Introduction
General
Financial analysis is a rather complicated matter to deal with because it involves the knowledge of different aspects of such sciences as economics, mathematics, etc., and presupposes the presence of the analytical way of thinking from the side of the person that deals with the analysis. Finance itself is a very interesting thing to write about as people who willingly deal with finance or are made to deal with it always get to know a lot of new things while exploring the topic.
Financial problems
So, that is why this very analysis will deal with a rather difficult but, at the same time very interesting topic of the financial analysis. The analysis aims to examine the financial problems that were experienced by different firms and companies at certain stages of their development and to analyze how these problems influenced the financial side of the company’s work. The activities that will be carried out in this analysis are connected with the average assessments of the companies’ costs of capital, calculating the possible prices for the stocks of companies, defining the approximate prices for the companies’ shares, determining the rate of the companies’ growth, etc.
Background of the problem
Basic Notions
The current financial analysis will deal with different economic problems using specific examples from existing companies that still operate in the market. The keywords and notions of the analysis are exchange rate, price of the stock, expected return of the financial system, the rate of growth of a company. These notions will be explained in the analysis in order to avoid any possible cases of ambiguity that might occur in another case.
Specific Examples
The problems that are going to be considered in the analysis are examined using specific examples, such as the following:
- calculation of the weighted average cost of capital (WACC) of the firm Hilliard Corp.;
- assessment the prices of common stocks of such companies as J. Ross and Sons Inc.;
- detection of the return rate of the stock of the company Grant Corporation;
Methods
The analysis of the financial systems and data will involve a set of different methods that can help the research in their own way. The method of mathematical calculation proved to be a reliable one while dealing with problems of such kind. All the formulae that are used in the analysis also helped much in the work. Besides, such methods as a case study, survey making, and others make it easier for people to gather and systematize the knowledge got from the work in order to carry out the successful calculations and the following analysis. So, now let us proceed to the next stage of this analysis which is called “Calculations”.
Calculations
Hilliard Corp.
This very company expressed the wish to have the weighted average cost of its capital calculated. To do, this the company carried out a huge piece of work and gathered the following information. It became evident that the company’s long-term bonds nowadays offer a yield of 8 percent maturity. The fact that the price of the company’s stock comprises a sum of 32$ per share can not be deprived of attention as well.
The same is true about the recently paid dividends that reached the level of 2$ per share and promise to develop next year up to 6$ per share. All the above-mentioned data and figures allow us to conduct the calculations and state that the weighted average cost of its capital of the company Hilliard Corp will be approximately at the level of 12%.
J. Ross and Sons Inc.
This company is concerned with the issue of calculating the cost of its common stock, as well as the cost of the newly issued preferred stock and the calculation of its weighted average cost of the capital. Based on the conducted calculations we can present the following results. The cost of the company’s common stock will amount to the level of 70$ per share, while the cost of the newly issued preferred stock will be at the level of 90$ per share. Drawing from this we can conclude that the weighted average cost of the capital of this very company will be at the level of 10.8%
Mack Industries
The company experienced the growth of the cost of its stock that reached the level of 20% this year and is said to grow 15% more in the next year. The following years are supposed to witness a constant growth of 5% per year. It is evident that if the planned rate of the expected return of the company must equal 12%, the price of the common stock per share must also grow. In the following year it must be already at the level of 1.35$ per share and every year the cost will increase by 0.05$.
Grant Corporation
The corporation considered in this very point of the analysis is one of the leaders in the market of stock and it needs some calculations to be carried out as for the growth rate of the cost of this company’s stock. The information given runs as follows: nowadays the stock is sold at the rate of 40$ per share while dividends amount to 2$ (Do = 2$). The required return rate is 13.8%. As can be understood after considerable calculations, the growth rate for this stock is at the level of 10.8%.
Philadelphia Corporation
The Corporation from Philadelphia has a considerable growth in the cost of its stock, which is demonstrated by the following figures: the dividends are paid in the sum of 2$ per share, while the required rate of the return is 15%, and the annual growth rate of the company is 5%. This allows us to say that the stock of this company is sold at the price of 35$ per share.
Yohe Technology
The company sells its stock at the price of 40$ per share and pays dividends in the sum of 2$. The risk premium is at the level of 7%, and the risk-free rate is 5%. In order to find out what will be the cost of the company’s stock in 5 years, we shall trace the growth of the sum of the dividend that is supposed to grow steadily at a certain percent indicated as “g”. If we take the “g” as the sum of 5%, we can clearly see that in 5 years the stock of the company will cost 50$ per share.
Yahoo
This internet giant has issued 15-year bonds that are callable in the period of 5 years and have a coupon rate of 9%. The bonds are sold at the market at the price of 1,100$ per share. We need to calculate what will be the yield to call of bonds and by using the method of simple mathematical calculations we can state that the yield to call of the bonds will be at the level of 1, 230$ per share.