Motorola Solutions Inc.
Financial Analysis
Shelton Stevens
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Table of Contents
Corporate Governance Analysis…………………………………………………………………..3
Financial Statement Analysis……………………………………………………………………...5
Liquidity and Turnover Ratios………………………………………………………….....5
Leverage and Coverage Ratios……………………………………………………………6
Profitability………………………………………………………………………………..7
Market Value……………………………………………………………………...………8
Cost of Capital Analysis…………………………………………………………………………..9
Cost of Equity……………………………………………………………………………..9
Cost of Debt……………………………………………………………………………...12
Capital Structure…………………………………………………………………………13
WACC Calculation………………………………………………………………………13
Optimal Capital Structure………………………………………………………………………..15
Dividend Policy Analysis……………………..............................................................................18
Works Cited……………………………………………………………………………………...20
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Corporate Governance Analysis
Analyzing a company’s corporate governance reveals a lot about its shareholders interest
and how risky its management is. This is done by looking at two key factors in a company: how
powerful the chief executive officer is, and if the board of directors is an effective counterweight
to the CEO’s power. For my company Motorola Solutions Incorporated I used four main criteria
to assess their corporate governance which are the amount of inside versus outside members on
the BOD, if the CEO is also the chairman of the board, if the CEO is on the audit or
compensation committees of its BOD, and the amount of company shares owned by the CEO.
These criteria are relevant to corporate governance because each demonstrates a specific amount
of authority that either the BOD or CEO has within the company.
Motorola Solutions Incorporated has a BOD consisting of nine people which is a good
size (“Board of Directors”). According to Google the average BOD includes nine members but
there’s currently a range of three to thirty one members in today’s major companies (“Evaluating
the Board of Directors”). Of the nine members on Motorola Inc.’s BOD only one is an inside
director meaning that they are an employee of the company. The other eight members are outside
directors meaning that they are not actually employees of the company. It is good that the
majority of their directors are outside of the company versus inside because they will not have a
conflict of interest between working at Motorola Solutions Inc. and making decisions for the
company. They will also offer a different viewpoint than that of the director who does work for
the company.
Motorola Solutions Incorporated’s CEO is Gregory Q. Brown. He began working for the
company in 2003 and eventually rose through the ranks becoming the CEO in 2008. Mr. Brown
is also the chairman of the board at Motorola Solutions Inc. (“Board of Directors”). This can be
seen as problematic because it may give him too much power in making decisions for the
company and lead to situations where his opinion is the only one that can actually make change
within the company. With this size BOD it is possible that Mr. Brown has too much control over
the company. This could cause them to make decisions that are in his best interest rather than the
interest of the company overall.
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Mr. Brown is on the Executive Committee at Motorola Solutions Inc. (“Committees”). It
would be a conflict of interest if the CEO was on either the audit or compensation committee
because they would have a say in how they pay themselves or how their company’s financial
statements are completed. With Mr. Brown on neither of these committees it shows that although
he has significant influence over his company he does not influence the way or method in which
their money is being reported. This is positive because he is not directly tied to any board
committees that would have a direct influence on how he is compensated.
Mr. Brown owns 114,720 shares as well as 38,303 options. In total this amounts to a
market value of $9,995,490 of the company according to Morningstar.com although it is
important to remember that options are possible shares bought in the future and so Mr. Brown
does not actually own his options yet (“Gregory Q, Brown”). This amount does not give Mr.
Brown a majority stake in the company. It would be both beneficial and hurtful for the CEO to
own a majority stake in their company. This would allow the CEO to have the final vote in any
discrepancies within the company. It would also provide an incentive for good performance
because the CEO is actually invested in the company he works for both in the short term and
long term.
Overall the corporate governance for Motorola Solutions Inc. is good. They have positive
aspects such as the amount of outside directors on their BOD, the CEO’s independence of the
audit and compensation committees, as well as the CEO not having a majority stake in the
company. However, their CEO Mr. Brown is also the COB which might give him too much
overall power in making decisions for the company. With these four criteria taken into
consideration I would recommend separating the CEO and the COB into positions for two
different people so Mr. Brown does not have too much power and the board members can
counterweight the power that he does have.
