Running head: ASSESSMENT 2 1

Assessment 2: Financial Analysis Report

Student’s Name

Institutional Affiliation
ASSESSMENT 2 2

Assessment 2: Financial Analysis Report

Introduction

The following report provides an analysis of financial, capital structure, and dividend

decisions made during a six-week simulated stock market trading. In the six-week period, stocks

for five companies were bought. The goal was to make financial and purchase decisions that

would maximize profitability and shareholder return. At the beginning, the overall theme of the

trading was to identify long-term stocks that could provide guaranteed returns in the far future

and short-term stocks that could provide high returns in the present despite carrying significant

risks. While efforts were made to stick to the theme, the purchase decisions made largely failed

to yield the desired returns. Consequently, the this report seeks to analyze the trading activities

made during the period with the goal of explaining the decisions made and recommend future

decisions that would enable the company achieve high profitability and shareholder returns. The

analysis will take into account the operating environment of Iwi/Maori organizations and the

impact of corporate financial performance on the activities of such organizations. To begin with,

an overview of the trade carried out in the six-week period will be given. Secondly, there will be

three separate sections discussing financial, capital structure, and dividend decisions that can be

made to improve the company’s fortunes. The report will conclude with a highlight of major

lessons learned during the trading and how the said lessons will influence future business

decisions.

Overview of the Trade Carried out in the Six-Week Period

Trading started in the month of January and continued until early March. As earlier

pointed out, a theme had been selected for the trading to inform decisions that would be made

during the six-week period. The theme was influenced by the need to achieve high levels of
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profitability and increasing shareholder returns while bearing in mind that there was only a very

short period (six weeks) to achieve the said goal. The chosen theme targeted to meet two

objectives. Firstly, there was the need to trade in stocks that would provide long-term stability

and returns. Stocks of the said nature usually have lower risks. However, while the returns are

guaranteed for a considerable time in the future, there are minimal when weighed in the short-

term (Hill, Jones, & Schilling, 2014). In this regard, the goal was to purchase more of the long-

term stocks so that both the short-term and long-term gains can be high.

The second approach was to purchase stocks that would deliver high returns in the short-

term despite carrying significant risks. Companies that are trying to establish a footing in the

industry may usually have stocks with volatile prices (Hill, Jones, & Schilling, 2014). As the

companies try to achieve stability, their stocks also grow in price considerably. The purchase of

the said stocks guarantees high returns in the short-term (Windsor & Boatright, 2010). However,

due to the volatility, they also expose one to significant risks. Therefore, care is usually taken

when selecting such stocks to ensure that exposure to risks is minimal during the expected period

of returns. Another advantage of stocks that yield high short-term returns is that they cost

significantly less than stocks from other established companies (Windsor & Boatright, 2010).

Therefore, one can make a small investment and stand to benefit greatly in the future.

The identified theme was used as guide for trading during the six-week period. Care was

taken to balance between buying short-term and long-term stocks so that the desired returns

could be achieved. At the end of the period, the major stocks bought were that of Amazon Inc.,

Facebook Inc., Signature Bank, and Churchill Downs Inc. The stocks of Signature Bank, and

Churchill Downs Inc. were chosen for the short-term gains. On the other hand, the stocks for

Amazon Inc., and Facebook Inc. were chosen for their long-term gains. In the former category,
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Signature Bank, and Churchill Downs Inc were viewed as companies with a high potential for

growth in the short-term. The financial reports for the two companies showed that they had

achieved significant growth in the last three years and there was still the opportunity and

capacity for expansion. As a result, their stocks would yield high returns in the short-term as the

businesses exploit their existing growth potential and increase both their revenues and profits.

In the latter category, Amazon Inc., and Facebook Inc. were chosen for their long-term

gains. To begin with, the two are established companies that occupy a niche that is hard to fill. As

a result, they will remain to be present even in the future as the services they provide remain

valuable. Secondly, the said companies have a huge market capitalization and are considered

among the largest companies in the world. Due to their size, they are well equipped to weather

any difficult economic times and remain profitable in the future (Singh & Pattanayak, 2014).

