Obtain the most recently issued annual report of a publicly owned manufacturing or merchandising corporation of your choice. Do not select a bank, foreign company, insurance company, financial institution, or public utility. It would be appropriate to select a firm that you know something about or have an interest in.
Case Study, Presentation (5 to 10 minutes )
Obtain the most recently issued annual report of a publicly owned manufacturing or merchandising corporation of your choice. Do not select a bank, foreign company, insurance company, financial institution, or public utility. It would be appropriate to select a firm that you know something about or have an interest in.
Use a search engine to locate your company’s website and then scan your firm’s home page for information about annual report ordering. If you don’t see a direct link to Investor Relations or Investors on the home page, look for links such as Our Company, About Us, or Site Map that may lead you to SEC Filings, Financial Information, or Annual Reports. Most companies allow you to save or print an Adobe Acrobat version of their annual reports. You will need to either submit a hard copy of the report with your answers or email me a copy of the annual report.
Required:
GUIDANCE FOR THIS AND THE FOLLOWING ASSIGNMENTS:
- When a question asks you to explain, describe, analyze, etc., use complete sentences
and well-organized paragraphs. A complete explanation is required. Do not cut and paste; use your own words.
- Name of company chosen: _______________________________________________
- Information about the company:
What is the industry classification for the company (according to Fortune or the Internet site
you are using)?
Describe the nature of the company’s business.
List the company’s primary products or services (use brand names where available).
What is the address of the company’s corporate headquarters?
What is the address of the company’s Web site?
List other countries in which the company operates:
What were the company’s revenues for the most recent fiscal year? _________
Who is the chairman of the company’s board of directors?
______________________________________________
Who is the company’s CEO?
_________________________________________________
- Provide the following market data:
On what stock exchange is the company’s stock traded?
____________________________________________
What is the ticker symbol for the company? ________________________
What was the price of the company’s stock on the last day of the yea?
Price: _______________________ Date: ______________________
What were the lowest and highest stock prices during the past year?
52-week low: __________________ 52-week high: _________________
- Obtain a copy of an article about the company. Attach a copy of the article.
Name of article: ______________________________________________
Source of article (name of magazine or newspaper, date, page numbers):
__________________________________________________________
Summarize the article. Use complete sentences and well-organized paragraphs. Your summary
should be no fewer than 100 words in length.
Part B
- Which method, single-step or multiple-step, is used in the income statement? How can you tell?
- Calculate the gross profit ratio for each of the years reported. Briefly evaluate the trend of these results.
- Is operating income increasing or decreasing for the years reported? Can you find any clues in the management discussion and analysis as to why this is happening? Explain your answer.
- Does the company report any unusual items? If so, what are the effects of these items on net income and earnings per share?
- Which method, direct or indirect, is used in the statement of cash flows? How can you tell?
- Describe in your own words the top 5 sources and uses of cash for this firm.
- Evaluate the change in cash. Has the firm generated most of its cash requirements from operations, or has it borrowed extensively? Has the firm’s uses of cash been balanced between investments and dividends?
- Have there been significant treasury stock transactions?
- Has the cash balance been increasing or decreasing? What seem to be the implications of this pattern for dividends?
- What is the amount of depreciation expense for the current year? Page _____
(Hint: Look at the operating activities section of the cash flow statement if the indirect
method was used.)
Current year____________________ Last year___________________ What are the companies depreciation policies?
- Are tangible assets significant for the company? What proportion of total assets are held as tangible assets? (PPE) What specifically are the company’s tangible assets?
Intangible assets
- Does the company have any intangible assets? If so, what are they? Page _____
- Does the company report any goodwill?______ Page _____
What is the amount? __________________
- What is inventory for the company? Does the company manufacture inventory? What proportion of total inventory are raw materials? Work in process? Finished goods?
- Are current liabilities large for the company? What proportion of liabilities are current?
- What types of long term debt does the company have? Is it publicly traded? Are there bank loans? When does the debt mature? What is the average interest rate on the debt? Compare it to the coupon rates reported.
