Finance and Accounting of an Organization - Essay Example

?Money and Management Midterm By Finance and Accounting of Contents Contents PART I – Pension 4 LockheedMartin Corporation 5 Background information about the company 5 Financial Ratios of Lockheed Martin 5 Earnings per Share 5 Price Earnings Ratio 6 Price per Book 6 Price per Sales 6 Return on Equity 7 Payout Ratio 7 Price per Cash Flow 7 Dividend Yield 7 Altera Corporation 8 Background information about the Company 8 Financial Ratios of Altera Corporations 8 Earnings per Share 8 Price Earnings Ratio 8 Price per Book 9 Price per Sales 9 Return on Equity 9 Payout Ratio 9 Price per Cash Flow 9 Dividend Yield 10 Conclusion 10 List of References 11 PART I – Pension This section intends to carry out an analysis of how much an individual can earn by investing in life insurance companies. Essentially, investment in a life insurance requires apt application of life annuity principles. A life annuity refers to a system for distributing funds provided to the insurance firms by the annuity holders. It is imperative to note that, the insurance companies are obliged to make regular and lifelong payments until the holder dies (Brealey & Myers, 1997). Consider the formula of calculating life annuity returns Payout= P*R*(1+R) exponent N/ (1+R) Whereby P is the principal, R interest rate and payout refers to the periodic payment. Take a percentage interest of 6% and use the annuity calculator for easy calculation. For a single life annuity, fixed amount to be paid is 3,333 per month. This adds up to EUR 39,996 annually. Therefore, annual periodic payment would be: A = EUR 39,996 Now I believe that I would need more money than EUR 39,996 annually. There would be different factors that would reduce the value of EUR 39,996 at that time like inflation. Therefore, when I retire and I think EUR 45,000 should be a valuable amount that I would need every year to spend my life happily. In order to have this amount every year, the interest rate should be 7% as calculated using Goal Seek option in Microsoft Excel. The life expectancy and retirement age considered in this context is 70 and 55 years respectively. PART II- SHARE ANALYSIS This part intends to examine and analyze two companies from the investment analysis. Various financial ratios will be applied to analyze the performances of the company. The implication created by the ratios will be used to recommend a suitable company for investors to invest. The two companies intended for analysis for this report are Lockheed Martin Corporation and Altera Corporation. Lockheed Martin Corporation Background information about the company Lockheed Martin is a global leader in providing aeronautics and defense security services. The company is the world’s largest federal contractor of the agency with unique product portfolio. Headquarter of the company is situated in Bethesda, Maryland in Washington Metropolitan Area. The company is present in more than 75 countries. The company has partnership with more than 300 industry players across the globe. It employs around 120,000 employees worldwide who include 80,000 scientists, engineers and IT professionals. This research establishes that, Lockheed reported $46.5 billion revenue in 2011 through its portfolio that includes aeronautics, electronics system, IT and global services, and space system. Net Income of the company is $2.65 billion in 2011. Presently, its share price is $93. Financial Ratios of Lockheed Martin Earnings per Share The Earnings per share shows how much return a shareholder is earning for each share (Friedlob and Plewa, 1996). The earnings per share of the Lockheed Martin were 7.81 in 2011. However, the average 3-year EPS growth rate of the stock is zero. Price Earnings Ratio Price Earnings ratio is the calculated by the following formula. Price earnings ratio = the market price per share/ annual earnings per share. A higher P/E of the stock implies that, investors are paying more for earning every dollar consequently; the share becomes more expensive compared to the stock with lower P/E ratio. The P/E ratio of Lockheed martin is 10.9 (Gitman, 2003).This implies that, the investors have to pay $10.9 to earn a single dollar. On the other hand, the industrial average P/E ratio is 13.2. Therefore, the Lockheed’s stock is paying more as compare to the industry. Price per Book The ratio shows the price of the stock to its book value. It is expressed as Price per book = price of stock/book value The lower the P/B ratio the better the value of the stock is (Kaplan and Atkinson, 1998). The P/B ratio of Lockheed martin is 13.7 compared to its industry average, which are 3.0. The wide gap between the P/B and the industry average implies that, there is no positive indication for investors to invest in Lockheed Martin. Price per Sales P/S ratio is calculated by the following formula Price per Sales = ratio of share price / revenue per share. It is imperative to note that, when the value of P/S ratio is less than 1 the environment for investment is considered favorable. This is because the investors are paying less for each unit of sales. The P/S ratio of Lockheed Martin is 0.6 compared to the industry ratio that is 0.8. Hence, the ratio makes the stock favorable for investors. Return on Equity The ROE is calculated by the formula given as follows ROE = Net income divided/shareholder’s equity. ROE indicates the amount of profit a company generates using shareholder’s equity (Ross, Westerfield and Jordan, 2009). Lockheed martins’ ROE is 103.1% compared to the industry average, which is 22.1%. This figure shows that the company is generating more income than the shareholder’s equity hence it is very much impressive for the investors. Payout Ratio Payout Ratio reflects the earnings that the company has distributed in the form of dividends to the shareholders (McLaney, 2009). The company’s payout ratio is 41.4% in 2011, which shows that company has paid approximately 41 percent