Additionally, both companies have worked towards diversifying their operations, thereby,

reducing the risks of having only one income channel. Therefore, they are bound to remain

profitable in the future and yield significant long-term returns.

At the end of the period all of the stocks except that of Amazon Inc. had failed to yield

the desired returns. The stock for Churchill Downs Inc. experienced a fall and ended at a price

that was 224% less than the buying price. The stock of Facebook Inc. remained largely stagnant

with a growth of only 0.5%. The stock of Signature Bank also experienced a similar fate with a

growth of 0.32%. Amazon Inc. stock yielded considerable returns with a growth of 1.95%.

Failure to achieve high performance was attributed to market slowdown and decisions that

maximize on the utility of the best stocks during the short period of trading. In this regard, a

detailed analysis of the trading activities will follow together with the best decisions that could

be made to achieve better results in the future.

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Financing Decisions

In the six-week period, financial decisions were made based on the role of financing to

strategic decision making. As pointed out by Abor (2005), companies now rely on financial

decisions to support their strategy. Since cooperation’s strategies rely on where they are and

where they want to be, sound financial decisions act as a bridge to achieve the desired goals. In

this regard, the role of financing to strategic decision making was given a key focus during the

six-week trading period.

The first role of financing that was given key focus is the analysis of financial statements

from potential trading companies. Financial statements give an overview of a company’s

financial position. Investors rely on such information to determine future profitability of the

company and whether shareholders would receive the desired returns (Alkaraan & Northcott,

2006). Additionally, they interpret such information to determine whether a company is able to

meet both its short-term and long-term obligations. Two key metrics were used during the six-

week trading period to determine the financial viability of chosen companies. Firstly, revenues

and profits were analyzed to determine how well the company has been performing in the recent

period. High revenues and profits indicate stability and high returns in the future. Secondly, debt

and liquidity rations were analyzed to determine how well a company could meet its short-term

and long-term obligations.

High liquidity ratios indicate a good flow of cash. It is an indicator that a company has

managed its assets well and is in a good position to honor its short-term obligations (Saleem &

Rehman, 2011). Companies with high liquidity ratios can be expected to remain operational and

profitable in the foreseeable future. Therefore, it is prudent to purchase stocks from the said

companies. Debt ratios show whether a company has borrowed more than it would be able to pay
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in the future. Companies with high debt are usually unattractive to investors and lenders in the

long-term (Delen, Kuzey, & Uyar, 2013). They run the risk of failing to raise enough capital

when such is needed to expand operations and make more revenues. Additionally, the said

companies may have poor activities in the stock market since few investors will be interested in

their stock. Consequently, care was made to buy stocks from companies with a good debt ratio.

The companies would be able to honor their long-term obligations and remain operational.

Two stocks were purchased based on the liquidity and debt ratios of their companies. The

two stocks are Amazon Inc., Facebook Inc. The two companies had high liquidity ratios, thereby,

indicating that they had the means to meet short-term obligations. Additionally, high liquidity

ratios also enable a company to respond swiftly to market changes, such as the existence of new

opportunities, thereby, increasing the chances of having positive returns in the future. Amazon

Inc., Facebook Inc. stock were purchased with the goal of ensuring both long-term and short-

term gains due to their high stability.

The second role of financing that was considered during the six-week trading period was

cost reduction. A company can achieve more success by delivering more with less. Financing can

be used to institute cost-control measures that will ensure that high operational efficiencies are

achieved (Uremadu & Efobi, 2012). The end result is that there will be more positive returns

despite minimal investments being made during the period. There are a number of ways that

companies can achieve cost-reduction through financing. They include investing in technologies

that improve efficiency by automating some activities and buying items in bulk so as to negotiate

for better prices. However, the strategy used during the six-week period was to purchase

affordable stock that had the potential for high returns so that the portfolio can earn high returns

with minimal investment.

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Two stocks were purchased in line with the goal of reducing costs and achieving high

returns. They are the stocks of Signature Bank, and Churchill Downs Inc. The said stocks are

from companies that have vast potential for growth by virtue that they are still trying to establish

a niche in the market. While their prices have the risk of being volatile, they can also yield high

returns when the companies grow and increase their revenues and profits significantly.

