FIN 324 Week 4 Learning Team Assignment Final Report and Presentation
FIN 324 Week 4 Learning Team Assignment Final Report and Presentation
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Date Created: 11/16/15
Final Report and Presentation The chief financial officer has requested that we compare two organizations that we would consider acquiring. A consensus within our organization has agreed to consider acquiring are JC Penny’s and Sears Roebuck. Sears and Roebuck was found in 1886 whose products include tools, bedding, and house wares electronics. Product reliability, excellence in customer service and revenue of 43.6 Billion according to (Sears Holdings.Com, 2011) are critical areas of consideration that rate as an excellent candidate. Today J.C. Penny’s is America’s shopping destination for discovering styles at compelling price according to www.jcpenny.net. As of January 9, 2011; JC Penny’s stock traded at $30.72 a share making it an organization to consider for acquiring for our organization. Other factors taken into serious consideration that will be discussed today are profitability, management efficiency and leverage ratios. By selecting and calculating six financial ratios we will look into the fiscal years of both companies analyzing the above ratios. Operating cost and evaluation of annual and year to year results to make a sound financial assessment of where the takeovers companies to its competitors. Profitability ratio’s is a system for measuring finances that are used to assess a business’s ability to generate earnings as compared to its expenses and other relevant cost accumulated during a set time. For most of these ratios a higher value compared to the competitions ratio or the same ratio from the past year means that the company is doing well. Another ratio for examining financial ratios is leverage ratio. Leverage ratios calculate the financial leverage of a company to have an understanding of the methods that the company uses for financing or to measure the ability to meet financial obligations. A ratio measures the combination of the company’s operating cost giving an idea of how changes in output will affect operating income. The most common financial leverage ratio is debt to equity ratio. Companies with high fix cost will see a better increase of operating revenue when output is increased compared to companies with high variable cost. The reason for this is the cost has already occurred, so every sell after the break even transfers to the operating income. A company with a high variable cost will see little to no increase in operating income with additional output because cost continues to be added into the outputs. The degree of operating leverage is the ratio used to calculate this mix. The results can be seen in the operating income. The formula for calculating leverage ratio is debt divided by equity equals leverage ratio. In 2010 the leverage ratio for J.C. Penny was 1.6 and the ratio for 2009 was 1.7. The ratio for 2009 was slightly higher than 2010, so the company experienced very little change in leverage ratio. For the past four years Sears has gained small increases in leverage ratio. For 2010 the leverage ratio was 1.7. The most significant change in leverage ratio was from 2008 to 2009, the ratio increased from 1.5 in 2008 to 1.7 in 2009. Finally in 2007 the ratio was the lowest in the past four years with a ratio of 1.4. In consideration of this merger understanding the operating cost of J.C. Penney Company, Inc. Holding Company in comparison to Sears , Roebuck and Co will offer an opportunity to compare a similar organization who markets many of the same products. Operating cost give a better understanding of the internal workings of a company both past and present. Costs of operating typically are into two categories, variable costs, and fixed cost. Organizations typically have more of one than the other. Expenses are fixed are subject to stay the same whether the business is inactive or operating at complete capability. Some examples of these expenses may include employee income or fees to lease equipment. Employee monies have to be separate from hourly wages in this view. Flexible expenses are seen as unpredictable operating costs. Flexible expenses can change based on different of factors. Money distributed for an hourly wage, for instance can change by fluctuating the amounts of time workers are working. A companies operating costs is not exclusive to a particular country but may differ between countries or even from one site to another. Within an industry, it is likely for expenses to be different. Even online businesses that have very reduced operating costs can find it hard to eliminate them completely it is just part of any business. Reckoning a company’s operating costs is thought as crucial to sensible business set up. Insufficient forecasting adds to the risk that a company will not be able to keep enough money to properly. For this merger to be successful the operating cost of the potential company may need some modifications to fall in line with the current company structure to have a smooth transition without jeopardizing quality or customer loyalty. In our decision takeover JC Penny’s is final. Its competitors finances will be an important step to ensuring that the proper company was chosen to complement our business. After reviewing both JC Penny’s and Sear’s financials results side by side from 2010. See Chart below 2010 JC Profitability Penny Sears Variance Return on Assets 3.74% 1.64% 2.10% Return on Capital 6.02% 3.38% 2.64% Credit Current Ratio 2.1 1 .2 0.90 Quick Ratio 0.7 0.1 0.60 LongTerm Solvency Total Debt/Equity 62.7 50 12.70 Liabilities/Assets 61.9 68.2 (6.30) Growth Over Prior Year Revenue 0.90% 1.47% 0.57% Ebit DA 7.65% 3.95% 3.70% Gross Profit 2.24% 1.07% 3.31% Inventory 6.20% 3.90% 2.30% Capital Expenditures 15.11% 39.63% 54.74% Cash from Ops 60.12% 76.10% 15.98% Levered Free Cash Flow 74.88% 77.11% 2.23% A few things standout, one JC Penny has had higher returns on its assets and capital holders by about 2% over Sears. 2010 was a tough year for many organization, but again compared to Sears, JC Penny’s revenue half a percent higher and its EBIT was almost a full four points higher. Based on the comparison it looks as if JC Penny was the correct a great target takeover organization? References Sears Holdings Corporation. Retrieved from www.searsholdings.com on January 8, 2011. JC Penny's. Our 20102014 Long Range Plan. Retrieved from www.penney.net/default.aspx on January 9, 2011. Leverage Ratio’s. (2010). Retrieved from www.investopedia.com Profitability Ratio’s. (2010).Retrieved from www.investopedia.com http://investing.businessweek.com/research/stocks/financials/ratios.asp?ticker
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