Security Analysis Valuation and Investment

This document provides insights into security analysis, valuation, and investment strategies. It covers topics such as DuPont analysis, macroeconomics and COVID-19 impact, and bond yield to maturity. The document also offers study material and solved assignments for further learning.

Security Analysis Valuation and
Investment

TABLE OF CONTENTS
PART A......................................................................................................................................3
2. DuPont Analysis.................................................................................................................3
PART B......................................................................................................................................5
4 MACRO ECONOMICS AND COVID 19.........................................................................5
7. Bond...................................................................................................................................7
REFERENCES.........................................................................................................................10
Appendix..................................................................................................................................11

PART A
2. DuPont Analysis
A.
Attached in appendix.
B.
Five step du Pont analysis 2016 2017 2018 2019 2020
Tax Burden = Net Income/EBT 0.63 0.65 0.86 0.75 1.63
Interest Burden = EBT/EBIT 1.07 1.02 0.99 4.52 1.41
Operating Income Margin = EBIT/Sales 0.25 0.25 0.25 0.04 0.02
Asset Turnover = Sales/Total Assets 0.60 0.57 0.60 0.36 0.32
Equity Multiplier = Total Assets/Shareholders Equity 2.13 2.32 2.02 2.18 2.41
Return on equity 21.7% 21.7% 25.8% 11.7% 3.4%
C.
The DuPont analysis refers to the expansion of return on equity. It is a useful tool
which is being utilized to decompose the various drivers of ROE. This allows the investors in
specifically focusing on the key metrics of the financial performance which helps in
determining the key strengths and weaknesses of the company (Saus–Sala, Farreras–Noguer,
Arimany–Serrat and Coenders, 2021). It assists the investor in knowing the key components
which has contributed in the major changes in ROE. Based on strengths and weaknesses
identified, corrective actions are undertaken to further improvise the situation along with
taking the advantage of the strengths identified.
By looking at the five-step model of DuPont, it can be seen that there has been an
increase in the interest burden over the given time period but the main reason behind the
decline in the return on equity is the operating income margin which can be seen decreasing
in the 4 years which indicates a real business-related issue. In addition to this, it can be seen
that there is an increase in the tax burden on the company over the years which has resulted
into affecting the net income of the company (Daryanto and Arrifa'i, 2019). Based upon this,
it can be stated that the weaker area for the kept strengthening areas of the company is its
asset turnover which can be seen to be increasing over the years which indicates that the
company trying to optimum utilize its assets in terms of generating revenue. On the other
hand, in regard to the weakness, the increasing tax and the interest burden along with the
operating profit margin is a point of concern where further improvements are necessary in
order to increase the return on equity.

There are number of drivers which drives the profit of the company which can be
bifurcated into financial and non-financial profit drivers, in terms of financial drivers, it
involves the price, fixed and the variable costs, sales volume, cost of debt and the stock.
These drivers can be seen in the financial statements of the company. While on the other
hand, in regard to the non-financial profit drivers it might not be able to expressed in terms of
amount. It incorporates, the overall productivity of the company, level and the quality of the
customer satisfaction, business culture and value, market share, customer satisfaction level
and morale, employee safety etc.
The company has implemented certain strategies which has resulted into
contributing towards the success of the organization. The company followed and
implemented three strategies which are in regard to creating high quality content for the
families, making that content more engaging and the last one is to making the content more
accessible by the way of innovative use of technology. In the present times, the company
have got the licensed shops and the products across the globe they are making use of the
foreign outsourcing strategy which will help the organization in effectively meeting up with
the growing demand of its products along with keeping its cost lower (Dowdell, Klamm and
Andersen, 2020). This strategy might result into assisting the company in adapting too well in
the other nation as they will adopt the various of the local customs while maintaining the
American taste. The company is regularly working on taking and developing competitive
advantage over others through the way of innovation in its product development. Also, the
company has also announced a strategic reorganization of its media and entertainment
business and in this new structure, the Disney’s world class engines will be more
concentrating on the developing and generating the original content in regard to the
organization’s streaming content services along with its legacy platforms. In addition to this,
the distribution and commercialization of the activities would be centralized into one and will
also be responsible for the monetization of the content and will also oversee the operations of
the organization’s streaming services as well.
These strategies will have a huge impact over the profitability of the company as it
has the ability to increase the customer base of the company which will result into increasing
the revenue of the company leading to enhancement in the profits. In addition to this, the cost
level of the company will decline which will result into affecting the enhancing the profits.
The increase in profitability would result into decreasing the requirement of the company in
taking additional debt. All these factors are having the ability to affect the profits of the