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Financial Statement Analysis
Analyzing a company’s financial statements reveals a lot about how well it operates and
gives you an idea of how well it may operate in the future. The four key components of a
financial statement analysis are liquidity and turnover ratios, leverage and coverage ratios,
profitability, and its market value. This information is then compared to its specific industry
segment to see how well it is doing relative to its competition. Motorola Solutions Incorporated
is part of the telecommunications equipment industry and this essay analyzes its performance
from 2014 – 2009. The data referenced in the charts below was collected by the Mergent Online
Database. A few companies were removed from the industry average due to their irrelevance
within the telecommunications equipment segment.
Liquidity and Turnover Ratios
The liquidity of a company is a measurement of how fast it can convert its assets into
cash. The current ratio measures a firm’s ability to pay its short-term obligations over the next 12
months and any number above 1 reflects a healthy business because it means that they have
enough money to pay their short term debt obligations at least once. The quick ratio measures the
dollar amount of liquid assets available for each dollar of current liabilities (“Quick Ratio
Definition”). Turnover ratios measure the efficiency at which a company is using its various
assets. Inventory turnover measures the efficiency of a firm’s inventory, net property plant and
equipment measures the efficiency of those assets, and the total asset turnover measures the
efficiency of all assets for a specific firm. Generally speaking low liquidity may lead to high
turnover ratios and vice versa. While high amounts of cash may lead to lower turnover ratios and
a lower ROA.
Current
Ratio
Quick
Ratio
Inventory
Turnover
Net PPE
Turnover
Total
Asset
Turnover
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MSI
(2014)
Industry
(2014)
MSI
(2013)
MSI
(2012)
MSI
(2011)
MSI
(2010)
MSI
(2009)
MSI AVG.
(20142009)
3.06
2.95
2.18
2.22
2.3
1.97
1.94
2.28
2.57
2.22
1.72
1.77
1.9
1.43
1.47
1.81
7.04
12.65
8.61
8.49
4.33
9.27
7.56
7.55
8.65
12.11
10.55
10
6.25
9.93
9.59
9.16
0.53
0.84
0.71
0.65
0.42
0.75
0.82
0.65
Motorola has high liquidity and was more liquid than its industry in 2014 and has been
rising for the past six years. Their turnover ratios fall shorter than the industry averages by
almost 29%. This means that Motorola is liquid enough to pay their bills in the short run without
undue stress but may be holding onto their inventory too long. By doing this they might not be
selling their inventory fast enough or at the pace of their competitors. This will also cause ROA
and ROE to shrink because when you hold onto an asset instead of selling it you are diminishing
the return you could actually be receiving for it. In conclusion, Motorola’s high liquidity and
underperforming turnover ratios show that they have room to improve in the future.
Leverage and Coverage Ratios
Leverage represents the amount of debt a company uses to finance its operations and
coverage represents a company’s ability to meet its financial obligations. The total debt to equity
ratio shows the proportion of debt and equity a firm is using to finance its operations
(“Debt/Equity Ratio Definition”). The interest coverage ratio shows how many times over a firm
can afford to pay the interest on its debt. The more volatile your company is the more coverage
you should have. Generally, a high leverage would result in lower coverage and higher ROE.
Total debtequity
Interest
Coverage
MSI
(2014)
Industry
(2014)
MSI
(2013)
MSI
(2012)
MSI
(2011)
MSI
(2010)
MSI
(2009)
MSI AVG.
(20132010)
1.24
1.54
0.67
0.57
0.29
0.26
0.4
0.571667
-6.9
20.96
10.75
19.03
11.59
6.02
2.79
9.177143
MSI has a significant amount of debt in comparison to its equity which is generally not
good although they were 19% below their industry average in 2014. This means that the
telecommunications equipment segment is a high debt area of business and MSI carries less
leverage than their competitors. Their significant amount of debt is boosting their ROE.
