Fluent Essays

must cited:  Ross, S. A., Westerfield, R. W., & Jordan, R. D. (2018). Fundamentals of corporate finance (12th ed.). McGraw-Hill 17 Financial Analysis Student’s Name Institutional Affiliation Course Professors’ Name Date Financial Analysis a) Provide these statements in proper format and include a screenshot of the data. WHIRLPOOL CORPORATION CONSOLIDATED STATEMENTS OF INCOME (LOSS) Year Ended December 31, (Millions of dollars, except per share data) ILDE 2017 whirlpool corporation consolidated statement of income (loss) year ended 31st Dec 2019 2018 2017 net sales 20,419 21,037 21,253 Expenses cost of products sold 16,886 17500 17651 gross margin 3,533 3,537 3,602 selling general and administrative 2,142 2189 2112 intangible amortization 69 75 79 restricting costs 188 247 275 impairment of goodwill and other intangibles 747 (gain) loss on sale and disposal of businesses -437 operating profit 1,571 279 1,136 other (income) expense interest and sundry (income) expense -168 108 87 interest expense 187 192 162 earnings (loss) before income taxes 1,552 -21 887 income tax expense 354 138 550 net earnings (loss) 1,198 -159 337 less net earnings (loss) available to no controlling interests 14 24 -13 net earnings (loss) available to whirlpool 1,184 -183 350 per share of common stock basic net earnings (loss) available to whirlpool 18.6 2.72 4.78 diluted net earnings (loss) available to whirlpool 18.45 -2.72 4.7 weighted average shares outstanding basic 63.7 67.2 73.3 Diluted 64.2 67.2 73.4 The accompanying notes are an integral part of these Consolidated Financial Statements. whirlpool corporation consolidated balance sheet at Dec 31st 2,019 2,018 assets current assets cash and cash equivalents 1952 1498 accounts receivable net of allowance of 132 and 136 respectively 2198 2210 inventories 2438 2533 prepaid and other current assets 810 839 assets held for sale 818 total current assets 7398 7898 property net of accumulated depreciation of 6444 and 6190 respectively 3301 3414 right of use assets 921 goodwill 2440 2451 other intangibles net of accumulated amortization of 593 and 527 respectively 2225 2296 other non-current assets 358 299 differed income tax 2238 1989 total assets 18881 18347 liabilities and stockholders’ equity current liabilities accounts payable 4547 4487 accrued expenses 652 690 accrued advertising and promotion 949 827 employee compensation 450 393 notes payable 294 1034 current maturities of long-term debt 559 947 other current liabilities 918 811 liabilities held for sale 489 total current liabilities 8369 9678 non-current liabilities long-term debt 4140 4046 pension benefits 542 637 postretirement benefits 322 318 lease liabilities 778 other non-current liabilities 612 463 total non-current liabilities 6394 5464 stockholders’ equity Common stock, $1 par value, 250 million shares authorized, 112 million shares issued, and 63 million and 64 million shares outstanding respectively 112 112 additional paid in capital 2806 2768 retained earnings 7870 6933 accumulated other comprehensive loss -2618 -2695 treasury stock 49 million shares outstanding respectively -4975 -4827 total whirlpool stockholders equity 3195 2291 no controlling interests 923 914 total stockholders’ equity 4118 3205 total liabilities and stockholders equity 18881 18347 whirlpool corporation consolidated statement of cash flows year ended Dec 31st 2019 2018 2017 operating activities net earnings (loss) 1198 -159 337 Adjustments to reconcile net earnings (loss) to cash provided by (used in) operating activities depreciation and amortization 587 645 654 impairment of goodwill and other intangibles 747 (gain) loss on sale and disposal of businesses -437 changes in asset and liabilities accounts receivable -87 79 160 inventories -39 73 -229 accounts payables 140 210 180 accrued advertising and promotions 118 12 76 accrued expenses and current liabilities 22 162 -230 taxes differed and payable net -116 -67 239 accrued pension and postretirement benefits -81 -434 -58 employee compensation 106 44 36 other -181 -83 99 cash from operating activities 1230 1229 1264 investing activities capital expenditures -532 -590 -684 proceeds from sale of assets and business 1174 160 61 purchase of held-to-maturity securities -173 proceeds from held-to-maturity securities 60 113 investment in related business -25 -35 other -6 -4 -3 cash from investing activities 636 -399 -721 financing activities net proceeds from borrowing of long-term debt 700 705 691 repayment of long-term debt -949 -386 -554 net proceeds (repayment) from short-term borrowings -723 653 367 dividends paid -305 -306 -312 repurchase of common stock -148 -1153 -750 purchase of no controlling interest shares -41 -5 common stock issued 8 17 34 other -7 -7 -14 cash from the financing activities -1424 -518 -553 Effect of exchange rate changes on cash, cash equivalents and restricted cash -28 -67 63 Increase in cash, cash equivalents and restricted cash 414 245 53 Cash, cash equivalents and restricted cash at beginning of year 1538 1293 1240 Cash, cash equivalents and restricted cash at end of year 1952 1538 1293 Supplemental disclosure of cash flow Information Cash paid for interest 194 183 181 Cash paid for income taxes 469 206 311 b) Calculate annual rate of return by using adjusted closing prices for the past 20 The annual rate of return on a stock is a measurement of how much the stock has increased on average per year over a certain time period (Jordà et al., 2019). When comparing performance to basic returns, the method is preferable since it is often computed as a geometric average to assess how much an investment has earned over time. Historical Annual Stock Price Data for Whirlpool Current Value - Original Value / Original Value * 100 = Rate of Return Formula Whirlpools Rate of Return will be: = 142.660904 - 28.739281/28.739281 * 100 = 396.396914 percent based on the data. (Current Value/Original Value) = Annual Rate of Return Formula 20 years = 1/n - 1 N. As a result, Whirlpools annual rate of return will be (142.660904/28.739281). 8.34065419 percent = 1/20 = 1.083406542 - 1 = 0.083406542 c) Using the data on the companys stock rate of return and the indexs rate of return estimate beta of the corporation. The volatility or risk of a stock is measured as a percentage of the overall stock markets volatility. According to Hollstein, Prokopczuk, and Simen (2019), a stocks beta indicates the predicted or expected change in stock price depending on general market movements. The Beta of Whirlpool will be calculated as follows: 0.09 percent risk-free rate (3-month US Treasury bill) The stock rate of return for Whirlpool is 8.34065419 percent. The market rate of return is 10\%. 8.34065419 - 0.09 = 8.25065419 percent difference between stock rate of return and risk free rate The difference between the risk-free rate and the market rate of return = 10-0.09 = 9.91 percent. Beta Estimate = 8.25065419/9.91 = 0.832558445 = difference between stock rate of return and risk free rate / difference between market rate of return and risk free rate According to the source, beta is 1.91. (5Y Monthly) My Beta is less than one, indicating that Whirlpool Corporation Stock is less volatile than the overall market. The stock has a beta of 1.91, which is a 5Y monthly, suggesting that it is highly volatile when compared to the market as a whole, according to the Source. d) Estimate the expected annual rate of return of the corporations security. 0.09 percent risk-free rate 8.34065419 percent rate of return on stock The market rate of return is 10\%. Expected Annual Return as calculated by CAPM = RFR+stock (RmarketRFR), according to Situm, M. (2021). Where: RFR stands for risk-free rate. Bstock - Stock Beta Rmarket stands for market rate of return. e) Using the financial statements mentioned above estimate the annual rate of interest paid by the corporation (cost of debt). Also, find the tax rate and capitalization ratio (proportions among equity and debt). Using these values that you have found, estimate the annual weighted cost of capital (WACC) of the corporation. The effective rate of interest paid by a company on its obligations is known as the cost of debt. It is the entire debt of a company before any tax deductions (Zaid et al., 2020). The total book value of debt on the B. Sheet is $5899 million. $187 million in interest cost from the income statement As a result, loan cost = 187/5899 = 0.031700288 or 3.17 percent. Rate of effective taxation: $1552 million in earnings before taxes Taxes - $354 million As a result, the tax rate is 354/1552 = 0.228092784 or 22.8 percent. Ratio of capitalization: Whirlpool has a market value of $11586.190 million (E). Debt (D) has a book value of $5899 million. E / (E + D) = 11586.190 / (11586.190 + 5899) = 0.6626 Weight of equity = E / (E + D) = 11586.190 / (11586.190 + 5899) = 0.6626 D / (E + D) = 5899 / (11586.190 + 5899) = 0.3374 Weight of Debt = D / (E + D) = 5899 / (11586.190 + 5899) = 0.3374 The equity cost of capital will be Cost of Equity = Risk-Free Rate of Return + Beta of Asset * (Expected Return of the Market - Risk-Free Rate of Return) = 8.34065419, which corresponds to the Expected Annual Rate of Return in d above. As a result, the Whirlpool WACC calculation will be as follows: E / (E + D) = WACC 0.6626*8.34065419 percent + 0.3374*3.17 percent (1-22.8 percent ) = 0.063522162 = 6.352 percent Cost of Equity + D / (E + D)*Cost of Debt(1 - Tax Rate) = 0.6626*8.34065419 percent + 0.3374*3.17 percent (1-22.8 percent ) = 0.063522162 = 6.352 percent Whirlpool Corporation has a low WACC, indicating that