Finance Assessment 1

Group Assignment

Tutor: Aysha Buheji

Team Members: Fatema Abdulla Isa A.Nabi Ali Madan 201401053
Mohamed Khaled Abdulla Jasim Ahmed 201300294
Abdulla Khaled Mohamed Haji Saheb Albalooshi 201300473
Mohamed Khaled Fahad Mansoor Isa Al Mansoor 201501398
Part A:

“Life is a rollercoaster” you woke up one day and heard that your wealthy relative has
died. It was noted in his will that he would like his fortune to be ultimately used for
charity purposes. He also wrote that he would like you to be in charge of managing this
money for 5 years, after which the money should be given to an NGO called “Save the
Children”. He has left you $ 1,500,000 and has stated that you should invest this money
either in the Walt Disney Company or Apple Inc. (both companies are listed on US stock
exchanges) and that his dying wish is to have a minimum return of 15% p.a. With mixed
feelings of grief, fear and excitement you start wondering about the following: How
would you handle the first phase? Which company will you choose? How will you make
this choice?
You sit together with your friend who has just completed an “introduction to finance
course” and set a plan for how you are going to approach your decision. Your friend also
suggests that you present your plan with justifications to the other family members.
Below are the tasks and questions that you need to answer according to the plan you
have set together.

You will need to find the historical financial statements for these two companies, as
well as the stock price history.
Q1: Ratio calculations and ratio interpretation 30 marks
Use the quarterly financial statements of Apple (dated 25 June 2016) and Walt Disney
(dated 2 July 2016) to undertake financial ratio analysis for each company and evaluate
their relative strengths and weaknesses.
All the numbers from this part are from Yahoo Finance
And the Outstanding Shares are from Ycharts
Industry Average from Yahoo

Electronic industry Average

Entertainment Industry Average

Solvency Ratio:

Apple

Disney

Solvency ratios measure the firm’s ability to meet all of its debts both long term and
short term but solvency ratios focus more on the long term.

We could not find Industry average for debt ratio so we are going to compare them with
each other.

Debt ratio is used to know the proportion of both companies’ assets that have been
financed by debts, and when companies have very high debt ratio it means that it is in a
higher risk and the company would not easily be able to borrow more money in case of
an emergency. Apple has a debt ratio of 58.60% while Disney has 51.39% that is not a
significant difference between the two companies. In addition high debt ratio is not
always bad as loans are exempted from taxes so this means that both companies would
have to pay less taxes and this would benefit them overall.
 The next ratio is Debt to Equity Ratio, is used to know how much debt both companies
is using to finance their assets compared to amount financed by shareholders equity.
Apple debt to equity ratio is 141.5% and it is high compared to the electronic Industry
that is 52.62% this shows that Apples finances most of their operations by taking debts
rather than their shareholders. While Disney debt to equity ratio is 105.72% it is
relatively high compared to the Entertainment industry that is 72.69%. This shows that
both companies are financing themselves by taking debt and that may put them at risk
as they would not be able to pay their debt if the debt to equity ratio is so big.

Times interest earned ratio shows how many times the company could pay its interest
using their income before tax. As for Apple there is no interest expense on yahoo finance
so there could not be answer while for Disney times interest earned ratio is 26.98 times
which means that Disney could almost pay their interest 27 times. And that’s a good
indicator that Disney is doing well in terms of paying their interest.

Equity multiplier is better to be compared with the industry average we could not find
the industry average so we compared them with each other.

Equity Multiplier measures the financial leverage of the company, it also shows wither
the company is operating on debt or its own equity, if equity multiplier is low it means
that the company is using less debt to finance their assets, it is preferable if it is low but
if it is too low they are not taking advantage of debt which is tax free, Apple’s equity
multiplier is 2.42 times and this means for every 1 million equity they have 2.42million in
debt, while Disney’s equity multiplier is 2.057 this shows that Disney is financing a little
more of their operations using their equity and not debt so in this ratio Disney is better.

Liquidity Ratios:

Apple

Disney

Liquidity ratios are ratios that show if the companies are able to pay their short-term
obligations.

Current Ratio measures the company’s ability to pay its liabilities with their assets. So
when Apple and Disney are compared Apple could pay their current liabilities with their
current assets 1.31 times while Disney could not pay all their current liabilities with their
current assets because it is only 0.975 times, and when this number is higher it is better
because it shows that the company is able to meet the requirements if they do really
need to liquidate their assets.

Quick Ratio is very similar to current ratio the only difference is that it does not take
inventories into consideration because inventories are sometimes hard to convert into
cash so it only takes into account things that could easier be liquidated such as cash and
securities and Apple is still more likely to be able to pay their current liabilities as the
value 1.29 times is still higher than Disney which is 0.899 times.

Profitability Ratios:
Apple

Disney

Profitability ratios are ratios that measures the company’s ability to make profits

Return on Assets is and indicator of how profitable the company is when comparing it
with its assets, in other words how efficient the company is in producing profits. Apple
has a 2.55% return on their assets and Disney has 2.86% return on their assets so in
terms of efficiency Disney seems to be more efficient in producing profits using their
assets by a slight margin.

