Long Term Financing

Choose a publicly traded company on which to focus, modeled on the Walmart analysis
Part A Project an income statement for next year for the firm based on your assessment of revenue growth, key projected financial ratios, and any other key assumptions, making sure to justify any assumptions.

1. What is your projection for net income and how does it compare with the previous year?
2. Based on your assessment of anticipated dividends, what is your projection for a change in retained earnings?

Part B Project a balance sheet for next year for the firm based on your assessment of the change in retained earnings, key projected financial ratios, and any other key assumptions, making sure to justify any assumptions. Use external borrowing as your balancing “plug.” What is your assessment of the firm’s financial needs?

Part C Based on your projection of financial needs, what recommendation would you make to the firm—for example, how to meet increased financing needs or what to do with excess financial capacity?

Long Term Financing

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Long Term Financing

Part A

Walmart incorporation, a relatively large company in the retail industry having received competition from other major players such as Amazon developed strategies to stay afloat. The strategies were designed mainly to counter external factors that were of great influence to the business revenue. To this effect, the business applied five analytical principles of Michael Porter in determining the level of competition in the retail industry with reference to the effects of various external factors. The analytical tools herein, aided in evaluating the bargaining power of suppliers, the bargaining power of the business clients, the threats associated with new market entrants, the threat of substitution and the threat of competition. The Walmart analysis takes form of the SWOT (strength, weakness, opportunity and threats) in evaluating effects of above mentioned five factors in success of the business. The analysis noted that the threat of competition from existing and new entrants was eminent hence the need for business adjustment for meaningful survival.

Amazon which is presently the most valuable publicly traded company and a focus of the study, in many ways utilizes the Walmart analytical tools to enhance industrial relevance and counter competition both from the existing and new market entrants. With an intensive web-based selling approach, Amazon has managed to spread its business globally and to stay ahead of its major competitors. Figures from the past four years of Amazon financial statements (income statement) illustrate a steady increase in the total annual revenue of the giant retailer (“Amazon balance sheet 2005-2020 | AMZN,” n.d.). For instance, total revenue as per below extract of the retailer’s income statement in the past four financial years shows an average revenue increase of $36,133,750. Hypothetically, it can be deduced that below financial data projects a further increase of total annual revenue in the next financial year with all other factors held constant. To this end, we can assume that the total revenue in the financial year ending 12^th Dec 2020 would be sum of the total revenue realized in the preceding financial year plus the average increase in revenue per year $(280,522,000+36,133,750) hence, a total revenue of  $316,655,750.

Part B

Based on four year analysis of Amazon’s statement of financial position (“Amazon balance sheet 2005-2020 | AMZN,” n.d.), it is evident that the business retains much of the income on an increasing trajectory each year as opposed to paying out any dividends. In this sense, it can only be anticipated that Amazon will not pay any dividend in the next financial year but would re-invest part of its capital in form of retained earnings (“Amazon balance sheet 2005-2020 | AMZN,” n.d.). According to Amazon balance sheet 2005-2020 | AMZN,” n.d., a key observation on the statement of financial position over the past four years indicates a relative decline in long term liabilities (borrowing) and an increase in non-current assets. Moreover, the financial statement shows that the firm is able to meet its current obligations just from its current assets and liability figures. For instance, the current ratio in the last four financial years is relatively aligned with the industrial average showing that the firm is able to meet its short term obligations as per below schedule;

Similarly, figures of non-current assets for each financial year over the past four reporting periods shows that the firm is very able to service its long-term borrowings without any unreasonable strain.

Part C

Financial data derived from the income statement, showing increasing revenue over the past four reporting periods not only signal an expanding operational capacity of the Amazon’s retail business, but also shows that the firm has sound financial models to counter other industrial giants. Moreover, based on the firm’s balance sheet, it is pretty obvious that the business is able to effectively rationalize on its assets to increase its operational capacity without straining much on heavy borrowing. This in itself provides a good financial life the company since its assets are relatively sufficient to generate more business revenue. It is therefore a recommendation that the business should in the short-run focus on re-investing shareholders wealth in form of retained earnings instead of paying out dividends due to its expansion philosophy evident in the income statement and balance sheet.

References

Amazon balance sheet 2005-2020 | AMZN. (n.d.). Macrotrends | The Long Term Perspective on Markets. https://www.macrotrends.net/stocks/charts/AMZN/amazon/balance-sheet