Research articles and tools on project portfolio management….

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Question Answered step-by-step Research articles and tools on project portfolio management…. Research articles and tools on project portfolio management. Summarize the advantages of performing project portfolio management as well as challenges.  Business Management Project Management IT 260 Share QuestionEmailCopy link Comments (0)

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Description Create an 8-10 page report in which you examine a major public company and provide a recommendation on how shareholder value could be enhanced, with resulting impact on the firm's capital structure and stock value.Futther instructions attached 5 attachmentsSlide 1 of 5attachment_1attachment_1attachment_2attachment_2attachment_3attachment_3attachment_4attachment_4attachment_5attachment_5.slider-slide > img { width: 100%; display: block; } .slider-slide > img:focus { margin: auto; } Unformatted Attachment Preview 8/10/2020 Resources: WACC and Capital Structure – MBA-FPX5014 - ... Tutorials Support Log Out  Course Navigation  Bryan Nickerson Resources: WACC and Capital Structure Pysh, P. (2012). What is financial risk [Video] | Transcript Retrieved from https://www.youtube.com/watch?v=-4mXnFK0ecM Ross, S. A., Westerfield, R. W., Jaffe, J. F., & Jordan, B. D. (2018). Corporate finance: Core principles and applications (5th ed.). New York, NY: McGraw-Hill. Available from the bookstore. These two chapters deal with the capital structure of a firm, that is, how a firm will finance itself, via debt or equity. An examination of the features, benefits, and negatives of financing through both financing types will be discussed in these chapters. Chapter 14, "Capital Structure: Basic Concepts," pages 423–450. Chapter 15, "Capital Structure: Limits to the Use of Debt," pages 451–479. Understanding Finance. (2014). James Tompkins: The capital structure decision and taxes [Video] | Transcript Retrieved from https://www.youtube.com/watch?v=HeWcPUk8rGw View the first 15 minutes of the video. https://courserooma.capella.edu/webapps/blackboard/content/listContent.jsp?course_id=_267356_1&content_id=_9084382_1 1/1 12/15/2019 Chapter 10 The Cost of Capital ▪ Sources of Capital ▪ Component Costs ▪ WACC ▪ Adjusting for Flotation Costs ▪ Adjusting for Risk 10-1 1 What sources of long-term capital do firms use? Long-Term Capital Debt Equity 10-2 2 The concept of cost of capital ▪ In earlier chapters we have seen: ▪ So what is the required return for the entire firm? What is the cost of capital of the firm? ▪ rd = bondholders’ required return (Bond YTM) ▪ rp = Preferred stocks required return ▪ rs = Common stocks required return ▪ Required return by investors becomes cost of capital by issuer ▪ It is the weighted average of the costs of the various types of capital it uses. ▪ Weighted Average Cost of Capital (WACC) ▪ Used in projects evaluation 10-3 3 1 12/15/2019 What sources of long-term capital do firms use? Long-Term Capital Long-Term Debt Preferred Stock Common Stock 10-4 4 Calculating the Weighted Average Cost of Capital WACC = wdrd(1 – T) + wprp + wc rs/e ▪ Definitions ▪ ▪ ▪ ▪ The w’s refer to the firm’s capital structure weights ▪ ▪ ▪ wd = Long-term Debt / Total Assets wp = Preferred Stocks / Total Assets wc = Common Stocks / Total Assets The r’s refer to the cost (i.e. required return) of each component ▪ ▪ ▪ rd = bondholders’ required return (Bond YTM) rp = Preferred stocks required return rs/e = Common stocks required return T = Tax rate The cost of capital is used primarily to make decisions on new projects ➔ focus on today’s marginal costs NOT historical costs 10-5 5 How are the weights determined? WACC = wdrd(1 – T) + wprp + wcrs ▪ ▪ ▪ Should we use accounting numbers or market value (book vs. market weights)? ▪ Market weights are theoretically superior. However, they are unstable over time and sometimes difficult to find (especially market value of debt) ▪ Rating agencies and security analysts use book value Should we use actual (existing) numbers or target capital structure? ▪ Target capital structure For now, we will take management-determined weights with little attention to how they have been calculated 10-6 6 2 12/15/2019 Cost of Debt WACC = wdrd(1 – T) + wprp + wcrs ▪ ▪ rd is the marginal before-tax cost of debt ▪ The yield to maturity on outstanding longterm debt is often used as a measure of rd rd(1 – T) is the marginal after-tax cost of debt ▪ Why tax-adjust; i.e., why rd(1 – T)? ▪ Because interest on debt is tax-deductible 10-7 7 Example ▪ Company XYZ’s debt represents an issue of 15-year, 12% semiannual coupon bond. Each bond sells for $1,153.72. What is the