Question

Using the 2017 UPS Annual Report

The CEO of the company is convinced that financial analysis should hinge only on what is happening internally within the company. Convince him otherwise based on the following:

A. Analyze the implications of interest rate changes on any of the calculations you performed. Be sure to substantiate your claims.

B. How might an issue (negative or positive) within the overall stock market impact the company’s stock valuation numbers, other financial variables, or its overall portfolio management? Be sure your response is supported by evidence.

C. Analyze the impact of any external factor (i.e., external to the company) discussed throughout the course on the company’s financial position. Be sure to justify your reasoning.

Answer 1

A.

Interest rates is one of the most important macroeconomic variable in addition to gross domestic product (GDP) and fiscal policies. In most cases, the shareholders’ value is mainly affected by the interest rates. In analyzing the implications of interest rates on shareholders’ value In United Parcel Services (UPS), I used Milestone One. The initial interest rate was 8%.

I varied the interest rate to 5% and 15%. See the results:

Based on the above Excel Workbook, it is evident that the higher the interest rate, the lower the present value and the lower the interest rate, the higher the present value. For example, in the case of UPS, when the interest rate increased from 8% to 15%, the present value declined from $13,617.88 to $$12,256.09. On the other hand, when interest rate declined from 8% to 5%, the present value increased from $13,617.88 to $14,327.40.

B.

The value of the bonds is positively or negatively impacted by the changes in interest rates. This is based on the fact that the value of the bond is computed adding the par value and the present values (PVs) of the coupon interest payments. Both the par value and the coupon interest payments are discounted by a certain interest rate. A change in interest rate, whether increase or decrease, will ultimately affect the overall value of the bond. For instance, increase in interest rates will reduce the value of the bond while a decrease in interest rates will increase the value of the bond. Therefore, relationship between the value of the bond and the interest rate is inverse.

C.

There are many external factors that can have an impact on the company’s financial position. They include market fluctuations, political instability, inflation, and competition. I will talk about competition. UPS operate in a highly competitive logistics industry. It has to compete with other companies including FedEx, U.S. Postal Service, and DHL among other competitors. These companies try to outdo each other in terms of market share and customer base. UPS is the leader in the industry. However, it has been losing a huge portion of its market to U.S. Postal Service, and FedEx. Already, FedEx has adopted modern technologies including driverless delivery vehicles, delivery robots, delivery drones, crowdsourcing, algorithm, and analytics-based applications. On the other hand, U.S Postal Service is in the process of forming a merger with Uber. This ultimately means shrinking of UPS market share across the United States. Shrinking of the market share will ultimately lead to decline in total revenues and profits both in the short-run and in the long-run. On the other hand, decline in revenues and profits will mean decline in Earnings per Share (EPS) and hence reduced investment from capital investors.