Chapter 4-table 2: Do financial statements help in Financial decisions and corporate valuation

Table 2: Distribution of the company Total Assets by

Period (In Millions of U.S. Dollars)

Bank	2004	2005	2006	2007	2008
1. Compass Group PLC	10905	11084	9394	8293	8923
2. Toronto Dominion Bank	250128	293702	315981	339472	452937
3. Harris Corp	2226	2457	3142	4406	4559
4. Morgan Stanley	747334	898523	1121192	1045409	658812
5. Boeing Co	56224	59996	51794	58986	53801

Table 2 presents the data on the Total assets of the selected companies by period. It reveals that Compass Group PLC has increasing total assets from 2004 to 2006, but, decreased in 2007. The company recovered in 2008 as evidenced by the values US$10905, US$11084, US$9394, US$8293, and US$8923 respectively. This means that the owners reinvested into the business.

The total assets of Toronto Dominion Bank were increasing as evidenced by the values US$250128, US$293702, US$315981, US$339472, and US$452937 respectively. This means that owners of Toronto Dominion Bank consistently reinvested into the business.

Harris Corp net income were increasing as evidenced by the values US$2226, US$2457, US$3142, US$4406, and US$4559 respectively. This means that Harris Corp owners reinvested into the business.

The total assets of Morgan Stanley increased from 2004 to 2005, but, decreased in 2006 to 2008 as evidenced by the value of US$747334, US$898523, US$1121192, US$1045409, and US$658812 respectively. This means that Morgan Stanley paid their debt in 2008.

Boeing Co total assets decreased in 2008 as evidenced by the values US$56224, US$59996, US$51794, US$58986, and US$53801 respectively. This means that Boeing Co declared cash dividends on stocks which are usually distributed at a later part.

Generally, the figures on the table reveal that Compass Group PLC, Toronto Dominion Bank, and Harris Corp owners invested into new business. Morgan Stanley paid their debt, and Boeing Co declared cash dividends on stocks, with dividends distributed at a later part. This implies that the three selected banks financial managers decided on cash flow out within the period, making investment highly risky.

Chapter 4: Do financial statements help in Financial decisions and corporate valuation

Chapter 4

PRESENTATION, ANALYSIS AND

INTERPRETATION OF DATA

The chapter presents the analyses, and interpretation of the data collected from Compass Group PLC, Toronto Dominion Bank, Harris Corp, Morgan Stanley, and Boeing Co balance sheets, income statements, and Cash flows. The formulated questions identified in the problem were used as the bases for the presentation. The sequence of structure includes tables, analysis and interpretation of data of the current study.

Presentation, Data Analyses, and Interpretation

This section systematically presents the informational data from the balance sheets, income statements, and Cash flows data of Compass Group PLC, Toronto Dominion Bank, Harris Corp, Morgan Stanley, and Boeing Co companies. As well, the section brings to fore the systematic examination of the same data to reveal how financial statements help in Financial Decisions and Corporate Valuations. This gathered informational data were treated using Microsoft Excel program. On the other hand, the computations used statistical tools such as: current ratio, return on assets, return on equity, debt to total assets, firm value, and DuPond Framework.

Problem 1: What is the company profile of the selected banks of the United State of America in terms of: a) Net Income, b) Total Assets, c) Total equity, d) Total Debt, e) Total Liabilities, f) Total Revenue, g) Total Cost, h) Current assets, i) Current Liabilities, and j) Market Value?

To answer problem 1, the company profile of the selected banks of the United State of America were collected and presented in succeeding tables.

Table 1 presents the distribution of the company Net Income by period (In Millions of U.S. Dollars).

Table 1: Distribution of the company Net Income by

Period (In Millions of U.S. Dollars)

Bank	2004	2005	2006	2007	2008
1. Compass Group PLC	232	251	367	664	571
2. Toronto Dominion Bank	1513	1724	3714	3304	3154
3. Harris Corp	133	202	238	480	444
4. Morgan Stanley	4531	4939	7472	3209	1707
5. Boeing Co	1872	2572	2215	4074	2702

Table 1 presents the data on the net income of the selected company by period. It reveals that Compass Group PLC has an increasing net income from 2004 to 2007 and decreased in 2008 as evidenced by the values US$232, US$251, US$367, US$664, and US$571 respectively. This means that Compass Group PLC lost US$ 93 millions in 2008.

The net income of Toronto Dominion Bank were decreasing from 2006 to 2008 as evidenced by the values US$1513, US$1724, US$3714, US$3304, and US$3154 respectively. This means that Toronto Dominion Bank lost US$150 millions in 2008.

It also reveals that Harris Corp net income were increasing from 2004 to 2007 but decreased in 2008 as evidenced by the values US$133, US$202, US$238, US$480, and US$444 respectively. This means that Harris Corp lost US$36 millions in 2008.