The financial decisions made during the six-week trading period took into account the

operating environment of Iwi/Maori organizations and how business decisions can have an

unconventional impact on the said organizations. Iwi/Maori organizations are guided by a culture

that considers long-term sustainable returns to be of more value (Warriner, 2007). While the

organizations strive to be financially viable as any other business, wealth creation is deemed

important if it can be sustained for the future (Warriner, 2007). In this regard, the decision to

focus on stocks that could yield significant returns both in the short-term and in the long-term

were made in light of the Iwi/Maori organizations’ culture. The business would remain

financially viable for the foreseeable future by having high-risk stocks yielding high returns in

the short-term and low-risk stocks yielding low returns in the long-term.

Despite the financial decisions made during the period, the desired financial returns were

not achieved. The failure can be attributed to a slowdown in the market which led to poor growth

in most of the stocks that were purchased. In this regard, there are a number of financial

decisions that can be made in the future to avoid such an occurrence. To begin with, more

metrics should be used to analyze the financial position of companies before making the decision

to buy their stock. One key ratio that can be used is profitability ratios. The ratios provide a

picture of how efficiently a company is earning its income relative to its size and revenues. High

profitability ratios can be achieved even in companies with a lower market capitalization
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provided they are efficient enough in their practices. While Facebook reported significant profits

in its recent financial report, its profitability ratio pointed to a case of inefficiency. As a result,

low returns were achieved despite the fact that the company occupies a unique niche with the

potential for both short-term and long-term growth.

Another key financial metric that should be considered is price to earnings ratio. The ratio

values the company based on how its per-share earnings compare to share price. A stock with a

historically-high price to earnings ratio indicates a company that has performed well consistently

and can deliver high returns in the short-term and in the long-term. The metric is especially

useful when comparing stocks from different companies especially when they differ greatly in

terms of market capitalization. Big companies may choose to plough back their earnings into the

business and pay a small amount to the investors. As a result, their price to earnings ratio will be

significantly lower. Therefore, it is prudent to invest in companies that show high price to

earnings rations since high returns will more likely be guaranteed.

Capital Structure Decisions

A capital structure determines where a company source the money it uses to finance its

operations. A sound capital structure provides a stable foundation for business growth since it

ensures that there will always be money to finance the operations of an entity (Uremadu, 2012).

At present, companies rely on two major capital structures to raise funds that will finance their

operations. The two methods are debt and equity. A company can choose to borrow money an

acquire debt to finance its operations. It can also choose to sell stock to investors and gain equity.

The implementation of both strategies goes a long way to ensuring that a company will meet its

goals.
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In the six-week period, capital structure decisions were made to facilitate trading and

increase the chances of achieving the desired objectives. For instance, there was a focus on

avoiding companies that were largely financed by debt since they face the risk of lacking

sufficient capital in the future to finance operations if they had not paid a significant portion of

their debt. However, based on the unimpressive trading outcomes for the six-week period, it is

clear that better capital structure decisions are to be made in the future in order to achieve better

results.

The first critical capital structure decision that should be made is to consider the benefits

and drawbacks of each financing methods before selecting to purchase stock from a company

based on the criteria (Covas & Den Haan, 2011). Equity and debt financing come with their fare

share of costs. In the case of equity financing, investors will expect dividends at the end of the

period for the money they have chosen to invest in the company. Dividends are a cost that come

with selling company shares to raise more funds to finance operations. A high rate of return to

investor indicates that there is a higher cost to financing the operations of a given company.

Therefore net profits will be significantly reduced. In the case of debt financing, companies have

to pay interest for money borrowed. The amount of interest that a given loan attracts is the cost

of acquiring such a loan. Historically, the cost incurred in taking loans has been significantly

lower than that incurred in issuing out dividends (Covas & Den Haan, 2011). However, interest

payments impact net profits significantly since they are an expense that should be deducted from

the income. Taking into account the merits and demerits of each capital structure will ensure that

better decisions are made when choosing which stock to buy or sell.

