fannie mae annual report

Nicholas Gnan: Spring, Outhouse

Note to the user:

This Word document provides a structured template for preparing your responses to the

questions in the annual report project. If you did not purchase the workbook you are not permitted

to use this template.

INTRODUCTION TO THE CORPORATE ANNUAL REPORT:

A Business Application with IFRS Content

4th edition

Copyright 2015 by Applied Accounting Analytics. All rights reserved. Reproduction or translation of this book beyond that permitted by the applicable copyright law without Applied Accounting Analytics’ permission is prohibited.

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To be completed by the student and submitted with the completed annual report project according to your instructor’s requirements.

Complete the following before you submit your assignment. This step is required to

validate your compliance with sections 107 or 108 of the 1976 United States Copyright

Act.

1. Remove the front cover of the workbook and identify:

Student Name: Nicholas Gnan

Term: Spring

Selected Company: 8

Instructor: Outhouse

2. Print out your completed electronic template.

3. Attach the following:

This front cover (completed) Electronic solution template Printed reports as specified by the instructions that immediately follow

Chapter 1: Select a Company and Gather Documents – Question 1

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CHAPTER 1 - INTRODUCTIONSelect a Company and Gather DocumentsChapter 1: Select a Company and Gather Documents—Question 1

Identify with an “X” the primary source of data for this project.

Example for The Home Depot 2013 Annual Report: http://www.homedepotar.com/

Click here to enter

text.Annual report to shareholders

Click here to enter

text.Annual report to shareholders with a letter from Chief Executive Officer and SEC Form 10-K as part of the annual report to shareholders.

X SEC Form 10-K and the company website.

Fill in the page numbers from the annual report where the following are located.

Required information for this workbook project.

Page No.

Required information for this workbook project.

Page No.

Financial Highlights Pg. 69 Chief Executive Officer Letter Pg. 2

Management’s Discussion and Analysis (MD&A) Pg. 71 Notes to Financial Statements Pg. F7

Income StatementPg. F4

Report of Independent Accountants or Independent

Auditors’ Report

Pg. 153

Balance Sheet Pg. F3 Five- or Ten-Year Summary of Operating Results

Pg. F37

Statement of Change in Stockholder’s Equity Pg. F6

Management’s Report (Responsibility) on Internal

Control over Financial Reporting

Pg. 150

Statement of Cash Flows Pg. F4 Investor and Company Information or Shareholder

Information

Pg. 67

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http://www.homedepotar.com/


Identify Why You Selected This CompanyChapter 1: Identify Why You Selected This Company – Question 1

A) What is/are your motivation(s) or interest(s) in selecting this company?[See above for examples.]

B) What question(s) are you seeking to answer?[For example, is the company profitable? Can the company change and develop new products and services to be competitive? Would I invest in this company? Will the company provide rewarding career opportunities? In chapter 5 you will have pulled together the financial and nonfinancial information to answer these question(s).]

A)

I am interested in the current state of the housing market so Fannie Mae being a major player in that market caught my interest.

B)

I am looking to see if there is a correlation between the well-being of Fannie Mae and the housing market.

Company and Annual Report EssentialsChapter 1: Company and Annual Report Essentials – Question 1

What is the company’s complete name?

Federal National Mortgage Association

Chapter 1: Company and Annual Report Essentials – Question 2

What is the address of your company’s corporate headquarters?

3900 Wisconsin Avenue, NW Washington, DC


Identify the company’s website address.

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www.fanniemae.com


Identify the telephone number and e-mail address of the company’s Investor Relations Department.

202-752-7115https://www-us.computershare.com/investor/Contact


Which stock exchange lists your company?

NYSE


What is your company’s stock exchange trading symbol?

FNMA


What is your company’s Standard Industrial Classification (SIC) and sector? Run a search on “Standard Industrial Classification,” and the classification and code will be identified. Your company may list more than one SIC code numbers. The first listed is considered the primary SIC for the company.

For example, search – The Home Depot SIC – brings up a listing of sources. Once you locate this code, search on the Department of Labor website at https://www.osha.gov/pls/imis/sicsearch.html to find out more about your Company’s SIC.

SIC Code: 5211Sector: Basic Materials, Construction, Retail

Industry: Lumber and other building materials

SIC CODE: 6162 Sector Mortgage Bankers


Locate the board of directors listing. How many board members does your company have?

12

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https://www-us.computershare.com/investor/Contact



How many of the directors are company employees, labeled inside directors? And how many are non-company directors, labeled outside directors? Why does a company want and need outside directors?(Inside and outside directors are typically identified as such by their title and company.)

