The paper “ Investment Banking - Financing and Acquisition” is a fascinating variant of the assignment on finance & accounting. Freeport-McMoRan Copper and Gold Inc. (FCX) in 2006 were able to report historic growth in terms of financial performance (FCX, 2006). To start with, the prices of its core commodities soared with gold going for $600 per ounce and copper trading at $3.00 per pound (ibid). The market fundamentals for both metals continue to improve. Secondly, the good performance in prices boosted the company’ s financial results to record net income of $1.4 billion, revenues of $5.8 billion, operating income of $2.9 billion, and operating cash flows of $1.9 billion.
Thirdly, the company set a good number of records in its Grasberg operations which also reflected good performance (Bureau of Mines, 2009). Moreover, the company was able to pay its shareholders with dividends of more than $1billion in the year. In the nutshell, the company was liquid i. e. it had more cash ($907 million) compared to its debt of $680 million. The long-term growth opportunities and strong commodity prices as witnessed in 2006 gave the company a reasonable reason to pursue the acquisition of Phelps Dodge. FCX acquired Phelps Dodge for $26billion in cash and stock.
This share purchase saw FCX take on all the assets and liabilities of the later. To understand the attractiveness of Phelps Dodge to FCX, it will be crucial to look at liquidity, leverage, and profitability ratios of the company. Under liquidity ratio is the acid test ratio which when computed= current assets/current liabilities. In 2005, the acid test ratio was 4070.7/1609.3=2.53; and in 2006, the acid test ratio was 7600.9/3262.9=2.33.These ratios were relatively higher as preferable ratios are those slightly higher than 1.0.
Since the ratios were above 2.0, it implies that the company was underutilizing its capital and required long-term investment in innovation, international marketing, and product development (Value Line, 2007). In terms of profitability ratios, Return on Equity (ROE) is used to determine the performance of shareholder investment. ROE=Shareholder Equity/Net profits before tax. In 2005, the ROE = 5601.6/1786.1=4.668, while in 2006, the ROE 7690.4/1915.7=4.01. The ratios are high but decreasing meaning that shareholders are beginning to sense a reduction in their earnings.
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