The second critical capital structure decision that should be considered in the future is the

fact that profitability is shared based on the capital structure of a business. An entity that relies
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heavily on debt ends up with more interest payments to meet at the end of a given period.

However, the said entity has fewer business owners to pay since it has relied on debt rather than

equity. Consequently, such companies may yield high returns when their stock is purchased

(Covas & Den Haan, 2011). Additionally, relying on debt for financing leaves a business with

extra funds in the short-term which can be used to expand operations by increasing capacity or

targeting new markets. Therefore, more returns can be achieved and help meet the intended

objectives.

The proposed capital structure decisions take into account the operating environment of

Iwi/Maori organizations and how such businesses can access capital despite being significantly

different from other organizations. To begin with, many Iwi/Maori organizations focus on a

diverse bottom line that goes beyond financial performance (Harmsworth, 2005). They also aim

for social, cultural, spiritual, and environmental goals. In this regard, balancing between debt and

equity as a way of accessing capital can help the organizations gain sufficient financing to pursue

goals beyond financial performance. Secondly, some Iwi/Maori organizations are set up to

further the interests of a select group of people or community who normally share certain

resources, such as land (Harmsworth, 2005). In such organization, the benefits of issuing equity

to raise finances can be exploited. The businesses will be able to maintain their goal of having a

community-owned enterprise while raising sufficient capital at the same time to pursue their

financial, social, cultural, and spiritual goals.

Dividend Decisions

Dividend payments have an impact on the performance of a company. Companies pay

dividends from net profits they have earned during a given period. Dividend decisions usually

aim to meet two objectives. Firstly, dividend payments attract more investors to a company (Gill,
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Biger, & Tibrewala, 2010). High payments indicate a high return on investment. A company

stock will then fetch high prices, thereby, increasing its value. Investors are usually attracted to

companies with high return on investments since they know their money will yield substantial

returns both in the short-term and in the long-term.

Secondly, dividend payment decisions are made based on a company’s need to reinvest

some of the money it has earned back to the business. Companies need to grow sustainably in

order to remain relevant in the future. Lack of growth will impede prospects of earning revenues

and profits in the future. One strategy that is used to sustain growth is to plough back some of the

earned profits into the business. For instance, some of the profits can be channeled into research

and development activities so that there can be more products and services to sell in the future.

The balance between giving investors good dividends and saving some of the returns for future

business investments underlies a good dividends strategy. Companies with the capability to

perform well both in the short-term and in the long-term balance between earning shareholders

significant returns and plowing back profits into the business to support future activities.

There are two key. The major dividend decision that can help in choosing a company

with the best stock to invest is to choose companies that employ a performance-based dividend

payout strategy. Companies that utilize the said strategy pay investors based on the performance

for a given period. The strategy yields two important outcomes. Firstly, it ensures that investors

earn a fair share of the returns since they have helped the business to raise funds that it has used

to support its operations (Skinner, 2008). When investors are paid well, the stock of a company

becomes attractive and increases in value. As a result, the company continues to increase in value

and stands a better chance of raising funds in the future to support operations. Secondly, a

performance-based payout guarantees that there will be funds left to re-invest in the business
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(Skinner, 2008). Therefore, a company will maintain its ability to grow and achieve more

revenues and profits in the future.

Conclusion

The six-week trading period was a great learning experience on how companies make

financial, capital structure, and dividend decisions to maximize profitability and shareholder

returns. Two key lessons were learned during the period. To begin, it was found out that the stock

market was a volatile environment that required constant shifting of strategies to achieve the

desired outcomes. For instance, a stock bought today may require to be sold tomorrow to achieve

high returns. Therefore, an investors needs to remain open to new decisions and flexible enough

to address any market shifts. Secondly, a critical evaluation of a company’s various performance

metrics are required to purchase the right stock. Failure to perform a critical analysis will lead to

stocks that stagnate or fail. In this regard, future trading endeavors will take into account the said

lessons to achieve the best outcomes.

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References

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