Need assignment done for BUS401 Principles of Finance template that assignment needs to be on is attached also feedback from professor & original draft is attached

Running Head: BUS401 PRINCIPLES OF FINANCE 1

BUS401 PRINCIPLES OF FINANCE 3

BUS401 Principles of Finance

Keisha Thomas

Sherri Jenkins

April 1, 2020

Formulate the expected financial returns of a company and associated risks by completing the following calculations.

Calculate the Return on Equity (ROE) using the DuPont system

ROE equates Morgan Stanley`s profit to the amount of shareholders equity.ROE evaluates the firms efficiency in generating profit from the owner`s equity. For instance in the last quarter the net income for Morgan Stanley was 8340million and shareholders’ equity was 81965.50million. The return on equity would therefore be 8340/81965.50 which is 10.18%. However, though ROE is a good tool, it fails to address the factors that aided in the realization of such returns on common stock. This is where DuPont formula comes in which allows the firm to evaluate whether the directors are effectively generating value for the company owners.

DuPont system breaks the ROE into three elements namely profitability, the efficiency as well as the leverage as illustrated below

Return on investment = margin % ×turnover of assets ×financial leverage.

Margin = net profit/ sales

Turnover = total sales / total assets

Leverage =assets/equity

Considering MorganStanley’s last quarter performance

Margin = 8340/ 40896 = 20.39%

Turnover = 40896/ 899016.5=0.0455

Leverage= 899016.5/81965.5= 10.9682

ROE would therefore be 20.39×0.0455×10.9682= 10.18%

The firms ROE is not such appealing to an investor as each dollar of owner’s equity is yielding 0.1018 dollars against the acceptable rate of 15%.

Calculate the Constant Growth Stock Valuation (CGSV) and compare it to the current stock price.

The current stock price of Morgan Stanley is $33.90 dollars. CGS is a share that carries a constant dividend growth percentage into a foreseeable future period. Such growth is common to large firms whose performance corresponds with that of the economy. The CGS value is determined using the equation below

Pn = D1 * (1+g)^n /(k – g)

Where Pn is the expected price of shares after in years

D1 is the expected dividend

G is the dividend growth per annum

K is the cost of capital

N is the number of years to calculate the price of shares

The growth rate of dividend has been 18.20 % over the past 12 months.

Research Morgan Stanley industry and evaluate what type(s) of capital constraints your company must consider in order to be competitive in the market. Explain the appropriate financial techniques that would be used in this evaluation

Morgan Stanley recorded a 27 and 48percent increase in revenue and income last year which was above the industry’s average of 19%and 25% respectively. To make Morgan Stanley competitive in the financial services industry, these constraints must be considered.

a) The firm must continuously attract and retain high skilled worker force while checking on its labor costs.

b) Morgan must also offer a great range of products and services if it has to maintain its industry competitiveness.

c) Also, Morgan Stanley should diversify its geographical niches as there is possible emergence of new competition.

d) It must as well have efficient review of its capital needs as idle resources negatively affect its returns.

e) The company also must keep track of diverging market waves brought about by improved technological intake. It must be ahead in technology than competitors to benefit from efficiency advantage.

References

Investing.com. (2020, April 2). Morgan Stanley (MS) income statement. Retrieved from https://www.investing.com/equities/morgan-stanley-income-statement

Morgan Stanley. (2019, December 31). Sustainable investing’s competitive advantages. Retrieved from https://www.morganstanley.com/ideas/sustainable-investing-competitive-advantages

Morgan Stanley. (2020, April 2). Strategies. Retrieved from https://www.morganstanley.com/im/en-us/registered-investment-advisor/strategies.html

Yahoo. (2020, April 2). Morgan Stanley (MS). Retrieved from https://finance.yahoo.com/quote/ms/financials/