FIN550 Final Project.docx - RUNNING HEAD UPS Financial...

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RUNNING HEAD: UPS Financial Analysis1UPS Financial AnalysisDannon McGarritySouthern New Hampshire UniversityFIN550 Corporate Financial ManagementProfessor WelchJuly 23, 2019
UPS Financial Analysis2Financial analysis is the process of evaluating businesses, projects, budgets and other finance-related entities to determine their performance and suitability (Kenton, 2019a). It can be used to evaluate economic trends, set financial activity, and identify projects or companies for investment. After analyzing their 2017 Annual Report, I have conducted a financial analysis of United Parcel Service (UPS). The critical elements that I have focused on include, Time Value ofMoney, Stock Valuation, Bond Issuance, Capital Budgeting, and Macroeconomics. Time Value of MoneyThe concept of the time value of money is a simple finance principle that states that a dollar today is worth more than a dollar in the future (Kenton & Murphy, 2019). Net present value is a calculation that takes a value received at some point in the future and calculates what itis worth today. This is used by companies to put value on an investment with future earnings. It can also be used as a valuation measure by investors trying to put a current value on a company. This is achieved through a free cash flow valuation. Free cash flow is an important number to stockholders as it represents the cash available to investors after all company costs (Hayes, 2019a). Estimating the future free cash flow and putting a present value on those amounts, gives investors an idea of how much the investment should be worth. Taking future amounts and bringing them to the present works through the use of a discount rate. This rate is calculated by the assumption of risk and is basically the cost of capital, or the required return rate investors wish to earn. Risk has to be incorporated when attaching present value to future money simply based on the fact that there is no certainty of the future estimated cash flows (Borad, 2019). When the rate is higher, it means the investment is riskier. Ariskier investment could result in higher returns, but there is also a higher chance of loss. So, when risk is high, the discount rate it set high to assume the risk for the future periods. When the
UPS Financial Analysis3discount rate is higher, the present value of a future amount is a lot lower than if the rate was lower. When a company encounters a change in present value, it can mean one of two things. If the present value has decreased, this could mean that their required rate of return, or discount rate, has increased. This would indicate that their risk is much higher which may be less appealing to some investors. On the other hand, if the change results in an increase of present value, this could mean that the risk associated with the company is lower. In this case, the discount rate would be lower. When an investment has higher risk, investors may step back and think if they want to take their investment and put in into a safer place where there return is more

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