Verizon Communications Inc. Financial Analysis & WACC Calculation

This project provides a comprehensive financial analysis of Verizon Communications Inc., utilizing data extracted from Morning Star and Yahoo Finance. The analysis includes a review of Verizon's financial statements for fiscal year 2018, calculation of the Weighted Average Cost of Capital (WACC) using the Capital Asset Pricing Model (CAPM) to determine the cost of equity, and an assessment of investment viability using the Net Present Value (NPV) method. The project incorporates a ten-year stock return analysis, comparison with the S&P 500 index, and detailed calculations for cost of equity and after-tax cost of debt. The final WACC is computed to be 3.18 percent, and the positive NPV suggests the investment proposal should be accepted. References to reputable sources and regulatory websites support the data and methodologies used throughout the analysis.

Financial Management

Part I and Part II
The problem in the part one and part two was to extract the financial statements of a
levered enterprise. The company chosen for the assignment is Verizon Communications Inc.
The financial data has been extracted from the website Morning Star and has been presented
as follows.
VERIZON COMMUNICATIONS INC (VZ)
Fiscal year endesd on December 2018
Amount in million
$
Revenue 130863
Cost of revenue 55508
Gross profit 75355
Operating expenses
Sales, General and administrative 31083
Other operating expenses 17403
Total operating expenses 48486
Operating income 26869
Interest Expense 4833
Other income (expense) -2413
Income before taxes 19623
Provision for income taxes 3584
Net income from continuing operations 16039
Other -511
Net income 15528
Net income available to common shareholders 15528
Earnings per share
Basic 3.76
Diluted 3.76
Weighted average shares outstanding
Basic 4128
Diluted 4132
EBITDA 41859
(Source: Morning Star, 2019)
VERIZON COMMUNICATIONS INC
(VZ) BALANCE SHEET
Fiscal year ended on December 2018 Amount in million $
Assets
Current assets
Cash
Cash and cash equivalents 2745

Short-term investments
Total cash 2745
Receivables 25102
Inventories 1336
Prepaid expenses 5453
Other current assets
Total current assets 34636
Non-current assets
Property, plant and equipment
Gross property, plant and equipment 252835
Accumulated Depreciation -163549
Net property, plant and equipment 89286
Equity and other investments 671
Goodwill 24614
Intangible assets 103905
Other long-term assets 11717
Total non-current assets 230193
Total assets 264829
Liabilities and stockholders' equity
Liabilities
Current liabilities
Short-term debt 7190
Accounts payable 7232
Taxes payable 1483
Accrued liabilities 13786
Deferred revenues 4207
Other current liabilities 4032
Total current liabilities 37930
Non-current liabilities
Long-term debt 105873
Deferred taxes liabilities 33795
Minority interest 1565
Other long-term liabilities 32521
Total non-current liabilities 173754
Total liabilities 211684
Stockholders' equity
Common stock 429
Additional paid-in capital 13437
Retained earnings 43542
Treasury stock -6986
Accumulated other comprehensive income 2723
Total stockholders' equity 53145
Total liabilities and stockholders' equity 264829

(Source: Morning Star, 2019)
Part III and Part IV
The problem given in the part III was to retrieve the data for the company’s stock
annual return for the past 10 years. It must be noted that the platform Yahoo Finance has been
used for the same. The data presented has been formatted in a tabular form. This is followed
by the calculation of the monthly average rates utilizing the closing prices of the each month.
Further, the monthly averages are converted into the yearly averages. In order to retrieve the
market data for part IV, the data of S&P 500 index has been utilized. S & P 500 index is the
representation of the market as it is comprised of market capitalization of 500 companies of
the United States (Chong, Hussein & Phillips, 2011). Similar exercise has been performed for
the market data. The data for the company as well as the market are presented in the table
provided as follows.
DATE VERIZON
S&P
500
2009 1.43% 2.49%
2010 1.96% 1.15%
2011 1.45% 0.10%
2012 1.11% 1.10%
2013 1.57% 2.21%
2014 0.02% 0.93%
2015 0.39% 0.01%
2016 1.73% 0.80%
2017 0.45% 1.50%
2018 1.04% -0.44%
AVERAG
E 1.12% 0.99%

