� Estimate your company’s weighted average cost of capital. You can use the income statement
information to estimate the tax rate.
� If your company uses this in the capital budgeting process (i.e., as the discount rate in NPV and IRR),
what assumptions are they making?
� Does your company face any particular difficulties in using this rate? For example, does your company
have different divisions or units that might have differing levels of risk?
Write up a 2-page summary of your findings, including any calculations you might have made, and
describe which method you used to find the required rate of return on debt for your company.
Investment Analysis
INVESTMENT ANALYSIS 2
Investment Analysis Paper on Chesapeake Energy Corporation
Chesapeake Energy Corporation is a US based utility company dealing in natural gas
exploration and production. The company has its headquarters in Oklahoma City, OK and
employs approximately 10,800 people (as of December 31, 2013). The company was
incorporated in 1947 and has evolved to be a leader in the energy sector worldwide with over
$7.4 billion in total assets (as of December 31, 2014).
Board of Directors
The board of directors is very important to the organization since they determine the
direction to be taken by the business. In Chesapeake Energy Corporation, the board of directors
is composed of a ten member team; nine of the ten are independent members. Each of the nine
sits in a charter committee namely; audit committee, compensation committee, nominating
committee and finance committee. The Chair to the Board is a member of nominating committee
and finance committee.
Monitoring Potential of the Firm’s Board of Director
The strategic monitoring potential of the board is derived from the fact that 90% of the
members have complete autonomy and sits on committees (Market Line, 2014). The charter is
also governed by constituency statutes that permit them to make decisions in favor of the
company rather than the shareholders’ interests (Brian et al, 2013).
Strengths and Weaknesses of Board Structure
INVESTMENT ANALYSIS 3
Intense market competition and structuring of the board might either erode or increase the
company’s market share. This board strength and weaknesses include; Mainstream on vertical
integration and also a strong market position based on personnel. On the other hand, the
weaknesses are high debt resulting from heavy borrowing. Their opportunities also include
increasing demand for natural gas in the world and key employees, while the treats for the board
structure are going to be increasing competition and legal compliance and changing gas prices.
Ethical Concerns
The company lacks appropriate responsiveness to the shareholders concerns. This is
because the directors have full autonomy over decision making. Despite the fact that their
position is backed up by the constituency statutes, it amounts to lack of transparency in the
overall organization (Bundy & Ann, 2013).
Competitive Financial Ratio
Proper financial management is based on building upon the business strength while at the
same time striving to overcome the company challenges. Financial analysis is imperative in
determining the profitability of the business. Financial ratios are based on the notion that trends
and patterns always occur while doing business that can be quantified, interpreted, and used by
the management for decision making process (Brooks & Mukherjee, 2013). However, research
illustrate that competitive financial ratios as well as DuPont identity help determine the part of
the business that is performing and the part that is underperforming.
By using Chesapeake Energy Corporation, they can calculate the company Return on
Investment (ROI). This value can help us to determine the organization’s competitive position by
INVESTMENT ANALYSIS 4
comparing the value with the ROE of Anadarko Petroleum Corporation, that’s the company’s
competitors.
Table 1
Raw Data for Chesapeake Corp (in thousands or in millions – what is it?)
Chesapeake Corp
2014 (m)
2013(m) 2012 (m)
Net Income $1,917 $724 $(769)
Revenue $20,951 $17,506 $12,316
Assets $40,751 $41,782 $41,611
Equity $18,205 $18,140 $18,796
ROI Calculations (see Appendix E)
When the two figures shown in Appendix E are compared, it is quite evident that
Chesapeake Energy corporation (CEC) has a competitive advantage as compared to Anadarko
Petroleum Corporation whose ROI is a negative value. Therefore, this implies that CEC
management can create value for the shareholders (Berk et al., 2013).
