MBA 606 Finance

Group Project
Presentation

Presented By:
Sherry Sebastian, Kipley Pereles,
Joshua Roller, Michelle Torres, Erin Morris,
Joseph Molina, Luis Lindemann
 Company Profile
•Industry - Semiconductor-Integrated Circuits

•Broadcom headquarters-UC Irvine's University Research Park

•19 Years in business- Henry T. Nicholas III, Ph.D., and Henry

Samueli, Ph.D. founded Broadcom in 1991

•Target market
•Broadband Communications
•Mobile & Wireless
•Enterprise Networking

•Main product line

•Cable, Satellite and IP set-top boxes
•Cable, and DSL gateways
•Digital TV solutions
•Blu-ray Disc Players and recorders
•Other Integrated Circuit solutions
 Company Profile
•Main suppliers
•Taiwan Semiconductor Manufacturing Corporation
•Global Foundries, Inc.
•Semiconductor Manufacturing International Corporation

•Leading Customers:
•Cisco, Echostar, Motorola, Pace, Thomson, and Samsung.

•Main competitors-Texas Instruments, Qualcomm

•Net Revenue for 2009: $4.490 billion

•EPS - $.13 for 2009 from $.41 for 2008

•Total Assets- $5.127 billion

•Market Capitalization- $15.5 billion

•Stock market where traded- Public (NASDAQ:BRCM)

•Stock price, range (before and after crisis): Low $7.90 and High $166.24
•$32.31 (December 31, 2009)
 Contents

1 Ratio Analysis

2 Capital Budgeting

3 Planning Process

4 Capital Structure

5 Pricing Structure
Section 1: Ratio Analysis
 Section 1

LIQUIDITY RATIOS
-Current Ratio-
Measures the ability of a company to pay its bills over the
short run and the margin of safety to meet everyday
cash needs.
 Liquidity: Current Ratio

• Current Ratio = Current Assets / Current Liabilities (expressed as Times)

• Cash balances and strong liquidity have been a hallmark of financial strength
• Current Liabilities which include accrued liabilities have doubled resulting in reduced
current ratio figures.
• Liquidity is strong (above 2.0), although deteriorated somewhat from the prior year and
is not as liquid as industry competitors. This could become a weakness if not corrected.
 Section 1

LEVERAGE RATIOS
-Debt-to-Equity Ratio-
Resources provided by creditors and owners
Leverage: Debt-to-Equity Ratio

•Debt to Equity = Total Debt / Total Equity (expressed as a percentage)

•Result of increased liabilities (payable and accruals) but not interest
bearing debt.
•32% is still a very low ratio and continues to show a very strong
financial position.
 Section 1

ACTIVITY RATIOS
-Inventory Turnover Ratio-
Measure of a co’s cost of goods sold divided by its inventory

-Avg. Collection Period Ratio-

Measures how fast the company collects on its sales
Activity: Inventory Turnover Ratio

• Inventory Turnover = Sales/ Inventory (expressed in Times)

• The higher the ratio is, the more efficiently the inventory is managed
• Management has stated that their channel inventory is in good shape.
• Lower turnover may be result of a rapidly expanding product line and
should be watched carefully.
•Industry competition is doing a better job of managing inventory.
Activity: Average Collection Period Ratio

• Average Collection = Receivables / Sales per day (expressed as days)

• Measures how fast the company collects on their sales
• Sales were flat year over year but went down from ‘08-’09 and receivable
balances have increased resulting in an increased average collection period.
 Section 1
PROFITABILITY RATIOS
-Gross Margin Ratio-
Measured as gross margin (sales-COGS) divided by revenue
-Profit Margin Ratio-
Measured as net income divided by sales
-Return on Equity Ratio-
Measured as net income divided by total equity
-Earnings per Share Ratio-
Measured as dividing net income by shares outstanding
-Price to Earnings Ratio-
Measure of a company’s price per share divided by its earnings
per share
Profitability: Gross Margin Ratio