Meanwhile MSI’s interest coverage is volatile and fluctuated erratically in the time between
those years. It grew almost tenfold between 2009 and 2013 then dropped significantly lower to 6.9 in 2014. They were highly negative in 2014 which means they were most likely unable to
pay their debt this past year. The reason their coverage was negative in 2014 is due to an
operating loss. Overall, this shows that there is uncertainty as to whether MSI has enough
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coverage in respect to the amount of leverage they have taken on which could cause serious
financial difficulties in future years.
Profitability
Profitability is a key measurement for businesses because it shows if they are gaining or
losing money. Net profit margin is a ratio which compares a firms profits to its revenues ("Net
Margin Definition”). Their return on assets measures the return they are receiving on their assets
and similarly the return on equity does the same for a firm’s equity. Generally, high profit
margins correlate to low turnover ratios.
Net Profit
Margin
ROA
ROE
MSI
(2014)
Industry
(2014)
MSI
(2013)
MSI
(2012)
MSI
(2011)
MSI
(2010)
MSI
(2009)
22.09
11.21
12.64
10.13
14.12
3.28
-0.23
11.66
40.63
8.77
21.7
8.96
31.74
6.6
20.72
5.86
14.39
2.47
6.13
-0.19
-0.53
MSI AVG.
(20142009)
10.33833
5.893333
18.84667
MSI was highly profitable and had a profit margin double that of its industry for 2014
although those numbers significantly increased in the past six years. Return on assets measures a
company’s returns in comparison to the amount of assets they hold on their balance sheet and as
previously stated a higher return usually correlates to a higher turnover because you are selling
your inventory versus keeping it on hand ("Return On Assets (ROA) Definition”). MSI
outperformed their industry’s ROA by 32% in 2014 showing significant improvement from
previous years. Their high ROA is due in fact to their high profit margins. In 2014 their profit
margin was 22.09 the highest it’s been in six years. The same can be said for their ROE where
they doubled their industry average in 2014. As previously mentioned their leverage is boosting
their ROE. For 2014, their ROE was 40.63 the highest it’s been in six years. This means that they
are making a significant amount of returns which should provide them with more coverage and
ability to lower their leverage. Overall, MSI is a highly profitable firm with good margins and
returns.
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Market Value
Market value is an important factor in a business’s analysis because it represents what a
company would sell for in the marketplace. It is a key component when comparing a business to
another or to its industry because it shows how it is valued and can explain where they stand as a
piece in the business industry ("Market Value Definition”). It also shows buyers confidence in
the company, where high confidence correlates to a high P/E ratio and lower confidence will
result in a lower P/E ratio. The price to earnings ratio is a good indicator of market value because
it represents a company’s share price in relation to its per-share earnings which shows the
performance of its stockholder’s equity ("Price-Earnings Ratio (P/E Ratio) Definition”).
P/E Ratio
MSI
(2014)
Industry
(2014)
MSI
(2013)
MSI
(2012)
MSI
(2011)
MSI
(2010)
MSI
(2009)
MSI AVG.
(20132009)
-
27.14
16.28
18.15
19.85
47.56
22.89
24.946
The industry average P/E ratio for 2014 was 27.14 in the telecommunications equipment
segment and MSI has fluctuated between 16.28 and 22.89 in previous years with an outlier of
47.56 in 2010. In 2014 Motorola Solutions Inc.’s P/E ratio was not reported due it being negative
for the overall year. This means that MSI has a highly volatile market value showing serious
uncertainty in their market performance. Overall, this is an indicator that MSI has not been
performing well in past years and gives them an opportunity to improve.
In conclusion, after analyzing MSI’s financial statements with emphasis on liquidity and
turnover ratios, leverage and coverage ratios, profitability, and market value it is clear that this
company has significant room for improvement. Their performance over the past six years has
been volatile and uncertain which appears to be due to misallocating their returns. This is a
highly profitable company but it does not have significant liquidity, turnover ratios, or coverage
to support its operations and I would recommend raising those amounts to stabilize the company
better.
