Separation between Management and Ownership (Research Paper Sample)

Financial Performance
Student’s Name
Institutional Affiliation
Financial Performance
Verizon
Corporate Governance Analysis
Separation between management and Ownership
Verizon has a clear separation of management and ownership, and there is a board of directors that oversees the business operations and the implementation of the firm’s strategy. The people who are appointed to the board possess various expertise which has been essential for the success of the company. The management of Verizon is responsive to the stakeholders since it usually files both quarterly and annual reports for review and analysis (Verizon.com, 2019).
Potential Conflict of Interest
There is no potential conflict of interest at Verizon since there is a clear separation of power amongst the various positions of the executives. Also, the managers of Verizon are appointed based on merit and not through family relationships.
Interaction with Financial Markets
There is a high-level of interaction between Verizon and the financial markets since the information about the stock prices is readily available on websites such as Yahoo Finance. Also, the company’s website provides information about the movement of share prices. Social Obligations
Verizon regards its image in society highly and, hence, the company invests some of its funds towards corporate social responsibility and environmental sustainability (Verizon.com, 2019).
Stockholder Analysis
The stockholders of Verizon include insiders, individuals, and institutions. The insiders are the employees and the company’s directors who acquire the shares through a stock compensation plan. Some of the institutions include Next Link Wireless and Straight Path, Vanguard Group, and Blackrock Inc. The marginal investor in the stock of Verizon is Vanguard Group which holds the largest stake of 7.63% of the total shares (Yahoo Finance, 2019a).
Risk and Return
The risk profile is analyzed by comparing the debt and equity of a company. When a company is financed by more equity than debt, the financial risk of the entity is high which might lead to a reduction in the net income generated by the company. The other way of evaluating the risk profile of an organization is to retrieve the information presented in the annual reports. The overall risk of Verizon is high and it arises from market, firm, industry, and currency. Verizon is prone to market risk due to foreign currency fluctuations and changes in interest rates. Some of the transactions that the company carries out require the use of foreign currency which is prone to frequent fluctuations. However, the company uses the swap strategy to minimize the interest rate and currency risks. The industry poses a risk to the operations of Verizon because of competition (Verizon.com, 2019). To create a competitive advantage in the industry, the management of Verizon invests huge cash flows to ensure that the quality of service delivered to the consumers is acceptable. The firm risk arises from the fluctuation of net income and revenue which are caused by changes in market conditions (Verizon.com, 2019).
The cost of equity was calculated using the capital asset pricing model, and the formula is indicated below.
Cost of equity=Rf +b*(Rm-Rf)
Rf= 2.59 (Treaury.gov, 2019)
Rm=Risk premium + Risk free rate=4.67 (Marketriskpremia.com, 2019) +2.59
=7.26
Beta, Verizon=0.47
Cost of Equity
Verizon=2.59+0.47*(7.26-2.59) =4.7%
Cost of Debt
Verizon=4.7% (Verizon.com, 2019)
Cost of Capital
The cost of capital would be calculated by adding the cost of equity and debt as indicated below.
Verizon=4.7%+4.7%=9.4%
Measuring Investment Returns
There is a typical project that Verizon is undertaking currently, and it is long-term. In 2017, the cash invested in the capital expenditure of the company was $17.2 billion. In 2016 and 2015, the amount that was invested in the same project was $17 and $17.7 billion respectively (Verizon.com, 2019). The project entails the acquisition of software, and it is expected that it will lead to an increase in the future revenue of the firm. The projects in future would not be similar to the ones that are being carried out currently because of the changes in technology and consumers’ needs.
Capital Structure Choices
In 2017 and 2016, the value of long-term debt of Verizon was $113 and $105 billion while the value of equity was $44 and $24 billion respectively (Verizon.com, 2019). Verizon uses more debt compared to equity to finance its operations. The advantage of using debt is that it does not constraint the company to pay dividends like it is the case with equity financing. Additionally, debt is beneficial to the company since there is no restriction as to the amount of money that Verizon can borrow provided that it has adequate assets to finance it. The disadvantage of debt is that it increases the interest expense of the firm which might lead to a decline in net income. Additionally, an increase in debt raise the financial risk of the company, and this might lead to the future denial of loans. The company has too much debt since the value of long-term obligations in the last two financial years exceed equity by more than two times.
Optimal Capital Structure
The optimal debt ratio of Verizon is 0.4 which implies that the debt of the company should not surpass 40% of the total capital invested in the business. The recommended debt ratio for the company should be 0.2 since the company is performing well in the market and, hence, it is capable of raising additional capital using equity. Relative to the sector, Verizon has too much debt since it is the highest compared to Sprint, Metro Plc, and Leap Wireless. The debt ratio of the market in 2018 was 0.11 which implies that the one for Verizon is higher (Csimarket.com, 2019).
Mechanics of Moving to the Optimal
If a company’s actual debt is different from the recommended one, there should be a gradual process regarding the way it gets to its optimal level. A company cannot reduce debt immediately since it would depend on how fast it would be to raise capital using stock. Verizon should use more equity financing compared to debt to minimize the high financial risk that could affect the future profits of the firm.
Dividend Policy
In 2017, 2016, and 2015, the dividend paid by Verizon was $2.33, $2.285, and $2.23. It is evident that the company has been returning cash to the shareholders in the last three years. Verizon bought back common stock in 2015 at a value of $5.134 billion, but none was purchased in 2016 and 2017. The cash accumulated by the company as at the end of the financial year 2017 was $2 billion. If Verizon has excess cash, then it would be advisable for the company to pay higher dividends to its stakeholders (Verizon.com, 2019). Additionally, the excess cash could also be invested in projects that would lead to the optimization of the company’s profits.
A Framework for Analyzing Dividends
The dividends that the company should have paid during the last financial year is the difference between the opening and closing retained earnings. In 2017, the opening and closing balance of the retained earnings of Verizon was $15 and $35 billion respectively. Hence, the company increase in the retained earnings was $20 billion which is the amount of dividends that the company should have paid its shareholders. However, from the firm’s cash flow statement, the company only paid dividends worth $9.472 billion. The current cash balance of the firm at 2017 was $2.079 billion. Hence, it would not be advisable for the company to pay dividends in excess of the actual amount that was paid since the company does not have adequate cash flows.
Valuation
There has been an increasing growth pattern for Verizon in the last two years as indicated by the net income results. The net income of the company in 2017 and 2016 was $30.5 and $13.6 billion respectively which implies improved performance. The high growth pattern for the company is expected to last for five years since the company has invested vast cash on long-term projects and, hence, the net income is expected to increase in the future. The estimated value of equity for the firm is $44 billion which is the total value of equity (Verizon.com, 2019). The market value of Verizon is $238.63 billion which is higher than the estimated value (Yahoo Finance, 2019a). The variable that is driving the value of Verizon is the profit margin because there was an increase in the profitability of the firm in 2017. When the net income of a company rises, the value of shares increase because of the upsurge in demand. If I was hired by the company, I would minimize the value of leverage to ensure that there is growth in the future.
Sprint
Corporate Governance Analysis
Separation between management and Ownership
At Sprint, there is a clear separation between management and ownership since there is an executive team that oversees the operations of the business. Sprint is responsive to stakeholders since it files annual reports and the stockholders are permitted to act by written consent in case there is an issue with the management (Sprint.com, 2019).
Potential Conflict of Interest
There is no potential conflict of interest at Sprint because there is a clear separation of power amongst the various positions of the executives.
Interaction with Financial Markets
The finan...