be associated with well-established companies such as the Ford Motor Company while “high-tech stocks that are more grow oriented and potentially volatile” such as Apple Inc. are associated with the NASDAQ (Diffen,2017).

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?

(NYSE) Ford Motor Free Cash Flow: 2013 (in millions)

Free Cash Flow= Cash Flow from Operations- Capital Expenditures

3,847= 10,444- 6,597 (2013annualreport.ford.com, p.70)

Ford Motor Company Free Cash Flow: 2014 (in millions)

7,044= 14,507-7,463 (2014annualreport.ford.com, p.FS-6)

From this free cash flow, we are able to see that FORD had more incoming money and thus could use more on capital expenditure such as machinery, buildings, patents, land and office equipment. There will also be the surplus amount of money that can be used to expand the business as well as maintaining it. An increase in free cash flow shows the progress of Ford’s financial status and with this, Ford can “pursue opportunities that enhance shareholder value” (Investopedia, 2017).

(NASDAQ) Apple Inc. Free Cash Flow: 2013 (in millions)

The full information of 10-K for 2013 isn’t given by Apple and therefore it will be obtained from the 2014 10-K report.

Free Cash Flow= Cash Flow from Operations- Capital Expenditures

37,069=53,666-16,597 (2014investor.apple.com p.35)

Apple Inc. Free Cash Flow: 2014 (in millions)

39,089= 57,713-20,624 (2014investor.apple.com p35)

From this free cash flow, it is also evident that Apple Inc. had more incoming money and thus it could use it on capital expenditure such as machinery, buildings, patents, land and office equipment. There will also be the surplus amount of money that can be used to expand the business as well as maintaining it. An increase in free cash flow shows the progress of Apple Inc.’s financial status and with this, Ford can “pursue opportunities that enhance shareholder value” (Investopedia, 2017).

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

Ford

Liquidity Ratios:

Current Ratio= Current Asset/Current Liabilities

2016: 108,461/90281= 1.20

2017:115,902/94,600=1.23

The ratio of Ford will tell us its capability to clear their debts with their assets. If the ratio is less than 1.00 would mean that the company is unable to clear their debts. From our calculation, it is clear that Fords’ current ratio increase from 2016 to 2017 indicating that their debts decreased considerably in comparison with their cash or assets. This means that the company has no issues whatsoever in paying off their debts.

Quick Ratio= (Current Assets-Inventories)/ Current Liabilities

2016: (108,461-12266)/90281=1.07

2017: (115902-14166)/94600=1.08

With Ford’s quick ratio, we are able to know its available liquid assets for the worth of every dollar of its current liabilities. In this case, Ford has the required amounts of inventory to pay for their current liabilities since the quick ratios for both years was above 1.00. The liquidity of a company directly varies with its quick ratio. If these quick ratios are anything to go by, then Ford is a very liquid company.

Management Ratios

Debt ratio= Total Debt/Total Assets

2016: 142970/237951= 0.6=60%

2017: 154,287/257808=0.6=60%

The debt ratio shows the dependability rate of Ford to other companies or lenders. The lower the percentage, the more independent a company is.

Debt to Equity ratio= Total Debt/Total Common Equity

2016: 142970/29170=4.90

2017: 154287/34890= 4.42

The Ford debt-to-equity ratio is somewhat lower; this implies that they have been somehow independent and thus they have had a less aggressive reaction in financing their growth with debt (Folger, 2017). Whenever there exists a high debt-to-equity ratio then it means there is “greater potential for financial stress if earnings do not exceed borrowed costs”. This argument is supported by the situation when the United States government received bailouts from automakers (Folger, 2017).

Profitability Ratios

Operating profit Margin= EBIT (Earnings Before Interest and Taxes)/ Sales

2016: 7690/151,800=5.06%

2017: 9281/156776=5.92%

The operating profit margin shows the ability of a company to “create value for their shareholders by generating operating cash flow” (Investopedia, 2017). It shows the percent that the company keeps per dollar such that for every 10 million that ford earns, they would keep 5.06 percent of that which is the same as $506,000. This margin increased in the subsequent year meaning that the country will face fewer difficulties in catering for their costs in the event of sales decline.

Gross profit= (sales-cost of goods sold)/sales

2016: (151800-128725)/151800=15.20%

2017: (156776-132892)/156776=15.23%

The gross profit margin for Ford measures how well it operations are undergoing. There higher the percentage the more smoothly the business is running.

Apple

Liquidity ratio

Current Ratio= current assets/current liabilities

2016: 106869/79006=1.35

2017: 128645/100814=1.27

Apple current ratio is higher compared to Apples, meaning it in a better position to pay its debts with its assets.

Quick ratio= (current Assets-Inventories)/Current Liabilities

2016: (106869-2132)/79006= 1.32

2017: (128645-4855)/100814= 1.23

With Apple’s quick ratio, we are able to know its available liquid assets for the worth of every dollar of its current liabilities. The ratio is greater than one in both years and when compared to Ford, Apple is more liquid.

Management Ratios

Debt ratio=Total Debt/Total assets

2016: 193437/321686=60.13%

2017: 241272/375319=64.28%

In comparison to Ford, Apple’s debt ratio shows that they are a more independent company. They require less of borrowed money.

Debt-to-equity-ratio= Total Debt/Total Common Equity

2016: 193437/128249=1.51

2017: 241272/134047=1.80

Apple’s debt-to-equity ratio of these two years is quite high, meaning it borrowed highly from its owners.

Profitability Ratios

Operating profit margin= EBIT (Earnings Before Interest and Taxes)/Sales

2016: 61372/215640=28.46%

2017: 64089/229230=27.96%

It is clear that Apple generates more cash compare to Ford. It has well surpassed Ford in its operating profit margin thus it will hold more money per dollar as compared to Ford. This increases Apple value thus acts as a form of security during low-profit seasons.

Gross Profit Margin= (sales-cost of goods sold)/sales

2016: (215640-131376)/215640= 39.08%

2017: (229230-141048)/229230=38.47%

The gross profit margin percentage for Apple is superb reflecting on their efficiency.