company as it affects the key drivers which results into enhancement in the profits of the
company.

PART B
4 MACRO ECONOMICS AND COVID 19
A.
Covid 19 has largely impacted the globe economy in several ways which is reducing
efficiency and productivity of various industries. It becomes essential to give emphasis on
demand and supply factors of international market to derive influence of crisis on
international market. Negative impact has been arrived due to various adverse situations like
shut down of firms, unavailability of resources, strict government guidelines, etc that has
given unfavorable outcome to almost all economies. Demand and supply shocks associated
with Covid 19 at all levels of individuals occupations & industries (Ozili and Arun, 2020). In
order to analyses the supply shocks it becomes crucial to classify essential and nonessential
industry to get accurate outcome. In the times of crises people taste and preferences has
completely changed and diverted their attention to only necessity components. It has declined
consumption of luxury items due to temporary shutdown of stores which has changed living
pattern of customers.
The global economy has faced long duration that has influenced purchasing power
of citizens of various nations. Supply shocks can be measured via labor index and demand
study is based on changing preferences. For example- At the industry level sectors like
transport are affected from demand shocks where as mining, manufacturing services,
entertainment, restaurants, tourism, other industries are adversely impacted by supply
constraints. Demand for specific industries like groceries, etc are highly demanded and have
been successful in accomplishing their objectives with following government protocols. On
the other side, many sectors are facing challenges in supplying their products & services due
to government curtail regarding non necessities goods.
From the evaluation it can be identified that demand and supply shocks has been
raised mainly due to changing business as well society environment. Demand shock has been
seen due to people’s immediate respond to crises due to fear of infection that declined
purchasing of goods and services (McKibbin and Fernando, 2020). On the contrary side, it
can be interpreted that supply has lessened due to workers non ability to perform business
activities at home because of shut down of companies. For instance- Work from home has
been successful for IT and non technical background performers industry. Covid 19 has also
created exogenous & instantaneous changes in consumer perception because of explicit

government guidelines, higher negative externalities in social consumption, risk of infection,
etc .
The overall impact of covid 19 pandemic situation on global economy is adverse in
terms both demand and supply (Ozili and Arun, 2020). It can be understood by lower
availability of liquidity in economies, less flexible procurement of raw materials, increased
barriers due to enemy nations, layoff of employees, reduced preference regarding
unnecessary products, etc. Macro environment has widely got influenced from improper
implication of economical models. By analyzing both the extent of demand and supply it can
be understood that aggregate economy GDP, growth in real income, price level, investment
level, labor market, etc has been negatively got influenced.
B.
United Kingdom has adopted the Fiscal and monetary policy to manage its economical
issues. There are various objectives of a country which it tries to achieve with formulating
policies that provides path to move towards success. In order to make aggregate demand and
supply more effective to achieve established objective UK has given emphasis on creating
policies to manage macro economics factors (Guerrieri and et.al., 2020). Both fiscal and
monetary policy (FP & MP) can impact aggregate demand because they can influence the
factors used to determined investment spending on business capital goods, exports & imports,
spending on commodities and services, etc. Fiscal policy is responsible for tax, government
spending, budgets, exchange rate change, etc. For Example- FP affects the aggregate demand
through making alteration in government expenditure and taxation which ultimately influence
employment & purchasing power of household income that impact consumer spending
capacity in current situation of crises. This can be taken into consideration for understanding
that through changes in taxation countries try to influence flowing liquidity in economy so
that available monetary resources can be monitored through emphasis on official authorities
actions. monetary policy are widely taken into practice for making changes in money supply
in economy which h affect business expansion, employment, cost of debt, savings, etc by
creating some changes in interest & inflation rate.
According to Keynesian Theory has given focus on unemployment, excessive
savings, fiscal, multiplier effect, etc. with help of this particular macro economic theory it can
be understood that demand
This specific theory can be understood in pandemic situation that there is threat of
cutting wages due to closing of companies which are referred as unnecessary sector. For
example-reducing wages are declining spending of consumers in UK economy in turn

