Financial Analysis
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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
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
- 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.
- 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.”
- 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:
- 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.
- 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.
- 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.
- 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.