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Cost of Capital Analysis
Firms will try to make investments in projects or ideas that will bring them the highest
rate of return. A firm’s cost of capital is the rate of return required to persuade the investor to
make a given investment ("Cost Of Capital Definition”). We measure this because it shows a
firm’s opportunity costs and what they should most likely invest in. Measuring the cost of capital
is done by using the weighted average cost of capital formula which contains three parts: the cost
of equity, cost of debt, and also the cost of preferred stock. Motorola Solutions Inc. does not
have preferred stock as of December 2013 and so it is excluded from the weighted average cost
of capital formula and analysis for this specific firm.
Cost of Equity
The cost of equity for this firm was measured using the capital asset pricing model. There
are other models used to calculate the cost of equity however the capital asset pricing model is
generally considered the standard model used throughout the business industry and the other
formulas are also derivatives of this model. The capital asset pricing model measures a
company’s beta, risk free rate, and also the expected market return. Its formula is stated as
("Capital Asset Pricing Model (CAPM) Definition”):
Beta is a measurement of the riskiness of a firm. Motorola Solutions Inc.’s beta was
measured using the bottom up, and regression analysis method. The regression analysis beta is a
measurement of your firm’s historical returns and a corresponding index’s historical returns.
This version relies heavily on past information which makes it a less reliable source when you
are using it to forecast future predictions. This firm’s regression beta was 1.26 for the years of
2009-2014. The bottom up beta is a weighted average beta of all the betas in a firm’s specific
industry and also uses historical data but not of the specific firms beta you are trying to calculate.
According to the Morningstar online database this firm operates specifically in the
telecommunications equipment industry (“Company Profile”). This beta also requires the
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marginal tax rate which was 19.18%. This tax rate is the average across all profitable firms in the
industry because Motorola Solutions Inc. did not have operating losses within the time frame of
2009-2014 and so it would be misleading to use information from all of the firms including the
ones who had losses during this time frame ("Damodaran Online: Home Page for Aswath
Damodaran.").
To calculate the regression analysis beta I found the adjusted close price for the stock of
Motorola Solutions Inc. and also the S&P 500 for each month from 2013-2009. I used monthly
prices instead of daily or weekly prices to reduce the non-trading bias. From there I calculated
the returns for both stocks and the standard deviation for Motorola Solutions Inc. This
information was then entered into a regression analysis program in Microsoft Excel.
To calculate the bottom up beta I found Motorola’s industry average unlevered beta
without cash on Damodaran’s official website under the “Total Beta’s by Industry Sector,” page.
Aswath Damodaran is a renowned finance professor at the Stern School of Business in New
York City ("Damodaran Online: Home Page for Aswath Damodaran."). I corrected this beta for
cash by multiplying it against one minus Motorola’s most recent cash holdings divided by their
current market value. Then to lever their beta back I took the unlevered beta adjusted for cash
and multiplied it by one plus the tax rate times the quick estimate of Motorola’s market value
debt to equity ratio.
Motorola Solutions Inc. had a bottom up beta of 1.26 for the time period of 2009-2013
which was the exact same as the regression beta. Because they were the same I did not have to
choose one or the other but I believe that since the bottom up beta is more forward looking as
previously mentioned that it is more justified as an accurate depiction of this firm’s risk. The
telecommunications equipment industry average beta is listed as 1.24 on Damodaran’s official
website under the “Total Beta’s by Industry Sector,” page. Motorola Solution’s Inc. is slightly
above their industry average at 1.26. This firm faced financial issues in 2009 and so it was not
surprising that they would be considered riskier and carry a higher beta than their industry
average. A beta of 1 carries a risk similar to that of the current market, anything below 1 is
considered less risky than the market and anything above 1 is considered riskier than the market.
This firm is slightly risky in comparison to the overall market but they did show signs of
improvement after 2009 which may make their beta decrease for future analysis.
