General Electric is engaged in the Electrical industry. The following data will explain GE’s performance in relation to the industry performance. Explain what happened to General Electrics share price over the past year using: 1. Free cash flow is the cash flow that is available for distribution among all the security holders of an organization. The cash flow includes the stocks or equity being held by the investors, the amount borrowed from the creditors and the amount invested by the preferred stock holders and the money coming from the convertible security holders.
It is arrived at by adding net income to the depreciation and amortization and deducting the change in working capital and the capital expenditures. Net change in working capital is defined as the difference between the working capital between two accounting periods. Working capital is the difference between the current assets and the current liabilities of the same accounting period. The above insertion of FCF numbers for GE are taken from the financial statement source: http://finance. yahoo. com/q/bs? s=GE&annual C.
Weighted average cost of capital is the rate that any organization is projecting to pay to finance its day to day business operations. This is the minimum return that a company must earn on its present assets in order to pay its liabilities to creditors and pay dividends to its stockholders. It is the calculating of the relative weights of the different securities that form the entire capital structure. Sources of capital include bonds, stocks, warrants, and options. Bonds are money borrowed from creditors. Stocks are money from investors. Cost of equity – It is the opportunity cost of an investment.
It represents the rate of return that the company will be able to earn at the same risk level as the amount of money infused by creditors and investors into the company. Cost of capital is arrived at using the expected average rate of return of investors in a firm as basis. D. Insert WACC numbers for GE with explanation of source. STOCKS 669,000. 00 Cost of capital = . 02 +(. 12-. 02)(1. 03) 0. 123 2. GE VS. INDUSTRY LEADERS Statistic Industry Leader GE GE Rank Market Capitalization GE 173. 53B – 26-Jan P/E Ratio (ttm) DHR 13. 19 8. 56 26-Jul
PEG Ratio (ttm, 5 yr expected) CHKE 4. 59 0. 87 26-Jun Revenue Growth (Qtrly YoY) PPG 37. 50% 11. 10% 26-Jun EPS Growth (Qtrly YoY) CBE 26. 40% -20. 50% 26-Jun Long-Term Growth Rate (5 yr) TXT 12. 75% 10. 20% 26-May Return on Equity (ttm) CHKE 50. 96% 18. 71% 26-Jul Long-Term Debt/Equity (mrq) GE 4. 885 – 26-Jan Dividend Yield (annual) CHKE 12. 20% 7. 20% 26-Mar http://finance. yahoo. com/q/in? s=GE The fair market values have different effects on GE and the industry. The price earning ratio shows that the industry garnered 13. 19 whereas GE only got 8. 56.
The PEG ratio of the industry was 4. 59 whereas the GE data shows 0. 87. The revenue growth for the industry is 37. 50% whereas GE only generated 11. 10%. The EPS for the industry is 26. 40% whereas GE only got -20. 50%. The long term growth rate for five years of the industry is 12. 75% whereas GE only got 10. 2%. The return on equity of the industry is 50. 96% whereas GE only got 18. 71%. The dividend yield of the industry is 12. 20% whereas GE got 7. 20%. This data show that GE did not do as well as the industry did. The GE data shows that it is not as liquid as the industry.
3. The foreign markets played a very important role in GE’s performance in terms of its impact on risk adjusted cost of capital. A. Influence of foreign capital markets, e. g. , foreign government purchases of U. S debt and oil. The foreign markets will affect the company’s performance in the stock market. The US. Debt and oil will affect the sales of GE. GE sells electrical products. A client of GE company will try to reduce its purchase of GE products if there is an economic depression. The company will also buy more GE products if there is lots of money to spend.
B. Markets for GE products such as power plants, jet engines, locomotives, medical equipment, TV (NBC) will buy more GE electrical products in times of abundance or profits. These same companies will reduce their purchase of GE products if in times of economic depression. The United States is now in an economic depression(Samuelson & Nordhaus,1995). 4. Discussion one strategic financial strategy for GE The one strategic financial strategy of GE is to balance borrowing money from bonds and generating money inputs from investors.
The best ratio would be a one to one ratio of bonds to investors. The weighted average cost of capital should be reduced in order to increase company profits. This can be done if the company can look for bond companies or individuals who can offer the lowest possible interest rate(Hirt,2002,5). Other matters to supplement above analysis: The above financial statement analysis shows that General Electric has been doing financially good for the past year of operations. The company must go that extra mile in order to equate its performance with the better performance of the industry.