The net income of Morgan Stanley increased from 2004 to 2006 but decreased in 2007 to 2008 as evidenced by the values US$4531, US$4939, US$7472, US$3209, and US$1707 respectively. This means that Morgan Stanley lost US$1502 millions in 2008.

Boeing Co can be seen to have high net income in 2007 and decreased dramatically in 2008 as evidenced by the values of US$1872, US$2572, US$2215, US$4074, and US$2702 respectively. This means that Boeing Co lost US$ 1372 millions in 2008.

Generally, all of the selected banks net income in 2008 dropped. This implies that it is not profitable to invest in these banking systems which are in the United State of America. Clearly, given this indicator, investors should not take any chances because they will just lose money in 2009.

Chapter 3-1: Do financial statements help in Financial decisions and corporate valuation

The Study Area

This study primarily focused on the information given by the Financial Statement of the Compass Group PLC, Toronto Dominion Bank, Harris Corp, Morgan Stanley, and Boeing Co. for the last five years of the United State of America. This study covered the periods 2004 to 2008 only.

Statistical Treatment

To examine how financial statement of the Compass Group PLC, Toronto Dominion Bank, Harris Corp, Morgan Stanley, and Boeing Co. Help in Financial Decisions and Corporate Valuations, the following statistical formulas were used:

a. Current ratio. This was computed to determine the short-term solvency ratio or working capital ratio. It also used to measure Liquidity risk.

Current ratio = Current Assets .

Current Liabilities

b. Return on Assets. This was used to determine the profitability of the company.

Return on Assets = Net Income

Total Assets

c. Return on Equity. This was used to determine the profit of the company. This will compare to the return on assets to determine the financial risk of the company.

Return on Equity = Net Income

Total Equity

d. Debt to total assets. This was used to measure the percentage of total assets provided by the creditors.

Debt to total assets = Total Debt .

Total assets

e. Total Cost

This was computed to get the unknown value of historical cost of the selected company

TC = PE + PEx + I

Where: TC = total cost every period

PE = Prepaid expenses value

PE = Plant and equipment value

I = Intangible

a. Firm Value . This was computed to strengthen the deal with an investment project subject to risk.

Where: TR = total revenue

TC = total cost

r = discount rate (10%)

n = years (5)

b. Market Value. This was computed because it is one of the important variables in this study. This is to determine the dollar amount at which an item can be sold of the Compass Group PLC, Toronto Dominion Bank, Harris Corp, Morgan Stanley, and Boeing Co. on the last five years.

MV = LTB + SE

Where: MV = Market value

LTB = Long term debt

SE = Shareholders’ Equity

g. DuPond Framework

This was computed to analyze financial statement of the selected company’s. This was used to summarize the company’s performance.

Return on Equity = Profitability X Efficiency X Leverage

Chapter 3: Do financial statements help in Financial decisions and corporate valuation

Chapter 3

METHODOLOGY

This chapter presents and discusses the method of research used and the procedures utilized by the researcher in the study of ascertaining how financial statement of the Compass Group PLC, Toronto Dominion Bank, Harris Corp, Morgan Stanley, and Boeing Co. Help in Financial Decisions and Corporate Valuations. It likewise includes the sources of data and the statistical treatment that were employed by the researcher.

The Research Method

This study made use of the descriptive quantitative method of research as it was aimed at ascertaining how Financial Statements Help in Financial Decisions and Corporate Valuations.

This research study was conducted for twelve (12) months considering the number of days for gathering data. This varied from different research company of mixed variables.

The data involved in this study were from: http://www.reuters.com/finance / stocks/incomeStatement?stmtType=CAS&perType=ANN&symbol=CMPGF.PK,

http://investing.businessweek.com/businessweek/research/stocks/financials/financials.asp?symbol=TD&dataset=cashFlow&period=A&currency=US%20Dollar,

http://www.reuters.com/finance/stocks/incomeStatement?stmtType=BAL&perType=ANN&symbol=HRS.N, http://www.reuters.com/finance/stocks/income Statement?stmtType=BAL&perType=ANN&symbol=MS.N, and http://www. reuters.com/finance/stocks/incomeStatement?stmtType=INC&perType=ANN&symbol=BA.N. From the Dataset Series: Balance sheet, income statement, and Cash flow of the five selected banks were used.

The dataset series from: http://www.reuters.com/, http://investing.Business week.com and http://finance.google.com were also collected to find out how financial statement of the Compass Group PLC, Toronto Dominion Bank, Harris Corp, Morgan Stanley, and Boeing Co. Help in Financial Decisions and Corporate Valuations.

The Compass Group PLC, Toronto Dominion Bank, Harris Corp, Morgan Stanley, and Boeing Co. companies’ profile for the last five years in terms of the company profile of the selected banks of the United State of America in terms of: a) Net Income, b) Total Assets, c) Total equity, d) Total Debt, e) Total Liabilities, f) Total Revenue, g) Total Cost, h) Current assets, i) Current Liabilities, and j) Market Value were presented to identify the profitability, efficiency, leverage, return on assets, return on equity, market value and firm value of the company.