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The risk free rate for this firm I used was the ten year T-bond interest rate as of February
2, 2015 which was 1.68% ("Resource Center."). I chose this rate because ten years is a decent
estimate of the total time it would take to plan and execute a project within this industry segment.
Also United States bonds are rated AAA which makes them practically risk free. The implied
risk premium I chose for this firm was the trailing twelve month cash yield for the implied ERP
on Damodaran’s website as of February 1, 2015 ("Damodaran Online: Home Page for Aswath
Damodaran."). I chose this because it was specifically calculated by Damodaran using both
current and historical information together. I changed it with the historical risk premium which
uses only historical data gathered to create the risk premium. Below is a sensitivity analysis
showing my actual cost of equity used (the base case) and three other possible scenarios in which
a different beta, risk free rate, and risk premium are tested individually.
Estimate
Beta
Base case
Bottom up = 1.26
Case 1
Industry Average =
1.24
Case 2
Bottom up = 1.26
Case 3
Bottom up = 1.26
RF
10Y
Tbond =
1.68%
10Y
Tbond =
1.68%
5Y Tbill =
1.19%
10Y
Tbond =
1.68.%
Risk
Cost of
Premium Equity
IRP =
6.02%
9.27%
IRP=
6.02%
9.14%
IRP =
6.02%
8.78%
hist =
6.25%
9.56%
This sensitivity analysis provides a good range of costs of equity that are likely to be used
for this firm. It is important to note that there is not a precisely correct cost of equity but rather
the base case is the most likely scenario and the three following cases provided a plausible range
for the cost of equity. Case 1 uses the industry average beta of 1.24 versus the bottom up of 1.26.
Case 2 uses the 5 year T-bill rate of 1.19% as the risk free rate instead of the 10 year T-bond rate
which is 1.68%. Lastly, case 3 changes the risk premium from the implied which is 6.02% to the
historical which is 6.25%.
The cost of equity used for this firm is 9.5% meaning any projects expected to be
accepted by this firm must offer at least that much in return to be considered a valuable
11 | P a g e
proposition. However, the sensitivity analysis ranges from 8.78% to 9.56%. This amount is
decent considering all of the factors which go into making the cost of equity which would be
their beta of 1.26, their risk free rate of 1.68%, and their interest risk premium of 6.02%.
Cost of Debt
A firms cost of debt is the rate the firm is currently paying on its debt ("Cost Of Debt
Definition”). There are three ways to calculate cost of debt: credit rating method, synthetic
method, and borrowing history. Because my firm’s borrowing history was a wide range of 2%13% and their credit rating was outdated I decided to use an average of the credit rating method
and synthetic method to give me the most accurate cost of debt out of the information available.
It was surprisingly hard to find any relevant information on this firm’s credit rating.
There was one news article from 2012 which mentioned Motorola Solutions Inc. as having a
BBB rating from S&P ("TEXT-S&P Rates Motorola Solutions Notes 'BBB'"). From this I was
able to find their spread on Damodaran’s website on the “Ratings, Interest Coverage Ratios and
Default Spread,” webpage. The spread for a BBB firm was 1.75%. I added this to the same TBond rate that was used in calculating the market value of equity sensitivity analysis to get their
cost of debt which was 3.43% for this method. Because this article was three years old and its
authenticity was not provable I decided to average it with their synthetic rating.
The synthetic method tracks the amount of debt obligations your firm has and compares it
to the amount of years they are paying it off within. To calculate this amount I found Motorola
Solutions Inc.’s operating lease information for the next six years. This information was used
along with their earnings before interest and taxes, current interest expense, and also their current
long term government bond rate, in a spreadsheet provided by Dr. Beierlein. (Beierlein, Jaclyn)
This spreadsheet took all of this information into account and required manually adjusting to
make sure the bond rating matched the cost of debt amount. By doing this it gave me a rating of
AAA which carried a spread of .40%. I added this to the same T-Bond rate that was used in
calculating the market value of equity sensitivity analysis to get their cost of debt which was
2.08%. When you do an arithmetic average of the credit rating method and the synthetic rating
method you get a total cost of debt of 2.76%.