Return on Equity is the percentage of profits that has been generated with the money
shareholders has put in the company and the higher the better because it means for
every dollar invested the company would be able to make more out of it.

The electronic equipment industry average for RoE is 31.20% while Apple is only 6.16%
and that is a significant difference, this shows that Apple does not produce a lot of
return from investments compared to the industry average, this is definitely a drawback
to Apple as it is way behind in terms of return on equity.

The entertainment industry average RoE is 19.60% while Disney is only 5.88% this is still
low compared to the industry average. Even though Disney RoE is lower than Apple
when we compare both with their industry average Disney is doing better.

Profit Margin is a ratio that measures the percentage of profits from the company’s sales
and if the value is high it means that the company’s expenses are low.

The electronic industry profit margin is 16.30% and Apple’s is 18.41% and this is good
because this means that Apple is able to keep costs low in order to increase their profit
margin
The Entertainment industry profit margin is at 13.70% while Disney is at 18.19% and this
also shows that Disney is out performing in their industry and is able to keep their costs
low. In this ratio both companies are performing at a higher level than their industry
average.

Market Value Ratios

Apple

Disney

Market to book ratio to compare between the market value and the book value as in
what will shareholders’ get if the company is closes now.

Price to book value average in the electronic industry is 5.89 while Apple is at 3.98 this
means that if Apple would close now it would give less to the shareholders than the
average company

The price to book value in the entertainment industry is -7.30 while Disney is 3.77 this
shows that Disney is way safer than the average entertainment company and the
investors would get more.

Price to earning ratio indicates the amount the investor can expect to invest in order to
receive one dollar from the company earnings.
The electronic industry P/e ratio is 17.10 but Apple is 64.61 this is a big difference
between the industry average and apple this means that we need to investor more to
receive one dollar of earnings.
The entertainment industry P/e ratio is 18.60 but Disney is 64.17 this is also a huge
difference.
But in P/e ratio both companies are fairly close to each other and there is no huge
difference between the both.

Asset Utilization Ratios:

Apple

Disney

These ratios shows how effective is the company in using their asset investment

Receivables Turnover measures how effective the company is on collecting the credit
they have issued to their customers. The longer it takes to get the money the more the
company loses.
Apple receivable turnover is 2.22times while Disney is 1.6 times this means that Apple is
more efficient in collecting the money from their customers.

Inventory Turnover indicates how fast the company is able to selling their inventories. As
the higher the turn over it mean that they’re having strong sales so it is better, but if the
turnover is very high it may be due to discounts on the products/services, Apple’s
inventory turnover is 14.34 time while Disney is 5.3 times this shows that Apple is doing
better in terms on sales but both companies come from different industries so it is
difficult to compare.

Fixed assets turnover indicates on how effective is the company on generating sales from
fixed assets only. Apple’s fixed assets turnover is 0.2 times while Disney is 0.194 times,
this shows that Apple is doing better in terms of using their fixed assets to generate
sales.

Total asset turnover measure how much the company is generating sales per dollar of
their assets. Apple has a total asset turnover of 0.14 times while Disney is 0.157 times
these can not be compared because they come from different industries.

Pay-out Ratio
Apple

Disney

Payout ratio
This ratio indicates the proportion of the net income that are paid as dividends to
investors
Apple’s payout ratio is 40.88% while Disney is 44.09%; even though Disney is high a
lower payout ratio is better because giving out less money means that the value of the
share could increase, hence why Apple is better because it is reinvesting the money in to
the company.

Q2: Stock valuation 15

 marks
Use a dividend discount model to estimate a fair value of each company. Compare the
market price of both companies’ stocks on 3 October 2016 with this estimated value to
determine whether you think they are undervalued or overvalued.

We chose Constant growth method because it is simple to use, and it would allow us to
easily understand the stock valuation. Even though it assumes that the growth rate is the
same it is the best available option for us.

Nov 03, 2016 0.57 Dividend

Aug 04, 2016 0.57 Dividend
May 05, 2016 0.57 Dividend
Feb 04, 2016 0.52 Dividend
Nov 05, 2015 0.52 Dividend
Aug 06, 2015 0.52 Dividend
May 07, 2015 0.52 Dividend
Feb 05, 2015 0.47 Dividend
Nov 06, 2014 0.47 Dividend
Aug 07, 2014 0.47 Dividend
May 08, 2014 0.47 Dividend
Feb 06, 2014 0.43571 Dividend
Nov 06, 2013 0.43571 Dividend
Aug 08, 2013 0.43571 Dividend
May 09, 2013 0.43571 Dividend
Feb 07, 2013 0.37857 Dividend
Nov 07, 2012 0.37857 Dividend
Aug 09, 2012 0.37857 Dividend
 Apple Company

2016 Dividend = 0.52 +0.57+0.57+0.57 = 2.23

2013 Dividend = 0.37857 +0.43571+ 0.43571 + 0.43571 =1.6857

We could not find more Dividends, the latest Dividend is for 2013
That is why we chose it. If we have more Dividends will be better to know the history of
the company.