DuPont Analysis for the Companies for the Past Three Years
Return on Investment (ROI) as indicated in research is one of the most important
company analysis tools, which is used to measure how well a company manages and creates
value for their shareholders. However, the values on the ROI can sometimes be misleading in
terms of real value and risks associated with a particular investment. The numbers in the ROI can
INVESTMENT ANALYSIS 5
easily be misleading to financial analysis if the individual components of the ROI have not been
broken down to their individual components. In this regard, DuPont can bridge the gap created
by the ROE and provide a reliable measure of how the company creates value for its
shareholders(Mitchell, Mitchell, &Cai, 2013).DuPont is the financial analysis tool that enables
the breakdown of the ROE into its various individual components such as financial leverage,
asset turnover, and profit margin (Haskins, 2013). The following is the financial calculation of
DuPont of Chesapeake Energy Corporation, together with their competitor, Anadarko Petroleum
Corporation (APC) (Chesapeake Corp, 2015).
DuPont analysis is used to break down ROE in order to get a more detailed understanding
of the ROI and where the information is obtained from (Gitman & Zutter, 2014). To understand
the DuPont analysis for Chesapeake Energy Corporation for the last three years, the trend is
calculated.
Table 2
DuPont Analysis
Year ROE N/ Margin Asset T/over
E/ Multiplier
CEC
2014 10.50% 34% 51% 224%
2013 4% 35% 42% 230%
2012 (4.30)% 43% 30% 233%
INVESTMENT ANALYSIS 6
The raw data are in Appendix D below.
Differences and trend that emerge
In the year 2012, the operating efficiency of APC (0.18) was higher than that of CEC
(0.06) as can be seen in their profit margins. In the same year, it can be deduced that the asset use
efficiency of between the two companies are almost the same since they stood at 0.255 for APC
and 0.256 for CEC. On the other hand, the financial leverage for CEC was higher (3.4) than the
financial leverage for APC (2.5).
In the year 2013, the operating efficiency of APC (0.05) was still higher than that of CEC
(0.04). In the same year, the asset use efficiency of CEC was higher than the asset use efficiency
of APC. Similarly, CEC had a higher financial leverage in the year 2013 than APC. Overall, it
can be deduced that CEC performed better than APC in the year 2013.
In the year 2014, the operating efficiency of APC (0.095) was higher than that of CEC
(0.091). However, the asset use efficiency of CEC stood higher (0.5) than that of APC (0.3). On
the other hand, APC had a higher financial leverage (3.1) than CEC (2.4) as can be deduced from
the financial calculations. The higher the financial leverage, the better a company is placed to
provide good value for its shareholders (Brian, Sandra, & Jennifer, 2013).
Dividend Growth Model
INVESTMENT ANALYSIS 7
The dividend growth model helps in the in-depth understanding of equity by forecasting
business performance and selecting the appropriate valuation model. Return on investment is a
method that determines the efficiency of a company by dividing the returns and the cost of the
investment (Isiklar, 2005). Just as its name suggests, retention ratio refers to the percentage of
the net income that remains to grow the business after dividends have been paid. The price of
stock is the cost at which an investor needs to undergo in purchasing securities in the exchange
market. Earnings per share are the portion that indicates the company’s profitability as it
indicates the monetary value of earnings per outstanding share of the company’s stocks.
The financial information used in these calculations was drawn from the income
statement shown in Appendix A. Appendix B shows the dividend in stock for Chesapeake
Energy Corporation of the year 2014. The total dividend paid by the company in the year 2014
amounted to $1273m with an outstanding shares of $665.14m.. The dividends per shares that
were offered by the company in 2014 were $2.32%, hence a promising return to the company
shareholders. The price of the company’s stock on 2 June 2014 was $14.05. The calculations of
the stock prices in relation to the ROI and retention ratio are shown in Appendix C. The
following are the figures that have been used in the analysis that is presented in Table 4.