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Capital Structure
A firm’s capital structure shows their use of debt and equity to finance their firm. This
amount is found with a firm’s market value of equity and debt. Market value of equity is a
simple calculation found by multiplying the firm’s stock price by their current amount of shares
outstanding. Market value of debt is calculated by finding a firms total debt on their balance
sheet, their interest expense on their income statement, and their long term lease information on
their annual 10-K form. The next step is to calculate the weighted average maturity date for their
debt and time to maturity. Afterwards you find the present value of their long term leases and
current leasing obligations. The last step is to add the present values which will give you your
total market value of debt.
Motorola Solutions Inc. has a market value of equity of $16.5 billion and a market value
of debt of $7.7 billion. These numbers show that almost one third of the company is being
financed with leverage which is a significant amount. Their current capital structure is 32% debt
and 68% equity.
WACC Calculation
The weighted average cost of capital is found by adding a firm’s equity, after tax debt,
and preferred stock together. Motorola does not offer preferred stock and so it is excluded from
the calculation. Below is a diagram of the WACC formula ("Weighted Average Cost Of Capital
(WACC) Definition”):
I created a sensitivity analysis changing various parts of the WACC formula to find a
good range that Motorola’s WACC would fall into. Below are charts showing the sensitivity
analysis:
Percent Equity
Return on Equity
Percent Debt
Return on Debt
Tax Rate
WACC Base Case
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68%
9.27%
32%
2.76%
19.18%
7.02%
Percent Equity
Return on Equity
Percent Debt
Return on Debt
Tax Rate
WACC Case 2
68%
9.14%
32%
2.76%
19.18%
6.93%
Percent Equity
Return on Equity
Percent Debt
Return on Debt
Tax Rate
WACC Case 3
68%
9.56%
32%
2.76%
19.18%
7.21%
Percent Equity
Return on Equity
Percent Debt
Return on Debt
Tax Rate
WACC Case 4
68%
9.27%
32%
3.43%
19.18%
7.19%
These charts show that the firm’s base case WACC is 7.02%. The other cases show what
the WACC would be if different variables used within the calculation were changed. Case 2
lowers the return on equity making the WACC equal 6.93%, Case 3 raises the return on equity
making the WACC equal 7.21%, and Case 4 raises the return on debt making the WACC equal
7.19%. This means that by losing your return on equity you would require a lower return, while
gaining either a higher return on equity or debt would require you to make a higher return.
Similar to the cost of equity previously discussed there is not a precise WACC that can be found
and so this sensitivity analysis provides you with a good rang of where the WACC would fall.
The range for Motorola’s WACC is from 6.93%-7.21%.
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Optimal Capital Structure
In the previous section Motorola’s cost of capital was analyzed and their market value of
equity was found to be $16.5 billion while their market value of debt is $7.7 billion. These
numbers show that almost one third of the company is being financed with leverage which is a
significant amount. All firms have an optimal capital structure which maximizes the benefit of
taxes for a company where they are taking on just enough debt to help their company without
becoming cumbersome. Motorola’s optimal capital structure would be 30% debt and 70% equity.
At that rate their optimal WACC would be 6.93%. According to this they are optimizing their
debt which allows them to have such a high amount of debt and still be unconcerned about it.
There are many inputs for the optimal capital structure which have been explained in
previous sections. These are the market value of debt, market value of equity, current firm value,
current debt ratio, tax rate, beta, risk free rate, interest risk premium, operating income, total
liabilities, interest expense, times interest earned, current cost of equity, default spread, current
cost of debt, weight of equity, weight of debt, current WACC, and unlevered beta.
