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Apple and Google Finances - Assignment Example

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This discussion examines financial risk using price earning ratio (P/E) and beta parameter. The ratio P/E is a number that informs how much an investor would pay to get 1 $ profit…
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Apple and Google Finances
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Teacher’s Discussion Form Module 5 DQ 2 An investor uses financial parameters to determine the financial risk ofa publicly traded stock. This discussion examines financial risk using price earning ratio (P/E) and beta parameter. The ratio P/E is a number that informs how much an investor would pay to get 1 $ profit. For example, if a share price is $ 18 and earning is $ 3, then an investor pays $ 3 to make $1. An investment carries two concepts; return and risk. The concept “return” in financing is how much an investor is going to get within a certain period of time on an invested amount of money. This return is associated with risk. One of the models is Capital Asset Pricing Model (CAPM) that considers the risk concept associated with investment. The formula for return according to CAPM method is; ROR = Rf + β (Rm – Rf). In this formula, β is a risk measurement indicator. Return is higher for higher value of β. P/E ratio of Apple, Inc. and Google (“Apple PE ratio”, “Google PE ratio”): Apple P/E Google P/E March 31, 2012 14.62 March 31, 2012 19.43 June 30, 2012 13.72 June 30, 2012 17.19 September 30, 2012 15.11 September 30, 2012 23.62 The P/E ratios show that one will pay less money to get 1 $ earning from Apple stock than from Google stock. The β value of Apple is 1.21 (“Apple Inc”) and of Google is 1.08 (“Google Inc”). The rate of return, ROR while everything is kept constant except beta will be higher for Apple stock than for Google stock. Module 6 DQ 1 Liquidity indicates how quickly an asset can be turned into cash. It is measured using formula, Current ratio = current asset / current liabilities. The higher value of current ratio demonstrates liquidity of the company. Asset management is measured using the ratio return on assets, ROA. It is expressed as, ROA = Net income / Total Assets. This ratio demonstrates how total assets are used to make profit. A company can use its own funds, borrow the capital, or combine own funds and borrowed money to purchase property or equipment. Financial leverage illustrates the company’s activities in acquiring an asset. The ratio that is widely used to specify a company’s financial leverage is the debt-to-equity ratio. Industry accepted method to express profitability of a company is return on equity (ROE). It is expressed as, ROE = Profit after taxes / Shareholder funds. Market value indicates the price at which an investor at a given period of time buys or sells a common stock. We are comparing two companies: Apple, Inc., and Google (“Apple current ratio”, “Google current ratio”). Current ratio: Apple, Inc. Google March 31, 2012 1.583 March 31, 2012 5.84 June 30, 2012 1.571 June 30, 2012 3.84 September 30, 2012 1.496 September 30, 2012 3.94 Return on assets (ROA): Apple, Inc. Google March 31, 2012 31.42 % March 31, 2012 15.76 % June 30, 2012 29.77 % June 30, 2012 15.02 % September 30, 2012 28.54 % September 30, 2012 13.38 % Debt-to-equity ratio: Apple, Inc = zero Google = 0.0912 (“Google debt to equity ratio”). Return on equity (ROE): Apple’s latest 12 months REO is 35.3 % (“Apple Inc: Ratios on Return.”), while Goggles average of first 3 quarters REO is 18.63 % . Stock prices Apple’s common stock price on January 14, 2013 was $ 501.75, volume traded was over 26 millions. Apple’s market capitalization is 471.99 B . Google stock price on the same day was $ 723.24, volume traded was 2.859 millions. Google’s market capitalization is 237.66 B. Analysis: Google is more liquid than Apple. Apple is using assets better than Google. Both Apple and Google are doing well in managing financial leverage. Apple is getting more return on equity than Google. Apple’s market capitalization is much higher than Google’s. Module 6 DQ 2 The following three documents demonstrate business activities: balance sheet, income statement, and cash flow statement. These documents contain absolute values. Though, absolute values can explain many aspects of business, but cannot determine relative values. Relative values represent differentiation among competitors. They study activities of the same company during a period of time, compare results against a target mark, compare results against industry average. Ratios are compared to one another to achieve the complete picture of business activities. Relative value in mathematics is expressed through ratio. A ratio has two numbers: numerator and denominator. A ratio can be expressed in number or in percent. Ratios monitor a company’s profitability, liquidity, and potential. The government agencies, investors, banks, and company managers review these facts. A single ratio is not sufficient to evaluate a company’s business. A company’s business is