Table 3
CEC 2014
Net Income $1917 m
Equity $18,205 m
Total Dividends Paid $1273m
Outstanding Shares $665m
Earnings Per Share (EPS) $ 1.55
Dividends Paid Per Share $ 1.87
INVESTMENT ANALYSIS 8
Stock Price 2/6/2015 $ 14.05
Table 4
Growth rate Chesapeake Energy Corporation 2014
ROE Net Income/Equity 10.53%
Retention Ratio 1-(cash dividends/net income) 34%
1-(1273/1917)
Growth rate in earnings Retention rate X ROE 3.54
Dividend Discount
Model
Return rate R = Dividend /price of stock
- g
3.67
Price of Stock Dividend/Return Rate R – Growth Rate g 14.05
Dividend Discount Model (DDM) = (2)
(3)
Issues with Using the Growth Model
Growth model by Chesapeake Energy Corporation brings issues as it relies much of the
company growth rate model that assumes a stable growth of 3.54% (Coe, 2002). This model
demands that the Chesapeake Energy Corporation company stock is hypersensitive to the entire
INVESTMENT ANALYSIS 9
growth dividend rate that is provided that cannot exceed the cost of equity. The growth model
brings along the issue of not taking into account non dividend factors that are inclusive of brand
loyalty and customer retention in Chesapeake Energy Corporation.
Growth
The Reasonability of Constant Growth is tested through the use of discounted cash flow
that resides in the very heart of any valuation that the company is geared to use in its operations
(Gomes, 2010). The use of reasonability of constant growth ensures that understanding about any
given value of the most important perception is given in the right way ever for the benefit of the
company success. Therefore, it is necessary to assume a constant growth in the company.
The numbers arrived at using dividend growth model seem logical and feasible as can be
evidenced in the appendix. However, the use of dividend growth model seems complex and
cumbersome due to several calculations and steps involved. It is reasonable to assume a constant
growth in a company provided all the necessary requirements are taken into consideration.
Debt and Equity
The total equity for Chesapeake Energy in 2014 amounted to $18, 205 million while the
long term debt for the same period was $11,154. The cost of debt was 5.24 % for fixed debt
while the cost of equity was calculated at 3.6%. The cost of debt was averaged from all the cost
of bonds borrowed from the open market (Chesapeake Corp Annual report, 2014).
Equity
The cost of equity has been calculated from the following formula. D/PO + g =
($1.87/$14.05) + 3.5 = 3.6 (Lee, n, d). Where
INVESTMENT ANALYSIS 10
D = Dividend paid per share
PO = Price of share in the market
g = growth rate in earnings
Table 5
Market Value of Equity
Chesapeake 2014
Shares outstanding 659 million
Price as of 2/06/2015 per
share
Market value of equity
$ 14.05
9,258.95m
CAPM 10.57
Debt
In 2014, Chesapeake Energy (CHK) repaid all the outstanding loans that were due in
2015 and also terminated the term loan due in 2017. The balances on the notes were redeemed
including the outstanding 6.875% senior notes that were also due in 2018. However, these were
replaced by other senior notes that were due between 2017 and 2038 at lower interest rates
(Gitman & Zutter, 2014).
Table 6
Cost of Debt
INVESTMENT ANALYSIS 11
Company name Year
Long term debt
Current Portion of Debt
Total Debt
$11,154 million
$11,154 million
Cost of Debt % before taxes 5.24%
Tax Rate 35.8
Weighted Cost of Capital
= (18,205/29359) x 3.6 + (11154/29359) x 5.24 x (1-0.358) = 3.51%
(6)
Table 7
Weighted Cost of Capital Raw Data
Company name Value $ %
Equity (R s ) 18,205 62%
Debt (R b ) 11154 38%
Total Value 29359 100
(Ross, Westerfield &Jaffe, 2013)
Annual Report
INVESTMENT ANALYSIS 12
The Chesapeake Energy cooperation annual Report charts the company’s yearly
financial performance and provides information on their production and operations. The
report also includes information about the energizing employees, the commitment to
safety and environment excellence, and their passion for the communities where they
operate.
