Strong_Reflection 1_FINCB

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University of Phoenix *

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FINCB/571

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Finance

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Jan 9, 2024

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1 Reflection One Amanda Strong University of Phoenix FINCB/571 Daniel Pasternack December 15, 2023

2 Reflection One Primary and Secondary Markets You are a new economist for a major financial institution, and you have been invited to speak as a guest lecturer for a Freshman Finance course at the local university. Share how you would describe the overall purpose and mechanics of both primary and secondary markets. How would you explain the way the performance of your company is influenced by the activity of the markets you described? When considering the primary and secondary markets, you must first determine what these markets are defined as within the greater realm of the financial market. The primary market is defined as “the market for the sale of new securities by corporations” (Brealey et al., 2020, Chapter Financial Markets and Institutions). The secondary market is where these securities are traded among investors. In these markets securities are simply assets financial in nature. They are available for trading within the stock market. In the primary market one of the purposes is to provide a route to enable capital for improvements in your organization or to expand operations through the sales of the firm’s assets in the form of what is called a security or share. Usually through an Initial Public Offering or IPO the corporation makes shares available to the public. This allows the corporations to use the primary market to find investors to purchase securities or shares directly from the corporation. Once a share is purchased through the primary market, the new investor is now considered to be a part owner. These shares are out on the market, which allows investors to sell their shares in the corporation. Other investors that have purchased shares in another company may also decide to sell their stocks in that company. These investors would conduct their transactions in the secondary market. The secondary market transactions between investors usually do not have an impact on the number of shares available in the secondary

3 market because these transactions are simply transferring of ownership of the security or share that was initially purchased in the primary market. The transferring of ownership is usually managed through a stock brokerage company using an electronic communication method. ROE and EPS You are a research analyst for a publicly traded company, and you have been assigned to give a presentation on how a company uses performance metrics in corporate valuation. Think about how you would present return on equity (ROE) and earnings per share (EPS) to a group of investors or senior management.  Explain the use of ROE and EPS in evaluating the value of a company. Include how to calculate ROE and EPS.  Why is understanding ROE and EPS important to a company’s value?  Share an example of a company whose ROE and EPS you calculated.  What do these results say about the company? A company’s value can be evaluated by examining the return on equity or ROE and the earnings per share or EPS. The return on equity ratio reflects the income provider to shareholders per dollar on investment by the shareholder. This calculation is used to help determine if the corporation is financially stable and if they are operationally sound enough to show a profit for the shareholders of the corporation. Net income and book equity of the firm are metrics used in this calculation. The calculation to examine the return on equity is ROE = net income/equity. The next ratio is earnings per share, and this differs from return on equity because the earnings per share is focused more on the amount of the profit that can be provided directly to the shareholders. Return on equity is focused on the total return on the equity and not a profit

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4 that is distributed. Earnings per share are used to determine the value of a company by evaluating changes in profits provided to the shareholders. They could reflect both short and long-term growth options. The calculation for the earnings per share ratio is net profit/number of common shares. By utilizing return on equity and earnings per share to evaluate a company’s value is important because these values can aid in understanding if a company is stable and what the potential for long-term financial growth could look like. Examining these metrics over a certain period, investors can also look to see what factors could have impacted the organization. In certain cases, there can be unique factors such as the recent global pandemic. Examining these metrics, you can also compare your corporation to competing corporation to evaluate how your investment is performing. Look to see whether it is performing well, or underperforming compared to other corporations. The corporation that I investigated as an example to calculate both the Return on equity and earnings per share is Verizon Communications, Inc. I calculated Verizon’s return on equity by using the figures from Yahoo Finance from 12/31/2022 to obtain the data for net income and equity. Using the formula discussed above return on equity for amazon calculates as: ROE = Net Income/Equity Net Income for Verizon 2022: $21.256 M Equity for Verizon 2022: $92.463 $21,256,000 / $92,463,000 = .23 .23 x 100 = 23%

5 To calculate EPS, I used the same reporting time, 2022 for Verizon Communications Inc. and numbers for common shares and net profit were provided by Yahoo Finance. EPS = Net Profit / Number of Common Shares Net Profit for Verizon 2022: $21.256 B Number of Common Shares: 4.20 B $21,256,000 / 4,200,000 = $5.06 Upon further review it is said that having a 10-20% return on equity is within a good range. With Verizon Communications having a return on equity of 23% they are right around that range. While it can be difficult to determine if the earnings per share are high enough. Having a positive earnings per share especially in a struggling economy is a positive.

6 References Brealey, R. A., Myers, S. C., & Marcus, A. J. (2020). Fundamentals of corporate finance (10th ed.). McGraw Hill Education. https://prod.reader- ui.prod.mheducation.com/epub/sn_c424/datauuid-4b1eb4a4f9ff42dda570a9e3dd8d35c0 Fernando, J. (2023, May 24). Return on equity (ROE) calculation and what it means . Investopedia. https://www.investopedia.com/terms/r/returnonequity.asp Yahoo! (2023, December 11). Verizon Communications Inc. (VZ) income statement . Yahoo! Finance. https://finance.yahoo.com/quote/VZ/financials/

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