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Analyzing liability, calculating debt-to-equity ratio, and minimizing company risk

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TOPIC 1

Select one of the following companies:
Southwest Airlines
Delta Airlines
United Airlines
AirTran
Continental Airlines

Go to http://money.com or http://finance.yahoo.com and enter the company symbol and then find the financial statements. For your company, analyze the liability section of the balance sheet. For each liability, write a short description. Use information from the notes to help you. Then, calculate the debt-to-equity ratio for the current year with the available information. What tentative conclusions can you draw about the debt position of your airline? Do owners or creditors have more claims on the company's assets? How can you tell? What types of financial risks apply to your company?

TOPIC 2

When the stock market is going up over a long period of time, investors can become complacent about the risks of being a stockholder. After the significant decline of the stock market in 2008, people have begun to rethink the risk involved in owning stock. What kinds of risks do the owners of publicly-traded companies face? What could you do, as an investor, to continue to invest in the market but minimize your risk? Select two companies that you would invest in if you had the money. Find their financial statements on the Internet and examine the shareholders' equity section of their balance sheets. What does your analysis tell you about each firm? Is this a good investment? Explain your findings and conclusion.

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Solution Preview

TOPIC 1

Select one of the following companies:
Southwest Airlines
Delta Airlines
United Airlines
AirTran
Continental Airlines

I have selected Southwest Airlines to analyze.

Liabilities description

Accounts Payable is the Southwest's debt obligation to pay off short term debt to its creditors (The information was obtained at http://www.investopedia.com/terms/a/accountspayable.asp "Accounts Payable").
Accrued Liabilities is Southwest's assumed liability for supplier invoices that haven't been received from the supplier (The information was obtained at http://www.accountingtools.com/accrued-liability "Accrued Liability").
Air traffic Liability is Southwest's that are tickets sold and initially deferred. In other words, air traffic liability is tickets sold for flights that will be completed in the future. Refundable tickets sold but the travel is not completed can be reused for one year from the date of sale or refunded. The passenger revenue is recognized when the flight is provided. Southwest and Air Tran will included the sale of frequently flyer points and/or flight credits as part of the air traffic liability.

Current maturities of long term debt is Southwest's liability for the senior notes distributed as part of the Southwest and Air Tran merger as the cash portion of the note. As part of the merger, the senior note holders would receive company common stock at a conversion rate of 53.3761 shares and $615.16 in cash per $1,000 in principal of the senior notes.

Long term debt less current maturities consists of Southwest's aircraft purchase financing facilities, three Boeing 737 aircraft's financed under a fixed-rate facility, eight Boeing 717 aircraft's were pledged as collateral for obligations linked to enhanced equipment trust certificates, public offering of $115 million convertible senior notes, various term loan agreements, operating leases and capital leases.

Deferred income tax is utilized as an asset and a liability method. The deferred tax assets and liabilities are recognized on the tax effect of temporary differences between the financial statements and tax bases of assets and liabilities based on the current tax rate.

Construction obligation is the liability for agreements between Southwest airline and Broward County for managing the design and construction of the airport's modernization project. Also, the liability to maintain the LFMP project at Dallas Love Field.

Other non-current liabilities for Southwest is unfunded medical expenses, which are paid as the benefits are due.
The debt-to-equity ratio measures the ratio of ...

Solution Summary

This solution provides an in-depth analysis of the balance sheet liabilities of Southwest Airlines. The expert also includes a lengthly discussion on risks of stock ownership. Finally, the solution provides a review of the shareholders' equity for of AT&T and Altria.

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? Net Profit Margin Ratio (Note: on the Dunn and Bradstreet Web site this ratio is labeled Return on Sales)
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? Price-to-Earnings Ratio (P/E) Ratio

Analyze the company's working capital management. Explain why the company's operating and cash cycles are currently optimized. If you think they are not optimized,explain why.

Based on the company's financial statements, list the long-term debt held by the corporation, maturity dates and yield to maturity. List the types of stock issued by the company, the stocks' current selling price, and the 52-week average selling price.

o Compute the weighted average cost of capital (WACC) for both years and discuss your findings.

o Write a brief analysis that summarizes how your company compares to industry averages.

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