First we list the possible debt to equity ratios. For this analysis we changed the debt to
equity ratios in increments of 10%. From there we calculated the beta at each new debt to equity
rate by multiplying the unlevered beta by the varying debt to equity rates and then multiplying it
by the firm’s tax rate. Then we calculated the new cost of equity by adding the new beta to the
risk free rate and multiplying the total by the interest risk premium. Then we calculated the new
value of debt by multiplying the debt ratio by the firm value and then used this amount to find
the new interest expense. From there we divided the operating income by the interest expense to
get the new times interest earned and used that to find the default spread for that specific ratio.
The new cost of debt was found by adding the new default spread to the risk free rate. Lastly, the
optimal new WACC was calculated by multiplying the debt rate by the new amount of debt, the
equity ratio by the new amount of equity, and all of that by the current tax rate.
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Debt Ratio = Wd
new We New beta New Cost of Equity
New value of debt New interest expense New TIE New spread New Cost of Debt new WACC
0% 100%
0.91
7.1744%
- #DIV/0!
0.40%
2.08%
7.17%
10% 90%
0.99
7.6678% 2,435,033,702.50
50,648,701 23.9888
0.40%
2.08%
7.07%
20% 80%
1.10
8.2846% 4,870,067,404.99
101,297,402 11.9944
0.40%
2.08%
6.96%
30% 70%
1.23
9.0776% 7,305,101,107.49
173,861,406 6.98832
0.70%
2.38%
6.93%
40% 60%
1.40
10.1348% 9,740,134,809.98
261,035,613 4.65454
1.00%
2.68%
6.95%
50% 50%
1.65
11.6151% 12,175,168,512.48
350,644,853 3.46504
1.20%
2.88%
6.97%
60% 40%
2.02
13.8354% 14,610,202,214.97
1,268,165,552 0.95808
7.00%
8.68%
9.74%
70% 30%
2.63
17.5359% 17,045,235,917.47
1,479,526,478 0.82121
7.00%
8.68% 10.17%
80% 20%
3.86
24.9369% 19,480,269,619.96
2,275,295,492 0.534 10.00%
11.68% 12.54%
90% 10%
7.55
47.1399% 21,915,303,322.46
2,559,707,428 0.47466 10.00%
11.68% 13.21%
100%
0% #DIV/0!
#DIV/0!
24,350,337,024.95
2,844,119,365 0.4272 10.00%
11.68% #DIV/0!
Above is the optimal capital structure table used to calculate for Motorola using all of the
variables and formulas previously mentioned above. This table had to be adjusted to the spreads
on Damodaran’s website under the “Ratings, Spreads and Interest Coverage Ratio,” page though
because they change monthly and the formulas in this table were premade according to a
previous months spreads ("Damodaran Online: Home Page for Aswath Damodaran."). I also
changed the inputs to see the effects on the optimal capital structure with a different beta and
different tax rate. The different beta I used was the industry segment beta of 1.24 which had no
effect on their optimal capital structure as it remained at 30 to 70 only it lowered the new WACC
to 6.85%. The different tax rate I used was 40% which is a standard amount applied to
information when no other sources of validation are available. This had a significant change on
their capital structure raising the optimum amount to 50% debt and 50% equity which was to be
expected because it was such a large shift in the tax rate.
The firms’ actual tax rate is 19.18% which is an industry average throughout all
profitable firms in the telecommunications equipment segment according to Damodaran’s
website under the “Effective Tax Rate by Industry,” page( "Damodaran Online: Home Page for
Aswath Damodaran."). I chose this tax rate instead of an average from all of the firms in the
segment because this would be a misrepresentation of their company to include firms that
actually lost money during this time frame. Using this rate might underestimate the equation of
their optimal WACC but it would be better to be under and have more than enough coverage
than to be over and not have enough. My firms overall credit rating is BBB which means that
there is some uncertainty as to if they will face bankruptcy however they are not at a junk rate
which would signal a definite cause for concern.
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In conclusion, I believe that they currently have enough coverage to support their high
amount of debt although it is hard to predict if they will continue having enough coverage for
their debt because past years have shown that their coverage was extremely volatile. I
recommend that they rely more on equity and pay off some debt so that they can stabilize their
coverage and will know without a doubt that they can sustain their capital structure.