demand component of market forces is highly getting affected (Mason and Jayadev, 2018).
Excessive Saving has been exceeded as one of the threatening concept in theory which can be
connected with pandemic through concentration on people's changing perception regarding
their taste and preference. Citizen of United Kingdom and other country has adopted strategy
to save money in order to meet their necessary requirements in future.
FP and MP are implemented by government to reduce negative impacts by taking
suitable course of action. For essence- the liquidity in current scenario has been lessened for
which government can decrease interest rate so that common people can drive funds easily to
conduct their business practices sufficiently and effectively. In addition to this, pandemic
situation has resulted in closet of companies that has lay off many employees which is main
reason that availability of resources to supply goods and services. Generally, it is exerted by
deficit in recession and suppression in inflation during boom times. These two policies are
utilized by United Kingdom to develop strategic approach to develop significant activities
through controlling liquidity to manage demand and supply of industrial practices can
become possible. Pandemic crises has been adverse situation for global economy and
countries are making effective implementation in order to attain positive outcome through
executing stated course of action.
7. Bond
A.
The yield to maturity (YTM) refers to the speculative ate of return or the interest rate
over the fixed rate securities like bond. It is based upon the belief that an investor purchases
the securities at its existing market price and is going to hold back that security till it matures.
In addition to this, all the interest and the coupon payments are being made within a time
frame. The core purpose of behind the importance of measuring yield to maturity is the
reason that it enables the investors in drawing a comparison among the different securities
and the returns which they expect from each other. In addition to this, it is very useful since it
allows the investors in respect to gaining an understanding pertaining to how the changes in
market conditions might impact the portfolio as when the securities fall in their prices, the
yield rises and when the price rises, the yield falls. In simple terms, YTM is used as a tool
which helps in deciding whether a bond is a good investment or not. It assists in making the
decision by comparing the bond with the other bonds in order to know which bond will
provide better return at maturity.
B.

(Source: https://markets.ft.com/data/bonds )
The slope of the yield curve helps in providing the answer to the question where the
economy is heading. This is due to the reason that the shape of the yield curve reflects the
expectations of the investors pertaining to the future interest rates which indirectly defines the
economic growth. The upward slope of the curve depicts that the market for business is
expected to remain usual for the economy and thus, there is no important variation in the
interest rates. It can be seen in the above chart that the curve is moving towards upward
which indicates a strong economic growth which goes in hand with the high inflation
(Hopewell and Kaufman, 2017). It can eb seen that all the three curves are moving upward.
The latest curve is having eth yield rate between 0% to 0.5% to nearly 0.25% and in contrast
to it, the yield curve is 1 week ago is little higher than it but not with much difference as it is
nearly 0.29% while in case of 1 month ago, it was 0.45%. this indicates that eth economy is
growing and along with that, eth demand of the money is also high due to the increase in the
spending activities.
More the demand for money, the more it will drive up loan costs. In this way, in
times of monetary development or the economic expansion, financial investors expect the
security yields with longer-development to be higher than more limited term since they
expect future interest rates just as inflation to be high. Higher spread results into giving a
vertical inclining yield bend. During eth first two years, eth curve was flat which is usually
happens when the all the maturities are having the same yield (Term Structure of Interest
Rates. 2021). This simply accounted as the yield of a two year bond will be similar to that of