before-tax cost of debt (rd) for this XYZ? What is the after-tax cost of debt if T=40%? INPUTS 30 N OUTPUT ▪ ▪ -1153.72 60 1000 PV PMT FV I/YR 5 Before-tax cost of debt ➔ rd = 5.0% x 2 = 10%. After-tax cost of debt = rd(1 – T) = 6% 10-8 8 Cost of Preferred Stock WACC = wdrd(1 – T) + wprp + wcrs ▪ ▪ Preferred dividends are not tax-deductible, so no tax adjustments necessary. The cost of preferred stock can be solved by using this formula: rp= Dp/Pp 10-9 9 3 12/15/2019 Example ▪ What is the cost of preferred stock of company XYZ if dividend is $10 and preferred stock price is $111.10? rp = $10/$111.10 = 9% 10-10 10 Cost of Equity WACC = wdrd(1 – T) + wprp + wcrs ▪ ▪ If equity comes from retained earnings: ▪ rs = the marginal cost of retained earnings If equity comes from new stocks ▪ rs = re the marginal cost on new equity 10-11 11 What sources of long-term capital do firms use? Long-Term Capital Long-Term Debt Preferred Stock Common Stock Retained Earnings New Common Stock 10-12 12 4 12/15/2019 Cost of Equity - Retained Earnings, rs ▪ Three ways: ▪ CAPM Model: ▪ ▪ ▪ ▪ rRF = risk-free rate ▪ RP = Risk Premium rs = rRF + (rM – rRF)b rM = return on market portfolio (market return) (rM – rRF) = market premium b = Firm’s beta (sensitivity to risk) ▪ DCF: rs = (D1/P0) + g : D1 = D0(1 + g) ▪ Own-Bond-Yield-Plus-Risk-Premium: rs = rd + RP ▪ We usually use all three methods then we take the 10-13 average 13 Example ▪Given: ▪rRF = 7%, rM = 13%, and the firm’s beta is 1.2 ▪D0 = $4.19, P0 = $50, and g = 5% ▪rd = 10% and RP = 4% ▪CAPM ▪rs= rRF + (rM – rRF)b = 7.0% + (6.0%)1.2 = 14.2% ▪DCF ▪D1= D0(1 + g) = $4.19(1 + 0.05) = $4.3995 ▪rs= (D1/P0) + g = ($4.3995/$50) + 0.05=13.8% ▪Bond-yield plus risk premium ▪ ▪ rs = rd + RP = 10.0% + 4.0% = 14.0% Take average ▪ rs = (14.2% + 13.8% + 14% ) / 3 = 14% 10-14 14 Cost of Equity - New Common Stock, re ▪New common stock issues involve flotation costs F ▪F is given as percentage of new issue proceeds ▪It is a substantial cost that may not be ignored re = D (1 + g) D1 +g = 0 +g P0 (1 − F) P0 (1 − F) 10-15 15 5 12/15/2019 Example ▪ re = If the firm incurs a flotation cost of 15% of the proceeds, what is re? D 0 (1 + g) $4.19(1.05) +g= + 5.0% = 15.4% P0 (1 − F) $50(1 − 0.15) 10-16 16 What is the firm’s WACC? wd = 30% wp =10% wc =60% T=40% WACC = wdrd(1 – T) + wprp + wcrs = 0.3(10%)(0.6) + 0.1(9%) + 0.6(14%) = 1.8% + 0.9% + 8.4%= 11.1% If equity comes from retained earnings WACC= wdrd(1 – T) + wprp + wcre = 0.3(10%)(0.6) + 0.1(9%) + 0.6(15.4%) = 1.8% + 0.9% + 9.24%= 11.94% If equity comes from selling new stocks 10-17 17 Comprehensive Example 18 6 12/15/2019 Comprehensive Example ▪ Given: ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ Bondholders’ required return rd=YTM=12% Tax rate = T = 40% The company has preferred stock priced currently at $100 and pays constant dividend of $10 per year. Risk-free rate is rRF = 4% and return on market portfolio (market return) is rM =10%. Investors estimate this firm’s beta (sensitivity to risk) at 1.2 The company just paid dividend of D0 = $4 on its common stock that is now priced at P0 = $35. Analysts estimate dividend to grow at g = 6%. Investors believe that this company’s equity should have a premium of RP = 3% over its debt. If this company decided to issue new stocks, flotation cost is estimated at F = 10% wd = 40% wp =10% wc =50% What is weighted average cost of capital of this firm? The next 3 slides will guide you through the process 19 Solution of Comprehensive Example - 1 ▪ Cost of debt: ▪ Cost of preferred stock ▪ rp= Dp/Pp = 10/100 = 10% ▪ After-tax cost of debt = rd(1 – T) =12%(1-0.4) =7.2 % 10-20 20 Solution of Comprehensive Example - 2 ▪ Cost of Equity – Retained Earnings ▪CAPM ▪rs= rRF + (rM – rRF)b = 4.0% + (10.0% - 4.0%) 1.2 = 11.2% ▪DCF ▪D1= D0(1 + g) = $4.00(1 + 0.06) = $4.24 ▪rs= (D1/P0) + g = ($4.24/$35) + 0.06=18.11% ▪ ▪Bond-yield plus risk premium ▪ rs = rd + RP = 12.0% + 3.0% = 15.0% ▪ Take average ▪ rs = (11.2% + 18.11% + 15% ) / 3 = 14.77% Cost of Equity – New Common Stocks D (1 + g) $4.00(1.06) re = 0 +g= + 6.0% = 19.46% P0 (1 − F) $35(1 − 0.10) 10-21 21 7 12/15/2019 WACC WACC = wdrd(1 – T) + wprp + wcrs = 0.4(12%)(0.6) + 0.1(10%) + 0.5(14.77%) = 2.88% = 11.265% + 1.0% + 7.385% = If equity comes from retained earnings WACC = wdrd(1 – T) + wprp + wcre = 0.4(12%)(0.6) + 0.1(10%) + 0.5(19.46%) = 2.88% + 1.0% + 9.73% = = 13.61% If equity comes from selling new stocks 10-22 22 Questions and Discussions 10-23 23 10-24 24 8 12/15/2019 How risky is each source of funds to investors? ▪ ▪ ▪ Debt ▪ ▪ Lowest risk Company required to make timely payments of interest and principal Common stock ▪ ▪ Highest risky Firms are not “legally” required to pay common dividends Preferred stocks ▪ ▪ More risky than debt but safer than common stocks Companies are not required to pay preferred dividend. However, company required to pay preferred dividend before common dividend 10-25 25 Assume two companies with same cost of capital components but different capital structure. Looking at capital structure only, a project that looks good to one firm, may be bad to another 26 What factors influence a company’s composite WACC? ▪ Market conditions (beyond firm control) ▪ ▪ The firm’s capital structure (within firm’s control) The firm’s dividend policy (within firm’s control) You should know how each factor impact WACC ▪ Interest rates ▪ Stock prices (investors’ sentiment) ▪ Corporate Tax rates ▪ Personal Tax rates 10-27 27 9 12/15/2019 Should the company use the composite WACC as the hurdle rate for each of its projects? ▪ ▪ NO! The composite WACC reflects the risk of an average project undertaken by the firm. Therefore, the WACC only represents the “hurdle rate” for a typical project with average risk. Different projects have different risks. The project’s WACC should be adjusted to reflect the project’s risk. 10-28 28 Why do we focus on after-tax (not beforetax) capital costs? ▪ ▪ Stockholders focus on A-T CFs. Therefore, we should focus on A-T capital costs, i.e. use A-T costs of capital in WACC. Only rd needs adjustment, because interest is tax deductible. 10-29 29 Observation ▪ ▪ The after-tax required returns are higher on preferred stock than on debt ➔ consistent with higher risk of preferred stock. The before-tax required returns are lower on preferred stock than on debt ➔ apparent inconsistency? ▪ Corporations own most preferred stock ▪ 70% of preferred dividends are excluded from corporate taxation ▪ Inconsistency resolved 10-30 30 10 12/15/2019 10-31 31 Why is there a cost for retained earnings? ▪ ▪ ▪ Earnings can be retained or paid out as dividends Cost of retained earning is an opportunity cost If earnings are retained ▪ If earnings are paid out ▪ They could be reinvested by the firm ➔ earn a return ▪ Investors could buy other securities ➔ earn a return. 10-32 32 Why is the cost of retained earnings cheaper than the cost of issuing new common stock? ▪ ▪ When a company issues new common stock they also have to pay flotation costs to the underwriter. Issuing new common stock may send a negative signal to the capital markets, which may depress the stock price. 10-33 33 11 Dear learners, Please read the following carefully BEFORE YOU START this assessment. ==================================================== See an exemplary report(s) that I have posted for this assessment. There are FOUR components of this report: 1. First, you explore a few standard strategies that must be addressed separately before you make your own. For each strategy, explain how it may affect stock prices in the short run and in the long run. I have posted a few exemplary reports. Use them for a list of possible strategies. 2. Second, you run a thorough financial analysis. This part of assessment 3 is identical to assessment 1 i.e. ratios must be categorized into five groups. At least two ratios under each category must be analyzed and compared with industry averages. 3. Third, you select a single strategy. The strategy must stem directly from the analysis i.e. build on the strengths and mitigate risks and weaknesses. In addition, a well-developed strategy will consider available resources and the potential reaction of key stakeholders (e.g. competitors, shareholders, clients, … etc). 4. Fourth, you calculate WACC from its ingredients and report its values before and after implementing your suggested strategy. This is the main point of this assessment. Make sure that your report is professional (see my faculty expectation document). Good luck Dr. Alhenawi 8/10/2020 Assessment 3 Instructions: Financial Engineering to Enhance ... Course Navigation  Katherine Hyatt Tutorials Support Log Out  FACULTY  COACH Bryan  Nickerson Assessment 3 Instructions: Financial Engineering to Enhance Shareholder Value Create an 8-10 page report in which you examine a major public company and provide a recommendation on how shareholder value could be enhanced, with resulting impact on the firm's capital structure and stock value. Introduction This portfolio work project will illustrate what potential financial strategies can be employed by firms to impact company valuation and how they should be financed. This is a relevant concept for both large and small companies. You will have a chance to apply the skills expected of an MBA graduate; from the financial management perspective, you should be able to: Utilize financial strategies that will increase the price of stock. Calculate WACC and capital