FedEx Corp.’s Financial Ratios Calculation

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Introduction

FedEx is a company which is in the business of transport and information industry. The company provides services worldwide and is listed n the Network stock exchange. It operates a network of companies offering services in both transport and information. The company was incorporated in 1998 to form the current company. The company has various names in various parts of the world, such as FedEx Ground, FedEx freight, fed ex-office, FedEx customer critical, and many other companies networked worldwide. The company has acquired through mergers or acquisitions various companies in various parts of the world.

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This paper undertakes to calculate and find out the performance of the company in terms of return on the shareholders’ value and the attractiveness of its stocks. Various methods will be used in determining the costs of capital, especially equity capital.

Weighted Average Cost of Capital

The weighted average cost of capital is one of the most tools available for managers to use in decisions making relating to the long-term sustainability of the firm. It is the overall process of generating, evaluating, and selecting the cost of capital that will be required by an investment project. It at times acts as the internal rate for projects.

Company Name: FedEx Balance Sheet: 31, May 2008

Market Value Date: 8th July 2009; Weighted Average Cost of Capital

Using Gordon Dividend Growth model

Source (a) Book Value (b)
(In thousands)
Market Value (c) (In thousands) Proportions (d) Cost % (e) Weighted (f)
Equity 14,526,000 18,700,000 0.925 9.245 8.55%
Long term debt 1,506,000 1,506,000 0.075 5.79 0.43%
Preferred stock 0 0 0 0% 0%
Total 16,032,000 20,206,000 1.0000 8.98%

Using CAPM model

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Source (a) Book Value (b)
(In thousands)
Market Value (c) (In thousands) Proportions (d) Cost % (e) Weighted (f)
Equity 14,526,000 18,700,000 0.925 9.79 9.06%
Long term debt 1,506,000 1,506,000 0.075 5.79 0.43%
Preferred stock 0 0 0 0% 0%
Total 16,032,000 20,206,000 1.0000 9.49%

Assumptions

I have made the following assumptions in calculating the weighted average cost of capital.

  1. The market value of debt capital remains the same as book value as of 31st May 2008.
  2. The 2012 Bond is assumed to be the standard or the average bond for the company, and its 9.65% return has been taken as the average interest rate for the company’s bond.
  3. The average risk-free rate has been assumed to be 3%.
  4. The S & B 500 has been assumed to have a risk premium of 7%.
  5. The market value of the share capital has been taken to be the market capitalization value as of 10th May 2009.

Cost of equity using a dividend growth model

Most investors who are not risks takers use the model called Dividend Growth Model. It has been said that this model has been proven strong, low risk, and can produce long-term returns compared to the other model that investors used. To use this model, investors must be patient watching while their dividends are slowly increasing annually. The concept behind this model of investing is to buy a solid share with tracks of increasing dividends annually. The model supports higher prices as compared to other models. This kind of strategy was suitable for investors who wanted to protect themselves from inflation. Since dividends increase every year, the income that the investors get will also increase. Most companies who fall from this strategy are stable and large by nature.

The model will be used for year 5 to perpetuity and is as follows;

Ke = D(1+ g) + g

P0

Whereas P0 is the present value at year, Ke is the required rate of return, g is the growth rate at year five onwards, and D0 is dividend at year 1.

According to Brealey et al. (2007), the Growth rate of any particular company analysis the assets, earnings, and the growing dividends in the particular financial year. The dividend discount model initiates a clear understanding of different growth rates, and also, the relationship between share price, rate of return, and dividend are analyzed. Any particular company may have no growth, constant growth, or non-constant growth.

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Whereas P0 = 60.06

g = 8.45%, D0 = 0.44

Ke = 0.44(1+ 0.0845) + 0.0845

60.06

= 0.09245 or 9.245%

Cost of equity using Capital Asset Pricing Model

According to Brealey et al. (2007), the Discount rate is used to calculate the present value of future cash flows. In order to calculate the Discount rate, we use the Capital Asset Pricing Model (CAPM) equation. According to Yahoo finance; (2009), the company Beta is 0.97.

Rs = Rf + Bs (Rm – Rf)

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Where: Rs – cost of equity capital

Rf– the return that can be earned on a risk–free investment (e.g., US treasury bill) =3%

Rm – the average return on all securities (e.g, S & P 500 stock index) = 7%+3% =10%

Bs – the securities beta (systematic) risk. =0.97

There foreRs = 3% + 0.97(7%)

Rs= 9.79%

The risk-free market is considered to be 10%. As seen the trend of the market for the previous 10 to 15 years, we can consider a risk-free market of 3%.