•Gross Margin Ratio = Gross Margin / Revenue (expressed as a percentage)

•The company has a stated long term gross margin target in the 50-52%
range which it is achieving.
•Margins have been enhanced by licensing revenue resulting from
Qualcomm’s litigation settlement (added 4%)
Profitability: Profit Margin Ratio

•Profit Margin = Net Income / Sales (expressed as a percentage)

•Amount of net income per $1 sales is decreasing.
• Result of increasing litigation expenses & continuing heavy R&D
expenditures & a new $50M charitable contribution figure.
•The co is returning to a much more satisfactory profit rate in the
projections b/c of increased profits & no new negative surprises.
Profitability: Return on Equity Ratio

•Return on Equity = Net Income / Total Equity (expressed as a percentage)

•Measure how the shareholders did on their investments
•From ‘06-’07, change largely due to increased R&D expenditures of $200M.
•From ‘08-’09, change largely due to a slippage of total revenue by $200M.
•Net Income improved during the projection period b/c it assumed a modest
revenue of 2% plus the new project ($85M) resulting in increased profits & no
new negative expenses.
Profitability: Earnings per Share Ratio

•Earnings per Share = Net Income / Shares Outstanding (expressed in

dollars)
•From ‘06-’07, change largely due to increased R&D expenditures of $200M.
•From ‘08-’09, change largely due to a slippage of total revenue by $200M.
•The co. helped themselves by doing share repurchases starting in 2007.
 Research and Development

•New product development is a key strength/differentiator of Broadcom’s

according to analyst’s estimates.
•Ratio based on expenses divided by revenues.
•R&D expenses are expected to remain flat over the projected period in so far
as dollars spent & are projected to stay well about 30% of revenue.
Financial Strengths/Weaknesses
Strengths:
 Liquidity is strong (current ratio of 2.5 in ‘09).
 Leverage ratio (debt-to-equity ratio of 32% in ‘09) is low as Broadcom
has no interest bearing debt.
 Gross Margin of 51% in ‘09 , achieving their long-term GM target &
margins have been recently enhanced by 4% from recent settlement
with Qualcomm.
 R&D expenditures (32% of revenue for ‘09), resulting in product
innovation.
Weaknesses:
 Inventory turnover (12 times/year in ‘09) is high because of rapidly
expanding product line.
 Average collection period (41 days in ‘09) has deteriorated from prior
year due to receivable increasing & revenues decreasing.
 All profitability measures are weak and deteriorated over the last four
years due to increased R&D expenditures & litigation related expenses
& most recently a decline in revenue.
 New Ratio Implications
Strengths:
 Liquidity continues to remain strong (current ratio builds to 3.06 in 2012).
 Leverage ratio (debt-to-equity ratio remains in the 30% range for the
projection period.
 Gross Margin increases to 53%, slightly above management target and
comparable to competitors.
 R&D expenditures remain above 30% for the projection period resulting in
continuing new product innovation. Base revenue projections are kept at a
very conservative 2% growth.
 Profitability measures are improving (profit margin of 1.27% in 2009
improves to 5.27% in 2012). R&D expenditures & litigation related
expenses have been kept at 2009 levels over the projection period with no
new unusual items expected.
Weaknesses:
 Inventory turnover (12 times/year) has been kept constant in the projection
period and still a weakness relative to competitors.
 Average collection period (41 days) has been kept constant and at a level
higher than competitors.
 Stock Price Chart

Like the recession we are in today, every bubble ends in a bust.