Potential Real Options
The first opportunity that exists for this company is to increase its supply capacity or
output. This is advised by the current and projected increase in demand for natural gas across the
world. Another opportunity that exists for this firm’s business is to improve its overall efficiency,
and this is based on the technical and intellectual expertise that its employees have. Chesapeake
Corporation also has the option to boost competitiveness through organizational changes such as
increased promotion or reduction in company costs. The Board of directors who govern the
decision making of the company’s management has also proven to be aggressive and keen on
ensuring the firm remains competitive (Chesapeake Corp Annual Report, 2014).
The options that this company has for future action are company specific (Chesapeake
Corp Annual Report, 2014).The first option which is to gradually increase demand for natural
gas in international markets is completely an external factor. This opportunity was identified
from an analysis of the company’s SWOT analysis under the title of Opportunities. Opportunities
usually tend to be manifested in the external business environment of a company. This demand is
therefore existent within the oil and natural gas industry (Chesapeake Corp, 2015).
The second opportunity that exists is for the firm to leverage on the strengths that its
personnel have to increase its performance. This option was also generated from the SWOT
INVESTMENT ANALYSIS 13
analysis under the title of strengths which are an internal parameter for the business. As such,
this particular option is company specific as it is based on an appraisal of Chesapeake Energy
Corporation’s workers (Mitchelet al, 2013). The option of having its Board of Directors
influence decision making in a manner that will boost competitiveness is company specific
because the influence of this group of individuals is only within the scope of the company’s
actions (Chesapeake Corp Annual Report, 2014).
Capital Budgeting Process
The first option that is based on increasing demand basically means that the company has
to increase its supply to the market and this will lead to an increase its recurrent budget and will
affect its Capital budgeting marginally. To take advantage of increasing demand, the company
has to supply more and this will only happen if the relevant distribution channels are covered
more which will need more organizational resources through logistics (Chesapeake Corp, 2015).
Leveraging on the firm’s employees as a way forward will increase its budgetary costs.
This is because the company will need the employees to increase their output and this needs
better remuneration as well as motivation through paying them overtime or providing them with
bonuses for targets that have been met (Ayyagari et al, 2012).
The third option either increase budgeting or reduce. Competitiveness can be increased
through more promotion and marketing which needs resources to pay for the necessary activities
and materials needed such as more media coverage and otherwise. Competitiveness also comes
from cost-reduction measures which reduce budgetary allocation through initiatives such as
merging some managerial functions or reducing wastage which will lower company costs. The
reason why this option could go either way for the capital budget is the fact that the decision
INVESTMENT ANALYSIS 14
making of the company’s board of directors is not predictable but rather depends on the proposed
options as well as the manner in which voting will go (Papadopoulos, 2014).
In 2014, the company initiated meetings with its landowners in bid to expand its supply
networks in Pennsylvania and Texas while also continuing to communicate with other
landowners. In 2015, the company has undertaken to reduce its capital budgets while
maintaining a target of achieving differential performance for every dollar invested in the
company in order for the company to eventually achieve its leadership position in E & P industry
(Chesapeake Corp Annual Report, 2014).
Beta
Beta is applied in business finance as a measure of investment risks in the financial
market (Lovelady, 2012). The financial market risks are equated to 1 hence a beta of 2 for a
company implies that for every 1% change in the market benchmark value then the value of the
given firm changes by 2%. The beta for CHK is 1.04. Beta measures a company’s volatility of its
financial securities. Higher volatility rates attract better returns but the risks are also very high.
CEC Capm Calculations
rf + β (rm -rf) CEC
rf = risk free rate 0.02% 0.02
β = Beta 1.04 1.04
rm = return on the market 7% 7
Capm = 7.4
INVESTMENT ANALYSIS 15
For comparison purposes the competitors Capm calculations for APC has been included.
The result shows that the CEC Camp is much higher than those of APC. These can be attributed
to the differences in the rates of beta. The CEC stock is has higher risks than the average market
risks but for APC the company’s financial risks are much lower than the market’s risks. CEC
stocks have higher risks than APC stock given the different beta’s i.e. 1.04 and 0. 47 for CEC
and APC respectively.
