Accounting project-presentation and writing assignment.

Accounting Project -Whirlpool Background of your company Whirlpool went from been a modest machine company to the world's leading global manufacturer of home appliances. The company sold approximately $21 billion in 2015 in more than 170 countries around the world, That is more than a third of countries in the world. Whirlpool was established in 1911 when the uncle-nephew Emory and Louis started the Upton Machine Company in St. Joseph, MI to produce electric, motor-driven wringer washers. In 1916, The Upton-Manufactured washer sold fast. Louis was working as an insurance salesman, and his uncle Emory Had a machine shop where he work of his own. After having failed with the business, Louis secured the patent to a manual clothes washer and asked Emory to add a motor to the design to make it work on its own. Since the 1970s, Whirlpool has been pioneer of energy and water efficiency measures in its research and developing practice. Whirlpool continues to be involved with U.S. Department of Energy and U.S. Environmental Protection Agency. American multinational giant is the largest producer and seller of home appliances in the entire world With 8 production facilities in the Unites States alone, it has more than 70 research and technology and manufacturing houses, it has over 100,000 people employed which help in generating a revenue of 20 billion USD annually. Whirlpool Corp. is the parent company to other brands such as Jenn-Air, Amana, Maytag, Kitchen Aid, Inglisa and Indesit. Jeff M. Fettig serves the corporation as its Chairman and CEO and is traded as WHR on New York Stock Exchange (NYSE). In 1929, the company merged with Nineteen Hundred Washer Company and adopted the name Nineteen Hundred Corporation. Soon, it acquired Seeger Refrigerator Company and RCA. As of December 31, 2015, Whirlpool had approximately 97,000 employees. Analysis of your company. Valuation of your company- using the valuation methods we learned in modules 12 to 15, assess the current value of your company and compare your computations to its current market value. What are the strengths and weaknesses of each of the valuation methods? What action would you advise regarding purchasing your company's stock right now, based on your computed values? Sources Wirlpoolcorp.com Presentation Part Compute the value of your company using the valuation models covered in Modules 13 to 15: 1. 2. 3. Discounted Cash Flow Model ROPI Model Market Multiple Models 1. NOA Multiple 2. Book Value Multiple 3. NOPAT Multiple 4. Net Income Multiple Compare the intrinsic values that you have estimated above, with the current stock price of your company. Discuss whether you believe that your company's stock is priced right, overvalued or under-valued. What reasons could explain the differences between calculated intrinsic values and the current market price. Module 13 - Cash-flow-based valuation DISCOUNTED CASH FLOW MODEL This model values the firm as the present value of the future expected free cash flows that the firm generates. Where, Free Cash Flows = NOPAT - Increase in NOA 1 To compute the value of a firm using the discounted cash flow model: 1. A. Project the future free cash flows and B. discount the FUTURE CASH FLOWS to the present for the next 4 to 10 years (the H ORIZON P ERIOD ) 2. A. Project the future free cash flows and B. discount the FUTURE CASH FLOWS to the present for T E R M I NA L P E R I O D (after the horizon period). 3. Add the amounts from [1] and [2] above to determine the T OTA L F I R M V A LU E . 4. Subtract NNO (note: it is possible for NNO to be negative - in which case it would be added) to determine the V A LU E O F T H E F I R M ' S E Q U I T Y . 5. Divide the Firm Equity Value by the # of shares outstanding to determine the V A LU E P E R SHARE. 1 It is possible, over the short haul, for the changes in NOA to be negative (a decrease) or for NOPAT to be negative. over the long haul the free cash flows must be positive for a company to survive. However, Example: 1. Forecast NOPAT and NOA. Assume 5% sales growth during the horizon period (round forecasted sales to the nearest $1,000) and 2.5% sales growth during the terminal period. Net operating profit margin is forecasted to 8% (round to nearest $100) and assumes a NOAT of 1.40 (round to nearest $1,000). The appropriate discount rate is 5.5%. 