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Explain any assumptions made in implementing the models.

Where appropriate, explain how you arrived at the variables you are using. E.g., it is not enough to say you are assuming a 2 percent growth rate. You would be expected to provide justification/motivation of how you arrive at 2 percent growth rate.

Provide an indication of the sensitivity of your valuations to changes in the assumptions. E.g. perform sensitivity analysis for each model.

Analyzing the financial performance and current issues faced by Broadcom Limited Company

In this report, financial analysis of company has been taken into consideration. In this report, Broadcom Limited Company has been selected in this report to reveal the financial performance and current issue of the company. This report is divided into three specific parts. The first part starts with the analyzing the financial performance and current issues faced by Broadcom Limited Company. After that, price and value of company have been evaluated to identify the core value of the company.  Beta analysis and share price analysis will also be undertaken to analyze the financial performance of the company in current and the future period (Brigham, and Ehrhardt, 2013).

Broadcom limited is a designer, global supplier of products based on the analog-digital semiconductor technologies. It provides all kind of digital and technical products around the globe.  The stock price of a company is US$ 243.57 which is 99% lower than as compared to last year share price. The total revenue of the company is US$ 1374 crores

The Broadcom Limited is running its business in a designer, the global supplier of products based on the Analog digital semiconductor technologies. However, in 2013, Company had total revenue of AUD $20285 which increased by 7% in 2017. It shows that company has increased its overall profitability throughout the time (Duchin and Sosyura, 2014).

Ratio analysis of the company

This ratio analysis is computed to evaluate the financial performance of Broadcom Limited.

Current ratio

The liquidity ratio of the company reflects company's ability to pay off its short-term liabilities with the help of current assets.

Current ratio= current asset/ current liability (Palepu et.al, 2013)

Description

Formula

BROADCOM LTD  (AVGO)

Liquidity ratio

2013-10

2014-10

2015-10

2016-10

2017-10

Cash ratio

cash equivalents + cash / current liabilities

2.4042553

1.5787402

1.6282395

1.0061728

4.430209569

Current ratio

Current assets/current liabilities

           4.30

           3.77

           3.37

           2.31

              6.26

Quick Ratio

Current assets-Inventory/current liabilities

           3.62

           3.26

           2.91

           1.86

              5.68

It is analyzed that cash ratio of company has increased to 4.4 points in 2017 which is 100% higher as compared to 2013. The current ratio is increased to 4.43 point in 2017. In addition to this, the quick ratio of the company has increased to 5.68points in 2017 which is 70% higher as compared to the quick ratio of the company in 2013. This liquidity ratio reflects that company has increased the flow of money in its operating business more. The company has increased its liquidity assets with a view to meet its market demand (Ehrhardt and Brigham, 2016).

It could be described as the revenue generating power of the company. It establishes the relation between profit and total revenue of the company.  

Description

Formula

BROADCOM LTD  (AVGO)

2013-10

2014-10

2015-10

2016-10

2017-10

Profitability

Return on equity

Net profit/revenues

3%

6%

20%

-13%

10%

Return on assets

Net profit/Equity

19%

8%

29%

-9%

8%

Financial leverage

EBIT / EBIT - Interest

1.0

1.3

1.1

0.4

1.2

Asset turnover

total assets / total sales *365

61.4

897.0

566.5

1377.5

1126.3

Earnings per share

Net income - pref div/shares outstanding

0.2

0.1

0.3

-0.1

0.1

It is analyzed that Broadcom Limited has increased its net profit by 7% in 2017 as compared to last five year data. In addition to this, return on equity of the company is also increased to 10% in 2017 which is 100 % higher as compared to last five year data. In spite of increasing profitability and increased debt funding, the company has maintained stable financial leverage throughout the time. This shows that company has the strong position in the market and increased its profitability since last five years (Garrett, Hoitash, and Prawitt, 2014).

Evaluating the price and value of the company

Broadcom Limited has maintained optimum capital structure since last five years.  

Description

Formula

BROADCOM LTD  (AVGO)

2013-10

2014-10

2015-10

2016-10

2017-10

Times interest earned

EBIT / Interest expenses

276

3.981818182

8.544502618

-0.699145

5.248898678

Cash coverage ratio

EBIT + non-cash expenses / interest expenses

               553.00

                  439.00

               1,633.00

     (408.00)

                 2,384.00

Debt to Equity Ratio

Debt/ Equity

                   0.18

                      2.23

                      1.25

           1.64

                        1.68

This ratio shows that company has increased its debt to equity ratio to 1.68 in 2017. It is 1 point higher as compared to last five year data. Time interest ratio reflects company’s ability to cover its interest payment from the EBIT. In 2013, Broadcom Limited had increased its interest payment and profitability at large. It is observed that debt to equity ratio of the company has shown that company has optimum financial structure and reduced its cost of capital by reducing the debt portion (Kundakchyan and Zulfakarova, 2014).

