Calculate the Return on Equity(ROE) using Dupont System
According to Gitman, Juchau, and Flanagan (2015), Dupont system is used to analyze the ability of the company to increase the company’s rate of equity.
Dupont system=Profit Margin x Total Assets turnover x financial leverage
Profit Margin=Net Income/Revenue
=15,297÷54,490
=0.2807
Asset Turnover Ratio=Revenue/Average Asset
= 81,581 ÷155,128.5
=0.5258
Financial Leverage=Average Assets/Average Equity
=155,128.5÷77,564.25
=2
ROE =0.2807x0.5258x2
=0.2951
=0.30x100
=30%
Calculate the constant growth stock valuation and compare it to the current stock price
Constant growth stock value=retention ration x ROE
Retention rate = (Net earnings- Cash dividends paid)÷Net earnings
= (15,297-13,767.3)÷15,297
=1,529.7÷15,297
=0.1
And,
Constant growth=Retention rate x ROE
=0.1x30
=3%
The current stock price of products in Johnson & Johnson company is at 133.00USD, and it is expected to grow, thereby increasing the value of the stock.
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Research your company industry and evaluate what types of capital constraints your company must consider to be competitive in the market
According to Fracassi (2016), a capital constraint is a situation where a company lacks the capital to run effectively and efficiently. Types of capital constraints that must be considered include;
Cash flows: To be competitive in the market, a firm should be able to cash to cover recurrent expenditures such as rent and payroll. There are also other operational costs, such as paying governmental business taxes.
Budget: Adequate budget is essential in ensuring business operations are carried out smoothly. Lack of adequate finance can result in tight budgets that can make the attainment of organizational goals and objectives to be hard.
Marketing: Marketing and advertising is a key factor in the success of any business enterprise. The marketing strategies that are used by a firm will determine the customer base of the firm. In the case of capital constraints to a firm, the marketing activities will be compromised, thereby affecting the cash flow of the firm.
Human resource: The knowledge and skills of personnel need to be considered when a firm wants to have a competitive advantage in the market. They are an essential capital investment in any business since they will determine the return of the firm.
Explain the appropriate financial techniques that would be used in this evaluation.
Comparative statements: In this technique, the profit, loss account, and balance sheets of the previous period are compared with the current statements to come up with financial conclusions and recommendations.
Fund flow analysis: This technique analyses the source of funds and how the funds were utilized in the firm. It also analyzes the various changes that were in the current financial structure.
Cash flow analysis: Gullifer and Payne (2015) noted that cash flow analysis deals with the movement of money and bank balances. The two cash flows that are analyzed are the actual cash flows and the notional cash flows.
Cost Volume Profit Analysis: It deals with the current relationship between cost, sales, and profit. The cost is normally divided into two, the fixed cost and the variable cost. The results of the analysis will be utilized by the management in making profit planning.
Ratio Analysis: It is designed to develop a relationship between a specific product or item or a group of products in the profit and loss account or in the balance sheet. Ratio Analysis is able to highlight the solvency, profitability of a company, company gearing, and also liquidity of a firm.
Reference
Fracassi, C. (2016). Corporate finance policies and social networks. Management Science , 63 (8), 2420-2438.
Gitman, L. J., Juchau, R., & Flanagan, J. (2015). Principles of managerial finance . Pearson Higher Education AU.
Gullifer, L., & Payne, J. (2015). Corporate finance law: principles and policy . Bloomsbury Publishing.