Cost long term debt

The rate has been assumed to be equivalent to 9.65%.

Effective after-tax rate is = 9.65% (1-0.40) = 5.79%

Cost long term debt

Free Cash Flow

A cash flow statement is also one of the vital documents which are included in the financial report of the company. According to Brealey, R; et al.; (2007), the Cash flow statement reflects the cash inflow and outflow of the company day to day operations. The cash flow statement includes three main activities, mainly operating, investing, and financing. For this analysis, only two will be used as follows;

Year 2008 2007 2006
Net Operating Activities 3,484,000 3,563,000 3,676,000
Net Investing Activities ($2,897,000) ($4,124,000) ($2,454,000)
Net Increase/Decrease $587,000 ($561,000) ($1,222,000)

Therefore, the perpetual value of the company will be as follows

g=ROE X retention ratio; Retention ratio= 82%, and the payout ratio is 18%.

ROE = Net profit available to equity capital

Equity

= 1125000

14526000

= 7.74%

Therefore g= 82% x 0.0774

= 6.35%

PV= FCF (1+ g)

WACC –g

Using weighted average capital from Gordon model,

PV= 587,000,000(1+0.0635) = 23,736,673,000

0.0898 – 0.0635

Equity = perpetual value – long term debt

Equity = 23,736,673,000-1,506,000,000

= 22,230,673,000

Price per share = equity value

Number of shares

Price per share = 22,230,673,000= 71.40

311,355,000

The market value as at 10th may 2009 is 60.06.

Using weighted average capital from Gordon model

PV= 587,000,000(1+0.0635) = 19,881,353,500

0.0949 – 0.0635

Equity = perpetual value – long term debt

Equity = 19,881,353,500-1,506,000,000

= 18,375,353,500

Price per share = equity value

Number of shares

Price per share = 18,375,353,500 = 59.02

311,355,000

The market value as at 10th may 2009 is 60.06.

Valuation of shares

According to Peirson et al. (2000), a stock is overvalued when the Book value is lower than the market value. Similarly, a stock is undervalued when the Book value of the share is higher than the market value. The share value increases when it declares a financial year profit, its disclosures about its future prospects and projects. This influences the investors to invest in the organization and also when the organization is ready to buy back its own shares in some cases. An overvalued share is of high risk since if the book valued price is lower than the market value, there is a high risk to the investment made by the shareholders due to the loss already incurred due to the lower book value, and even a higher risk is involved if the book value decreases.

From the analysis above using three cash flows methods, there is a mixed result where the capital asset pricing model indicates that the shares are overvalued while the dividend growth model shows the shares are overvalued in the market. The market share of the company is 60.06, which is higher than its intrinsic value using the capital pricing model; therefore, the share is overvalued by the market while the dividend growth model shows that the shares are undervalued by the market since the intrinsic value is greater than the market value. However, I should note that for most shareholders, I used a different growth model as a yardstick to measure the value of the shares. Bearing this in mind, I will advise shareholders to hold the shares until the recession is over. This is because the market value is likely to come down, and the shareholders will have the opportunity to buy them. Using CAPM, I will advise them to hold buying the shares since the market is overvaluing the shares.

Conclusion

The company appears to be performing well in the market, and it is expected to be performing well in the near future. Based on the results of the analysis, still, people have confidence in the shares of the company. It is a better investment for the shareholders since it involves less risk, although it has foreign exchange and interest rates due to its international transactions.

The company provides its shareholders with dividends; therefore, it is a good investment for those shareholders looking for quick returns. Overall it should be included in the portfolio of an investor because it will reduce risk. Thus, they will have reduced their risks by incorporating these stocks into their portfolio.

References

  1. Bond rate for FedEx Corp., 9.65%, 2012.
  2. Brealey, R, Myers, S & Marcus, A 2007, ‘Fundamentals of corporate finance’, 5th edn, McGraw-hill, Sydney.
  3. FDX: Summary for FEDEX CORP – Yahoo! Finance Web.
  4. Peirson, G, Brown, R, Easton, S & Howard, P, Pinder, Sean 2000, ‘Business finance’, 7th edn, The McGraw-Hill Companies, Inc, Sydney.

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BusinessEssay. (2022) 'FedEx Corp.'s Financial Ratios Calculation'. 8 February.

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