A measure of success for a company in the eyes of the financial world is to have a high EPS. Please select two companies of your choice in order to assess their individual EPS in a complex capital structure. Compare and contrast the factors that contributed to the EPS and present your views as to which company would be the better investment. Support your response with examples.

Question 1

A measure of success for a company in the eyes of the financial world is to have a high EPS. Please select two companies of your choice in order to assess their individual EPS in a complex capital structure. Compare and contrast the factors that contributed to the EPS and present your views as to which company would be the better investment. Support your response with examples.

Respond to this…Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company’s profitability. It is calculated by taking net income minus dividends on Preferred Stock divided by the average outstanding Shares. (Investopedia, 2016).

For this discussion I looked at information from Starbucks and Dunkin Brand’s Group (Dunkin Donuts) pulled from June 2016 financials.

Starbucks reported a $5,237,000 Revenue and an EPS of 0.51 and dividends of 0.20. (http://www.nasdaq.com/symbol/sbux/revenue-eps)

Dunkin Brands reported a $216,309 trillion Revenue and an EPS of 0.54 and dividends of 0.3. (http://www.nasdaq.com/symbol/dnkn/revenue-eps)

By looking at the revenue from both companies, you’d think Dunkin was far ahead of Starbucks, but the EPS from both companies is very similar.

“An important aspect of EPS that’s often ignored is the capital that is required to generate the earnings (net income) in the calculation. Two companies could generate the same EPS number, but one could do so with less equity (investment) – that company would be more efficient at using its capital to generate income and, all other things being equal, would be a “better” company.” (Investopedia, 2016).

References

Investopedia, (2016). Earnings Per Share- EPS. Investopedia. Retrieved from  http://www.investopedia.com/terms/e/eps.asp

http://www.nasdaq.com/symbol/dnkn/revenue-eps

http://www.nasdaq.com/symbol/sbux/revenue-eps

 

Question 2

Financial accounting utilizing U.S. standards has primarily been based on historical cost. In business combinations, book value and carrying value on bonds can become relevant. In addition, fair market value of other assets may also become a factor.

Discuss the pros and cons of each method of valuation. Which method do you feel is the best for valuation of assets? Explain.

Respond to this…The fair market value method will show a more accurate picture of a company’s assets at a point in time, and this can be beneficial for those, such as investors, who rely on a company’s financial information in making decisions.  When assets are reevaluated to their actual or estimated fair market value, it can result in unrealized gains or losses for the company in the period the change in the value occurred.  These gains or losses will affect net income of the company and their equity shown on the balance sheet.  When the fair market value of the assets of a company are unstable and change often the fair market value method can lead to financial information that is misleading or challenging to interpret for its users (Way, n.d.).  With the historical cost method, the amount paid for an asset is known which makes this method objective in nature with a level of simplicity which are both positives of the historical cost method.  The main negative of the historical cost method is that the value on the books for an asset may be so dated that the financial information could be showing a misleading picture of the company’s true financial position (“Historical Cost,” n.d.).

With either method, there is a risk that the financial information could be misleading, so I would have to say that the fair market value method would be the best method for the valuation of assets.  The unknowns with the economy, such as inflation, can impact the financial position of a company including the value of their assets and liabilities.  Based on this I would rather have the value of the assets reevaluated more frequently by using the fair market value method than not at all if the historical cost method was used.

References

Historical cost. (n.d.). Retrieved from http://www.readyratios.com/reference/accounting/ historical_cost.html

Way, J. (n.d.). Advantages or disadvantages of fair value accounting. Retrieved from http://smallbusiness.chron.com/advantages-disadvantages-fair-value-accounting-20577.html

 

Question 3

Many companies provide their employees with an email account. These accounts have become a hot topic for litigation. Typically, these accounts are considered the property of the company and management has the right to obtain information from the accounts. Do you feel that companies should permit personal use of these accounts? Do you feel that the employee has some expectation of privacy with the company account? What are some steps that a company may take to control the use of employee email accounts? Explain.

Respond to this…I feel that a business email address should be just that, used of business. Unless of course you own the business, it is free to obtain an email address and everyone should have a personal one. I honestly feel that an email address that is given to you from your employer, with their name usually in the address, that it belongs to them and they have all rights to access it. It is just like your school email address, I feel the school can have full access to it if needed. I have a school email address, @rasmussen.edu, a work email address, @bangprinting.com, and a personal email address, @gmail.com. I keep everything separate.

I think an employer should stress to the employee that the email account that they provide is not their personal account and that they should keep this separate. Where I work, someone has access to everyone’s password for email. Unless you are involved in unethical activity through your emails, you should not care if your employer has access to it. Our IT department has access to allow certain emails to be blocked and give people limited access with who they can email and cannot. I think that along with stressing the fact that the addresses belong to the company, I think it would be fair to let employees know that their accounts may be monitored and that they have the capability to access their account at any time.