Part 1and Part 2

FIN 534

Student’s name:

Professor’s name:

Date:
 Part 1

Selecting Stock

The stock that was selected is Alphabet Inc. (Google). Google is among the leading

global technology companies that provide several services such as search engines, software

development, cloud computing, android TV, Android operating system, maps, and emails. The

company also owns several subsidiaries, such as Youtube that enables it to increase its internet

marketing revenue. The stock was selected due to economic, financial, and characteristics of the

client.

The main criteria that were utilized to select the stock are economic conditions and the

strong financial performance of the company. According to Benzinga Editorial, when selecting

stocks, one should choose the ones that are companies with well-established brands, long-term

increase in shareholders wealth, and mid-cap or large-cap (1). Google has several recognized

brands such as the Android operating system, Chrome, Youtube, Google Maps, and Gmail.

Moreover, Google has significantly increased shareholders' wealth as the share prices have

increased from approximately $758 in 2016 to 2731 in 2021 (2). Furthermore, financial analysts

estimate that the stock is undervalued and estimate that the stock has a fair value of

approximately $3200 (3). Additionally, Google is a large-cap company with a market

capitalization of $ 1.813 trillion. The revenue of the company has also been increasing

significantly over the years. For instance, according to Mogharabi, in the fiscal year ended 2021,

the company's revenue increased by 62% to $61.9 billion, mainly due to the increase in the

internet advertisement on its popular brands such as Youtube that has approximately $1.5 billion

daily views (3). As the number of clients who use Google products and services increases, the

client could realize high capital gain even if the company does not pay dividends.
Client’s Profile

The client is a 38-year old CEO of a restaurant chain in the US. She is considering

investing in the stock market approximately $500,000. The amount is insignificant as she

recently received an inheritance of $10,000,000 from her grandfather, and she earns $900,000 a

year. She has created several small startups such as cinemas and grocery stores, which, although

profitable, were strenuous to maintain. Therefore, she chooses to invest in the stock market as the

investment will not take much of her efforts and time.

The stock is ideal for the client due to several reasons. First, the client is a risk-taker, as

indicated by her entrepreneurial nature. Additionally, Google has high volatility as it has a beta

1, which indicates that investing in the company could be risky (4). Moreover, the client does not

require a company that pays dividends as her goal is to increase her capital gain in the long term

(5). The value of Google's shares has increased by more than 300% over the last five years.

Furthermore, most of its brands, such as Youtube and Maps, are likely to experience a growth in

demand as the utilization of the internet and the internet of things increases (2). Therefore,

although the price of the stock may be volatile, it is likely to increase in the long term.

Part 2

Financial Ratios

Ratio analysis is an effective way of determining the financial health of a company. Several

types of ratio analysis exist, including profitability, liquidity, activity, and leverage ratios. Since

the growth of the company is dependent on its profitability, the client should consider several

profitability ratios such as return on assets and net margin ratios. The return on assets of the

company has decreased as it was 14.29%, 13.50%, and 13.52% in 2018, 2019, and 2020,

respectively. On the other hand, the net margin ratio was 22.46%, 21.22%, and 22.06% in 2018,
2019, and 2020, respectively. The financial leverage of the company has also significantly

improved from 1.31 in 2018 and 1.37 in 2019 to 1.44 in 2020. On the other hand, the current

ratio of the company also improved from 3.92 in 2018 to 3.15 in 2020. Finally, the debt/Equity

ratio was 0.02, 0.07 and 0.11, in 2018, 2019, and 2020 respectively.

Based on the financial ratios, the company is healthy. The primary reason for this is that the net

margin of the company is approximately 22%, which indicates that more than a fifth of its

revenues are profits. The return on assets ratio was also high because, in 2020, it was 13.52%

that indicates that the company uses its assets effectively to generate revenue. The company also

has high liquidity of approximately 3, which suggests that it is not likely to run out of current

assets to pay its short-term obligations. Although the recommended current ratio is 2:1 to avoid

having too many current assets that could be invested to increase the revenue, the ratio has

improved over the three years. Finally, even if some of the ratios have slightly deteriorated in

2020, it was due to the COVID-19 pandemic that reduced the need for businesses, especially in

the hospitality sector, to advertise their products. Therefore, the financial health of the company

is likely to improve as the global economy recovers.

Risk Assessment and Mitigation

Investing in the stock market is associated with several risks, most of which are not related to the

financial performance of an organization. For example, market risk may be caused by the decline

in the valuation of the company's assets and profitability or the general decrease in the general

share market trends. The risk is considerably low because Google is expected to remain

profitable in the long term, and the client can wait to sell the shares where the stock market is

performing highly. The client also faces the risk of the values of shares reducing due to Google

issuing a substantial number of new shares. However, this risk is considerably low due to two
primary reasons. First, Google has a low debt/asset ratio; therefore, it is more likely to incur

long-term debt than raise additional capital by issuing capital. Moreover, the company is more

likely to issue a share split, which even though it would decrease the values of shares, the client

would have more shares (2). Finally, inflation risk may occur where the present value of future

capital gains will be lower than the present value of the amount invested. The risk can be

mitigated by diversifying stock by selecting other shares that pay high and frequent dividends.

Overall, investing in Google’s stock is considerably low.

