Leading With Finance

Leading With Finance Response Report

 LEADING WITH FINANCE

Leading With Finance Capstone Assignment Responses

Capstone Assignment / Capstone Assignment / Capstone Assignment Questions

Question 1: Balance Sheet and Financial Data Obsevations

Question

1. The preceding table gives balance sheet percentages and selected financial data for three companies
in very different industries - food and beverage, manufacturing, and social networking. Make three
observations in each section - Assets, Liabilities and Net Worth, and Selected Financial Data - that you
think are interesting. Describe what you think is going on.

REMEMBER: Each question in the Capstone must be answered in order. Once you click "Submit" to
move to the next question, your answer is final and cannot be changed.

Your Response

Assets:
- Company A with 45% of Cash and Marketable Securities is in the Social Networking industry. This
industry is known for holding high Cash quantities because they are paid in very short term (Accounts
receivable is low at 8%).
- Company B with 12% of inventories is in the Food & Beverage business. This industry holds a fair
amount of inventory to supply their customers on demand.
- Company C with 60% of PP&E is in the Manufacturing industry. This industry is heavy on PP&E since it
needs manufacturing plants to deliver the final product.

Liabilities and Net Worth:

- Company A with 65% of common stock gets is listed and gets most of its financing through equity.
- Company B with 7% accounts payable, the highest among all three, indicates that it offers a longer
payment term to its customers due to its B2B business model.
- Company C with 15% of long term debt indicates that it is financing it's operation/PP&E with debt/loans
from banks.

Selected Financial Data:

- Company A with Total debt/total assets of 0.189 indicates that 18.9% of its assets are financed through
debt and 81.1% through equity, which matches with the high quantity of common stocks.
- Company B with an inventory turnover of 2.9 its a positive sign. It suggests that products are in demand,
and the company is efficiently managing its inventory levels, avoiding excess stock that may lead to higher
holding costs or potential obsolescence.
- Company C with a receivables collection period of 5.4 days indicates that it is in the B2C business which
pays much faster than in the B2B business.

| Page 2 of 8
 LEADING WITH FINANCE

Submitted August 24, 2023 at 06:44 AM ET

Capstone Assignment / Capstone Assignment / Capstone Assignment Questions

Question 2: Identifying Companies

Question

2. One of these companies is LinkedIn (the social network), one is Panera (the food and beverage
company), and one is Caterpillar (the manufacturing company). Which is which? Give reasons for why
you think so.

Your Response

Company A is Linkedin the social networking

- High Cash at 45%, due to B2C low payment terms.
- Low PP&E at 17%, it only needs offices to operate.
- High Common stocks at 65% indicates that it is listed.

Company B is Panera the food and Beverage

- Inventory at 12%, they need a certain amount to respond to demand.
- Accounts payable at 7% indicates that it offers a longer payment term to its suppliers (not customers as
indicated in the last question).
- Total debt/total assets at 0.457 indicates that it has a balanced capital structure, whereas its financing is
built 45% from debt and 55% from equity.

Company C is Caterpillar the Manufacturing business

- PP&E at 60% indicates that it is heavy in machinery, equipment, tools, typical for manufacturing
businesses.
- Inventories at 2% probably means that it manufactures on demand to keep inventory costs as low as
possible.
- Inventory turnover is very high at 87.3, which means that is is moving it's inventory on avrg. every 4.2
days. It also means that its sales is efficient.

Submitted August 24, 2023 at 07:09 AM ET

Capstone Assignment / Capstone Assignment / Capstone Assignment Questions

Question 3: Observations on LinkedIn Financial Statements.