APC Capm Calculations
rf + β (rm -rf)
rf = risk free rate 0.02% 0.02%
β = Beta 0.47 0.47
rm = return on the market 7% 7
Capm = 3.4
Debt and Equity
The cost of equity is the return a company theoretically pays out to the company equity
investors. For instance, Shareholders, to compensate them for the risk they undertake by
investing in the company. Beta is a measure of a company’s systematic risk or volatility of its
security with the market as a whole. Chesapeake Energy Corporation is listed on New York
Stock Exchange with a market capitalization of 9.2 Billion shares. Currently, the company’s beta
is 1.30 (Google Finance, n.d) and fluctuates between 1.29 and 1.32 (Chesapeake Energy
Corporation, n.d.)
Expected Return- CAPM
INVESTMENT ANALYSIS 16
Capital Asset Pricing Model (CAPM) is a business model that is used to describe the
relationship between risk and the expected return. CAPM is used when pricing risky securities.
The paradigm behind CAPM is that investors need to get remunerated in two ways, that is, in
terms of risk and time value of money. The time value of money is represented by RF (Risk-
Free rate) in the equation shown in appendix F. The other half of the formula quantifies the risk
taken by the investor. From the calculation shown in appendix F, it indicates that the
shareholders need 7.4% average per year over a long period of their invested equity to make it
worthwhile to invest in Chesapeake.
Debt
Cost of debt is an effective rate that a corporation reimburses on its total liability. The
cost of debt is important as it gives the overall rate the company pays to employ debt financing in
business activities. To the investor, cost of debt is imperative to give the investor an idea
regarding the riskiness of investing in the company. AS the cost of debt rises so as the risk of
investing in the company. Cost of debt (Before Tax) = Corporate Bond rate of a company’s bond
rating. The current 20-year corporate bond rate (BBB) is 6.69% but the cost of debt is 5.54% as
indicated in the CHK annual report in 2014.
Weighted Cost of Capital
CEC Value $ %
Equity (Rs) 18205 0.62
Debt (Rb) 11154 0.38
Total Value 29359 1
INVESTMENT ANALYSIS 17
=18205/29359 x 0.62 +11154/29359 x0.38 x(1-0.358) = 3.51%
CEC WACC = 3.51
The tax rate for the year 2014 was given as 35.8%
Competitive Review
APC Value $ %
Equity (R s ) 19,725 0.566
Debt (R b ) 15092 0.433
Total Value 34,817 1
(6)
= 15,092/34817 x 0.57 + 15092/34817 x 0.47 (1-0.358)
= 4.51%
APC WACC = 4.51%
CEC seems to have a lower cost of capital than APC. But there capital structure seems to
be the same. The ratio of debt to equity is 4:6.
Dividend Growth Model versus CAPM
Dividend Growth model is a valuation technique that takes into account dividend per
share and the company’s expected growth (Brigham &Ehrhardt, 2013). The assumption in this
INVESTMENT ANALYSIS 18
model is that dividends grow at a constant rate annually. Thus, Dividend Growth Model can be
used to evaluate companies in the stable, mature industries. For Chesapeake the dividend growth
rate is 3.5% with an EPS of $0.30. This indicates that the dividend yield is below average.
However, the dividend payout is in an uptrend and increases slowly. Compared to the CAPM,
which was 30.02% is used to calculate whether investing in Chesapeake will increase investor’s
equity. CAPM is to evaluate the risk of the marketplace compared with the risk of investing in
Chesapeake. On the other hand, dividend growth model is used to find out the consistent growth
of Chesapeake dividends. The model assesses five years history of Chesapeake stock to ascertain
if the organization has consistently raised dividends.
From the above discussion, it is evident that Chesapeake has moderate amount of debt as
well as liabilities. This indicates that Chesapeake has the ability to pay its debts. CAPM shows
that the shareholders need an average of 10.58 per year on their equity to make a significant
investment in the company (Analyzing Chesapeake Energy’s Debt and Risk, 2015). The WACC
indicates that the company reimburses 3.51% on every dollar it uses to finance its activity. The
company’s beta which is at 1.04 indicates that the company needs a minimum of 3.51 on
investment and the company’s stock will have an upward trend.