structure. Evaluate how financial strategies impact the capital structure. This assessment requires you to examine a major public company and provide recommendations on how shareholder value could be enhanced, with resulting impact on the firm’s capital structure and stock value. You will estimate the firm's current WACC. Scenario Fast forward to when you have successfully completed the MBA program. You are now a Chief Financial Officer of a large, publicly traded company at (go ahead and insert your dream company here). Using your dream company, conduct extensive research on the current situation of the company using resources like the Wall Street Journal, Bloomberg, GuruFocus, Yahoo Finance, EDGAR, and the Capella library. As the CFO, you have been given a project by the CEO and Board of Directors to prepare a report on ways to financially engineer the company to increase stock price. From the company’s website, go to the financial section and examine the financial statements (income statement, balance sheet, and statement of cash flows) and 10K and 10Q reports, and conduct a financial ratio analysis including the following: current ratio, debt to equity ratio, return on equity (ROE) ratio, dividend yield, earnings per share (EPS or the last 4 quarters), price to earnings ratio (P/E), and market to book ratio. Compare these ratios to those of the company's nearest competitor. Assume that the objective of upper management is to maximize shareholder value by increasing the price of the stock. Describe the subjective impacts (threats, opportunities, competitive edge) that are unique to the firm and its industry that you found in your research. Based on the ratio results and research, from the following list of ways to financially engineer an increase in stock price, evaluate each method, examine its pros and cons, and then select the best ways for the firm to increase the stock price. Be as specific as you can by using qualitative assessments without proprietary company information: 1. Capital expenditures—new equipment, plant, machinery, marketing/advertising campaign, computer infrastructure (only choose if your research of the firm has discovered some specific opportunity here). 2. Merger/acquisition of a competitor. 3. Stock repurchases. 4. Dividend policy change—increase, decrease, stock split, stock dividend. 5. Reduction of debt. 6. Expansion into a new geographic market. 7. Introduction of new products/services. Your Role You are the Chief Financial Officer of your selected company. Requirements The report you submit to the CEO should meet these expectations: Evaluate strategies used to increase stock prices and shareholder value. Analyze strategies to employ cash to potentially increase shareholder value and the impact on financial risk of the entity, such as capital expenditures, mergers/acquisitions, stock buybacks, dividend increases, reduction of debt, expansion into a new geographic area, and introduction of new projects. Analyze financial statements and ratio analysis to determine the optimal strategies. Describe the subjective impacts that are unique to the firm and its industry through ratio analysis of the financial statements and qualitative research. Relate the analysis to the strategies. Identify the pros and cons regarding each strategy. Use behavioral models and theories to support your analysis and evaluation. Determine the best strategies, and describe how earnings and stock price can be increased by these choices. Comment on how the efficient market hypothesis may impact stock price with the recommendations. Recommend the best strategies to gain the most optimal performance. Provide justification and rationale for your recommendation. Align your recommendation with analysis and data. Provide examples and analysis to defend recommended strategies. Connect the recommendation to methods and models of financing and investing. Evaluate how the recommendation will be financed and how it will impact the capital structure and the risk of the company and the WACC. Calculate the firm’s current WACC and capital structure (percentage of assets financed by liabilities versus percentage of assets financed by shareholder equity). Determine whether the firm has sufficient finances to fund your recommendation internally (with cash) or if it needs to raise funds externally. If external financing is required, decide between common stock and debt (bonds) and explain the rationale for your decision. Examine how your strategy recommendation will potentially impact WACC, capital structure, the overall risk of the company stock, and the effect on the stock price. Deliverable Format Report requirements: Ensure written communication is free of errors that detract from