Question

3. Make at least three observations about these three sets of financial statements.

| Page 3 of 8
 LEADING WITH FINANCE

Your Response

Income Statement
- Linkedin has suffered increasing losses between 2013 and 2015. While its costs and expenses
increased 43% from 2014 to 2015, it's net revenue increased only by 34% resulting in losses in 2015.
- The losses in 2014 and 2015 reflected in the EPS, which was negative.
- Its Goodwill rose 10x from 2013 to 2015 probably through acquiring other companies that had a market
value greater than the book value.
- The Cash flow from investments increased substantially from -1472 to + 386 causing a positive effect on
the Total Cash Flow from Operating Activities.
- Net Borrowings (total increase in assets minus the total increase in liabilities) was 0 which had a very
positive impact on the Total Cashflow from Investing Activities.

Submitted August 24, 2023 at 07:45 AM ET

Capstone Assignment / Capstone Assignment / Capstone Assignment Questions

Question 4: Lower Valuation from Weak Forecast

Question

4. LinkedIn suffered a large drop in share value following an unexpectedly weak forecast of their future
earnings. Why would this surprise cause investors to value LinkedIn lower?

Your Response

Lower Growth Expectations: Investors value companies based on their growth expectations. If a company's
future earnings are expected to be lower than forecasted, it suggests that the company's growth potential
might not be as good as previously thought. This can lead to a reassessment of the company's valuation,
causing investors to assign a lower value to its shares.
Increased Risk Perception: A weaker earnings forecast can be a sign for increased risks or challenges.
Investors might see this as a sign of potential operational difficulties, competitive pressures, or unfavorable
market trends. The increase in risk can lead to a decrease in the company's valuation as investors
demand a higher return to compensate for the higher level of risk.
Uncertainty: A gap between previous expectations and the new weak forecast creates uncertainty.
Investors prefer predictability and stability. The unexpected reason of the weak forecast can destroy
investor confidence and make it harder to foresee the company's future earnings potential, leading to a
lower valuation.
Reevaluation of Assumptions: A weak forecast can motivate investors to reevaluate the assumptions and
models they used to value the company. This reevaluation could lead to adjustments in the discount rates,
growth rates, or other valuation inputs, which can result in a lower overall valuation.
Market Sentiment: Negative news influence market sentiment and investor mindset. A weaker earnings
forecast can trigger selling activity as investors react to the news, causing a downward pressure on the
company's stock price. This negative sentiment can further impact the company's valuation.

Submitted August 30, 2023 at 09:34 AM ET

| Page 4 of 8
 LEADING WITH FINANCE

Capstone Assignment / Capstone Assignment / Capstone Assignment Questions

Question 5: Microsoft's Market Capitalization Drop After LinkedIn

Acquisition
Question

5. On the news, LinkedIn's market capitalization increased to nearly $26 billion, while Microsoft's market
capitalization actually dropped $10.6 billion. Explain the drop in Microsoft's market capitalization. What is
going on?

Your Response

LinkedIn's increased market capitalization was driven by better financial performance through the financial
strength of Microsoft, shared Microsoft's customer list/data, shared supply chain, and shared back office.
On the other side, Microsoft's decrease can be linked to the fact that Linkedin core business has nothing to
do with Microsoft's business causing investors to doubt about the benefits for Microsoft. Consequently
investors would be motivated to assess Linkedin's financial health, growth prospects, and integration
challenges again. This could lead to negative market perceptions, dilution fears and impulsive reaction to
news. Furthermore, the market would start evaluating how the acquisition impacts Microsoft's direction,
affecting sentiment, prices and expectations.

Submitted August 30, 2023 at 09:57 AM ET

Capstone Assignment / Capstone Assignment / Capstone Assignment Questions

Question 6: Valuation of LinkedIn

Question

6. What do you think is the likely value for LinkedIn? Come up with a range you think the valuation would
be within.

Your Response

Linkedin's market cap in 2015 was $ 29 billion.