Part V
The problem in the part V is the computation of the Weighted Average Cost of
Capital. The formula for the weighted average cost of capital is listed as follows.
Thus, in order to compute the WACC, firstly it is required to compute the Re of Ke
that is the Cost of Equity, followed by the Rd or Kd that is the After Tax Cost of Debt and
give them respective weights in proportion to their ratio in the capital structure (Magni,
2015).
In order to calculate the cost of equity, the technique of CAPM has been used. The
technique describes the relationship between systematic risk and expected return for assets,
particularly stocks (Zhang, 2017). The formula for the cost of equity has been stated as
follows.
The Beta is representative of the how much risk the investment will add to a portfolio
(Noddeboe, & Faergemann, 2015). The Beta has been computed using the comparative data
of the stock of the company Verzion and the market. The same had accounted for 0.45, which

was adjusted to give the effect of the leverage and finally the adjusted Beta for the stock of
Verizon came to be 0.63.
Finally the data of December US Treasuries was obtained from the regulatory website
to extract the annual rate of return of the Interest Bearing Debt which comprises of both
marketable and non-marketable securities (Treasury Direct, 2018). Thus, the average risk free
rate accounted to be 2.560. The cost of equity was computed for Verizon as per CAPM which
came out to be 1.57 percent.
For the cost of debt calculation, the formula (Cost of Debt (Kd) = Interest Expense/
Total Debt) was used which was then adjusted as per the corporate tax of 21 percent. Thus,
the cost of debt after tax amounted to 4 percent.
Based on the data extracted as above, the WACC has been computed, taking the long
term borrowings and stock holder’s equity weights as per the financial statements data for the
calculation. Finally the WACC has been computed to be 3.18 percent.
Part VI
One can judge the viability of an investment proposal by utilizing the technique of the
capital budgeting. There have been prescribed a number of methods, out of which the most
popular being the Net Present Value (NPV) method, since it recognize the time value of
money (Smit & Trigeorgis, 2017). The NPV has been computed of the proposal using the
following formula. The cost of capital to be used here is the WACC computed in the previous
parts.
NPV=∑
i=1
n CFi
(1+ d)i
= CF0 + CF 1
(1+k )1 + CF 2
(1+k )2 + …. + CF 3
(1+k )3
where:
k = discount rate,
CFi = net cash flow from year i,
CF0 = initial investment, and
n = number of years.

It must be noted that there is only one project, the decision would be based on whether the
NPV is positive or negative (Marchioni, & Magni, 2018). Since the NPV is positive, the
proposal should be accepted.
References
Chong, J., Hussein, M. M., & Phillips, G. M. (2011). S & P 500 ETFs and index funds: Are
fees all there is to it? Journal of Wealth Management, 14(2), 59-67, 6.
Magni, C. (2015). Investment, financing and the role of ROA and WACC in value creation.
European Journal of Operational Research, 244(3), 855-866.
Marchioni, & Magni (2018). Investment decisions and sensitivity analysis: NPV-consistency
of rates of return. European Journal of Operational Research, 268(1), 361-372.
Morning Star (2019). Verizon Communications Inc. VZ. Retrieved from:
https://www.morningstar.com/stocks/xnys/vz/quote.html
Noddeboe, E. S. & Faergemann, H. C. (2015). Positive Alpha and Negative Beta (A Strategy
for Counteracting Systematic Risk). International Journal of Financial Studies, 3(4),
431-450.
Smit, H., & Trigeorgis, L. (2017). Strategic NPV: Real Options and Strategic Games under
Different Information Structures: Strategic NPV. Strategic Management Journal,
38(13), 2555-2578.
Treasury Direct (2018). December. Retrieved from:
https://www.treasurydirect.gov/govt/rates/pd/avg/2018/2018_12.htm
Yahoo Finance (2019). Verizona Communications Inc. Retrieved from:
https://finance.yahoo.com/quote/VZ/history?p=VZ
Zhang, L. (2017). The Investment CAPM. European Financial Management, 23(4), 545-603.