G= 3 square root 2.23/ 1.6857 - 1

= 0.097761 x 100 = 9.77%

D1 = 2.23 (1+ 9.776%) = 2.448

P0= 2.448 / 15% - 9.7761%

= 46.8616 $

The price on October 3th is =112.52$

So the value is overpriced, so we should not buy the stocks.

Jul 07, 2016 0.71 Dividend

Dec 10, 2015 0.71 Dividend
Jul 01, 2015 0.66 Dividend
Dec 11, 2014 1.15 Dividend
Dec 12, 2013 0.86 Dividend
Dec 06, 2012 0.75 Dividend
Dec 14, 2011 0.6 Dividend

Walt Disney Company

2016 Dividend = 0.71 + (0.818) this dividend is estimated, it is the average of the
dividend from Jul 07, 2016 until Dec 12, 2013 (0.71+0.71+0.66+1.15+0.86) / 5 = 0.818
2016 Dividend = 0.71 + (0.818) = 1.528
2013 Dividend = 0.86

We chose 2013 to compare with Apple Company because Apple have dividend until
2013. We cannot choose another year because we will not be able to compare between
the two companies.

G= 3 square root 1.528/ 0.86 - 1

= (0.2111) x 100 = (21.11%)

D1 = 1.528 (1+ 21.11%) = 1.8505

P0= 1.8505/ 15% - (21.11%)
= -30.2874$

The price of October 3th is =92.49$

There are limitations to this model because it assumes that the companies would have
constant growth and that is not always the case, there are other factors that may effect
the growth of the company such as a recession in the business cycle, it is clear that both
companies stocks are over prices but Disney’s stocks seems to be way over priced so it is
the better option to get the Apple stocks if referring to this model.
Q3: Risk and return of share prices 10
marks
Look at the stock prices during the 12 months (1 October 2015 - 30 September 2016)
and calculate the average monthly returns. Evaluate the comparative risk using the
coefficient of variation.

Apple

Disney

The way used to measure the return of a specific period is calculating the holding period
return. Basically, a monthly calculation used to measure the variability of returns
associated with a specific period of time, which results in -0.01625 (Disney) and
0.0007604 (Apple) average return.
A standard deviation used to know how far is the average data, which can be shown in a
normal distribution figure. Apple has a larger standard deviation which indicates for
more spread out figure in normal distribution. On the other hand, Disney got smaller
standard deviation, which show less spread out data on the figure.
Finally, a calculation of CV for the firms Disney and apple used to manage to measure
relative dispersion for each one of them. It mainly uses to compare the risks of assets
with expected returns. The higher CV of Apple indicates that the investments has more
volatility to its expected return unlike what Disney CV indicates for which has less
volatility to its expected return.

Q4: Recommendation 25 marks

Make a final recommendation regarding the company you will be investing in and
provide a detailed justification.

Apple is the recommended Company for several reasons

As for the solvency ratios both companies are very close to each other in terms of how
much of their assets a financed by debt but Apple is slightly more dependent on debt as
a way to finance their assets that may not always be a bad thing as they would not need
to pay tax on their debt. When it comes to liquidity ratios Apple is more able to meet
their short-term liabilities than Disney so it is the better option in terms of liquidating
their assets to pay their liabilities. When it comes to profitability Disney is out
performing Apple if both companies are compared to their industry averages. However
when it comes to Asset Utilization Ratios Apple is overall being more efficient in using
their assets and are enjoying high sales. As for payout ratio, Disney is paying more
percentage dividend than Apple but it is not always favorable to pay the most dividends
to shareholders.
When it comes to stock valuation both companies are over priced but Disney’s real price
is in negative which is not possible but it is a clear indication that it is way overpriced so
Apple even though it is overpriced it is the better option in terms of stock valuation.
The characteristics of risk and return are presented by the financial decision that is used
to determine the price of the share price. Therefore, based on the findings, apple got
higher standard deviation which results in more spread out data. Moreover, Apple CV
would be a better choice to choose as it has volatility to its expected return, as the
theory stated that the higher the risk, the higher the return, Apple would be a better
firm to take risk in.
We recommend that buying Apple stocks is the best option as its performance is
superior compared to Disney.
Q5: IRR and NPV 20 marks

Rather than investing the funds in the company identified in part A, the sister of your
deceased relative is insisting on using this money to build a factory that manufactures
plastic containers. Below is some of the information collated about this factory.

Annual sales 40,000 units at $125/unit

Profit margin 60%
Tax rate 30%
Construction cost of factory $1,500,000
Estimated economic life of the factory (5 years, no residual value)

Using an excel spreadsheet, conduct an NPV and IRR analysis to evaluate whether this
will be an acceptable investment. Make a recommendation based on the analysis.

Question 5:
Cash flows calculation:
$40000 * $125(per unit) = $5000000
$5000000* 60% (profit margin) = $3000000
$3000000* 30 %( tax) = $900000
$3000000 (profit margin) – $900000 (tax) = $2100000

According to the IRR and the NPV above this can be called an acceptable investment.