Apple debt to equity ratio

Directions: Answer the following questions on a separate document. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using the assignment link above.

A. Using the two stocks you selected from Homework #1, identify the Beta for each stock. In your own words, what conclusion can you draw from the stocks’ current and historical beta? If the stock market went up 10% today, what would be the impact on each of your stocks?

B. Using the 2014 financial statements from your stocks above and the equations from your textbook, prepare the Historical Average and Standard Deviation for each stock.

Homework # 1

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 New York Stock Exchange (NYSE) and the National Association of Securities Dealer Automated Quotation (NASDAQ) are the two stock exchanges in the United States. Both Stock exchanges operate within New York. Whereas NASDAQ operates through automated trading as dealer market, NYSE, on the other hand, deals in the floor auction market that completes stock exchanges (Diffen, 2017).

Since their inception in 1971 and 1972 respectively, the two stock exchanges are currently the largest stock exchanges in the world with a total of about 4700 listed companies. Compared to NASDAQ, NYSE has a slightly higher fee. For that reason, you will notice that NYSE associates with well-established companies such as Ford Motor Company whereas high-tech companies such as Apple are listed with NASDAQ.

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?

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

Free cash flows = capital expenditures less cash flow from operations

10,444 – 6,597 = 3,847

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

14,507 – 7,463 = 7,044

From the calculations both for 2013 and 2014, Ford Motor Company depicts a healthy financial standing with more money coming in from operations. This enabled the company to increase its capital expenditure for instance in buildings, land, machinery, equipment, etc. while at the same time-saving money for organizational growth and expansion. The increase in free cash flow is an indication that the company is better positioned to explore other opportunities that may maximize shareholders value.

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

Free cash flows= capital expenditures less cash flow from operations

53,666 – 16,597 = 37,069

2014: (NASDAQ) Apple Inc. Free Cash Flow (in Millions)

59,713 – 20,624 = 39,089

Apple, just like Ford experienced a relatively high cash flow from operations. This means that the company can comfortably increase its capital expenditure and equally save money for organizational growth as expansion. It is also better placed to pursue opportunities that may result in maximization of shareholders wealth.

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 Motor Company

Liquidity ratios

Current ratios are calculated by dividing the current assets with the current liabilities

Current ratio for 2013; = 42,457 /37,003 = 1.1473

Current ratio for 2014; = 40,442 / 40,108 = 1.0083

The current ratio for the two years is greater than one which means that Ford Motor Company is liquid and can be able to pay their debts with the available assets. A current ratio below one would depict incapability to pay off debts, and this is an indication of insolvency. The company experienced a decrease in its current ration from 2013 to 2014 which indicates that the company increased its debts (Ford, 2017). However, since the ratio was still above one, the company was still capable of paying off its debts either by cash and assets.

The quick ratio is calculated by dividing current assets fewer inventories by the current assets

Quick ratio for 2013; = (42,457 – 7,708) / 37,003 =0.9390

Quick ratio for 2014; = (40,442 – 7,866) / 40,108 = 0.8122

The quick ratio indicates the liquidity of the company in terms of the number of assets available for each dollar worth of its current liabilities. This means that for every dollar worth of debt, Ford Motor Company had 0.93 and 0.81worth of assets to cover its liabilities for 2013 and 2014 respectively. Therefore, according to the company’s quick ratios, the company was not liquid enough to cover its liabilities (Ford, 2017).

Management ratios

Debt Ratio = Total Debt / Total Assets

In 2013: 178,428 / 202,905 = .8701 = 87%

In 2014: 184,269 / 210,444 = .8803 = 88%

High percentages indicate that Ford operates majorly from borrowed capital and therefore the company is not independent. Low percentages would depict a more independent company.

Debt-to-Equity Ratio = Total Debt / Total Common Equity

In 2013: 177,429 / 26,112 = 6.8

In 2014: 185,269 / 24,805 = 7.5

The high debt-equity ratio indicates that Ford has been actively involved in financing its own growth from borrowings.

Profitability ratios

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

In 2013: 7,040 / 145,917 = .0478 = 4.80%

In 2014: 4,342 / 144,087 = .0302 = 3.00%

This profitability aspect is used to gauge how well a company is able to maximize shareholders wealth. In perspective, it is the percentage of every dollar a company keeps. The company experienced a decline in 2014.

Gross Profit Margin = (Sales – Cost of Goods Sold) / Sales

In 2013: (145,917 – 125,195) / 145,917 = .1478 = 14.90%

In 2014: (144,087 – 123,516) / 144,087 = .1427 = 14.28%

This aspect measures the efficiency of the company in terms of production and service delivery. The high percentages indicate that the company is efficient

Apple

Liquidity Ratios:

Current Ratio = Current Assets / Current Liabilities

In 2013: 73,286 / 43,658 = 1.68

In 2014: 68,531 / 63,488 = 1.08

The current ratios are above one hence indicating the company is in a better position to pay its debts. However, like Ford, Apple also experienced a decreased in its current ratio in 2014 (Apple, 2017).

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

In 2013: (73,286 – 1,764) / 43,658 = 1.64

In 2014: (68,531 – 2,111) / 63,488 = 1.05

The ratios indicate that for every dollar of debt, the company has the 1.64 and 1.05 unit worth of assets to pay back their debts. This is slightly higher than Ford’s

Debt Ratio = Total Debt / Total Assets

In 2013: 83,451 / 207,000 = 0.40 = 40%

In 2014: 120,292 / 231,839 = 0.52 = 52%

Apple’s debt ratio is lower than that of Ford. This indicates that as compared to Ford, Apple is more independent and does not rely majorly on borrowed capital to run.

Management ratios

Debt-to-Equity Ratio = Total Debt / Total Common Equity

2013: 83,451 / 123,549 = 0.68

2014: 120,292 / 111,547 = 1.08

The low debt-to-equity ratio shows that Apple is avoiding running itself on borrowed capital. This means that regardless of its returns, the company will still be capable of paying off its debts given its high liquidity.

Profitability ratios

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

In 2013: 50,155 / 170,910 = 0.29 = 29%

In 2014: 53,483 / 182,795 =0.29 = 29%

In term of saving money for every dollar made, Apple saves much more than Apple and this cuts across the two years (Apple, 2017). In terms of shareholder wealth maximization, Apple creates much value for its shareholders compared to Ford.

Gross Profit Margin = (Sales – Cost of Goods Sold) / Sales

In 2013: (170,910 – 106,606) / 170,910 = 0.38 = 38%

In 2014: (182,795 – 112,258) / 182,795 = 0.39 = 39%

The gross margins indicate that the company is efficient in its operations. This attracts investors to invest in the company. These ratios are critical in informing investment decisions. However, there is more to the latter such as corporate structure and management which is also critical when making investment decisions.

References

Diffen (2017). NASDAQ vs. NYSE. Diffen. Retrieved from: http://www.diffen.com/difference/NASDAQ_vs_NYSE on 10/4/2018

Ford (2017) Financial Reports and Filings. Annual Reports 2014 and 2013. Retrieved from: http://corporate.ford.com/investors/reports-and-filings/annual-reports.html#/undefine on 10/4/2018

Apple (2017) Financial Information. Earnings Releases and 10-K Annual Reports 2014. Retrieved from: http://investor.apple.com/financials.cfm on 10/4/2018