the overall message and quality. Use at least three scholarly resources. Your report should be between 8 and 10 pages. Use 12 point, Times New Roman. Related company standards: This report is a professional document and should therefore follow the corresponding MBA Academic and Professional Document Guidelines (located in the MBA Program Resources), https://courserooma.capella.edu/webapps/blackboard/content/listContent.jsp?course_id=_267356_1&content_id=_9084377_1 1/2 8/10/2020 Assessment 3 Instructions: Financial Engineering to Enhance ... including single-spaced paragraphs. Use APA-formatted references. Evaluation By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies through corresponding scoring guide criteria: Competency 2: Analyze financing strategies to maximize stakeholder value. Evaluate strategies used to increase stock prices and shareholder value. Competency 3: Apply financial analyses to business planning and decision making. Recommend the best strategies to gain the most optimal performance. Competency 4: Use data to support evidence-based financial decisions. Analyze financial statements and ratio analysis to determine the optimal use of cash. Evaluate how the recommendation impacts the capital structure and the risk of the company and the WACC. Faculty will use the scoring guide to review your deliverable as if they were your CEO. Review the scoring guide prior to developing and submitting your assessment. ePortfolio This portfolio work project demonstrates your competency in applying knowledge and skills required of an MBA learner in the workplace. Include this in your personal ePortfolio. Note: Your faculty may also use the Writing Feedback Tool to provide feedback on your writing. In the tool, click the linked resources for helpful writing information. SCORING GUIDE Use the scoring guide to understand how your assessment will be evaluated. VIEW SCORING GUIDE  https://courserooma.capella.edu/webapps/blackboard/content/listContent.jsp?course_id=_267356_1&content_id=_9084377_1 2/2 SHAREHOLDER VALUE INITIATIVE Amy Durham Capella University September 2019 Executive Summary This Shareholder Value Initiative examines opportunities for increasing shareholder value and the resulting impact on the stock value and capital structure of the publicly traded corporation Netflix, Inc. (NFLX). Netflix is the world’s leading online entertainment service, with over 141 million members in more than 190 countries (About Netflix, 2019). In order to increase shareholder value, Netflix, Inc. must enact strategic decisions with a high probability of success. This means choosing strategies with the potential for high returns on invested capital in order to increase the price per share of stock and grow the amount of cash dividends paid to shareholders (Hayes & Kenton, 2019). This high-level analysis was completed utilizing data contained in the annual financial reports of Netflix, Inc., the corporate history, geographical reach, product model and comparisons to industry competitors. Financial ratio calculations were completed using the income statement, balance sheet, statement of cash flow and additional financial data obtained from market research. After evaluating several different strategies, the recommendation is to pursue the addition of new Netflix original content at an estimated cost of $6 billion. This investment in enhancing the Netflix owned content library has the potential to increase the stock price per share by over $14, which would be of significant value to shareholders. Table of Contents Executive Summary ........................................................................................................................ 2 Company Background .................................................................................................................... 4 Financial Analysis ........................................................................................................................... 4 Ratios .......................................................................................................................................... 4 Financial Strategies ......................................................................................................................... 6 Capital Expenditures ................................................................................................................... 6 Mergers or Acquisitions of a Competitor ................................................................................... 6 Stock Repurchase ........................................................................................................................ 