6 months bonds. This shape of the curve happens when there is a transition among the normal
yield curve and the inverted yield curve. In simple word, it says that the market is at the point
of inflection. From that point, it could either go into recession or economic pick-up. It
highlights that the activity is slowing down and also the investors are uncertain about the
future.
The main cause behind the changes in eth yield curve is based upon the bond risk
premiums and eth expectations of the future interest rates. With reference to eth term
structure theory, the term structure of the interest rate or the yield on the bonds and the
various terms. Interest rate plays an important role in respect to identifying the current state
of an economy which reflects the expectations of the market participants pertaining to the
future changes in respect to the interest rates in addition to the assessment of the monetary
policy conditions. The yield bend is basically used to delineate the term construction of
financing costs for gave protections (Yield Curve Risk. 2020). This is significant as it's
anything but a measure of the obligation market's inclination about risk. Other factors which
result into change in the yield curve is the change in monetary policies which impacts the
economy in part by their effect on a particular segment in regard to eth yield curve. The
changes in the cash rate results into shift in the yield curve up and down. Another important
factor is change in the perspective of the investors in relation to risk which involves the credit
risk, liquidity risk, term risk etc. The assessment by the investor changes with these risks over
the period of time as and when they receive new information. Another actor is the change in
the demand and supply of the bonds which influences the price of the bond. The demand for
the bonds will reflect the preferences of the investors, which are affected by their
assumptions for future financial strategy and their view of risks. At the point when the
interest for a specific security expands, all else equivalent, its cost will rise and its yield will
fall.

REFERENCES
Books and Journals
Daryanto, W. M. and Arrifa'i, M. A., 2019. Measuring and evaluating state-owned banking
industry in Indonesia using risk based bank rating (RBBR). International Journal of
Business, Economics and Law. 18(1) pp.1-13.
Dowdell, T.D., Klamm, B.K. and Andersen, M.L., 2020. INTERNAL CONTROLS AND
FINANCIAL STATEMENT ANALYSIS. Journal of Theoretical Accounting
Research. 15(2).
Guerrieri, V. and et.al., 2020. Macroeconomic implications of COVID-19: Can negative
supply shocks cause demand shortages? (No. w26918). National Bureau of
Economic Research.
Hopewell, M.H. and Kaufman, G.G., 2017. Bond price volatility and term to maturity: A
generalized respecification. In Bond Duration and Immunization (pp. 64-68).
Routledge.
Maital, S. and Barzani, E., 2020. The global economic impact of COVID-19: A summary of
research. Samuel Neaman Institute for National Policy Research. 2020. pp.1-12.
Mason, J. W. and Jayadev, A., 2018. A comparison of monetary and fiscal policy interaction
under ‘sound’and ‘functional’finance regimes. Metroeconomica. 69(2). pp.488-508.
McKibbin, W. and Fernando, R., 2020. The economic impact of COVID-19. Economics in
the Time of COVID-19, 45.
Ozili, P. K. and Arun, T., 2020. Spillover of COVID-19: impact on the Global
Economy. Available at SSRN 3562570.
Saus–Sala, E., Farreras–Noguer, À., Arimany–Serrat, N. and Coenders, G., 2021.
Compositional DuPont analysis. A visual tool for strategic financial performance
assessment. In Advances in Compositional Data Analysis (pp. 189-206). Springer,
Cham.
Online
Term Structure of Interest Rates. 2021. [Online]. Available Through:<
https://www.investopedia.com/terms/t/termstructure.asp>.
Yield Curve Risk. 2020. [Online]. Available Through:<
https://www.investopedia.com/terms/y/yieldcurverisk.asp>.

Appendix
Income statement

Balance sheet