it is well-managed in terms of debt and equity. High WACC numbers indicate that a companys activities are fraught with danger, since it will have to pay more in interest (Arnold & Lewis, 2019). Whirlpool must theoretically pay its investors $0.0352 for every additional dollar it acquires at 6.352 percent. As a result, Whirlpool Corporations Expected Annual Return will be =0.09\% + 0.832558445 * (10-0.09) = 0.09 percent + 8.25065419 percent = 8.34065419 percent. Debt securities, also known as fixed-income securities, are money that has been borrowed and must be returned according to conditions that specify the amount borrowed, the interest rate, and the maturity date (Dennison, 2018). In other terms, debt securities are financial instruments that may be exchanged between parties, such as bonds (e.g., government or municipal bonds) or certificates of deposit (CDs). Shareholders ownership interests in a business are represented through equity securities. To put it another way, its an investment in an organizations equity shares that allows you to become a shareholder. Holders of equity securities vary from holders of debt securities in that the former are not entitled to monthly payments, but they may benefit from capital gains by selling the stocks. Another distinction is that equity securities provide the holder ownership rights, making him one of the companys owners, with a stake proportional to the number of shares purchased. As the name implies, a hybrid security is one that combines the features of both debt and equity instruments. To borrow money from investors, many banks and organizations use hybrid securities. They usually offer to pay a higher interest rate at a set or variable rate until a certain date in the future, similar to bonds. The amount and timing of interest payments are not guaranteed, unlike a bond. They may even be changed into shares at any moment, or an investment can be cancelled. Derivative securities are financial products whose value is based on fundamental factors. Assets such as stocks, bonds, currencies, interest rates, market indexes, and commodities may be used as variables. The primary goal of utilizing derivatives is to think about and reduce risk (Obthong et al., 2020). It is accomplished through insuring against price fluctuations, facilitating speculation, and gaining access to difficult-to-reach assets or marketplaces. Derivative securities are divided into four categories: 1. Futures Futures, also known as futures contracts, are a contract between two parties for the purchase and delivery of an asset at a future date for a pre-determined price. Futures contracts are already standardized and traded on an exchange. The parties engaged in a futures transaction must purchase or sell the underlying asset. 2. Forwards Forwards, also known as forward contracts, are similar to futures in that they are traded on a retail basis rather than on an exchange. The buyer and seller must decide on the derivatives terms, size, and settlement procedure when establishing a forward contract. 3. Options Options, sometimes known as options contracts, are similar to futures contracts in that they involve two parties purchasing or selling an item at a preset price at a future date. The main difference between the two kinds of contracts is that with an option, the buyer is not obligated to finish the purchasing or selling process. 4. Swaps Swaps are transactions in which one kind of cash flow is exchanged for another. An interest rate swap, for example, allows a trader to move from a fixed to a variable interest rate loan, or vice versa. References Arnold, G., & Lewis, D. S. (2019). Corporate financial management. Pearson UK. Dennison, T. (2018). Bonds, Fixed Income, and Money Markets. In Invest Outside the Box (pp. 9-53). Palgrave Macmillan, Singapore. Hollstein, F., Prokopczuk, M., & Simen, C. W. (2019). Estimating beta: Forecast adjustments and the impact of stock characteristics for a broad cross-section. Journal of Financial Markets, 44, 91-118. Jordà, Ò., Knoll, K., Kuvshinov, D., Schularick, M., & Taylor, A. M. (2019). The rate of return on everything, 1870–2015. The Quarterly Journal of Economics, 134(3), 1225-1298. Obthong, M., Tantisantiwong, N., Jeamwatthanachai, W., & Wills, G. (2020). A survey on machine learning for stock price prediction: algorithms and techniques. Situm, M. (2021). Determination of expected cost of equity with the CAPM: Theoretical extension using the law of error propagation. Managerial and Decision Economics, 42(1), 77-84. Zaid, M. A., Wang, M., Abuhijleh, S. T., Issa, A., Saleh, M. W., & Ali, F. (2020). Corporate governance practices and capital structure decisions: the moderating effect of gender diversity. Corporate Governance: The International Journal of Business in Society.