Profit and Shareholder Wealth Comparison Paper

Profit and Shareholder Wealth Comparison Paper

Managerial Finance I/FIN475

Profit and Shareholder Wealth Comparison Paper

Two conglomerates General Electric Corporation and Tyco International, both are conglomerates because they have many diversified business lines. General Electric decided to pursue a conservative growth strategy they are focusing on being the best or second in each industry where it competes. Tyco decided to pursued very aggressive sales and earnings growth strategy through rapid, multiple acquisitions. In this paper, will compare the profit and shareholder wealth of the two conglomerates General Electric Corporation and Tyco International

The first thing need done was to go to Moneycentral.msn.com and figure out the following information:

1) Common shareholders' equity (total equity less any preferred stock equity)

Financial data in U.S. Dollars

Values in Millions (except for per share items)

General Electric 112,314.0

Tyco International 35,387.0

2) Market Capitalization (total common stock shares outstanding times latest stock price)

General Electric Total Common Shares Outstanding 10,277.37

Total Preferred Shares Outstanding 0.0

Tyco International Total Common Shares Outstanding 498.03

Total Preferred Shares Outstanding 0.0

3) Net profit margins for each company for the past 5 years.

Profit Margins % Company Industry S&P500

General Electric 5Yr Net Profit Margin

(5-Year Avg.) 12.3 9.3 11.9

Tyco International 5Yr Net Profit Margin

(5-Year Avg.) 4.3 9.3 11.9

From that information, I had to divide each company's market capitalization by the companies' shareholders' equity. Which, was General Electric 10.93 and Tyco International was 71.05. By doing this I came up with market-to-book ratio provides one measure of shareholder wealth created by each company.

Then based on the market-to-book ratios, I had to decided, which one of the company's strategy provides the greater shareholder wealth creation. From the figures I came up with I decided that Tyco International had the greater shareholder wealth, because as the figures show Tyco International was 71.05 compared to General Electric