Question

CORPORATE FINANCE: USE THE INFORMATION PROVIDED IN CASE STUDY PART ONE TO ANSWER THE QUESTIONS IN CASE STUDY PART TWO    Case Study-Part One

A.    From the company you selected, provide the following core business information and characteristics:

1. The company name and ticker symbol. Duke Energy Corporation (DUK)

2. Provide a brief description of this company and the type of product and/or services it provides. If it is a diversify entity, please provide a general description of its operations. Duke is the largest electric power company in the US, serving Americans since 1904

3. Identify the core business of the company. Duke core business is to drive its value going forward

4. Identify the management structure of the company. This can be done by simply pasting the corporate structure flowchart. The flowcharts are located on the next pages

5. Identify the market in which this company is publicly traded. NASDAQ

6. Identify the country in which this company operates (if it is a Multinational Corporation just say Multinational Corporation). Duke Energy Corporation only operates in the United States

7. Identify the major business and financial risk the company faces along with any major competitors if any.

8. Identify any regulatory or legal institutions that this company is subject to.

    (a) Code of Business Ethics (b) Principles of Corporate Governance (c) Board of Directors    (d) Stock Ownership Guidelines Policy (e) Security Trading Policy (f) Regulation FD Policy (g) Related   Person Transaction Policy (h) Political Participation (i) Political Expenditures Policy (j) Principles for Health Care Reform (k) Board Committee Charters

B. From the company you selected, present the following financial information for year-end 2017:

1. What is company’s total market capitalization? $53.27 Billions

2. What is the company’s book value amount? $59.63 (As of December 2017)

3. What is the company’s total amount of outstanding liabilities? $96,175,000

4. What is the company’s total amount of assets outstanding? $137,914,000

5. What is the total amount of long-term debt outstanding? $49,035,000

6. What is the total amount of common equity outstanding? ($67,000)

7. What was the company’s total year-end resulting net income? $3,059,000

8. What is the effective year-end taxes paid by this company? $1,196,000

9. What was the company’s total year-end amount of reported earnings? If it is the same as total net income, the just state total net income. $3,059,000

10. What was the total year-end amount of dividends declared by this company?     A cash dividend payment of $0.89 per share was scheduled to be paid on December 18, 2017. This represents an 4.09% increase over prior dividend payment.

11. What was the year-end dividend retention policy by this company? At the current stock price of $91.09, the dividend yield is 3.91%

12. What was total year-end amount of dividends paid, if any, by this company? $0.890

13. Identify the total year-end amount of shares outstanding. DUK's current earnings per share, an indicator of a company's profitability, is $3.37. Investment Research reports DUK's forecasted earnings growth in 2017 as -2.03%, compared to an industry average of 4.4%.

C. From the company you selected, present the following financial and valuation metrics for year-end 2016:

1. What was the current market stock price for this company? You could also use the 2016-year end average price or the year-end closing price. If you do so, please state what market stock price you are using. payment. At the current stock price of $86.12, the dividend yield is 4.13%.

2. What is the company’s year-end earnings per share (EPS)? 4.36

3. What is the company’s year-end dividends per share (DPS)? $3.03

4. What was the company’s year-end book value per share (BVPS)? 56.63

5. What is the company’s current dividend yield? You could also use the 2016-year end average dividend yield. If you do so, please state?

6. What is the company’s beta coefficient? 0.16

7. What is the company’s earnings price multiples (P/E)? 17.64

8. What is the company’s market to book ratio (M/B)?

Case Study-Part Two

A.      Using the information from Case Study Part one, answer the following questions using Ratio Analysis:

1.            State your company’s Total Assets (TA) Turnover Ratio:

a)            Is your company managing its assets efficiently? What would you recommend your company to do to improve its asset management?

2.            State your company’s debt ratio and Times-Interest-Earned (TIE) Ratio:

a)            Is your company managing its debt issuances efficiently? What would you recommend your company to do to improve its asset and debt management?

3.            State your company’s Return on Total Assets (ROA)?

a)            Is your company having enough ability to turn its assets into net-income?