2. Compute the equity value per share. Sales Rounded $ NOPAT NOA IncreaseinNOA FreeCashFlow PVof FreeCashFlows Total FirmValue LessNNO LessNCI =FirmEquityValue #of shares outstanding =valuepershare 2015 1,450,000 115,990 1,035,630 $0 300,000 25,000 2016 2017 2018 2019 2020 Terminal Period Module 14 Operating Income based Valuation Residual Operating Income (ROPI) Model ROPI = NOPAT ( NOA Beg ) r w r w =WACC Steps in ROPI Model 1. 2. 3. 4. 5. Forecast and discount ROPI for horizon period Forecast and discount ROPI for terminal period 1 + 2 + NOA = enterprise value 3 - NNO = firm equity value 4 # of shares outstanding = stock value per share See page 14-11 Improve Efficiency (reducing NOA) Improve Profitability (increasing NOPAT) Module 15 Market Based Valuation Market Multiples - Used as a shortcut valuation method Popular due to simplicity Does not rely on subjective forecasts of future performance Also referred to as the method of comparables Weaknesses of the Market Multiple Model No 'right' measure to use - Because company value depends on future performance No 'right' companies to use for comparison - Could be over or undervalued No 'right' way to combine comparable company data to produce a multiple - Median, equal-weighted average, value-weighted average, or other average Examples: 1. Estimating Intrinsic Value using an NOA Multiple 2. Estimating Intrinsic Value using a Book Value Multiple 3. Estimating Intrinsic Value using a NOPAT Multiple 4. Estimating Intrinsic Value using a Net Income Multiple Effect of Profitability, Growth and Risk on Price to Book Ratios 5. Estimating Multiples Intrinsic Value using Examples of Industry-based multiples a. Company Value / Revenue (start-ups) b. Company Value / EBITDAR (retail and airlines) c. Company Value / Reserves (oil & gas) d. (Company Value / EBITDA) EBITDA CAGR (High Tech) Industry-based Change in Profitability - holding growth and risk constant Change in Growth - holding profits and risk constant Change in Risk - holding profitability and growth constant Change in leverage - holding profitability, growth and risk constant REVERSE ENGINEERING Using the observable to determine or estimate the unobservable - focus is on PB ratio. PB = 1 + Expected ROE - r e re - g Examples: Estimate implied growth rate under the following assumptions: Implied g= r e + [ ( PB1 ) r e ]ROE ( PB1 ) Estimate implied discount rate under the following assumptions: Implied r ( e )= ROE + [ ( PB1 ) g ] PB Estimate implied discount rate under the following assumptions: Implied ROE=( [ PB1 ] [ r e g ] ) + r e 1 2 3 4 5 6 7 8 1 2 1 2 1 2 3 Module 6 Company Analysis Part 1 Compute the following ratios for your company for the most recent two years: Accounts Receivable Turnover Average Collection period (use either ratio) Quality of Receivables Inventory Turnover Average Inventory Days Outstanding PPE Turnover Average Useful Life % Used Up Discuss the year-on-year trends for each of the ratios. What does your analysis tell you about the the company and its efficiency in relation to those assets? Based on your findings and analysis, what other information/data would you be interested in to help your analysis. Part 2 Review the notes to the financial statements for your company and report The methods used to [1] cost and [2] value inventory. The methods used for recording depreciation. Part 3 Chevron Annual Report - https://www.chevron.com/-/media/chevron/annualreport/2015/2015-Annual-Report.pdf What method of inventory costing does Chevron use? Assuming that the "excess of replacement cost over the carrying value of inventories" is the LIFO reserve, had Chevron used the replacement cost to value the inventory, what would be the inventory balance on the balance sheet? be the cost of purchased crude oil and products? be the net income of Chevron, assuming a statutory tax rate of 35%. Compute the ROA and ROE of Chevron using the LIFO reported inventory numbers and the replacement cost numbers. What impact did using LIFO have on the ROA and ROE