This market ratio evaluates the current market price of company that is listed on the security exchange. It is evaluated that share price of the company has increased by 200% since last five years. The dividend yield of the company has also increased. This shows that company has created value for its investment and increased its overall profitability throughout the time.

Particular

Formula

Share price

Price / earnings ratio

Market value per share/earnings per share

               124.75

Dividend yield ratio

dividend / current share price

                   4.99

It is the method of performance measurement that was started by the Du Pont. By using this method, Assets and return on equity of Broadcom Limited could be analyzed at their gross book value rather than net book value to produce a higher return on equity.

It is evaluated that the return on assets of the company shows the negative results. However, the return on equity of the company is also showing the -6.20% after implementing the Du Pont analysis.

Return on Assets

(+)

Return on Assets

(-)

Average Interest Rate

(x)

Debt/Equity Ratio

(=)

Return on Equity

-1.48%

-1.48%

1.33%

1.68

-6.202%

This has shown that company has not created the good amount of return on equity if the assets are valued at their gross book value rather than net book value to produce a higher return on equity (Prasad, et al. 2015).

It is evaluated that Intel Corporation has 34.2% PE ratio. Qualcomm Inc (USD) has also increased its return on equity by 15% since last five years. Skyworks Solutions Inc (USD) has reflected the positive return on equity by -6.202%. It has shown that as compared to another peer group, Broadcom Ltd has shown negative outcomes. It has revealed negative return on equity 6.2 which is not the good indicator for the future growth of the company. Nonetheless, the profitability and increased return on capital employed is the good indicator for the organization.  It shows that Broadcom Ltd is performing well in the market as compared to another market rival. However, in context with the growth perspective, Intel Corporation has increased its market share to 16% which is a positive indicator for the future growth of the company. if Broadcom wants to beat Intel Corporation then it needs to focus on creating competitive advantage in cost leadership strategy.

Undertaking beta analysis and share price analysis to analyze the financial performance

The Broadcom Ltd has been running its business on an international level. However, in Singapore, the company has increased its market share by introducing more advanced technologies. There are several competitors such as Qualcomm Inc (USD) Skyworks Solutions In who are providing the same services but using advanced technologies. The company has faced high fixed investment cost due to introducing new machines and network.  Apart from that, the company has also faced High exposure to financial market due to the sluggish market condition. Nonetheless, the profitability of the company is showing high increment but the return on equity computed at their gross book value rather than net book value reflects the negative indicator for the organization. It is analyzed that company has also faced the anti-trust issue in its business while bidding the Qualcomm for the takeover. As per the regulatory point of view, Broadcom Ltd has faced legal issues which have increased its overall cost of production by 3%.

The future earning of the company is based on several factors such as brand image, business operations and financial performance of Broadcom Company. For instance, if the marketing plans and sales employees are not effective then the company will fail to increase its overall revenue. The earning of the company is highly dependent upon the sales of the company. Broadcom Ltd sells all kind of digital and technical products around the globe with a view to increasing the overall sales. However, 20% part of the sales arises from the digital games and softwares. If the company wants to increase its overall return on capital employed then it will first have to increase its overall market share. It may be possible by using proper strategic alliance and focusing on the potential clients in the market. Business to business is also one of the major parts for increasing the future earning of the company (Sanlorenzo, et al. 2015). Other issues are like facing corporate penalties, failure to comply with the listing rules and regulation has also been faced by Broadcom Company since last five years. However, company

There are several valuation models which could be used to assess the market value and book value of Broadcom Ltd. The estimation of the value of the company is done by using several models such as dividend valuation model, free cash flow to equity model, price earnings ratio model and value ratio model.

This model is used to value of the company by valuing the company’s stock price based on the theory that its stock is worth the sum of all the future dividend payments. It is used to value stocks based on the net present value of the future dividends available to shareholders.

Calculation of Required rate of return under CAPM model

Risk-free rate (A)

2.65%

Beta (B)

0.726213465

Market Risk premium (C)

4%

The required rate of return [A+(B*C)]

3.63%

Ratio analysis of Broadcom Limited Company

Source: https://www.marketwatch.com/investing/bond/ambmksg-10y?countrycode=bx

It is observed that present value of the stock is found on yahoo finance. By using dividend discount model, the future value of the stock could be computed (Treanor, et al. 2014).