Debt and Equity
Competitive Review of Debt and Equity Mix
The cost of equity is more expensive than the cost of debt. But the optimal structure of the
company shows that equity capital is preferable to the company than the debt. The ratio of debt
to equity for Anadarko Petroleum Corporation (APC) in 2014 – 2012 was 4:6
Table 5
INVESTMENT ANALYSIS 19
Market Value of Equity
APC 2014
Shares outstanding 52 million
Price as of 13.36 per share
Market value of equity 721 million
CAPM 27.35
(Yahoo Business Finance, n, d)
Debt
The cost of debt for APC for 2014 was 5.1 while for the years 2013 and 2014 it was 5.2 and 5.5
respectively.
Table 6
Cost of Debt
APC 2014
Long term debt
Current Portion of Debt
Total Debt
15092 m
15092
Cost of Debt % before taxes 4%
Tax Rate 35.8%
INVESTMENT ANALYSIS 20
(5)
Weighted Cost of Capital
Table 7
Weighted Cost of Capital Raw Data
APC Value $ %
Equity (R s ) 19,725 0.566
Debt (R b ) 15092 0.433
Total Value 34,817 1
(6)
= 15,092/34817 x 0.57 + 15092/34817 x 0.47 (1-0.358)
= 4.51%
Capital Budgeting Assumptions
The assumptions made are that the business has been taken as a going concern and it has been
assumed that the directors of the business have no intention of closing the company in the near
future (Brooks & Mukherjee, 2013). To calculate the cost of debt for APC, the same tax rate of
35.8% has been applied.
INVESTMENT ANALYSIS 21
Capital Structure Theories
The capital structure of APC reveals that the debt to equity ratio 4:6. It means that the ratio is
optimal for the operations of the company. The capital structure theories can be traced to
Modigliani and miller. The theories assume that the cost of capital is reflected by the country’s
risk free rate which is also assumed to be constant while the growth rate is assumed to be zero as
all the earnings supposedly paid out as dividends. The investors are assumed to have
homogenous expectations while the market is perfect. The risk free rates have been taken as 4%
while the calculated interest rates for APC are approximately 5% (Ross, Westerfield & Jaffe,
2013).
The theories state that the cost of equity is more expensive than the cost of equity especially
where the concerned company has a lot of assets. The trade off theory applies partially to the
capital structure of the firm as its struggling to maintain a balance between the debt and equity
capital.
Summary
The shares of the company are fair and the prices of the shares are also high. In the last five years
the shares of APC have fluctuated constantly between 80 and 83 but the lowest share price was
47.41 recorded in August 2010 while the highest was 112.69 recorded in August 2014. At 84.79
dollars the shares are very expensive but the company is facing a positive future given that the
profits are reducing (Berk, DeMarzo, Harford, Ford, Mollica & Finch, 2013).
The company should analyze why the cost of sale increased rapidly from 10% in 2013 to 13% in
- I would certainly invest in this company though the short term profits are currently non-
existent but the situation is improving. The net income for the financial period in 2013 reduced
INVESTMENT ANALYSIS 22
by a significant margin just as much as the net income for 2014 while the cost of goods also
increased from 10% in 2013 to 13% in 2014. The liquidity status of the company is also not
stable especially for the current are assets. In 2014 the current ratio for CHK was 1.81 compared
to 1.77 in 2013. The quick ratio however was more promising, in 2014 the ratio was 1.27
compared to 0.66 in 2013. The debt to assets is also improving. In 2014, the ratio was 27%
compared to 31% in 2013. The gross profit margin decreased to 34% in 2014 from 35% in 2013
while the return on assets increased to 8% in 2014 from 3% in 2013. The ROE increased to
10.53% in 2014 from 3.9% in 2013. Considering all the above factors, the company has a great
potential to recover from its current financial crisis and expand even much more than before. I
would certainly invest in the company.