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Dividend Policy Analysis
A dividend policy is a set of guidelines a firm uses to decide how much of its earnings it
will pay out to shareholders ("Dividend Policy - Complete Guide To Corporate Finance”).
Comparing a firm’s dividend policy to its free cash flows can help you to analyze the efficiency
of their dividend policy. Free cash flows are measured as operating cash flows less capital
expenditures ("Free Cash Flow (FCF) Definition”). If a firm has more free cash flows than
dividend payouts then the management might be misallocating funds. If a firm has less free cash
flows than dividend payouts the firm should either reinvesting more in the company or should
reevaluate its current investment strategy.
Dividends per share shows the amount of dividends that were paid out to their
shareholders for that year. A dividend is an annual sum of money paid out to shareholder from
either a firm’s residual cash after all possible projects have been planned or a fixed amount from
the annual earnings ("Dividend Policy - Complete Guide To Corporate Finance”). Yearend
shares outstanding shows the amount of shares that are being sold in the market at the end of the
year in millions, while repurchase of common stock shows the value amount of stocks
repurchased by the company each year. Dividends per share is the sum of declared dividends for
every ordinary share issued ("Dividend Policy - Complete Guide To Corporate Finance”).
Year
2013
2012
2011
Dividends paid per share
$1.14
$0.96
$0.22
Year end shares outstanding
254.50
276.10
318.80
Repurchase of common stock -$1,694.00 -$2,438.00 -$1,110.00
DPS
0.45%
0.35%
0.07%
2010
336.3
-
2009
0.35
-
Motorola did not repurchase stock in 2009 and then in 2010 it neither paid dividends nor
repurchased stock which is an indicator of poor performance. The following three years they
paid out an average amount of dividends and repurchased a sizable amount of stock which
signals that they are expecting steady cash flows in the future. Their cash for the concurrent
years follows a similar pattern of decreasing in 2011 and 2012 then increasing again in 2013.
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Motorola’s DPS increased significantly from 2011-2014 which means that they were paying out
more dividends as time progressed. Below is a chart of free cash flows to equity.
FCFE
Net Cash Flows to Stockholders
Cash Returned Ratio
2013
2012
$1,540.00
$723.00
$1,821.00 $2,575.00
1.182467532 3.5615491
2011
2010
2009
$629.00
$189.00
$279.00
$990.00
-$179.00
-$2.00
1.573926868 -0.947089947 -0.007168459
This table shows Motorola’s free cash flows from 2009 to 20014. They grew significantly
in five years but were less than Motorola’s dividends and repurchases from 2011 onward.
Motorola’s invested capital decreased significantly throughout the five years while their returns
on assets, capital, and equity, increased. This means that Motorola should most likely look at the
different projects they are taking on and reevaluate them. It is not wise for a company to payout
more in dividends and repurchases than what their free cash flows allow because this means that
the money is coming elsewhere from the firm and other assets are not being utilized properly.
Although, this could be reassurance to the investors that the company is not facing trouble after
they did not pay out dividends in 2010 and could show that they are expecting steadier cash
flows in the future since they started repurchasing a significant amount of stock.
Stock Price
Dividend
Return
Dividend Yield
2013
66.15
$1.14
0.2568173
$0.017234
2012
53.54
$0.96
0.2479963
$0.017931
2011
43.67
$0.22
0.2818341
$0.005038
2010
2009
34.24
29.3
0
0.35
0.1686007
$0.000000 $0.011945
0.2388121
$0.010429
The table above shows Motorola’s stock and dividend returns annually from 2013-2009.
Their stock price has risen each period by about 18% annually. Their average dividend yield was
about 1% and their average return was about 23%. However, in 2010 this company did not pay
out dividends. This is because they faced some financial difficulty in 2009. In conclusion, after
analyzing the firm’s dividend policy I recommend that they cut back on the amounts their paying
out and instead put that towards their investment policy.
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