Open price=$8.92/share; At low: $7.90; at high: $166.24
As of Mar 3=$31.20
Day's Range: $31.15 - 32.06
52wk Range: $15.55 - 32.49
Yield=1.00%; Dividend=$0.08/qtr, $0.32 year
Profitability: Price-to-Earnings Ratio

•Price to Earnings Ratio = Price per share / Earnings per Share (expressed in times)
•Represents investors expectations of a company’s future income.
•2009 is high relative to its earnings because the market and the investors of
Broadcom believe in a bright earnings future for this company.
•Result: EPS declined significantly in 08-09 because of the drop off in revenue &
litigation settlement costs & a high stock price.
Section 2:
Capital Budgeting
 Capital Budgeting
State of the art Bluetooth earpiece
Broaccom holds patents for Bluetooth
technology as well as software utilized in
devices with Bluetooth capabilities

Difficulty in generating numbers for one

piece of hardware or software we bundled
the two and chose to create a more
advanced Bluetooth earpiece

Distinguishing Broadcom’s product from

competitors
Voice to text capabilities
Reduced static and connectivity issues
 Capital Budgeting – Base Model
Initial investment of $30,000,000

Salvage of 20% after 6 years - $6,000,000

Initial net working capital of $500,000 then 2% of revenue for each

successive year

$85 per unit, increase 3% annually

Cost $25, increase 3% annually

1,000,000 units first year with 5% annual increase

Growth maintained by continual passing of laws forbidding cell
phone usage while operating vehicles

CoC 15%

NPV – $152,539,536 IRR – 130% Payback – 1.67 years

 Capital Budgeting - Best Case

Increased demand - 15% annual increase in unit sales

Unit price $110

60% increase in NPV - $244,245,199

IRR 156%

Payback 1.38 years

 Capital Budgeting – Worst Case

Lack of demand sales decrease 10% annually

Unit price decreased to $70

Cost increased to $30 per unit

NPV - $87,957,375, 42% decrease

IRR – 97.3%

Payback – 4.24 years

 Capital Budgeting – Tax Rate

Potential tax rate change 34% to 38%

Decreases net income

NPV - $142,464,195, 7% decrease

IRR – 133%

Payback – 3.63 years

 Capital Budgeting - CoC

Change from 15% to 10%

NPV - $183,763,020, 20.5% decrease

IRR – 130%

Payback – 3.67 years

WACC – 35.55%
NPV - $75,916,331
IRR – unaffected
Payback - unaffected
Section 3:
Planning Process
 Planning Process

•SWOT: Strength, Weaknesses, Opportunities, Threats

•SLRP: Strategic Long Range Plan: As a company….

•Where are we?
•Where would we like to go?
•How will we get there?

•Pro- Formas: 3 year financial projections

•Used to develop an appropriate capital structure and financing
strategy.

•Annual Plan: States what’s going to happen over a year period.

-Comparing budgets to the annual plan
Planning Cycle
Planning Cycle- Pro Formas Income Statement
Planning Cycle- Pro Formas Balance Sheet
Planning Cycle- Annual Plan By Quarter
Income Statement
Planning Cycle- Annual Plan By Quarter
Balance Sheet
Section 4:
Capital Structure
 Capital Structure

 Determine the WACC (Weighted Average

Cost of Capital)

 Examine existing capital structure and

determine the ideal mixture of debt and
equity to support the investment project.

 Incorporate an indenture that details the

terms of the agreement between Broadcom,
Inc. and its bondholders.
 Capital Structure

 Determine the WACC (Weighted Average

Cost of Capital)

 Examine existing capital structure and

determine the ideal mixture of debt and
equity to support the investment project.

 Incorporate an indenture that details the

terms of the agreement between Broadcom,
Inc. and its bondholders.
 Capital Structure

 WACC= R(E)*E/V +R(D) * D/V * (1-Tc)

 Market Value of Equity (E):
 #outstanding shares/Price of stock
 = $16,563,559.95

 Cost of Equity: Er=Rf + (Rm-Rf) x β

 Rf = 3.6, Rm = 23.5, Rm-Rf = 19.90, Beta
Coefficient 1.31
 Er = 29.67%
 Cost of Debt (D): According to the most
recent 10-k (ending Dec-31-2009) Broadcom
has no (0) interest bearing debt.
 Capital Structure

 Calculating WACC:
 V: market value of debt + market value of equity
= $16,563,559.95
 E/V = 1.00 D/V = 0
 Corporate Tax Rate= 34%

