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Question: Corporate Finance
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Introduction
In this present paper, we will discuss the financial ratios of Advance microdevices Inc. which is a multinational semiconductor company in America. The company is based in Sunnyvale, California, the United States. The company provides computer processors and related technologies for the consumer market and business. The main products of the company include motherboard chips, microprocessors, embedded processors, server workstations, graphic processor and others. The company traded under NASDAQ and it lies under the semiconductor industry. It is the second-largest supplier, and the company serves its products worldwide. The total equity of the company is $385 Million, and total assets of the company are 3.616 Billion (Global Provider of Innovative Graphics, Processors and Media Solutions et al., 2016).
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Operating risk
The operating risk is defined as the risk which is summarised by the company at the time of operating within the particular industry. The operational risk remains after predicting the systematic and financial risk. The company faces various operational risks such as human resource, system, internal procedure (Makaew et al., 2015). The operational risk of the company includes a risk of a breakdown in internal procedure, inability to perform the operations successfully by human risk, fraud risk, the risk of recruiting ineffective human resources and risk of wrong internal management decision.
Financial risk
The financial risk is defined as the risk which includes the loss of money by the shareholders due to investing in the particular debt due to which the company is unable to meet its financial obligations. It is the risk which is related to the financial industry. The risk is related to the financial transactions such as the loan of the company, investment of funds and others. There is various type of financial risks such as credit risk, liquidity risk, the risk of change in price, and currency risk. The credit risk is the default risk in which there is a risk of the borrower to pay the borrowed amount. The liquidity risk is defined as the risk which is faced by the company due to an inability of purchase and sale of securities in the volatile market. The debt to total capitalization ratio of the company in 2014 is 10.88 which shows that the company has high financial risk because of having high debt contribution in the capital of the company which needs to repaid to the lenders but the company is taking the risk in order to get higher profit.
Preferred Stock
The preferred stock is defined as the class of ownership in which the shareholders are preferred firstly at the time of distributing dividend, and the amount of dividend is fixed. The preference shareholders are also preferred first at the time of winding up of an organisation. No, the company does not have preferred stock.
Capital structure
The capital structure is the total sources of finance which are used by the company for its operations and growth (Rampini et al., 2013). The capital structure of the company includes equity, debts, common stock, long-term debt, and short-term debt. The capital structure is shown below:
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Current actual beta: The beta is defined as the measure which is used in a fundamental analysis to predict the volatility of portfolio in relation to the overall market. The current actual beta of the company is 2.7. Thus it is higher than one which shows that the volatility of Advanced Micro Devices, Inc. is higher than the market volatility.
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Unlevered Beta of the company: The formula for calculating Unlevered beta is beta / 1 + (1 - tax rate) x (debt / equity). The unleveraged beta of the company is 1.78. The unleveraged beta does not include the liabilities and debts of the company.
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Current marginal tax rate: The current marginal rate is defined as the percentage of tax which is levied on the income of each bracket. It is the percentage which is taken from the taxable income. The marginal tax rate comprises of state, federal and local income tax (Romer et al., 2014). The current marginal rate is defined as the tax which is paid on the additional dollar of income. The current profit marginal tax rate is 28.71%.
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Cost of debt after and before: The cost of debt is defined as the effective rate which is paid by the company on the total amount of current debt within the particular accounting period. The cost of debt before is 7.1926% which is calculated by dividing interest expense upon the cost of debt. The interest expense is 160 and cost of debt is 2224.5. The cost of debt after tax is 6.1%.
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Cost of preferred stock: The cost of preferred stock is calculated by dividing the preferred dividend by the preferred stock price plus the expected growth rate. The company does not have preferred stock, so the value of preferred stock is zero.
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Cost of equity: It is defined as the return which is paid by the company to its equity investors for compensating the risk taken by the investors by investing the funds into the stock of the company. The formula for calculating the cost of equity is a risk-free rate of return adds beta of asset multiplied by the value which is determined after deducting risk-free rate of return from expected rate of the market. The beta is 2.666, and the market premium is 7.5%. So the cost of equity is 22.25%.
Cash dividend yield
The dividend yield is defined as the sum of annual dividend per share of the company divided by current price per share. The high dividend yield does not reflect the good financial position of the company. The dividend yield of the company is zero. It is shown in the below chart:
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Weighted average cost of capital: It is defined as the rate which is expected to pay on the amount of investment which is invested by the security holders of the company. It comprises of the cost of debt and cost of equity. The current weighted average cost of capital of the company is 18.93%. It is calculated by the formula E/ (E+D) *Cost of equity+ D (E-D)*Cost of debt*(1-tax rate). The weight of equity is 0.776, and the weight of the debt is 0.224. The cost of equity is 22.25%, and cost of debt is 7.1926%.
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Price earnings multiple: The price-earnings ratios of the company are used to determine the value of the company. It is calculated by dividing the market value per share upon earnings per share. It helps to predict the price relativity of current share with the earnings per share. The price-earnings ratio of the company is shown below:
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Stock performance in five years: In the past five years, the market capitalization of the company reduces in 2012 and rapid increased in 2013 but again it drops in 201 and rises in 2015. The performance of the stock fluctuates in the past five years. The revenue growth of the company is 23.2%. The five-year CAGR is -10.3%. The operating margin is -10.1% whereas the sector average is 4.6%. The net margin is 201 is -13.3%.
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Debt to capitalization ratio: The debt-equity ratio of the company is 4.84 in which the total debt is 1.86 Billion which shows that the company is having high financial and operating risk. The company has to pay the high amount of debt to the lenders. Thus the financial position of the company is not stable. It also shows that the company is unable to operate its day to day activities.
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Reason for not investing : The aim of the investment is to grow money within the particular time period. The stock performance of the company in past five years in unstable and it shows the higher risk in the investment of the fund. Secondly, the debt equity of the company is 4.84 which is also very high and its high risk. The stock is also falling, and the company has 1.9 rating out of 5. The growth of the company is very low which 23.2% is in 2016. The long-term growth in past five year is -10.3%. The operating margin is -10.1% whereas the sector average is 4.6%. The net profit in the past five quarter is -13.3%. The net income of the company is -406 Million. The return of capital investment is -24.9% due to which it is not profitable to invest in the stock of Advance micro devices Inc.
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Global Provider of Innovative Graphics, Processors and Media Solutions | AMD. (2016). Amd.com. Retrieved 2 December 2016, from http://www.amd.com/en-gb
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Makaew, T., & Maksimovic, V. (2015). Industry Shocks, Operating Risk, and Corporate Financial Policies around the World. Operating Risk, and Corporate Financial Policies around the World (July 1, 2015).
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website. (2016). NASDAQ.com. Retrieved 2 December 2016, from http://www.nasdaq.com/symbol/amd/pe-ratio
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Rampini, A. A., & Viswanathan, S. (2013). Collateral and capital structure. Journal of Financial Economics, 109(2), 466-492.
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Romer, C. D., & Romer, D. H. (2014). The incentive effects of marginal tax rates: Evidence from the interwar era. American Economic Journal: Economic Policy, 6(3), 242-281.
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