- What proportion of assets are financed with equity? What classes of equity does the company have? What transactions occurred during the year?
- Does the company have treasury stock? What is the reason for having treasury stock? Does the company have share based compensation?
Read the “significant accounting policies” and review other note disclosures as necessary to answer the following questions:
What are the principal components included in the firm’s receivables (or accounts and notes receivable, or trade receivables)?
What inventory valuation method(s) is (are) being used for financial reporting purposes? How much more would ending inventory have been if it were reported on a total FIFO basis? (Hint: This disclosure is sometimes referred to as the “LIFO Reserve.”)
Does the firm report a reconciliation of the statutory income tax rate with the effective tax rate? If so, what are these rates, and what principal temporary differences caused them to differ?
Have any significant subsequent events occurred since the balance sheet date? If so, describe the effects that these items will have on future financial statements.
What depreciation method(s) is (are) being used for financial reporting purposes? How much total depreciation and amortization expense did the firm report?
Does the firm have any stock options outstanding? If so, how many option shares are exercisable at the end of the year?
Does the firm have any significant contingencies or commitments that have not been reported as liabilities on the balance sheet? If so, describe the potential effects of these items from the perspective of a common stockholder.
Part C
Liquidity:
Calculate working capital, the current ratio, and the acid-test ratio as of the most recent balance sheet date. Show formula and all calculations.
Based on your calculations in part a, assess the company’s overall liquidity position. Explain which ratios indicate particular strengths and/or weaknesses within the company. Assume the following industry averages: current ratio = 2.0; acid-test ratio = 1.6.
Profitability:
Calculate ROI, showing margin and turnover, for the most recent year. Show formula and all calculations.
Calculate ROE for the most recent year. Show formula and all calculations.
Calculate the price/earnings ratio for the most recent year, using the company’s year-end market price per share of common stock in the numerator and diluted earnings per share in the denominator. Show formula and all calculations.
Calculate the dividend payout and dividend yield ratios for the most recent year. Show formula and all calculations.
Based on the results of your calculations in parts d, e, and f, assess the company’s overall profitability. Explain which ratios indicate particular strengths and/or weaknesses within the company. Assume the following industry averages: ROI = 15%; margin = 10%; turnover = 1.5; ROE = 20%; price/earnings = 14.0; dividend payout = 40%; dividend yield = 5%.
As an investor in this company’s stock, would you be pleased with this year’s dividend yield? Explain.
Financial leverage:
Calculate the debt ratio and the debt/equity ratio as of the most recent balance sheet date. Show formula and all calculations.
Based on the results of your calculations the debt ratio and the debt/equity, assess the company’s overall leverage position. What would you estimate the industry averages to be for the debt ratio and debt/equity ratio? Explain.
Explain the relationship between ROI and ROE, and the concept of financial leverage. Would you expect the percentage difference between ROI and ROE to be high or low for a firm that makes substantial use of financial leverage?
Activity measures:
Calculate the accounts receivable turnover and number of days’ sales in accounts receivable (based on a 365-day year) for the most recent year. Show formula and all calculations.
Based on your analysis of the accounts receivable turnover and number of days’ sales, do you believe that the company is doing an effective job at managing accounts receivable? What would you estimate the industry averages to be for the accounts receivable turnover and number of days’ sales in accounts receivable? Explain.
Calculate the inventory turnover and number of days’ sales in inventory (based on a 365-day year) for the most recent year.
Based on your analysis the inventory turnover and number of days’ sales in inventory, to what extent does the company need to be concerned about its inventory management policies? In assessing the inventory management policies, would you be more interested in knowing current ratio or acid-test ratio information? Explain.
Overall assessment:
Assume that you have $50,000 that you would like to invest in a single company. Evaluate the common stock of your focus company as a potential investment. From the data available in your focus company’s financial statements, identify the five most important criteria that you would use to make your investment decision, and explain why each is important
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