Current Stock Price * Number of Outstanding shares = $ 225.08 * 129024 = $29.040 million
Linkedin's Multiples are:
Market Cap to Sales: 9.74
Market Cap to EBITDA: 117.5
Market Cap to Book Value: 11.22
The average of the estimated market caps is 138.46/3 = $ 46.15 million
The final estimated value = average estimated market cap* Linkedin's sales
Final estimated value = $ 46.15 * $ 2.980 = $137.537 million

| Page 5 of 8
 LEADING WITH FINANCE

Submitted August 30, 2023 at 10:35 AM ET

Capstone Assignment / Capstone Assignment / Capstone Assignment Questions

Question 7: Pros and Cons of Multiples-based Valuation

Question

7. What are the pros and cons of multiples-based valuation?

Your Response

Pros:
- straight forward and easy to understand. Provides a snapshot of how the company is valued compared to
it's pears.
- relative to industry norms, allowing for a benchmark comparison, which helps in understanding if a
company valuation is above or below the industry.
- reflects the market sentiment and perceptions about a company. If higher than it's peers, might indicate a
positive outlook.

Cons:
- selections of wrong peers can lead to inaccurate comparisons.
- value range, instead of specific valuation figure.
- comparing multiples across different industries might not provide an accurate assessment.

Submitted August 30, 2023 at 10:51 AM ET

Capstone Assignment / Capstone Assignment / Capstone Assignment Questions

Question 8: Adding Back Stock Expenses to Get to Free Cash Flows

Question

8. Why did the analysts add back stock expenses to get to free cash flows?

Your Response

Because stock-based compensation is a non-cash expense that doesn't directly affect a company's cash
flow from its core operations. Nevertheless, including it in the calculation of free cash flows provides a
clearer picture of the cash generated by a company's business activities, which is important for assessing
its financial health and valuation.

Submitted August 30, 2023 at 10:54 AM ET

| Page 6 of 8
 LEADING WITH FINANCE

Capstone Assignment / Capstone Assignment / Capstone Assignment Questions

Question 9: Analysts' Assumptions Regarding Growth Rates

Question

9. What do you make of the analysts' assumptions regarding growth rates (both in the period analyzed and
the terminal period)?

Your Response

The role of growth rate assumptions is crucial in financial analysis and valuation, influencing projections of
cash flows and company value assessments. These assumptions are particularly significant during the
analyzed and terminal periods' growth rates. These projections serve as a foundation for valuation models.
For investors, evaluating the validity of these assumptions, performing sensitivity evaluations, and
considering qualitative factors and potential risks are essential. This process acknowledges the inherent
unpredictability of growth prediction. These assumptions ultimately determine valuation results, requiring
meticulous assessment in the face of evolving market dynamics and emerging data.

Submitted August 30, 2023 at 11:06 AM ET

Capstone Assignment / Capstone Assignment / Capstone Assignment Questions

Question 10: Analysts' Assumptions Regarding Capital Expenditures

Question

10. What do you make of the analysts' assumptions regarding the capital expenditures of the business?

Your Response

Capital expenditure (CapEx) assumptions are crucial in financial analysis and valuation, because they
determine a company's investment path, impacting cash flows and valuation. Key factors include growth
estimation, industry trends, maintenance vs. expansion, asset replacement, cyclicality, sensitivity analysis,
risk assessment, management guidance alignment, qualitative factors, and maintaining consistency with
growth rate assumptions. These assumptions create a comprehensive financial outlook, influencing a
company's value projection.

Submitted August 30, 2023 at 11:08 AM ET

Capstone Assignment / Capstone Assignment / Capstone Assignment Questions

| Page 7 of 8
 LEADING WITH FINANCE

Question 11: Did Microsoft Overpay for LinkedIn?

Question

11. Did Microsoft overpay for LinkedIn? Why or why not?

Your Response

On June 13, 2016, Microsoft announced it was acquiring LinkedIn for $26.2 billion.
Microsoft calculated the Total PV of Unlevered Free Cash Flow at $ 27,2 billion.
Microsoft paid $ 1 billion less than the PV of Unlevered Cash Flow, which was a great deal that generated
$ 1billion of value for Microsoft.

Submitted August 30, 2023 at 11:14 AM ET

| Page 8 of 8