INVESTMENT ANALYSIS 23
References
Analyzing Chesapeake Energy’s Debt and Risk – Chesapeake Energy Corporation (NYSE:CHK)
| Seeking Alpha. Retrieved May 23 2015 from http://seekingalpha.com/article/889131-
analyzing-chesapeake-energys-debt-and-risk
Ayyagari, M., Demirgüç-Kunt, A., &Maksimovic, V. (2012). Firm innovation in emerging
markets: the role of finance, governance, and competition. Journal of Financial and
Quantitative Analysis, 46(06), 1545-1580.
Berk, J., DeMarzo, P., Harford, J., Ford, G., Mollica, V., & Finch, N. (2013).Fundamentals of
corporate finance. Pearson Higher Education AU.
Brigham, E. F., &Ehrhardt, M. C. (2013). Financial management: Theory and practice. Mason,
Ohio: South-Western.
Brooks, R., & Mukherjee, A. K. (2013). Financial management: core concepts. Pearson.
Bundy, J & Ann, K. B. (2013). Strategic cognition and issue salience: Toward an Explanation of
Firm Responsiveness to Stakeholder Concerns. Academy of Management Review. 38 (3)
352-376.
Chesapeake Corp. (2015). Company Profile: Chesapeake Energy Corporation. Market-Line
Chesapeake Corp Annual report (2014) Annual Report Retrieved June 1 2015 from
INVESTMENT ANALYSIS 24
Chesapeake Energy Corporation: NYSE:CHK quotes & news – Google Finance. (n.d.), Retrieved
from https://www.google.com/finance?cid=656337
Chesapeake Energy Corp, CHK: NYQ summary – FT.com. (n.d.), Retrieved from
http://markets.ft.com/research/Markets/Tearsheets/Summary?s=CHK:NYQ
Coe, P. J. (2002). Power issues when testing the markov switching model with the sup likelihood
ratio test using U.S. output, Financial Service Professionals. Journal of Financial Service
Professionals.74-82.
Gitman, L. J., & Zutter, C. J. (2014). Principles of Managerial Finance, Pearson Higher Ed.
Gomes, O. (2010). Consumer confidence, endogenous growth and endogenous cycles, Journal of
Economic Studies, 37(4), 377-404
Haskins, M. E.(2013). A decade of DuPont ratio performance, Management Accounting
Quarterly, 14(2), 24-33.
Lovelady, M. L. (2012). Profiting with synthetic annuities: Option strategies to increase yield
and control portfolio risk. Upper Saddle River, N.J: FT Press.
Mitchell, T., Mitchell, S., & Cai, C. (2013). Using the DuPont decomposing process to create A
marketing model, Journal of Business & Economics Research (Online), 11(11), 485.
Isiklar, G. (2005). Essays on macroeconomic forecasting (Order No. 3177045), available from
ABI/INFORM Complete. (305363178)
Papadopoulos, N. &Heslop, L. A. (2014). Product-country images: Impact and role in
INVESTMENT ANALYSIS 25
International marketing, Routledge.
