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ADM 1340 Chapter Notes - Chapter 11: Dividend Yield, Investment, Weighted Arithmetic Mean

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peardinosaur3
22 Apr 2017
School
University of Ottawa
Department
Administration
Course
ADM 1340
Professor
Lamia Chourou

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ADM 1340 Full Course Notes
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Document Summary

Reporting and analysing shareholders" equity: corporate form of organization, characteristics of corporation, share issue considerations. The liability of shareholders is limited to their investment in the shares of the corporation. Shareholders cannot be made to pay for the company"s liabilities out of their personal assets. Limited liability is a significant advantage for the organization: transferable ownership rights, ownership of a corporation is held in shares of capital, which are transferable. Shareholders can just share their units if they don"t want to be involved anymore. Shareholders can invest in the corporation without having to manage it personally. Shareholders elect a board of directors that will represent the corporation and make the decisions for all shareholders. Income tax: proprietorships and partnerships do not income tax as separate entities. Increased cost and complexity to follow government regulation. Ease of transferring ownership rights (shares: ability to acquire capital (cash) by issuing shares, continuous life, potential for reduced income tax.

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Related Questions

Compare Companies --- Netflix (NFLX) vs. GEO Holdings (TOK) Compute financial ratios, time value, variables, and returns using industry standard tools for optimizing financial success. Analyze corporate financial data in evaluating past and future financial performances.

Use formulas to calculate the following financial indicators for each year of data: Three fiscal years for Netflix and GEO Holdings for:

o Price to earnings ratio

o Debt to equity ratio

o Free cash flow

o Earnings per share

o Return on equity

o Net profit margin

V. Performance Over Time

A. Analyze the performance of the Netflix over time. What financial strengths and weaknesses does this company have? Consider addressing the free cash flows and ratios you calculated earlier.

B. Analyze the performance of your GEO Holdings over time. What financial strengths and weaknesses does this company have? Consider addressing the free cash flows and ratios you calculated earlier.

C. Analyze how the data differ between these two companies. Why do you think this is? Consider addressing the free cash flows and ratios you calculated earlier.

VI. Investment

A. Are the companies considered growth or value companies? Why?

B. Which company’s stock is the better investment?

Netflix Inc. (NMS: NFLX)
Exchange rate used is that of the Year End reported date
As Reported Annual Balance Sheet
Report Date 12/31/2016 12/31/2015 12/31/2014
Currency USD USD USD
Audit Status Not Qualified Not Qualified Not Qualified
Consolidated Yes Yes Yes
Scale Thousands Thousands Thousands
Cash & cash equivalents 1467576 1809330 1113608
Short-term investments 266206 501385 494888
Current content library, net - - 2125702
Current content assets, net 3726307 2905998 -
Other current assets 260202 215127 206271
Total current assets 5720291 5431840 3940469
Non-current content library, net - - 2773326
Non-current content assets, net 7274501 4312817 -
Information technology assets 185345 194054 189274
Furniture & fixtures 32185 30914 25758
Building 40681 40681 40681
Leasehold improvements 107945 107793 57339
DVD operations equipment 70152 88471 89144
Capital work-in-progress 108296 8845 12495
Property & equipment, gross 544604 470758 414691
Less: accumulated depreciation 294209 297346 264816
Property & equipment, net 250395 173412 149875
Other non-current assets 341423 284802 192981
Total assets 13586610 10202871 7056651
Current content liabilities 3632711 2789023 2117241
Accounts payable 312842 253491 201581
Accrued expenses 197632 140389 69746
Deferred revenue 443472 346721 274586
Total current liabilities 4586657 3529624 2663154
Non-current content liabilities 2894654 2026360 1575832
Long-term debt 3364311 2371362 900000
Other non-current liabilities 61188 52099 59957
Total liabilities 10906810 7979445 5198943
Common stock 1599762 1324809 60
Additional paid-in capital - - 1042810
Foreign currency -47966 -42502 -4615
Change in unrealized gains on available for sale securities -599 -806 169
Accumulated other comprehensive income (loss) -48565 -43308 -4446
Retained earnings (accumulated deficit) 1128603 941925 819284
Total stockholders' equity (deficiency) 2679800 2223426