described thru performance, position, and potential. Not one particular ratio, but an array of ratios can demonstrate a company’s business. As an example: Return on equity explains a company’s profitability, current ratio explains short term liquidity, and earning per share explains a company’s potential to the current and prospective investors. That is why; a single ratio is not sufficient to evaluate a company. Module 7 DQ 1 The cash conversion cycle (CCC) relates to events: purchase of an inventory, sell of the inventory on credit as an account receivable, and turn it into cash (“Understanding The Cash conversion cycle”). Thus, CCC is a time required to convert an inventory into cash. Net working capital (NWC) measures a company’s short-term health, which can be, calculated at any time of accounting period. Net working capital = Current assets – current liabilities (“Working capital”). CCC and NWC relate to money, but from an accounting viewpoint CCC is a cash flow item and NWC a balance sheet item. CCC depends on account receivable, and NWC depends on existing assets and liabilities. NWC is a balance sheet variable and is a significant economic indicator of a company. Current assets of a company must exceed the current liabilities, or the company is in trouble. The worst-case scenario for a company whose current assets significantly exceed its current liabilities is bankruptcy. On a balance sheet, a company can have assets in the form of inventory, accounts receivable, cash and prepaid expenses, but without a positive cash flow, a company does not have cash. That is why CCC is essential. It helps paying company bills, purchasing new inventory or expanding the business. Both CCC and NWC play a significant role for managers in taking business decisions. Out of these two parameters, CCC plays a more significant role. NWC depends on CCC. Increase in assets may take place when more cash and inventory are added. Addition of funds thru debt increases liabilities while the addition of new inventory thru cash does not increase liability. Example (“Net working Capital”): Google Inc     Fiscal periods ended                    12/31/05        12/31/06        9/30/07                                                         Current assets                            $9,001          $13,039            $15,734 Current liabilities                              745             1,304               1,783 Net working capital                      $8,256          $11,735            $13,951 From analysis, it may be determined that Google maintained growth of current assets without any substantial increase of liability. This may have taken place due to successful CCC value. CCC also relates to REO and ROA. These ratios are crucial for outside investors. CCC = Time to convert inventory to receivable + Time to convert receivable to cash – Time to make payables. In the industry, the above terminologies are expressed as follows: DIO = Time to convert inventory to receivable; DSO = Time to convert receivable to cash; DPO = Time to make payables. Thus, CCC = DIO + DSO – DPO. It is clear from the formula that by reducing CCC, a company can improve the cash flow (“Understanding The Cash conversion cycle”). CCC of Barnes & Noble’s for fiscal year 2004 was 68.9 days, and for 2005 , it was 59.2 days. Hence, in 2005 the company did better in cash conversion (“Understanding The Cash conversion cycle”). The company achieved it by decreasing DIO by 4.5 days, by increasing DSO by 1.5 days, and increasing DPO by 6.7 days. For the same time period, Amazon’s CCC was - 31.2 days = (29.6 + 10.2 - 71). This means Amazon does not pay its suppliers before it gets paid (“Understanding The Cash conversion cycle”). A company manager can manipulate “Time to make payables” to purchase new inventory and increase assets (inventory or cash). This also positively affects NWC. Module 7 DQ 2 On January 14, 2013, Bloomberg (“S&P Falls”) reported that Apple slid 2.7 % after the news that the company had cut iphone production. This step will affect Apple’s working capital. Working capital influence is reflected primarily in the following areas: inventory, account receivable, cash, and account payable. In Q4 2011, Apple reported $ 1.89 B changes in working capital (“Quarterly Financial for Apple Inc.”). In Q1 of 2012, it was $ –268 M. This is a decrease over $ 2 B. Apple’s working capital dropped further in Q2, which was equal to $ - 1.07 B. In the Q 3, it was $ - 855 M. This was associated with net income growth. Net income growth in Q1 2012 was – 11.04 %, in Q2 2012 was –24.08 %, and in Q3 2012 was – 6.81 %. This analysis confirms the module principles. Module 8 DQ 1 Capital structure describes how a company is arranging and managing assets in operating the business. It reflects a company’s return (earning), ability to survive during recession. It is also essential for business managers, potential investors, and government agencies. To run a business, cash is arranged mainly thru equity and debt. Equity is the money given by the shareholders. Retained earning is also considered being equity. Debt capital refers to the borrowed