 Therefore
WACC= R(E)*E/V +R(D) * D/V * (1-Tc)
= 29.67%
 Capital Structure

Current Capital Structure:

Values Current Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5 Scenario 6

R(e): 29.67% 29.67% 29.67% 29.67% 29.67% 29.67% 29.67%

E/V: 1 0.75 0.50 0.3333 0.25 0.10 0.00

D: 0 0 0 0 0 0 0

D/V: 0 0.25 0.50 0.6667 0.75 0.90 1.00

1-Tc: 0.66 0.66 0.66 0.66 0.66 0.66 0.66

WACC: 29.67% 22.25% 14.84% 9.89% 7.42% 2.97% 0.00%

 Capital Structure

 We DO NOT recommend Broadcom floating an

offering for the size of $30M due to its large cash
reserves.
 High debt can lead to bankruptcy.
 If Broadcom were to issue bonds for the
investment we have illustrated the WACC impact.
 Due to Broadcom’s good ability to pay back any
money barrowed they will receive good credit
ratings allowing for a full offering.
 Capital Structure

Option 2 use of debt:

Values Current Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5 Scenario 6

R(e): 29.67% 29.67% 29.67% 29.67% 29.67% 29.67% 29.67%

E/V: 99.80 0.75 0.50 0.3333 0.25 0.10 0.00

D: 5.57% 5.57% 5.57% 5.57% 5.57% 5.57% 5.57%

D/V: 0.20 0.25 0.50 0.6667 0.75 0.90 1.00

1-Tc: 0.66 0.66 0.66 0.66 0.66 0.66 0.66

WACC: 2961.80% 23.17% 16.67% 12.34% 10.17% 6.28% 3.68%

 Capital Structure

 Financing of our Project:

Option 2- Scenario #6

 Cost of investment = $30,000,000

 Equity: 0% Bonds:100%
$0 $30,000,000
30,000 bonds issued
 Capital Structure
Indenture
Term Explanation
# of Bonds Issued: 30,000 Bonds Issued 30,000
Amount of Issue: $30,000,000 The company has issued $30,000,00 worth of bonds.
Date of issue: 6/1/2010 The bonds will be sold on 6/1/2010 and will mature on
Maturity: 6/1/2030 6/1/2030. Interest is payable annually on June 1 of each
Face value: $1,000 year to the person in whose name the bond is registered
Coupon rate: 5.57% at close of business on May 15.
Annual coupon: $55.70 Each bondholder will receive $55.70 per bond per year. (5.57%
Offer price: $995.43
Coupon payment dates: 1-Jun Bonds not secured by specific assets.
Security: None
Sinking fund: None
Call provision: At any time/ do not have a "deferred call"
Call price: The bonds have a "make-whole" call feature.
Rating: S&P AA Treasury rate Plus 0.15%
Moody's A The bonds are in the top grade of investment.
Negative Covenants include:
* The firm cannot pledge any assets to other lenders
* The firm cannot sell or lease any major assets
without approval of lender
Positive Covenants include:
*The company must periodically furnish audited
financial statements to lender.
* The firm must maintain any collateral or security in
good condition.
Section 5:
Pricing Structure
 Assumptions

 Assumptions
 Capacity to Purchase Goods
 Special Arrangements
 Operational Flow
 Terms and Conditions (T’s & C’s)
 Payment Terms
 Price Protection
 Third Parties
 Termination, Sunk Cost, Wind Down
 Cost Drivers
2010 %