Future value of stock =

VS

= Stock Value

D0

= Dividend at time 0 (most recent)

G

= Growth rate

RF

= Stockholders Required Rate of Return

Computation of the future value of stock

DO

1.75

G

5%

RF

3.63%

Future value of stock

285.9349307

Free Cash Flow to Equity model

This model is used to measure of how much cash available to the equity shareholders after deducting all the expenses.

Valuation of equity taking free cash flows of equity

Estimated Free cash flows for equity

Year

FCFF ($M)

Remarks

2017

    7,641.18

1707.87775

2018

    7,801.40

2019

    7,964.97

2020

    8,131.98

2021

    8,302.49

2022

    8,476.58

2023

    8,654.31

2024

    8,835.77

2025

    9,021.04

2026

    9,210.19

Terminal cash flows

    9,516.95

9210.19*(1+3.33%)

Present value of discrete cash flows for next 10 years

Year

FCFF ($M)

PVF @13.67%

PV of Cash Flows

1

    7,641.18

               0.880

       6,722.25

2

    7,801.40

               0.774

       6,037.83

3

    7,964.97

               0.681

       5,423.09

4

    8,131.98

               0.599

       4,870.94

5

    8,302.49

               0.527

       4,375.01

6

    8,476.58

               0.464

       3,929.57

7

    8,654.31

               0.408

       3,529.49

8

    8,835.77

               0.359

       3,170.13

9

    9,021.04

               0.316

       2,847.37

10

    9,210.19

               0.278

       2,557.47

Total

     43,463.15

Present value of terminal cash flows

Terminal cash flows

    9,516.95

     92,046.11

The total value of Equity

  1,35,509.26

No of Shares Outstanding

       8,710.00

Per share value of the value of equity

            15.56

This price earnings ratio model is the ratio for valuing the company that measures its current share price relatives to its per-share-earning (Vogel, 2014).

PE ratio = Market value per share/ earning per share

Market value per share= $ 242.4

Fiscal year ends in October. USD in millions except per share data.

2013-10

2014-10

2015-10

2016-10

2017-10

EPS

2.23

1.05

5.17

-4.75

4.18

MPS

232

235

239

240

242

PE ratio

104.036

223.81

46.2282

-50.526

57.8947

It is the ratio used to compare a stock’s market value to its book value. This ratio is calculated by dividing the current closing price of the stocks and book value per share.

P/B Ratio = Market Price per Share / Book Value per Share

Book value per share= (Total Assets - Total Liabilities) / Number of shares outstanding

Fiscal year ends in October. USD in millions except per share data.

2013-10

2014-10

2015-10

2016-10

2017-10

Total Assets

3415

10491

10592

49966

54418

Total liabilities

529

7248

5878

31074

34133

Total assets- Total liabilities

2886

3243

4714

18892

20285

Number of shares

2,71,035

3,52,850

3,71,035

3,71,035

3,71,035

Book value per share

0.0106481

0.0091909

0.012705

0.050917

0.0546714

After using all these four types of models, it is analysed that the share price of company is overvalued and sold in the market at the higher amount. However, discussion of the market price of company could be done by using the following methods and models given as below.

Valuation model

Discussion

Dividend valuation model (DDM)

After using this model, it could be inferred that share price of the company is undervalued. It shows that required rate of return of the company is 3.63% which is computed by using CAPM model. The dividend growth model analysis all the future dividend payment and on the basis of this dividend payment, it determines the share price of the company. However, as per the DVM, the share price of the company is $ 285 which is higher than the share price of company shown on the stock chart. This model considers the growth of the dividend, required rate of return, existing share price and expected a dividend of the company (Weygandt, et al.  2015).

Free Cash Flow to Equity model

This model is used alternative to the dividend growth model of company. The free cash flow of the company is computed on the basis of the average of flow of capital.  This free cash flow to equity model is also based on the growth of the country. This has been analyzed that company has good value for cash flow. This shows that company has the good amount of cash inflow.  This Free Cash Flow to Equity model reflects that company has strong growth in its business. However, the average cash flow of the business is very high which good indicator for the business is. As per the Free Cash Flow to Equity model, per share value of equity share holder is $ 15.56. On the contrary to that, the market price of the stock of the company is 265 which are way too high as compared to the value of the company. It reflects that company has the strong brand image and due to its high profitability, it has increased its share value in determined approach.