of its net income to the shareholders in the form of dividends. On the other hand, the average industry’s payout ratio is 43.9%. This is an indication of a well performing company, which investors can invest with hopes of receiving dividends after every financial year. Price per Cash Flow Price per cash flow shows the relationship between the share price and the cash flow per share. The price to cash flow ratio of the company is 10.4 against the industry ratio, which are 9.8. The company has higher ratio than the industry therefore the ratio is not attractive for investors. Dividend Yield Dividend yield shows how much dividend company pay to its investors relative to its share price. The higher the yield, the most likely investors attract towards company’s stock. The dividend yield of Lockheed Martin is 4.3% against its industry average that is 2.4%. It shows that the company is paying more yield to its investors as compare to its average industry. This is a fundamental incentive to investors; in fact, it forms a significant factor that will attract investors to invest in the Lockheed Martin. Altera Corporation Background information about the Company Altera Corporation was founded in 1983 with the purpose to provide software solutions to the world. Based on the market share, the company is the second largest designer of programmable devices. It obtains the second position in PLDs market and is behind XLNX. The company designs chips, used in the data processing, communication devices, and consumer, automobile and industrial markets. The company only designs and sells these chips and outsources its manufacturing to a third party. The company generated $2.064 billion revenue in 2011 while its net income was $771 million. Presently, the share price of the company is $32.5. Financial Ratios of Altera Corporations Earnings per Share The Earning per share of the company’s stock was $2.35 per share in 2011. However, the average 3-year EPS growth rate of the stock is 25.8 against the industry average that is 27.7. Price Earnings Ratio The P/E ratio of the company is 17.3 against the industry average that is 16.5. This signifies that, the investors have to pay $17.3 for earning every dollar, which is quiet high compared to the industry. This ratio indicates a relatively less conducive environment for the investors to invest in the company’s stock in comparison with the milieu provided by the Lockheed Company. Price per Book This study observes that, the P/B ratio of the company is 3.3 compared to the industry’s average, which is 2.4.The fact that, the ratio is higher than the industry, there exist an indication that, attraction of investors to invest in this company maybe limited compared to those who might want to invest in Lockheed. Price per Sales The P/S ratio of the company is 5.8 against its industry average of 2.2. This implies that, investors pay more for each unit of sales compared to the industry’s average. The gap between the two figures indicates a less conducive milieu for investments in Altera Company, particularly when comparing to Lockheed. Return on Equity The ROE of the company is 20.2% while its industry average is 15.3%. The company is able to generate almost 20% return using its equity. Moreover, the company is utilizing its investor’s money better than the industry. Payout Ratio The payout ratio of the company is 11.9% in 2011 while the average company’s payout ratio is 17.9%. Price per Cash Flow The Price per cash flow is 15.6 against the industry average of 9.2. The company has much higher ratio than the industry therefore the ratio. However, this is an indication of a favorable milieu for investment, which is less conducive when comparing it to that of Lockheed. Dividend Yield The dividend yield of the company is 1.1% against its industry average that is 2.4%. This ratio indicates that the investors are getting less dividend yield compared to the average industry. This is milieu is not appropriate for investment and it may limit the number of investors for this company. Conclusion Fundamentally, most investors check on the level of financial soundness and economy trend growths of a company before doing any substantial investment. Based on the above figures, more investor are likely to invest in Lockheed Martin’s stock because the company has strong ratios as compared to its industry and the Altera Corporation. Of more significance, the return on equity, dividend yield, payout ratio and price per sales. These ratios indicate financial stability of Lockheed Martin’s stock and a considerable level of favorability for the investors. In addition, these ratios confirm that this company is performing better than the other firms in the industry are. It is imperative to note that, the Earning per share, dividend yield and payout ratios are remarkable for the investors and encourage investors to invest in the firm. Moreover, the company is one of the highest dividend yield providers in the industry. On the other hand, Altera Corporation’s financial ratios indicate a certain extent of investor favorability but not persuading like that of Lockheed. When doing comparison of the two companies, Lockheed stands a relatively better chance of attracting more investors than Altera. In essence, this study observes that, Lockheed Martin would be a better option to invest in than Altera Corporation. List of References Brealey, R. and Myers, S. (1997). Principles of Corporate Finance. New York: McGraw-Hill Companies. Friedlob, G., & Plewa, J. (1996). Understanding balance sheets. New York: John Wiley & Sons. Gitman, L. (2003). Principles of Managerial Finance. Boston: Addison-Wesley Publishing. Kaplan, R., and Atkinson, A. (1998). Advanced Management Accounting. New Jersey: Prentice-Hall. McLaney, E. (2009). Business Finance: Theory and Practice. New Jersey, Pearson Education Ross, S., Westerfield, R., and Jordan, B. (2009). Fundamentals Of Corporate Finance Standard Edition. New York, McGraw-Hill. Read More