A. Using the two stocks you selected from Homework #1, identify the Beta for each stock. In your own words, what conclusion can you draw from the stocks' current and historical beta? If the stock market went up 10% today, what would be the impact on each of your stocks?

B. Using the 2014 financial statements from your stocks above and the equations from your textbook, prepare the Historical Average and Standard Deviation for each stock.

Click here to view the grading rubric.

Introduction According to the business dictionary, a stock exchange marked is a well-organized financial market where financial instruments such as bonds; stocks, options, notes etc. are traded. These Financial instruments are bought and sold at the prices governed by the forces of demand and supply called also as stock marked. The function of the Stock exchange are: Acts as an intermediary between the savers and investors. In addition the Stock exchange provide a medium or platform in which investor can deposit their securities thus allowing them to reduce risk and at the same time maintain liquidity. There are several stock exchanges in the United States of America, but the two principal are: New York Stock Exchange and NASDAQ. I will explain in a brief description of these two Stock Exchange. New York Stock Exchange (NYSE) The New York Stock Exchange is an American stock exchange located at 11 Wall Street, New York City. The stock exchange use floors trade to facilitate its united State but also across the world. As I mentioned above, NYSE is not the only the largest stock exchange in the United State but also across the world. The market capitalization of the companies listed here is approximately about US $19.3 trillion as at June last year(a third of total exchange in the world as at last year).The company that own the NYSE is Intercontinental Exchange, also is listed at the NYSE. The company was founded in the year 1972. NASDAQ Stock Exchange The second largest Stock Exchange is the NASDAQ STOCK EXCHANGE in the world and United State of America. The NASDAQ was founded in year 1971 by the National Association of Securities Dealers. The company listed in the NASDAQ exchange have a market Capitalization of about $4687 billion at mid last year. The NASDAQ is the world's first electronic exchange. The company that own the exchange is Nordic, and Nordic has managed about 400 companies. One of the company listed at the exchange is the WENDY'S Company. It is into the food and beverage Industry. Similarities between NYSE and NASDAQ i. ii. Both Stock exchanges are located in the United States and larger in Europe. Both Stock exchanges deal with equity exchanges and both assist in linking suppliers of funds to those that demand it. Differences between NYSE and NASDAQ i. NYSE is a physical market place which means that the securities are traded in a physical location. However for NASDAQ, securities are traded electronically on a virtual ii. marketplace. NYSE is classified as an auction market while NASDAQ on the other hand is classified iii. as a dealer market. NYSE relies on a specialist for trading decisions while NASDAQ on the other hand relies iv. on market maker. NYSE's trading hours are shorter (9.30 a.m. to 4.00 pm) while NASDAQ's is between v. 7.00 am to 4.00 p.m. NYSE is owned by Intercontinental Exchange while NASDAQ is owned by National Association of Securities Dealers. CAH FLOW ANALYSIS The free cash flow is an assessment of the amount of cash a company generate after accounting for all capital expenditure, such as building, or property, plant and equipment. The excess of cash is used to expand production, develop new products, make acquisitions, pay dividends and reduce debt. The companies that I have chosen for the purpose of illustration are McDonald's Inc. and The Wendy's Company. Both companies are in the food beverage and hospitality industry and have outlets all over the world. Below is a calculation of their free cash flows which will enable us to determine and compare the performances of the two companies since both companies are in the same industry. 2013 Free cash flows 2014 Free Cash flows From the two tables above we can clearly see the cash flows for both companies for the two years 2013 and 2014. From Mc Donald's Incorporation, we can see that its free cash flows increase from $122000000 in 2013 to $292000000 in the year 2014. Companies such as Mc Donald's that experiences an increase in free cash flows are deemed to be performing better because essentially they have funds to give investors the company is dissolved. An increase in free cash flow could have been caused by reduced dividend distribution; reduction in costs or factors such as improvement in efficiency and this could have been the case for MC Donald's between the years 2013-2014. Free cash flows often also affect the share value of a company. Therefore for this company; the high and increased free cash flow may make the share attractive hence raising its value. The Wendy's which is a competitor of Mc Donald's did not have a very high cash flow compared to McDonalds. Its free cash flows decreased from $34921000 to $-188812000 from 2013 to 2014. The negative free cash flows figures could have been caused by the company financing the purchasing of its assets using debt. This low and negative free cash flow figures have a high impact on the company's share value. First; it indicates how the company is performing poorly and secondly it reflects the great inefficiencies that could exists in the system. One of which could be cost inefficiencies in operations. Other factors that could have led to this state is poor management. Due to this low and negative figure in the free cash flow figures; the share value of the company might go down because investors fear that they might not get a return of their investments. To get them out of this situation, Wendy's might consider taking up debt so as to finance its operations. Lowegative cash flows also indicate that the liquidity of the company is questionable and hence the company might not sustain itself. RATIO ANALYSIS Mc Donald's Inc. Financial Ratios RATIO Current Ratio Quick Ratio Net profit margin Return on Assets Inventory Turnover vs. Cost of Goods sold Fixed Asset Turnover 2013 1.67 6.0% 7.8% 5.61 2014 2.06 1.96 5.5% 13.8% 6.7 4.72 4.45 2.28 The Wendy's Company Financial ratios RATIO Current Ratio Quick Ratio Net profit margin Return on Assets 2013 2.64 2.61 0.02 0.01 2014 1.65 1.63 0.07 0.03 Inventory Turnover vs. Cost of 17.6 Goods sold Fixed Asset Turnover 1.86 Note: 15.9 1.31 The data used for the financial ratio calculations was obtained from the 10k reports for the companies for the years 2013 and 2014. Financial ratios are tools used by analysts to analyze the performance of a company. From financial ratios; investors can read a lot into thee profitability, liquidity and asset management of a company. Shareholders can use the ratios to determine whether their funds have being utilized well in the company is they are being misused just by looking at the financial ratios alone. Below is an analysis of the challenges; strengths and weaknesses that can be inferred by stakeholders for each of the two companies. Mc Donald's From the financial ratios above; it can be determined that the company is doing better than its counterpart Wendy's. An observation at the net profit margin for instance shows us that Mc Donald's has a ratio of more than two while its Wendy has a very low net profit margin of less than one. The reason for this could be an operational efficiency experienced by Mc Donald's which its competency does not seem to enjoy. Mc Donald's also has more branches than Wendy's hence higher revenue which could translate to a high net profit too. On the side of liquidity; the company that scores highly is the Wendy's. Its current ratio and quick acid test ratio is higher than that of McDonald. This clearly indicates that the company has more assets that it can convert into cash than its counterpart Mc Donald's. They are faced with a higher ability to pay off its debts than Mc Donald's. A look at the weaknesses of the companies points us to Wendy's whose fixed asset turnover ratio is very low(less than 2 for the two years). This means that each dollar of assets produces only 1.87 dollars of sales. This is a very low amount and the company needs to use its assets efficiently and exhaustively to produces sales and consequently income. In conclusion; it can be determined that Mc. Donald's incorporation perform well than the Wendy's company considering its higher profitability and asset management ratios. The Wendy's can do a bench mark on Mc Donald's to be able to determine what they are doing better than them If its cost efficiencies, then they should emulate that too,. Opening of more branches and marketing of the outlets would be helping improve the profits. Resources Intercontinental Exchange Inc., 2017