Sales $ 36,651,500 100.00%

Cost/ Goods Sold (COGS) 28,596,796 78.02%
Gross Profit $ 8,054,704 21.98%

Operating Expenses
Salary (Office & Overhead) $ 2,850,000 7.78%
Payroll (Taxes etc.) 570,000 1.56%
Outside Services 28,750 0.08%
Supplies (Office Operation) 37,000 0.10%
Repairs/ Maintenance 53,000 0.14%
Advertising 125,000 0.34%
Vehicle, Delivery and Travel 85,010 0.23%
Accounting and Legal 127,500 0.35%
Building Lease 156,231 0.43%
Telephone/Internet/IT Service 275,000 0.75%
Utilities 79,000 0.22%
Insurance 354,891 0.97%
License Fees 200,000 0.55%
Transaction Fees (POS) 25,000 0.07%
Depreciation 158,974 0.43%
Litigation 733,030 2.00%
Professional Services 176,000 0.48%
Equipment Lease 743,645 2.03%
Armoured Car Contracts 175,356 0.48%
Service Continuation (RMA) 458,612 1.25%
Vehicle Lease 131,520 0.36%
Consulting Services 51,000 0.14%
Total Expenses $ 7,594,519 20.72%

Net Profit 460,185

 Discount Calculator
Base Price Discounted Price
Sale Price $ 85.00
Initial markup 100%
List Price $ 170.00

Units Request Order 200,000 200,000

Cash Discount 25%

Savings per base unit $ 42.50

Total Price $ 127.50

Lump sum total $ 34,000,000 $ 25,500,000

Tax 8%

Shipping and handling $ 25,000 $ 25,000

Total $ 36,651,500 $ 27,494,875

Total Savings $ 9,156,625

Shipping & Handling per Units 1 $ 13.99 Minimum Order

10 $ 32.99
100 $ 189.99
1000 $ 643.99
10000 $ 1,250.00 Maximum Order

If Payment In Full Within 10 Days $ 27,494,875

If Payment In Full Within 30 Days $ 36,651,500
If Payment Greater Than 60 Days $ 2,565,605
7%
 Termination Cost

• Cost Items
• Parts
• Assets
• One-Time Costs
• Third Party Contracts
• Wind Down Services
Samsung Termination Cost
Samsung-United States

Termination Costs

Cost Items: Percent From Operating Expenses

Salary (Office & Overhead) 221,614.40 0.0778
Payroll (Taxes etc.) 8,864.58 0.0156
Outside Services 22.55 0.0008
Supplies (Office Operation) 37.35 0.0010
Repairs/ Maintenance 76.64 0.0014
Advertising 426.31 0.0034
Vehicle, Delivery and Travel 197.17 0.0023
Accounting and Legal 443.54 0.0035
Building Lease 665.95 0.0043
Telephone/Internet/IT Service 2,063.35 0.0075
Utilities 170.28 0.0022
Insurance 3,436.36 0.0097
License Fees 1,091.36 0.0055
Depreciation 689.54 0.0043
Parts:
Depreciation 689.54 0.0043
Assests:
Unearned Discount 4,578,312.50 0.1500
Equipment Lease 15,088.27 0.0203
One-time Costs:
Transaction Fees (POS) 17.05 0.0007
Professional Services 845.15 0.0048

Third Party Contracts:

Vehicle Lease 471.95 0.0036
Armoured Car Contracts 838.98 0.0048
Litigation 14,660.60 0.0200
Consulting Services 70.97 0.0014
Wind Down Services:
Service Continuation (RMA) 5,738.51 0.01
Professional Services 273,801.00
Consulting to New Supplier 102,549.00

Risk @ 20% $ 18,325,750

Grand Total of Cost $ 23,558,633

 Risk Exposure

Pricing Structure Base Price

Unit Forecast 200,000
Sales price $ 34,000,000

Unearned Discount $ 9,156,625 Cash Discount 25%

Tax $ 2,831,328

Total Units Ordered 200,000

Total Unit Price per Order $ 36,651,500
Percent of Loss (Units) 0.50
Total Loss $ 18,325,750
Total Gross Income $ 18,325,750
Loss on Discount $ 9,156,625
Net Income $ 9,169,125
 Sources

 Researched Information from:

-10K/10Q Broadcom
-10K/10Q Texas Instruments & Qualcomm
(Industry Averages)
-Forbes
-Wall Street Journal
-Yahoo Finance
-ValueLine /Bloomberg, Thompson Financial
www.themegallery.com