money that is used in the business. Mainly it is arranged thru issuing a long-term bond. Some time leading companies borrow money to satisfy day-to-day working capital, or to pay employees and utility bills. Apple Inc. 2012 capital structure information (“Apple Inc. Balance Sheet”). Total shareholders equity = 118 B: consists of 16.422 B of common stocks, 101.289 B retained earnings, and 0.499 B other stockholders’ equity. Total Debt: Long term debt= zero. Apple capital structure is maintained using shareholder’s equity and retained earnings. Google capital structure 3rd Q 2012 (“Google Inc. Balance Sheet”). Total shareholders’ equity = 68.028 B. Retained earnings = 45.456 B. Short term debt = 3.218 B. Long term debt = 2.988 B. Google’s capital structure is maintained using shareholders’ equity, retained earnings, short-term debt, and long-term debt. Module 8 DQ 2 Operating leverage: In any production, there are two costs: fixed and variable. One of the fixed costs is equipment cost that never changes, but variable cost, like raw material cost changes. Operating leverage is a ratio of fixed costs to variable costs, and it determines to what extent a company uses fixed assets Financial leverage: A company in business uses debt and preferred equity. It generally financial leverage expresses to what extent a business is using borrowed money. The most accepted financial leverage is the debt-to-equity ratio, which is expressed as a ratio; total debt / shareholders’ equity. Total leverage: A business achieves total leverage by combining operating leverage and financial leverage. Relationship among leverages: A business is set up to make a profit, or in other words the goal of capital structure is to earn profit. A firm that has high operating and financial leverage, a small change in sales will produce high earning per share. The following parameters describe the aforementioned leverages: Q = is the quantity sold, P = is the selling price, V= is the variable cost, F= is the fixed cost, I = interest paid on borrowed money, F= is the fixed assets. The formula for total leverage, TL = [Q *(P-V) / Q * (P-V) – F – I]. Described below an example that describes the concept of TL (“CFA Level 1 Study Guide.”). Annual production of ABC company is, Q = 1000,000 units. Fixed cost, F = $2.0 million. Variable cost, V = $ 20 per unit. Price per unit, P = $ 50. Interest payment I = $ 80,000. Total leverage, TL = [100,000 * (50-20) / 100,000 * (50-20) – 2,000,000 - 80,000] = 3.27. If the company’s sale is increased by 20 %, then the company’s EPS will be increased by 65.21 %. Works cited “Apple Inc.” google.com. n.p., n.d. Web. 15 Jan. 2012. http://www.google.com/finance?q=NASDAQ%3AAAPL&ei=l4nxUPDCI-OZwQPGhAE “Apple Inc. Balance Sheet.” Yahoo Finance. n.p., n.d. Web. 15 Jan. 2012. http://finance.yahoo.com/q/bs?s=AAPL+Balance+Sheet&annual “Apple current ratio.” YCHARTS. n.p., n.d. Web. 15 Jan. 2012. http://ycharts.com/companies/AAPL/current_ratio “Apple PE ratio.” YCHARTS. n.p., n.d. Web. 15 Jan. 2012. http://ycharts.com/companies/AAPL/pe_ratio “Apple Inc: Ratios on Return.” Forbes.com. n.p., n.d. Web. 15 Jan. 2012. http://finapps.forbes.com/finapps/jsp/finance/compinfo/Ratios.jsp?tkr=AAPL “Apple ROA.” wikinvest. n.p., n.d. Web. 15 Jan. 2012. http://www.wikinvest.com/stock/Apple_%28AAPL%29/Data/ROA “CFA Level 1 Study Guide.” INVESTOPEDIA. n.p., n.d. Web. 15 Jan. 2012. http://www.investopedia.com/exam-guide/cfa-level-1/corporate-finance/degree-of-total-leverage.asp#axzz2Hln5UaSm “Google Inc.” google.com. n.p., n.d. Web. 15 Jan. 2012. http://www.google.com/finance?cid=694653 “Google Inc. Balance Sheet.” Forbes.com. n.p., n.d. Web. 15 Jan. 2012. http://finapps.forbes.com/finapps/jsp/finance/compinfo/FinancialIndustrial.jsp?tkr=goog&period=qtr “Google current ratio.” wikinvest. n.p., n.d. Web. 15 Jan. 2012. http://www.wikinvest.com/stock/Google_%28GOOG%29/Data/Current_Ratio “Google debt to equity ratio.” YCHARTS. n.p., n.d. Web. 15 Jan. 2012. http://ycharts.com/companies/GOOG/debt_equity_ratio “Google PE ratio.” YCHARTS. n.p., n.d. Web. 15 Jan. 2012. http://ycharts.com/companies/GOOG/pe_ratio “Google Return on Assets.” YCHARTS. n.p., n.d. Web. 15 Jan. 2012. http://ycharts.com/companies/GOOG/return_on_assets “Google Return on Equity.” YCHARTS. n.p., n.d. Web. 15 Jan. 2012. http://ycharts.com/companies/GOOG/return_on_equity “Net working capital.” Accounting Information. n.p., n.d. Web. 15 Jan. 2012. http://www.accounting-information.net/accounting_information/financial_ratios/net_working_capital_liquidity_measure.shtml “Quarterly Financial for Apple Inc.” marketwatch.com. n.p., n.d. Web. 15 Jan. 2012. http://www.marketwatch.com/investing/stock/aapl/financials/cash-flow/quarter “S&P 500 Falls.” Bloomberg. n.p., n.d. Web. 15 Jan. 2012. http://www.bloomberg.com/news/2013-01-14/u-s-stock-futures-little-changed-after-two-week-rally.html “Understanding The Cash conversion cycle.” INVESTOPEDIA. n.p., n.d. Web. 15 Jan. 2012. http://www.investopedia.com/articles/06/cashconversioncycle.asp#axzz2Hln5UaSm “Working capital.” INVESTOPEDIA. n.p., n.d. 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