7 Dividend Policy Adjustments ..................................................................................................... 7 Debt Reduction ........................................................................................................................... 7 Geographic Expansion ................................................................................................................ 7 Product or Service Expansion ..................................................................................................... 8 Analysis Summary and Recommendations .................................................................................... 8 Selected Strategy ......................................................................................................................... 8 Weighted Average Cost of Capital (WACC).................................................................................. 9 Shareholder Impact ....................................................................................................................... 10 References ..................................................................................................................................... 11 Appendix A – Financials .............................................................................................................. 13 Company Background In 1997 Reed Hastings and Marc Randolph launched a service which allowed users to rent movies online appropriately dubbed “Netflix”. Soon, Netflix, Inc. unrolled subscriptions that allowed for unlimited rentals at a low monthly rate. Only five years later, in 2002, the company went public, offering 5.5 million shares of NFLX on NASDAQ for only $15 per share (About Netflix, 2019). With the addition of streaming services, which allow members instant access to watch movies or television shows, popularity and membership continued to increase. Over the next decade, Netflix grew to over 40 million members and added upgrades that allowed its service to be accessed on a variety of electronic devices, including the X-Box, Blu-ray disc players, internet connected TVs, Wii, iPods, iPads and iPhones (About Netflix, 2019). Netflix has launched many of its own original, made for television movies and television series, and was the first ever internet television service nominated for a Prime Time Emmy. With countless awards, including several Oscars, Netflix was the most nominated service at the 2018 Emmys and tied with HBO for the most wins. Today, with over 141 million members in more than 190 countries, Netflix is unquestionably the world’s leading online entertainment service (About Netflix, 2019). Financial Analysis This high-level analysis was completed utilizing data from the past three years, as disclosed in the annual financial reports of Netflix, Inc., Other data for consideration includes the corporate history, geographical reach, product model and basic comparisons to IQIYI, Inc., a Chinese competitor in the online entertainment sector. Financial ratio calculations were completed using the income statements, balance sheets and statements of cash flow contained in Appendix A Financials. Ratios There are five major categories of financial ratios which can analyzed: profitability, liquidity, asset management, debt management, and market value. We will start by looking at the profitability ratio, which uses income statements to explore the return on investment and show how a well a company is doing at achieving profits from its operations. Table 1.0 shows that at the end of 2018, Netflix had a lower profit margin than Amazon. This is not surprising, as Netflix doesn’t sell advertising and relies solely on subscriptions for income. Increasing the profit margin would add value for shareholders. NFLX has a higher operating margin, meaning it is costing them more money to make money than AMZN. This is most likely related to the high costs of obtaining licensing or purchasing content. NFLX’s return on assets is also lower, though the return on equity is almost equal. Table 1.0 – Profitability Ratios – 2018 – Netflix (NFLX) vs. Amazon (AMZN) Profitability Gross Profit Margin Operating Profit Margin Return on Assets Return on Equity Netflix (NFLX) 36.8% 10.16% 4.66% 23.12% Amazon (AMZN) 40.25% 5.33% 6.19% 23.13% Table 2.0 measures the liquidity of Netflix compared to Amazon. Netflix actually appears to be slightly less liquid than Amazon. Though its current ratio is slightly higher Netflix also has a higher debt to equity ratio and a slightly lower cash ratio. Overall, Netflix appears to be doing well, but there is clearly room for improvement. Table 2.0 – Liquidity Ratios – 2018 – Netflix (NFLX) vs. Amazon (AMZN) Liquidity Current Ratio Debt to Equity Cash Ratio Netflix (NFLX) 1.49 1.98 .58 Amazon (AMZN) 1.10 1.13 .60 Table 3.0 shows us that Netflix has lower asset and equity turnover rates than Amazon. Netflix does not produce and sell merchandise, so it does not have inventory turnover. Improving the asset turnover rate would mean Netflix is better using its assets to generate revenue, which would add value for its shareholders. Netflix is also less efficient in using its equity to generate additional revenue. Table 3.0 – Efficiency Ratios – 2018 – Netflix (NFLX) vs. Amazon (AMZN) Efficiency Asset Turnover Inventory Turnover Equity Turnover Netflix (NFLX) .61 0 3.01 Amazon (AMZN) 1.43 8.10 5.35 Table 4.0 compares several market ratios. Neither Netflix nor Amazon has paid a dividend to its shareholders in the past quarter. Netflix averaged earnings of only 2.68 per share last year compared to Amazon’s 20.14, however, Netflix’s average P/E ratio was higher than Amazon’s, but it appears NFLX stock is more overvalued than AMZN. Table 4.0 – Market Ratios – 2018 – Netflix (NFLX) vs. Amazon (AMZN) Market Forward Dividend Yield Earnings per Share P/E Ratio Mkt/Bk Netflix (NFLX) 0.00 (as of 9/25/19) 2.68 (2018 average) 152.73 (2018 average) 31.18 (2018 average) Amazon (AMZN) 0.00 (as of 9/25/19) 20.14 (2018 average) 125.99 (2018 average) 21.98 (2018 average) Financial Strategies Increasing the price per share of Netflix would increase shareholder value. There are many strategies for financial engineering, including capital expenditures, mergers or acquisitions of a market competitor, repurchasing stock, changes to dividend policy, debt reductions, geographic market expansion or the addition of new products or services. • Capital Expenditures Capital Expenditures, often referred to as CapEx, are the funds a company invests in purchasing, maintaining or improving assets such as technology, equipment, or property. CapEx is primarily used for maintenance, growth and productivity. CapEx can have a significant impact on a company’s valuation. Annual CapEx is calculated as a percentage of annual revenue since it is reported on the income statement as an expenditure. This could result in profit reductions for the fiscal year, which impact the company’s valuation negatively (Investopedia, 2019). • Mergers or Acquisitions of a Competitor Generally, the term “mergers and acquisitions” refers to the consolidation of assets or companies through financial transactions such as acquisitions, mergers, purchase of assets, or consolidations. Though there is an expectation that a merger or acquisition will increase shareholder value, and may in the long term, the opposite can also occur. A study conducted by KPMG shows that 42% of deals fail to increase shareholder value. Further, 45% result in a decrease of value, meaning that combined, almost 90% of mergers or acquisitions fail to add shareholder value. While value often increases to a degree, the situations that occur post-merger between the two companies may lead to a value gap. Value gaps come about due to factors such as integration, inexperience, lack or loss of vision, management conflicts, poor risk or change management, lack of stakeholder communication, and clashes in the culture of the merging companies. This can lead to rising prices, reductions in quality and loss of customer. As supplier relationships or alliances suffer, the merged companies undergo degeneration leading to a decrease in shareholder value (Abrams, 2013). Sound decisions about M&A deals should not be based on how they will immediately impact earnings per share, but rather on the prospect of creating value down the road. • Stock Repurchase A company’s overall growth in profits may not be as important as increasing earnings per share of stock. When a company repurchases its own stock, the number of outstanding shares are reduced, each share represents a larger percentage of equity in the company and the value per share increases. While this appears to be winning investment, stock buybacks can potentially be harmful in situations where the company uses funds it cannot truly afford to spend or the stock is purchased for more than its true value. Stocks should only be repurchased when trading at a value below the best value estimate of management. A company should carefully weigh all options before allocating funds to a stock repurchase (Kennon, 2019) • Dividend Policy Adjustments One of the most important decisions a company’s directors make is the structure of dividend payout policy. A company must weigh the implications of allocating cash towards reducing debt, acquisitions, investments or share repurchases as opposed to paying dividends to the shareholders. Shareholders have an expectation
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