Financial Analysis Essay Example

Financial Analysis

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Date

Financial Analysis

  1. 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
201920182017
net sales20,41921,03721,253
Expenses
cost of products sold16,8861750017651
gross margin3,5333,5373,602
selling general and administrative2,14221892112
intangible amortization697579
restricting costs188247275
impairment of goodwill and other intangibles747
(gain) loss on sale and disposal of businesses-437
operating profit1,5712791,136
other (income) expense
interest and sundry (income) expense-16810887
interest expense187192162
earnings (loss) before income taxes1,552-21887
income tax expense354138550
net earnings (loss)1,198-159337
less net earnings (loss) available to no controlling interests1424-13
net earnings (loss) available to whirlpool1,184-183350
per share of common stock
basic net earnings (loss) available to whirlpool18.62.724.78
diluted net earnings (loss) available to whirlpool18.45-2.724.7
weighted average shares outstanding
basic63.767.273.3
Diluted64.267.273.4

The accompanying notes are an integral part of these Consolidated Financial Statements.

whirlpool corporation consolidated balance sheet at Dec 31st
2,0192,018
assets
current assets
cash and cash equivalents19521498
accounts receivable net of allowance of 132 and 136 respectively21982210
inventories24382533
prepaid and other current assets810839
assets held for sale818
total current assets73987898
property net of accumulated depreciation of 6444 and 6190 respectively33013414
right of use assets921
goodwill24402451
other intangibles net of accumulated amortization of 593 and 527 respectively22252296
other non-current assets358299
differed income tax22381989
total assets1888118347
liabilities and stockholders’ equity
current liabilities
accounts payable45474487
accrued expenses652690
accrued advertising and promotion949827
employee compensation450393
notes payable2941034
current maturities of long-term debt559947
other current liabilities918811
liabilities held for sale489
total current liabilities83699678
non-current liabilities
long-term debt41404046
pension benefits542637
postretirement benefits322318
lease liabilities778
other non-current liabilities612463
total non-current liabilities63945464
stockholders’ equity
Common stock, $1 par value, 250 million shares authorized, 112 million shares issued, and 63 million and 64 million shares outstanding respectively112112
additional paid in capital28062768
retained earnings78706933
accumulated other comprehensive loss-2618-2695
treasury stock 49 million shares outstanding respectively-4975-4827
total whirlpool stockholders equity31952291
no controlling interests923914
total stockholders’ equity41183205
total liabilities and stockholders equity1888118347
whirlpool corporation consolidated statement of cash flows year ended Dec 31st
201920182017
operating activities
net earnings (loss)1198-159337
Adjustments to reconcile net earnings (loss) to cash provided by (used in) operating activities
depreciation and amortization587645654
impairment of goodwill and other intangibles747
(gain) loss on sale and disposal of businesses-437
changes in asset and liabilities
accounts receivable-8779160
inventories-3973-229
accounts payables140210180
accrued advertising and promotions1181276
accrued expenses and current liabilities22162-230
taxes differed and payable net-116-67239
accrued pension and postretirement benefits-81-434-58
employee compensation1064436
other-181-8399
cash from operating activities123012291264
investing activities
capital expenditures-532-590-684
proceeds from sale of assets and business117416061
purchase of held-to-maturity securities-173
proceeds from held-to-maturity securities60113
investment in related business-25-35
other-6-4-3
cash from investing activities636-399-721
financing activities
net proceeds from borrowing of long-term debt700705691
repayment of long-term debt-949-386-554
net proceeds (repayment) from short-term borrowings-723653367
dividends paid-305-306-312
repurchase of common stock-148-1153-750
purchase of no controlling interest shares-41-5
common stock issued81734
other-7-7-14
cash from the financing activities-1424-518-553
Effect of exchange rate changes on cash, cash equivalents and restricted cash-28-6763
Increase in cash, cash equivalents and restricted cash41424553
Cash, cash equivalents and restricted cash at beginning of year153812931240
Cash, cash equivalents and restricted cash at end of year195215381293
Supplemental disclosure of cash flow Information
Cash paid for interest194183181
Cash paid for income taxes469206311
  1. 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

Whirlpool’s 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, Whirlpool’s annual rate of return will be (142.660904/28.739281).

8.34065419 percent = 1/20 = 1.083406542 – 1 = 0.083406542

  1. c) Using the data on the company’s stock rate of return and the index’s rate of return estimate beta of the corporation.

The volatility or risk of a stock is measured as a percentage of the overall stock market’s volatility. According to Hollstein, Prokopczuk, and Simen (2019), a stock’s 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.

  1. d) Estimate the expected annual rate of return of the corporation’s 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.”

  1. 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 company’s 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 Corporation’s 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, it’s an investment in an organization’s 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 company’s 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.

  1. 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 derivative’s terms, size, and settlement procedure when establishing a forward contract.

  1. 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.

  1. 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 Markets44, 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 Economics134(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 Economics42(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.

Last Updated on August 9, 2021