The final phase was the analysis and presentation of the data and the drawing of the conclusions and the recommendations.

Balance sheet 1

On the other hand, towards the end of the fiscal year 2000 the current assets and current liabilities swelled in such a way that the amount of current liabilities surpassed the amount of the current assets. However, the increased assets values were explained by the input into new outlets and other supplementary cost, thus increasing the gross productive assets. Additionally, property plant and equipment values were not accounted for accumulated depreciation; instead its original value was added into the retained earnings. So, from a $4.4.02 billion level or 69.9 % in 1990, Wal-Mart’s gross productive assets rose to $45.348 billion or 84.1% in 2000 (Jablonsky & Basrsky, 2001). Apparently, from the perspective of a prospective investor and even the shareholders, the financial managerial decision to restructure the company balance sheet, which in a way is a perfect company valuation, is successful.

Moreover, Riahi-Belkaoui in 1999 understood Wilson’s observation on the complimentary performance of stocks in the event that cash flows would show huge values as in the case of WAL-Mart’s restructured financial statement, and vice-versa. Additionally, the reputation built by Wal-Mart with its restructured balance sheet (Jablonsky & Basrsky, 2001) may give the company a competitive edge, which apparently investors consider as a factor in determining a firm value (Riahi-Belkaoui, 1999).

Balance sheet

Another feature in the restructured balance sheet which makes it different from a regular balance sheet is that of financing and investment activities. Cash receivables, inventory, and supplementaries constitute the short term investments for the current assets. On the other hand, account payable, current debt due to creditors, and supplementary accrued liabilities constitutes the short term financing for the current liabilities. So that in cases when the difference between the two is a negative value, then there exist a deficit. This deficit is usually funded by long-term sources of long-term investments in working capital to avoid company demise (Jablonsky & Basrsky, 2001).

Along the premise that a minimal long-term source of long-term investments in working capital is required to cover deficits, Wal-Mart financial managers must have decided to lessen the working capital, such that in 2000 $1.447 billion was allocated for it instead of the $1.867 billion which was allocated working capital in 1990.

Financial decisions and Corporate valuations 2

“Wal-Mart Restructured Balance Sheets (for the Fiscal Years Ended January

31, 1990 and 2000 – Amounts in Million)” (Jablonsky & Basrsky, 2001)

	1990	Change	2000
Long-Term Investment
Current Assets
Cash and Equivalents	$13	$1,843	$1,856
Receivables	$156	$1,185	$1,341
Inventory	$4,428	$15,365	$19,793
Other	116	$1,250	$1,366
Total Current Assets	$4,713	$19,643	$24,356
Current Liabilities
Accounts Payable	$1,827	$11,278	$13,105
Accrued Liabilities	$995	$9,618	$10,613
Current Debt Due	$24	$2,061	$2,085
Total Current Liabilities	$2,846	$22,957	$25,803
Working Capital	$1,867	($3,314)	($1,447)
Gross Productive Assets
Property, Plant, And Equipment	$4,402	$40,946	$45,348
Gross Other Assets
Other Assets	$55	$9,969	$10,024
Total Long-Term Investment	$6,324	$47,601	$53,925
Long-Term Financing
External Debt Financing
Long-Term Debt	$185	$13,487	$13,672
Long-Term Lease Obligations	$1,087	$1,915	$3,002
Minority Interest	$0	$1,279	$1,279
Total External Debt	$1,272	$16,681	$17,953
External Equity Financing
Common Stock	$273	$923	$1,160
Stock Repurchases	$0	($3,105)	($3,105)
Total External Equity	$273	($2,182)	($1,945)
Total External Debt	$1,272	$16,681	$17,953
Internal Equity Financing
Retained Earnings	$3,728	$21,401	$25,129
Accumulated Depreciation	$972	$8,407	$9,379
Deferred Income Taxes and Other	$115	$644	$759
Stock Repurchases	$0	$3.105	$3,105
Other Equity Adjustments	$0	($455)	($455)
Total Internal Equity	$4,815	$33,102	$37,917
Total Long-Term Financing	$6,324	$47,601	$53,925

Source: Jablonsky & Basrsky, 2001

The figures in the restructured balance sheet noticeably do not necessarily show the itemized account of the long-term investment as well as the financing strategy. However, four financial managerial activities can be readily assumed. One, the financial manager of the company made a long-term investment amounting to $47.6 billion. Two, the financial manager got a long-term financing of equal amount. Three, to have a working capital, the financial manager of the company decided to subtract current liabilities from current assets, which difference is significant to cover the daily operational company expenditures. Four, the financial manager decided to incorporate current assets and current liabilities to come up with a bottom-line company long-term investment asset (Jablonsky & Basrsky, 2001).