Stock Quote CHK Chesapeake Energy Corporation (n.d.). Retrieved from
http://finviz.com/quote.ashx?t=CHK
United States Government Bonds – Bloomberg (2015) Retrieved June 6, 2015, from
http://www.bloomberg.com/markets/rates-bonds/government-bonds/us
Yahoo Business Finance (n, d) APC retrieved June 25 2015 from
http://finance.yahoo.com/echarts?s=APC+Interactive#{%22range%22:%225y%22,%22allowCh
artStacking%22:true}
INVESTMENT ANALYSIS 26
Appendices
Appendix 1
Table 3
Chesapeake Energy Corporation (CEC) Financials for the past three years
Chesapeake Corp (CHK) Year 2014 (m) Year 2013 (m) Year 2012 (m)
Net Income 1,917 724 -769
Revenue 20,951 17,506 12,316
Assets 40,751 41,782 41,611
Equity 18,205 18,140 18,796
Table 4
Anadarko Petroleum Corporation (APC) Financials for the past three years
Anadarko Petroleum Corp Year 2014 Year 2013 Year 2012
Net Income -17,750 801 2,391
Revenue 18470 14581 13411
Assets 61,689 55,781 52,589
Equity 19,725 21,857 20,629
Debt 15092 13065 13269
GP 15,085 11,598 10,717
INVESTMENT ANALYSIS 27
Appendix 2
Table 5
Market Value of Equity
Risk-Free Rate 0.02% United States Government Bonds –
Bloomberg, 2015)
Chesapeake’s Beta 1.04
Expected Market Return 7%
INVESTMENT ANALYSIS 28
Appendix A
Chesapeake Energy Corporation (CHK)
INVESTMENT ANALYSIS 29
Appendix B
Chesapeake Energy
Corporation
Year 2014
Net income $ 1917m
Equity $ 18205m
Total dividends paid $ 1273m
Outstanding shares $ 665.14M
Earnings per share (EPS) $1.55
Dividends paid per share $ 1.87
Stock price as of _Chesapeake
Energy Corporation (CHK)
$ 14.05
Appendix C
Analysis Formula Year 2014
ROE Net income/ Equity 10.53%
Retention ratio 1 – (cash dividends/ net
income)
34%
Growth rate in earnings (g) Retention ratio x ROE 3.54
INVESTMENT ANALYSIS 30
Appendix D
CHK Financial Ratios Analysis
Ratio Details 2014 2013 2012
Current Ratio Current Assets/ current liabilities 1.81 1.77 1.75
Quick Ratio TT C/ Assets – inventories /TT/ C
Liabilities
1.27 0.66 0.47
Asset turnover Sales/Average total assets 0.51 0.42 0.30
Net assets turnover Net assets / total sales 0.87 1.04 1.45
Times interest
earned
EBIT/Annual Interest Expense 36.96 7.35 -11.65
Debt to total Asset Debt/Assets 0.27 0.31 0.29
Interest cover EBIT/Annual Interest Expense 36.96 7.35 -11.65
Profit margin on
sale
GP/sales 0.34 0.35 0.43
R.R return on
assets
EAT/Total Assets 0.08 0.03 -0.02
Equity Multiplier Total Assets/shareholders equity % 223.85 230.3308 232.52
ROE Net Income/equity % 10.53 3.99118 -4.297
Appendix E
ROI Calculations
ROI for CEC in 2012 (see table 1)
=724,000/18,140,000
=0. 04
ROE for CEC in 2013 (see table 1)
= $769,000/ (17,896,000
= (0. 043)
ROI= Net income/ Shareholders equity
ROI for CEC in 2014(see Table 1)
INVESTMENT ANALYSIS 31
= $1,917,000/$18,205,000
ROI=10.5%
ROI for APC in 2014 is (see Table 2)
= (1,750,000)/19,725,000
= -8.87%
INVESTMENT ANALYSIS 32
Appendix F
Figure 1
CHK Figs in “000’000′ 31-Dec-
14
31-Dec-
13
31-Dec-
12
Total Revenue 20951 17506 12316
Cost of revenue 13875 11356 7081
Gross profit 7076 6150 5235
Selling and Gen exp 554 686 723
Non recurring exp 329 794 3,662
Net Income from cont 1,917 724 -769
Other Income 2,915 2,903 2,811
Interest expense 89 227 77
EBIT 3,289 1,669 -897
income before tax 3,200 1,442 -974
Minority Interest -139 -170 -175
Income tax expense 1,144 548 -380
Net Income 1,917 724 -769
Current Assets 7468 3656 2948
Total Assets 40,751 41,782 41,611
Current Liabilities 5863 5515 6266
Long term debts 11,154 12,886 12,157
Total Liabilities 22546 23642 23715
Inventory 0 0 0
Total Equity 18,205 18,140 17,896
Debt to Equity % 61.27 71.04 67.93