1857708
Geo Holdings Corp (TOK: 2681)
Due to changes with International Financial Reporting Standards (IFRS), recent financials statement presentations have been adjusted to meet this standard. Please note the original historical presentations have remained in the original format
Exchange rate used is that of the Year End reported date
As Reported Annual Balance Sheet
Report Date 03/31/2016 03/31/2015 03/31/2014
Currency JPY JPY JPY
Audit Status Not Qualified Not Qualified Not Qualified
Consolidated Yes Yes Yes
Scale Millions Millions Thousands
Cash & deposits 37683 32052 19869000
Trade notes & accounts receivables 4100 4077 3992000
Merchandise 24894 23834 23495000
Deferred tax assets 2156 1806 1773000
Other current assets 5462 7181 5942000
Allowance for doubtful accounts -281 -292 343000
Total current assets 74015 68659 54729000
Asset for rent, gross 100974 104514 104647000
Accumulated depreciation - asset for rent -95154 -97475 96055000
Asset for rent, net 5820 7038 8591000
Buildings & structures, gross 40872 39984 39478000
Accumulated depreciation - buildings & structures -27470 -26362 25976000
Buildings & structures, net 13402 13622 13501000
Land, net 5844 6356 6651000
Leased assets, gross 2176 3519 4576000
Accumulated depreciation - leased assets -681 -1764 2588000
Leased assets, net 1495 1754 1988000
Other property, plant & equipment, gross 24838 20562 17708000
Accumulated depreciation - other property, plant & equipment -18391 -15292 13236000
Other property, plant & equipment, net 6447 5270 4471000
Total property, plant & equipment 33010 34043 35205000
Total intangible assets 1865 1277 2028000
Investment securities 926 1002 1266000
Long-term loans receivable 2250 6682 6628000
Lease & guarantee deposits 14905 14735 15034000
Deferred tax assets 3342 3774 2845000
Other investments & other assets 1222 1188 1760000
Allowance for doubtful accounts -1332 -3751 3917000
Total investments & other assets 21315 23632 23617000
Total non-current assets 56192 58952 60851000
Total assets 130207 127612 115581000
Trade accounts payable 12631 13540 13124000
Current portion of long-term borrowings 8333 7097 8754000
Current portion of bonds 149 149 249000
Income taxes payable 4815 265 1170000
Reserve for bonuses 1665 1420 1135000
Other current liabilities 10135 12595 10279000
Total current liabilities 37731 35068 34713000
Bonds 105 254 403000
Long-term borrowings 19509 21843 13910000
Lease liabilities 1612 1660 1590000
Deferred tax liabilities 23 22 26000
Asset retirement obligations 4406 3994 3898000
Other non-current liabilities 1857 1554 1839000
Total non-current liabilities 27514 29329 21668000
Total liabilities 65246 64398 56381000
Capital stock 8871 8615 8603000
Capital surplus 3283 6090 6078000
Retained earnings 52542 49998 44381000
Treasury shares - -1979 334000
Total shareholders' equity 64697 62724 58729000
Valuation difference on available-for-sale securities 166 282 297000
Loss (gain) on deferred hedge -15 - 297000
Total accumulated other comprehensive income 150 282 172000
Stock acquisition rights 113 206 59199000
Net assets 64961 63214 115581000
Total liabilities & net assets 130207 127612
Netflix Inc. (NMS: NFLX)
Exchange rate used is that of the Year End reported date
As Reported Annual Income Statement
Report Date 12/31/2016 12/31/2015 12/31/2014
Currency USD USD USD
Audit Status Not Qualified Not Qualified Not Qualified
Consolidated Yes Yes Yes
Scale Thousands Thousands Thousands
Revenues 8830669 6779511 5504656
Cost of revenues 6029901 4591476 3752760
Marketing expenses 991078 824092 607186
Technology & development expenses 852098 650788 472321
General & administrative expenses 577799 407329 269741
Operating income (loss) 379793 305826 402648
Interest expense 150114 132716 50219
Interest & other income (expense) 30828 -31225 -3060
Income before income taxes - United States 188078 95644 325081
Income (loss) before income taxes - foreign 72429 46241 24288
Income (loss) before income taxes 260507 141885 349369
Current tax provision (benefit) - federal 54315 52557 86623
Current tax provision (benefit) - state 5790 -1576 9866
Current tax provision (benefit) - foreign 60571 26918 16144
Total current tax provision (benefit) 120676 77899 112633
Deferred tax provision (benefit) - federal -24383 -37669 -10994
Deferred tax provision (benefit) - state -14080 -17635 -17794
Deferred tax provision (benefit) - foreign -8384 -3351 -1275
Total deferred tax provision (benefit) -46847 -58655 -30063
Provision for (benefit from) income taxes 73829 19244 82570
Net income (loss) 186678 122641 266799
Weighted average shares outstanding - basic 428822 425889 420546
Weighted average shares outstanding - diluted 438652 436456 431893
Year end shares outstanding 430054.212 427940.44 422910.887
Net income (loss) per share - basic 0.44 0.29 0.634
Net income (loss) per share - diluted 0.43 0.28 0.617
Number of full time employees 4500 3500 2189
Number of part time & temporary employees 200 400 261
Total number of employees 4700 3700 2450
Number of common stockholders 290 237 203
Foreign currency translation adjustments -5464 -37887 -
Geo Holdings Corp (TOK: 2681)
Exchange rate used is that of the Year End reported date
As Reported Annual Income Statement
Report Date 03/31/2016 03/31/2015 03/31/2014
Currency JPY JPY JPY
Audit Status Not Qualified Not Qualified Not Qualified
Consolidated Yes Yes Yes
Scale Millions Millions Thousands
Total revenue 267910 270308 262324000
Cost of sales -151798 -157825 152301000
Gross profit 116112 112483 110022000
Selling, general & administrative expenses -99559 -102925 100823000
Operating income 16552 9558 9198000
Interest & dividend income 49 114 111000
Rental income 1268 1167 1193000
Other non-operating income 1043 1062 453000
Total non-operating income 2361 2343 1758000
Interest expense -230 -231 332000
Rental expenses -759 -609 595000
Transfer to reserve for doubtful account - -227 -
Other non-operating expenses -100 -803 -
Total non-operating expenses -1089 -1871 684000
Ordinary income 17824 10030 1612000
Imapirment loss -1319 -1543 9344000
Other extraordinary losses -13 - 203000
Total extraordinary losses -1333 -1543 203000
Income before income taxes 16491 8486 1218000
Income taxes - current -5779 -2074 514000
Income taxes - deferred -147 925 87000
Total income taxes -5927 -1149 1821000
Profit 10563 7337 7726000
Profit attributable to owners of parent 10563 7337 4027000
Average number of shares outstanding - basic 51.331 53.169 -39000
Average number of shares outstanding - diluted 51.623 53.29 3987000
Year end shares outstanding 48.244 52.295 3738000
Earnings per share - basic 205.78 137.99 -70000
Earnings per share - diluted 204.62 137.68 3808000
Number of full time employees 3825 3579 53996.5
Number of part time employees 10421 10114 54066.499
Number of common stockholders 57105 65030 53996.5

