Corporate Financials I

 

SPRINT CORP

 

2330 SHAWNEE MISSION PKWY

WESTWOOD, KS 66205

Corporate Financial Report

Part 1

Fall 1997

CERTIFICATION

I, the undersigned, certify that this document is my work product, and that I have reviewed and proofread the document completely before submitting it for grading.

 

Andrew B. Gruenbaum

 

____________________________

1.

  • Sprint is a holding company. Its primary business revolves around the phone industry.
  • The principal activities of Sprint and its subsidiaries include domestic and international long distance, local exchange telecommunications services, product distribution and directory publishing.
  • Recently, Sprint has been aggressively developing its internet backbone and its PCS services.

This information came from the 10K report

2.

  • Sprint primarily competes in the long distance market. However, they are increasingly making efforts to compete with their internet backbone and smaller scale cellular service, referred to as PCS.
  • Prior to the deregulation of AT&T, AT&T was the company that controlled the long distance market. After AT&T was broken into the baby bells in the early 80’s, all of AT&T’s business was broken into the local operating groups referred to as the RBOCs.

This information came from the 10K report and specific research on the internet of the AT&T breakup.

3. See Exhibit A.

  • Very competitive. All of the companies are constantly offered new pricing plans to grab larger market share. Sprints current promotions are being the official long distance company of the NFL, and Fridays free until the year 2000.
  • The top three companies are all showing a profit. However, the diversification of all of these companies makes it very difficult to determine exactly where the revenue is coming from.
  • With the increase in internet activity, largely the providing of backbone bandwidth, many opportunities exists for companies competing in this market. This “backbone” can be used for internet, extranet, and intranet communications for corporations. Additionally, companies like Sprint can provide support on all levels of communication. This would include a wide arrange of consultants Sprint could provide to help a company achieve its ever expanding communication goals.
  • All of the companies in this industry, AT&T, MCI, WorldCom, LCI and other smaller long distance carriers, have mailings and phone calls trying to convince users of the benefits of their calling packages.

This information came from the 10K. The exhibit is a distillation of industry information on Yahoo!. (http://biz.yahoo.com/research/indgrp/util_telephone.htm.)

4.

  • Sprint is truly a worldwide corporation. They have no boundaries. If a phone call goes outside of the area where they can be the long distance carrier, they have agreements with the local carrier to make the completion of the phone call seamless to the users.
  • Sprint is a partner in Global One, a joint venture with Deutsche Telekom AG (DT) and France Telecom (FT) to provide seamless global telecommunications services to business, residential and carrier markets worldwide. Sprint is a one-third partner in Global One’s operating group serving Europe (excluding France and Germany), and is a 50% partner in Global One’s operating group for the worldwide activities outside the United States and Europe.

This information came from the 10K.

5.

  • AT&T, MCI, WorldCom, and regionally, the RBOCS.
  • AT&T competes in almost all areas with Sprint. AT&T dominates the long distance communications market and is expected to continue to dominate the market for some years into the future. AT&T is involved the internet and PCS. When the internet is specifically viewed, WorldComm is aggressively acquiring a subscriber base that will make them a force to be contended with in this area.

Wall Street Journal September 11, 1997 Special Section On Telecommunications, p. R22, “The Squeeze”

6. See Exhibit B.

  • In the exhibit, Sprint’s employee numbers have declined almost 3,000 employees. However, the union membership has remained pretty stable, so I can find no real evidence from this to make me believe NAFTA has had an impact on my company. Research did bring to light an article from January of this year that was titled, “Sprint emboiled in NAFTA labor dispute”. Since this was the only mention of anything tying NAFTA to Sprint, I would have to state there is no real impact of NAFTA.

This information came from the last four years of 10K reports, and from Telephony magazine, Jan. 22, 1997. (p. 15)

7. See Exhibit C & F.

  • For the purpose of this exercise, the competitors used were AT&T and MCI. Since information was not available from CD Disclosure for the Inventory Turnover, this ratio was not used.

8

  • This measure provides a method to show how efficiently the operations and the balance sheet are being managed.
  • Part of Sprint’s executive compensation plan is a stock option plan. Since Sprint’s stock is selling at over twice the book value price, the EVA is determined to be a positive amount. Because of the stock options made available to executives, the executives are able to take advantage of the positive EVA they have worked to achieve. The higher the selling price of the stock is over the book value price, the greater reward the executives receive.

This information came from the 10K, Value Line and the NAIC Greensheet from Sprint’s web site (www.sprint.com).

9.  See Exhibit D

 

  • While using CD Disclosure, I stumbled across a table that showed Sprints growth to be 8.5% over the past 5 years. That being the case, it is the number I used when computing the answer to this question.

 

10

  • To determine the Market Risk Premium Rate in my industry I went to “www.morninstar.net” and used the percentage increase that was the average of all mutual funds who specialize in the technology industry.
  • The addition of my stock to this portfolio would bring the beta down 0.02%.
  • No, they would increase it. Since the optimum beta is a beta that perfectly follows the market, the closer your portfolio is to 1, the less risky the investments. In this case, the beta of Sprint is 1.10. Since the mutual fund beta is 1.16, the addition of Sprint to the fund lowers the risk slightly, but makes the exclusive ownership of Sprint less risky.

11

  • Within the recent acquisition attempts within the industry, a very possible event that might alter the beta would be a buyout by one of Sprint’s competitors. If for instance, WorldCom is successful in winning the battle for MCI, Sprint might become a target of British Telecom as it attempts to gain worldwide backbone and market share.

12.

  • Value Line provides a table that showed the source of Sprint’s capital to be 25% from long term debt and 75% from retained earnings. Less than 1% was from preferred stock, so this number was not included in the calculation.
  • I calculated the CAPM for Sprint. I researched the loan rate Sprint could expect to pay if they needed to do any additional borrowing. After getting both of these numbers, I multiplied them by their respective percentages from Value Line to get the percent of capital raised by both methods. After adding these percentages together, I had the weighted average cost of capital.
  • The WACC is the cost to a company for a new project. If the company wants to start something tomorrow, this is the rate they can expect to pay.

 

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