PE Ratio Model

This ratio determines the value of the company on the basis of its earning and market value of the share. The earning of the company is computed by deducting all the expenses from the available earning. As per the PE ratio model of the company, it is inferred that company has decreased the value of its business. However, the company had PE ratio of 57 which is 50% lower than its last five year data. This PE ratio reflects that company has the market price of share 57% higher as compared to the earning offered to equity shareholders.  This price earnings ratio model is the ratio for valuing the company that measures its current share price relatives to its per-share-earning. After analyzing both MPS and PE ratio of the company, it is analyzed that company is overvalued in the market due to its strong brand image and high profitability (Yahoo finance, 2017). 

Price to book ratio

The price to book ratio of the company compares a stock’s market value to its book value. This ratio is calculated by dividing the current closing price of the stocks and book value per share. It is analyzed that since last five years, the book value of the shares should be between 0.56 to 1 on the basis of the number of shares in the market and total assets of the company.  However, as per the market data, the share value of the company is more than $ 265 which is very high as compared to the book value computed by using price to book ratio.  The assets of the company and share numbers help in determining the true value of the company (Zhu, 2014).  This price to book ratio shows the real value of the company based on the total assets of the company.  

After analyzing all the financial data of company and valuation model, it could be inferred that dividend discount model is the best method to value the company. It not only considers the present financial data of company but also estimates the future inflow for the organization on the basis of existing dividend payment and growth rate. In addition to this, by using another valuation model, there is high level of variance between market value or market share price of company and share price computed. Therefore, it could be inferred that dividend discount model reflects the true financial position of compay.

Conclusion 

The value of the company has been evaluated to identify the core value of the company.  Beta analysis share price analysis and financial model reflects the financial performance of the company in current and future period. It is inferred that company has increased its profitability in an effective manner since last five years. However, the share price of the company is overvalued in the market due to its high profitability and earning per share. It is inferred that if investors invest their capital in Broadcom limited then they would easily create value in their investment.  The share price of the company is increased due to the diversified growth of the company and increased profitability. Nonetheless, the company should focus on grasping new opportunities to increase its overall market share.  

References 

Brigham, E.F., and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage Learning.

Duchin, R. and Sosyura, D., 2014. Safer ratios, riskier portfolios: Banks? response to government aid. Journal of Financial Economics, 113(1), pp.1-28.

Ehrhardt, M .C. and Brigham, E.F., 2016. Corporate finance: A focused approach. Cengage Learning.

Garrett, J., Hoitash, R. and Prawitt, D.F., 2014. Trust and financial reporting quality. Journal of Accounting Research, 52(5), pp.1087-1125.

Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson Higher Education AU.

Kundakchyan, R.M., and Zulfakarova, L.F., 2014. Current issues of optimal capital structure based on forecasting financial performance of the company. Life Science Journal, 11(6s), pp.368-371.

Laeven, L. and Valencia, F., 2013. The real effects of financial sector interventions during crises. Journal of money, credit and Banking, 45(1), pp.147-177.

Laudon, K.C. and Traver, C.G., 2013. E-commerce. Pearson.

Prasad, E., Rogoff, K., Wei, S.J. and Kose, M.A., 2005. Effects of financial globalization on developing countries: some empirical evidence. In India’s and China’s Recent Experience with Reform and Growth (pp. 201-228). Palgrave Macmillan UK.

Sanlorenzo, M., Wehner, M.R., Linos, E., Kornak, J., Kainz, W., Posch, C., Vujic, I., Johnston, K., Gho, D., Monico, G. and McGrath, J.T., 2015. The risk of melanoma in airline pilots and cabin crew: a meta-analysis. JAMA dermatology, 151(1), pp.51-58.

Treanor, S.D., Rogers, D.A., Carter, D.A. and Simkins, B.J., 2014. Exposure, hedging, and value: New evidence from the US airline industry. International Review of Financial Analysis, 34, pp.200-211.

Vogel, H.L., 2014. Entertainment industry economics: A guide for financial analysis. Cambridge University Press.

Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & Managerial Accounting. John Wiley & Sons.

Broadcum Limited, 2017, annual report, Retrieved on 25th March, 2018 from https://investors.broadcom.com/phoenix.zhtml?c=203541&p=irol-reportsannual

Yahoo finance, 2017 retrieved on 25th March, 2018 from https://in.finance.yahoo.com/

Zhu, J., 2014. Quantitative models for performance evaluation and benchmarking: data envelopment analysis with spreadsheets (Vol. 213). Springer

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