Please read the article and answer these THREE questions:

1. Why are conditions currently favorable for firms to issue debt and pay out the proceeds to stockholders?

2. What are dangerous impacts of issuing additional debt mentioned in the article?

3. TransDigm used the proceeds of their debt issue to pay a one-time dividend while Intel used the proceeds to repurchase shares. How does a repurchase differ from a one-time dividend? Why do you think the two firms chose different approaches to distributing cash to shareholders?

___________

"Borrowing for Dividends Raises Worries" at the Wall Street Journal on 10/06/2009

Rock-bottom interest rates and thawed credit markets are emboldening some companies to use bond-sale proceeds to go on the offensive, even if that means rewarding shareholders at the expense of bondholders.

The nascent trend is controversial because corporate borrowers are sinking themselves deeper into debt to pay out special dividends, buy back stock or finance acquisitions. While such moves were all the rage during the credit boom, most corporate-bond offerings during the recession have been used to reduce debt or stockpile cash.

Eric Felder, global head of credit trading at Barclays Capital, says the lure of low rates and companies' stables of cash increases "the risk of non-bondholder friendly events."

Last week's sale of $425 million of bonds by aircraft-parts manufacturer TransDigm Group Inc. is one of the back-to-the-past corporate-bond deals causing concern among some analysts. More than $360 million of the proceeds will be used to pay a special cash dividend to shareholders and management of the Cleveland company.

