Cost of Capital
Questions for Financial Analysis
- 1. Executive Compensation and Control
- From the firm's Proxy Statement, compare the composition of the Board of Directors in 2004 (2005 Proxy) with 1999. What portion is "inside" versus "outside" directors? Now compare the compensation of the top executive and the top five between the two periods. How does this compare with the firm's share price performance and reported profits over the year?
- 2. Financial Statements Analysis
- Determine the "key" financial ratios for your firm using the methods developed in class. How have those ratios changed over time considering the most recent three years? Compare your firm's ratios with those of its major competitor. What can be concluded about its financial condition?
- 3. Beta Values
- How risky is your firm relative to the market? Do different sources of risk measurement give different values (consider at least three sources from the same time period)? Has risk stayed constant over time or has it varied (consider the beta value from a single source over at least three years)? How does your firm's beta compare with its major competitor?
- 4. Cost of Capital
- Determine your firm's cost of capital on the date of its most recent annual report using the firm's current estimated marginal tax rate.
- 5. Firm Valuation
- Determine your firm's required rate of return on equity from your best estimate of beta. Now what portion of the firm's value comes from current earnings? How much comes from growth opportunities? Does your firm earn excess returns on its current assets?
- 6. Financing
- How does your firm finance itself (e.g. retained earnings, debt issues, new equity)? What are its major sources of funds over the last five years? What does it use the funds for?
- What types of debt does it use? What are the issuing costs? Has your firm raised equity capital in recent years? Has your firm used any complex securities (convertible bonds or warrants) other than executive stock options in recent years?
- 7. Financial Capital Structure
- What does the firm's capital structure look like, considering both market and book values? Compare the current capital structure with what existed five years earlier. What has caused it to change?
- 8. Payout Policy
- How does your firm pay out funds to its shareholders? What is its dividend policy over the past 15 years? What is its payout ratio over that period? Compare the firm's payout ratio over the most recent 7 years with the 7 years previous. Does your firm repurchase shares? Compare the amounts spent on share repurchases with dividends paid over the most recent four years.