4.            What is your company’s ROE?

B.     Using the information from Case Study Part one, answer the following questions using market value analysis:

1.           Using yahoo finance, answer the following:

a)            What is the expected price earnings ratio (expected P/E).

b)            How does the current ratio (P/E) indicate compared to the expected P/E ratio?

c)            Is it undervalue based on expected P/E ratio? Please explain.

2.           Using the ROE in the section A, answer the following:

a)            Assuming an investment of 20 years, what is the present value of this stock?

b)            Is the present value higher or lower than the current stock price?

c)            Would you consider this stock be undervalue or overvalued? Please explain.

3.           Answer the following:

a)            What would be the company’s current indicated dividend?

b)            What is the company’s expected Dividend?

c)            What would be the company’s expected dividend yield, using the current price and expected dividend?

d)            What is the Company’s expected growth rate in earnings?

e)            What is the company’s expected growth in dividends?

f)             What is the company’s dividend payout and/or earnings retention rate?

g)            Is this dividend policy sustainable?

4. Using a Discounted Cash Flow (DCF) analysis with the information in part B, section 4, answer the following:

a)            What is the DCF expected ROE?

b)            Is the expected ROE higher or lower than the realized ROE in part A?

c)            What can you conclude about the difference between the expected ROE and the realized ROE in part A?

5.           Assuming a 5% historical risk-free rate of return, and a 10% market return, answering the following?

a)            What is the market expected risk premium?

b)            Using Capital Asset Pricing Model (CAPM), what is the expect company’s risk premium?

c)            How this expected return compares to the other ROE’s?

c.      Using the information from Section A and B, what is your final evaluation and recommendation regarding your company’s stock?

  

Answer 1

1.            Total Assets (TA) Turnover Ratio= Net Sales/ Total assets

Net Sales figure is not given. We take it as $23,189,000 from Yahoo Finance.

So, Total Assets (TA) Turnover Ratio= 23,189,000/ 137,914,000

= 0.168

a) The Total Assets (TA) Turnover Ratio can be used as an indicator of the efficiency with which a company is deploying its assets in generating revenue. The ideal value of the ratio depends on industry. However, a value of 0.168 is very low and we can conclude that the company is not managing its assets effectively.

Company can increase its asset turnover ratio by-

• Continuously using its assets and not letting its merchandise build up in storage.

• It should also limit purchases of inventory until it needs it.

• Look for increasing sales without purchasing new assets

2. Debt Ratio= Total Liabilities/ Total Assets

= 96,175,000/ 137,914,000= 0.697

Times-Interest-Earned (TIE) Ratio= (Net Income+ Tax+ Interest)/ Interest

= (3059000+1196000+1,986,000)/1986000

= 3.14

A Debt Ratio of 0.697 is close to ideal for a company. Although it depends on the industry, but a 2:1 D/E ratio means Debt ratio of 0.667 is very much ideal.

3.        Return on Total Assets (ROA)= Net Income/ Total assets

= 3059000/ 137,914,000

= 0.022= 2.2%

a)     The Return on Total Assets (ROA) is a low denoting the company is not able to turn its assets to net income efficiently.

4.         ROE= Net Income/ Shareholders Equity

= 3059000/ 41,739,000= 0.073= 7.3%

B.    

1.           Using yahoo finance, answer the following:

a)           Using EPS estimate for 2019 from Yahoo finance,

Expected P/ E ratio= Current price/ EPS estimate= 86.12/ 4.7= 18.32

b)            Current P/ E ratio (17.64) < Expected P/ E (18.32)

c)        Since Current P/ E ratio is lower than the expected, its bit cheaper and thus slightly undervalued.

2.          

a)     Using Gordon Growth model

Price, P= D1/ (Ke- g)

Where D1= next years dividend= D0x (1+ g)

D0= $3.03

g= 4.09%

Ke= ROE= 7.3%

p= [3.03x (1+0.0409)]/ (0.073- 0.0409)

= $98.25

b)       Thus from (a), the Intrinsic value of this stock is higher than the current stock price.

c)        As intrinsic value of the stock is higher than the current price, we may consider this stock undervalued.

Company’s current indicated dividend= $0.89

Company’s expected Dividend= $3.56 (Forward dividend from Yahoo Finance)

Expected dividend yield= Expected Dividend/ Current Share Price= 3.56/ 86.12= 4.13%