The added debt increased TransDigm's borrowings to 4.3 times its earnings before interest and taxes, compared with 3.1 times before last week's deal. The expected dividend of $7.50 to $7.70 a share is equal to nearly all of the net income that TransDigm reported since the end of fiscal 2003, according to Moody's Investors Service.

Moody's said the dividend "illustrates the company's aggressive financial policy." Moody's gave the new debt a junk rating of B3, even though the ratings firm said TransDigm's "strong operating performance will enable the company to service the increased debt level."

Sean Maroney, director of investor relations at TransDigm, says the "stability of our business, high profit margins and consistent cash flow" give the company "the ability to support this level of leverage."

Borrowing from bondholders to pay shareholder dividends is "a hallmark of an earlier credit era," Jeffrey Rosenberg, head of credit strategy at Bank of America Merrill Lynch, wrote in a report Friday. Such deals were popular in 2003 and 2004, the last time the Federal Reserve lowered its benchmark interest rate to historically low levels, keeping it at 1% for more than a year.

Companies like Dex Media Inc. DEX -0.18% took on debt to pay dividends to its private-equity owners, including Carlyle Group and Welsh, Carson, Anderson & Stowe, before taking the companies public. Dex Media filed for bankruptcy earlier this year under a mountain of debt.

With the federal-funds rate at 0% for nine months now and confidence returning to the stock and debt markets, investors have been driven to take on more risk. That is flooding the corporate-bond market with cash. Investors poured $43 billion into investment-grade corporate-bond funds in the second quarter and nearly $40 billion in the third quarter -- almost double previous peak quarters, according to Lipper AMG Data Services.

The wave of buying drove down borrowing costs for the average highly rated corporation to about 5%, according to Merrill, a level not seen since 2005. In the heat of the crisis last October, such rates averaged 9%. Through the end of September, more than 1,000 high-rated companies borrowed a record $860 billion, according to Dealogic.

In July, Intel Corp. INTC 0.33% sold $1.75 billion of convertible bonds, planning to use $1.5 billion of the proceeds to buy back shares. A spokesman for Intel declined to comment.

The computer-chip giant has a strong credit rating of single-A, so it doesn't carry a burdensome debt load. Still, the deal raised eyebrows among some analysts and investors, who say floating debt to buy back stock could become more common as companies regain confidence.

And as merger-and-acquisition activity revs up, the cheaper cost of debt compared with equity is tempting companies to use bond sales as a deal-making war chest.

Analysts are watching Kraft Foods Inc. in anticipation that the company would finance its proposed purchase of U.K. chocolate, candy and chewing gum maker Cadbury PLC by raising tons of debt. Last month's unsolicited bid by Kraft was then valued at about $16.7 billion, but it could be weeks before Kraft submits a formal offer.

Three major credit-ratings agencies have warned Kraft that they could slash the company's debt ratings if the company reaches a deal agreement with Cadbury. At the current offering price, Kraft would need to shell out at least $6 billion in cash, much of it likely from the debt markets, according to corporate-bond research firm Gimme Credit.

"Kraft is committed to maintaining an investment-grade rating," a Kraft spokesman said, declining to comment further.

So far in 2009, returns to high-grade bond investors are 19%, according to Merrill. "We've seen a feeding frenzy" because of low interest rates, says Kathleen Gaffney, portfolio manager at Loomis, Sayles & Co. She sold some bonds recently to take profits from the rally. Loomis Sayles wants to have cash on the sidelines in case the Fed raises rates soon or Treasury bonds sell off.

Please read the article and answer these THREE questions:

1. Why are conditions currently favorable for firms to issue debt and pay out the proceeds to stockholders?

2. What are dangerous impacts of issuing additional debt mentioned in the article?

3. TransDigm used the proceeds of their debt issue to pay a one-time dividend while Intel used the proceeds to repurchase shares. How does a repurchase differ from a one-time dividend? Why do you think the two firms chose different approaches to distributing cash to shareholders?

