Financial Analysis Essay

Financial Analysis

School versus Work

Q A:

The best option should minimize the loss on investment for both the stocks and bonds

The current price of the Apple stock = $144.02

The total number of my Apple share = 1000

Therefore, the total value of my shares = 1000 * $144.02 = $144020

Apple’s current quarterly dividends = $0.63 cents per share

Apple’s current annualized dividends = $2.52 per share

Expected total dividends in 2017 = 1000 * $2.52 = $2,520

The Apple stock has appreciated over the past five years from $76.025 in the closing of 2012 to 144.02 in 2017 (NASDAQ, Historical prices).

Value of each bond = $100

Total number of bonds = 1000

Total par value of the bonds = 1000 * $100 = $100,000

Coupon rate = 4.25%

Annual coupon payments = 0.0425 * $100,000 = $4,250

Expected coupon payments in 5 years =$4250 * 5 = $21,250

Q B:

The main advantage of selling a combination of stocks and bonds is that I will be able to meet my financial needs and retain a portion of each investment. Therefore, I will continue to enjoy some returns from each investment option. For example, retaining some Apple stock will ensure that I continue receiving some dividends and gain from the appreciation of the stock. Similarly, retaining some bonds will ensure that I continue to receive some annual coupon payments. The diversification of the investment will cushion me from the total loss of investment due to stock market volatility. On the other hand, the main disadvantage of selling a combination of stocks and bonds is the failure to optimize the opportunity for growth of investment by holding all the Apple stock considering the appreciation of the stock over the past five years. Apple’s stock has appreciated from $76.025 per share in 2012 to $144.02 per share in 2017. This trend illustrates the likelihood of a further upward movement in the value of Apple stock in the next five years

Q C:

I would sell half of the bonds and get the remaining amount by selling Apple stocks. The Apple stocks have the prospects of appreciating by more than $25 per share in the next five years considering the stock’s history. Coupling this gain with the annual dividends (assuming $2.52 per share for the next five years), would lead to higher total returns in comparison to the bonds. However, there is the risk of the stock depreciating due to factors such as stiff competition, changes in regulations and mismanagement of the company. This depreciation would lead to the loss of some of the investment. On the other, hand the bonds provide a certain return on investment for the next five years. However, the bonds do not offer the prospects of growth and gains other than the annual coupon payments.

Calculations

Amount = $100 * 100 = $100,000

The amount generate from selling the bonds is equal to cost of school

Lost returns on investment = Expected coupon payments in 5 years

$4250 * 5 = $21,250

Therefore, this option is not viable because the entire invested amount would go to paying the cost of school.

Amount = 1000 * $144.02 = $144020

This amount would allow me to pay the cost of school and remain with $44020.

Lost returns on investment (dividends) = 1000 * $2.52 *5= $12,600

Lost returns on investment (appreciation of stock by $25) 1000 * $25 = $25,000

Total loss on investment as per the projected dividends and appreciation = $37,600

Half of bonds = $100 * 500 = $50,000

350 Apple shares = $144.02 *350 = $50,407

Total amount = $100,407 (Sufficient to pay cost of school)

Expected loss on investment for bonds (5 years) = 2,125 * 5 = $10,625

Expected loss on investment for stock (5 years) = $25 * 350 = $8,750 (sold stock)

$2.52 * 350 * 5 =$4,410 (dividends)

Total loss                                                                     = $13,160 + $10,625 = $23,785

Expected gains on investment for bonds (5 years) = $2,125 * 5 = $10,625

Expected gains on investment for stocks (5 years) = $25 * 650 = $16,250 (appreciation)

$2.52 * 650 * 5 =$8,190

            Total gains                                                                  = $24,440 + $10,625 = $35,065

Q D:

The financial reasoning for accepting the job is that the job would provide an additional source of income. Furthermore, I would not need to sell my bonds and shares if I accepted the job rather than go to school. Therefore, my expected return on investment would be higher for both the bonds and Apple stocks. The projected total loss on investment for selling the bonds and stocks is $23,785 in 5 years. On the other hand, the project total gain on investment if I do not sell the bonds and stocks is $58,850.

Bonus versus Stock

Q A:

The most logical choice is the company’s bonus. Currently, the bonus and shares have the same value as shown below.

Number of shares = 100

Value of each share = $50

Total value of shares = $50 * 100 = $5,000

Bonus = Total value of shares = $5,000

However, there is the risk of the decline in the value of the shares, which would lead to loss of part or all of the $5,000. This risk does not apply to the bonus. 

Q B:

The advantage of the bonus is that it does not represent the value of the company. Therefore, the bonus is not subject to the risk of loss of value due to the decline in the company’s worth. On the other hand, the advantage of accepting the company’s shares is the probability of appreciation of the shares due to the growth of the company and increase in its worth. The disadvantage of the bonus is that it cannot accrue gains through means such as dividends because it is paper money. On the other hand, the disadvantage of the shares is the risk of depreciation, which would lead to the loss of part or the entire initial amount. 

Q C:

The best financial decision is to choose the stock over the bonus. The company’s stock is the best option because of the prospects of earning dividends and appreciating. The company’s bonus does not provide such outcomes. Below is a demonstration of the projected gains from the two options.

Current amount = $5,000

Expected gains in 5 years = $0.0

Current value = $5,000

Expected gains in 5 years – dividends (assume $1.0 per share/yr) = ($1 * 100 * 5) =$500

Compliance

The Securities Act of 1933 prohibits the offer or sale of securities using interstate means of commerce if the concerned company has not registered the securities. Only the companies meeting the SEC exemptions can offer or sell their securities without registration. This law means that I cannot sell the company’s shares. SEC registration requirements would apply when I need to sell the shares even if the company issued them under Rule 701 (SEC, n.d.). The attempt to sell unregistered securities would attract civil and criminal penalties.

Q B:

As a financial manager, I would need to comply with the requirements of the Securities Act of 1933, Securities Exchange Act of 1934 and Sarbanes-Oxley Act. The Securities Act compels public companies to disclose their financial information to investors and shareholders. This information enables the investors and shareholders to make the appropriate judgment about the company’s performance and value of its shares. The Securities Exchange Act of 1934 requires a company with listed securities to report its financial information and registration statements to SEC (Shim & Siegel, 2009). The concerned company must also file the reports to the listing stock exchange. On the other hand, the Sarbanes-Oxley Act compels public companies to engage in transparent financial reporting.

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