Using Actual Financial Accounting Information To Conduct Financial Ratio Analysis: The Case Of Motorola

In this paper, we demonstrate the use of actual financial data for financial ratio analysis.  We construct a financial and industry analysis for Motorola Corporation.  The objective is to show students exactly how to compute ratios for an actual company.  This paper demonstrates the difficulties in applying the principles of financial ratio analysis when the data are not homogeneous, as is the case in textbook examples.  We use Motorola as an example because the firm has several segments, two of which account for the majority of sales and represent two industries (semi-conductor and communications) that have different characteristics.  The case illustrates the complexity of financial analysis

Computing the divisional cost of capital using the pure-play method

The cost of capital model is used to calculate the net present value (NPV) of projects within a multi-unit corporation but may provide incorrect answers for projects that have a level of risk that differs from the overall average risk level for the corporation. We demonstrate the use of the pure-play method for calculating the required rate of return for a division of a corporation that has risk characteristics that differ from the risk characteristics of the overall corporation. We apply this methodology to the Integrated Electronic Systems Segment (IESS) of the Motorola Corporation. We find that the IESS division cost of capital of is 9.3% rather than the 12.3% cost of capital for the corporation as a whole.