___________ "Borrowing for Dividends Raises Worries" at the Wall Street Journal on 10/06/2009

Rock-bottom interest rates and thawed credit markets are emboldening some companies to use bond-sale proceeds to go on the offensive, even if that means rewarding shareholders at the expense of bondholders. The nascent trend is controversial because corporate borrowers are sinking themselves deeper into debt to pay out special dividends, buy back stock or finance acquisitions. While such moves were all the rage during the credit boom, most corporate-bond offerings during the recession have been used to reduce debt or stockpile cash.

Eric Felder, global head of credit trading at Barclays Capital, says the lure of low rates and companies' stables of cash increases "the risk of non-bondholder friendly events." Last week's sale of $425 million of bonds by aircraft-parts manufacturer TransDigm Group Inc. is one of the back-to-the-past corporate-bond deals causing concern among some analysts. More than $360 million of the proceeds will be used to pay a special cash dividend to shareholders and management of the Cleveland company. The added debt increased TransDigm's borrowings to 4.3 times its earnings before interest and taxes, compared with 3.1 times before last week's deal. The expected dividend of $7.50 to $7.70 a share is equal to nearly all of the net income that TransDigm reported since the end of fiscal 2003, according to Moody's Investors Service. Moody's said the dividend "illustrates the company's aggressive financial policy." Moody's gave the new debt a junk rating of B3, even though the ratings firm said TransDigm's "strong operating performance will enable the company to service the increased debt level." Sean Maroney, director of investor relations at TransDigm, says the "stability of our business, high profit margins and consistent cash flow" give the company "the ability to support this level of leverage." Borrowing from bondholders to pay shareholder dividends is "a hallmark of an earlier credit era," Jeffrey Rosenberg, head of credit strategy at Bank of America Merrill Lynch, wrote in a report Friday. Such deals were popular in 2003 and 2004, the last time the Federal Reserve lowered its benchmark interest rate to historically low levels, keeping it at 1% for more than a year.

Companies like Dex Media Inc. DEX -0.18% took on debt to pay dividends to its private-equity owners, including Carlyle Group and Welsh, Carson, Anderson & Stowe, before taking the companies public. Dex Media filed for bankruptcy earlier this year under a mountain of debt. With the federal-funds rate at 0% for nine months now and confidence returning to the stock and debt markets, investors have been driven to take on more risk. That is flooding the corporate-bond market with cash. Investors poured $43 billion into investment-grade corporate-bond funds in the second quarter and nearly $40 billion in the third quarter -- almost double previous peak quarters, according to Lipper AMG Data Services. The wave of buying drove down borrowing costs for the average highly rated corporation to about 5%, according to Merrill, a level not seen since 2005. In the heat of the crisis last October, such rates averaged 9%. Through the end of September, more than 1,000 high-rated companies borrowed a record $860 billion, according to Dealogic. In July, Intel Corp. INTC 0.33% sold $1.75 billion of convertible bonds, planning to use $1.5 billion of the proceeds to buy back shares. A spokesman for Intel declined to comment. The computer-chip giant has a strong credit rating of single-A, so it doesn't carry a burdensome debt load. Still, the deal raised eyebrows among some analysts and investors, who say floating debt to buy back stock could become more common as companies regain confidence. And as merger-and-acquisition activity revs up, the cheaper cost of debt compared with equity is tempting companies to use bond sales as a deal-making war chest. Analysts are watching Kraft Foods Inc. in anticipation that the company would finance its proposed purchase of U.K. chocolate, candy and chewing gum maker Cadbury PLC by raising tons of debt. Last month's unsolicited bid by Kraft was then valued at about $16.7 billion, but it could be weeks before Kraft submits a formal offer.

Three major credit-ratings agencies have warned Kraft that they could slash the company's debt ratings if the company reaches a deal agreement with Cadbury. At the current offering price, Kraft would need to shell out at least $6 billion in cash, much of it likely from the debt markets, according to corporate-bond research firm Gimme Credit. "Kraft is committed to maintaining an investment-grade rating," a Kraft spokesman said, declining to comment further. So far in 2009, returns to high-grade bond investors are 19%, according to Merrill. "We've seen a feeding frenzy" because of low interest rates, says Kathleen Gaffney, portfolio manager at Loomis, Sayles & Co. She sold some bonds recently to take profits from the rally. Loomis Sayles wants to have cash on the sidelines in case the Fed raises rates soon or Treasury bonds sell off.