INTERMEDIATE ACCOUNTING II CLASS Paper #1 Instructions Completion instructions · Address all of the bullet points in the ‘Description and questions’ section below. · Limit the
Intermediate Accounting II
Veronica Lebron
Yanil Gonzalez
Paper 1
Michael Carniol
Automatic Data Processing, Inc. (ADP) and Bill.Com Holdings, Inc. (Bill.Com)
Veronica Lebron
Yanil Gonzalez
Professor Michael Carniol
03/03/2020
Automatic Data Processing, Inc. (ADP) and Bill.com Holdings, Inc. (Bill. com )
Companies’ Primary Product Offerings
Automatic Data processing, Inc (ADP) operates in two business segments, which includes employer services and professional employers' organization. In the employer service's segment, the company serves a variety of clients ranging from single employee's small businesses to a large enterprise offering a wide range of solutions such as strategic, cloud-based platform , and HRO solution (ADP. 2019). The solution offering by ADP addresses the client's needs through client payroll services, benefits administration, and talent management, HR management, workforce management, compliance services, insurance services, and retirement services.
Bill. Com Holding, Inc is a provider of cloud-based software that simplifies, digitizes, and automates complex back-office financial operations for a small and midsize business. Bill.com , through its artificial intelligence (AI), enabled commercial software to create a seamless connection between our customers, suppliers, and clients (Bill.com, 2019). Customers use the platform to generate and process invoices, streamline approval, send and receive payments, reconcile their books, and manage their cash. The products solution includes end to end connection; enable secure connection, visible and transparent, and AI-enabled platform.
ADP’s dividends and share repurchases
a).
According to the statement of consolidated stockholder equity, ADP paid a dividend of $1,338.8 million in 2019 , and per share, each shareholder investor received was $3.06 per share. The cash dividend paid to common shareholders was $1293.0.
b).
Shareholders received more cash via a dividend in the year ended 2019 due to the reverse repurchase agreement, and less cash was paid to share purchase. The stocks were less liquidated because more shares were repurchased, leading to a higher dividend per share. By the end of 2019, ADP had purchased 6.5 million shares at an average price of $143.02. The total value of repurchased stock in dollars was 929.63= (143.02× 6.5 million shares). The value reported in the statement of financial cash low shows the value of share repurchase was $937.7 in millions. The total outstanding share as per the statement of financial position is 434.6 million, while the repurchased stock during fiscal years 2019 was 6.5 million. Therefore the percentage of (6.5 ÷ 434.6) × 100% = 1.50%.
c).
Dividend
Dividend per share paid during the fiscal year 2019, is 3.06
Period= 70 yrs.
Discount rate per years = 3.5%
Present Value of the dividend = ((1.035^-70)-1) ÷ 0.035 × $3.06= $79.56 payment per dividend.
PROFFESOR EXAMPLE; Using the present value annuarity table
Compute the present value of these four payments as of today using a 2.2% discount rate.
Compute the annuity factor for 16 annual payments using a 2.2% discount rate.
Compute the payment amount for this “debt.”
Repurchase shares
Average price per share = $143.02
Period = 70yrs.
Discount rate per year = 3.5%
Present Value of the share repurchase = ((1.035^-70)-1) ÷ 0.035 × $143.02 = $3718.58
To total market value of share repurchase = $3718.58 × 6.5 = $24,170,000,000 while Market value of the voting and non-voting common equity is $56,967,135,373. The share repurchase would have the market value of $24,170.0 million as compared to $56,967.3
Bill. Com’s initial public offering
a).
Bill. Com initial public offering share issued was 9,823,529, with each share valued at $22.00. The total value of the initial public offering was $216,117,638. After public offering, the company had an outstanding common stock of 70,554,392 and 72,027,921 if the underwriter option purchases additional common stock. Before the public offering the company had outstanding common stock of (70,554,392 – 9,823,529) = 60,730,863 shares.
b).
Bill.com expects net proceeds of common stock in the offering, which is approximately $195.8 million or $226.0 million in case underwriters exercise their option to purchase additional shares. The proceeds would be used as working capital and other general corporate purposes. The corporate purposes include research and development, sales and marketing, general and administrative matters, and capital expenditures (Bill.com, 2019). The portion of the proceeds would be used for acquisition or investment in technology solutions.
b).
Average price per share = $22
Period = 70yrs.
Discount rate per year = 3.5%
Present Value of the share repurchase = ((1.035^-70)-1) ÷ 0.035 × $22 = $572
The shareholders would be compensated $572 each year for their money invested by considering the future value of their investment.
ADP’s most substantial liability is its “Client funds obligations
a).
ADP's most substantial obligation is the client fund obligation. ADP impound funds from the client before the date the client is obligated to make payments to their employees for payroll or to the federal, state, and local tax authorities (ADP. 2019). The liability is created when ADP assumes responsibility to remit funds to satisfy client payroll and tax payments obligation. If the company does not pay the debt, it is required to return the impounded fund to the clients. This liability is payable within one year , as disclosed in the statement of financial position.
b).
The customer held obligations are invested in highly liquid, investment-grade marketable securities, and through that, the company gains through interest revenue, transaction fees, and other income related to market securities.
c).
ADP faces liquidity risk, especially when they are not able to liquidate on the available securities to pay customers on time to satisfy client obligations. ADP addresses this risk by investing in safety principal, liquidity, and diversification (ADP. 2019). ADP also faces interest primarily to the securities that mature, and the proceeds are reinvested. Credit risk is incurred in connection with available for sale securities, especially when borrowers are not able to meet securities terms. ADP addresses the risk by investing in investment-grade securities and U.S government securities.
Bill.com’s most substantia liability is its “Customer fund deposits.”
a)
Customer held funds are the funds held by another company until when the services and goods are delivered in exchange for the funds. In this case, Bill. Com owes services by the bank or customer that facilitated the deposit for the Bil.com to pay on its behalf after the services are delivered. Bill.com is under obligation to meet customer needs is in a liability agreement, and it only pays the liability by paying the customer funds when due.
b).
Bill.com benefits through investing the customer held deposit in market securities and gain interest in funds held deposit reported as revenue and revenue generated through transaction fee while facilitating the payments to the customer.
c).
Bill.com's risk associated with customer held deposits includes liquid risk, interest risk, credit risk, and foreign currency risk. This liability consists of the interest rate and liquidity risk. This is because customer held deposits are held in non-interest and interest-bearing banks deposit, money market funds, certificates of deposit, commercial papers, and other corporate notes and U.S securities (Bill.com, 2019). Investment on a fixed rate and floating rate interest carry a degree of interest rate risk. Credit risk is incurred when borrowers are unable to meet the term of the securities. The company reduces credit risk securities by investing in short-term marketable securities and limiting commercial papers.
6).
The two companies face liquidity and currency risk; therefore. they should consider their mechanism of investments to lower the current cost of transferring payment. For example, the Euro is more stable than U.S dollars; thus, hedging their currency with the Euro will help the two companies avoid foreign exchange costs. The company should consider investing in short-term securities to avoid more credit and interest risk effects. Through that, the company will be able to improve its revenue and pay a better dividend to shareholders.
References
Bill.com Holdings, Inc. (2019, Dec 12). Form 424B4, Prospectus [Rule 424(b) (4)]: Retrieved from https://sec.report/Document/0001193125-19-312012/
Automatic Data Processing, Inc. (2019, June 30). FORM 10-K, annual report. [ADP+10-K+2019.pdf]: Retrieved from https://www.sec.gov/Archives/edgar/data/8670/000000867019000021/q4fy1910k.htm