The client may also employ additional strategies to mitigate her risk. For instance, since she does

not have experience training in the stock market, she should have an investment advisor who

may update her on how her shares are performing and when she should sell them to maximize

her capital gain. Moreover, the client should have an investment plan, which details when the

client may desire to liquidate the shares without haste to minimize the liquidity risk.

Recommendations

It is highly recommended that the client should Invest in Google due to several reasons. First, the

value of Google's shares has increased substantially over the years and is expected to keep on

growing due to the increase in profitability. Therefore, if the trend continues, which is likely to,

the client may have high capital gains. Moreover, the assets of the company are substantially

undervalued because financial analysts believe that the fair value of the share should be higher

by approximately $500 (2). Consequently, it is highly probable that the share prices will

appreciate. Therefore, since the main goal of the client is to maximize her capital gain, investing

in the stock is recommended.

The level of risk associated with Alphabet's stock is considerably low. The primary reason for

this is that Google has several strong brands such as Youtube and Android operating systems that
are expected to keep on generating revenue for the organization (2). Therefore, the client should

invest in the stock because financial experts recommend investing in companies with strong

brands because they are more stable and less risky. Moreover, it is unlikely that competitors

could compel google to exit the market due to increased competition due to product portfolio

diversification, economies of scale, and large capitalization. The main risks that may materialize

are only likely to affect the price of shares in the short-term adversely. Therefore, the client

should invest in Google's stock due to the relatively low risk.

Literature Review

It is important to understand the definition of key terms such as investors, investor's purpose,

firm's value. According to Sondakh, an investor could be defined as an individual or an

institution that commits its funds in a specific undertaking for a particular period to make profits

(5). On the other hand, the aim of investors refers to the objectives of investors, which may

include obtaining better rewards for assets earned, reducing infraction pressure, reducing taxes,

and get a decent life in the future (5). The firm's value could be defined as the fair value of the

company that is estimated by its value of assets and is reflected by its shares. Similarly,

Manikandan identifies similar factors that affect investors' purposes, such as perceived return on

investment and risk (6). The researcher also claimed that for an investment opportunity to be

perfect, it should meet all the needs of the investor. In contrast, Sivaramakrishnan examines the

factors that influence the intention and the actual investment in the stock market. He discovered

that the perception of a regulator, risk avoidance, and hassle factors had a negative impact on the

intention to invest in equity markets (7). Moreover, the financial wellbeing of an investor had a

negative impact on intention and a positive relationship with investors actually investing in the

stock market.
Researchers have examined the impact that affects the return on stocks. Angelia and her

colleague examined the factors that influenced the dividend policy of a given company (8). After

conducting multiple linear analyses on data obtained from food and marketing companies listed

in the Indonesia Stock Exchange in 2015-2017 (8). They found out that profitability and leases

affected the dividend policy of a firm. On the other hand, Martina and his peers examined the

factors that affected the return on a stock. They discovered that the quick ratio and debt to equity

ratio had a negative but not statistically significant effect on stock returns (9). In contrast,

earnings per share and price to book value had a positive and significant effect on the return on

stocks (9).
 Sources

1. Benzinga Editorial, 2012, Six Rules To Follow When Picking Stocks. Forbes.

https://www.forbes.com/sites/benzingainsights/2012/06/15/six-rules-to-follow-when-

picking-stocks/#368881525a2e.

2. Ali Mogharabi, 2021, Alphabet’s Google Advertising And Cloud Performed

Exceptionally Well In Q2; Raising FVE To $3,200. Morningstar.Com.

https://www.morningstar.com/stocks/xnas/goog/quote.

3. Yahoo Finance. 2021, Alphabet Inc. (GOOG), Finance.Yahoo.Com.

https://finance.yahoo.com/quote/GOOG/?

guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer

_sig=AQAAADQ6w6g5SIP9-7_BfSq1jKJdhrR1ma4AwwQLYhZt8u1CsniE5-

jqaigAa3wD2JcgxeeXZVfGAGHm5jc8rZIQoXdQ6Wpfwwv7XtyFj6fYCIMWDpF4gvL

hsgCuTRmnj3ZTZeBOrnp5qEQraw-faDXel59S2U8jN-mNIN_EU3OinMql.

4. Domago Karačić, 2014, Research of investment risk using Beta coefficient.

Interdisciplinary Management Research 10: 521-530.

5. Renly Sondakh,. "The effect of dividend policy, liquidity, profitability and firm size on

firm value in financial service sector industries listed in Indonesia stock exchange 2015-

2018 period." Accountability 8.2 (2019): 91-101.

6. A. Manikandan, A., 2017, perception of investors towards the investment pattern on

different investment avenues-a review. Journal of Internet Banking and Commerce,

22(S7), 1.

7. Sreeram Sivaramakrishnan, 2017, attitudinal factors, financial literacy, and stock market

participation. International journal of bank marketing.

8. Nia Angelia, 2020, the Analysis of Factors Affecting Dividend Policy in Food and

Beverage Sector Manufacturing Companies Listed in Indonesia Stock Exchange in 2015-

2017. Budapest International Research and Critics Institute-Journal (BIRCI-Journal),

902-910.

9. Sri Martina, 2019, the Effect Of Quick Ratio, Debt To Equity Ratio, Earning Per Share,

Price To Book Value And Return On Equity On Stock Return With Money Supply As

Moderated Variables (Study of Banking Companies Listed on Indonesia Stock Exchange

Period 2008-2017). International Journal of Public Budgeting, Accounting and Finance,

2(3), 1-10.