Two of the board members are working within the company. Ten work for companies other than Fannie Mae. The company wants the Board of Directors to make objective decisions.


Leadership addresses the stockholders, typically, once a year at the annual stockholders meeting. Identify where and when this occurred, as reported in your annual report.

N/A

The previous series of questions provides basic company information. All are building blocks of a complete study of a company through the annual report.

Company Strategy and Business Environment

Chapter 1: Company Strategy and Business Environment – Question 1

Review the chairman’s message of your company’s annual report. Does it appear to be uplifting or somewhat apologetic? Identify phrases that support your position.

The company is still focused on its reforms coming off of the 2008 collapse. As the company is looking forward it is using terms like “volatility” but are also trying to reduce risk so it seems counterintuitive. The overall message seems as though the company is showing the progress it has made since 2008 so it a positive message but a mix one. As an investor phrases like “we entered conservatorship in 2008” found in the 2015 10K are trying to increase investor confidence in the company.


Check below the one primary company strategy identified in the chairman’s message. Support your answer with phrases found in the chairman’s message that pointed you to the identified corporate strategy.

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Growth: Vertical Under the current conservatorship instituted by the federal government Fannie Mae “we are not permitted to retain our net worth” so there is no vertical growth. Horizontal___Under the Federal Housing Financing Agency (FHFA) Fannie Mae is not looking to grow Horizontally Concentric Fannie Mae is a leading source of liquidity for single and MultiFamily households Conglomerate “Fannie Mae is a government-sponsored enterprise” that reports directly to the FHFA Stability “We expect to be profitable for the foreseeable future” Retrenchment “we are not not permitted to retain our net worth (other than a limited amount that will decrease to zero by 2018)” .

Phrases to support your conclusion:The Federal Government has complete control how long this company will last.According to the 2015 10K the future looks grim for Fannie Mae it is never good when management has to say “We are not permitted to retain our net worth (other than a limited amount that will decrease to zero by 2018”. However with the backing of the government Fannie Mae can also say with confidence “We expect to be profitable for the foreseeable future” because they can take on more risk than a normal company. This has been curbed in the recent past by the FHFA because of the financial crisis but they still can be “a leading source of liquidity for Single and Multifamily households.”


Briefly summarize the company’s discussion found in Item 1 of SEC Form 10-K.

Type of business:

Government-Sponsered Enterprise Mortgage Credit Corporation Major business segments:

Single-Family Business, Multifamily Business

Primary customers:

Investment banks, Real Estate Brokers

Primary products and/or services:

Mortgage backed securities gaurenteed by the federal government.Other:

Click here to enter text.


Identify broad-based social, political, economic, and technological concerns that may affect your company. Put N/A if one of the categories does not apply.

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Social:

Fannie Mae needs the social idea of the American Dream is to own a house to continue for them to be successful.Political:

Fannie Mae has extreme dependence on the federal government. The 10K says “We do not know how the convervatorship will last”

Economic:

Fannie Mae is also dependent on the housing market.

Technological:

Fannie Mae is using new financial models to help lower risks in the housing market.

Other:


Wrap-up Chapter 1: Wrap-up – Question 1

After further review of additional information you should now be confident in identifying the one primary company strategy, beyond the insight provided by the chairman’s message?

Check below the one primary company strategy identified in the chairman’s message and all other supporting documents. Support your answer with phrases.

Growth: Vertical Fannie Mae is just trying to conserve their assets under the FHFA Horizontal Fannie Mae is just trying to conserve their assets under the FHFA Concentric Fannie Mae is a leading source of liquidity for Single-Family households. Conglomerate Fannie Mae reports directly to the Federal Government specifically to the FHFA Stability They have the government to back them up so as long as the government wants to keep them in business they will. Retrenchment Fannie Mae has to continue to reduce their net worth until 2018 .

Phrases to support your conclusion from information gathered from the chairman’s message, Item 1 of the SEC Form 10-K and other insight gained from completing Chapter 1.

Fannie Mae is a stable company but not a company to invest in. When the company publicly says “We are not permitted to retain our net worth (other than a limited amount that will decrease to zero by 2018” that is one to avoid. They are making smarter business decisions since the financial crisis. For stability their numbers do support the claim that “We expect to be profitable for the foreseeable future.” However, since “Fannie Mae is a government-sponsored enterprise” one

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does not know how long the current business model of conservatorship will last.Vertical and Horizontal growth are hindered by the conservatorship regulation as Fannie Mae has to purposefully decrease its net worth by 600 million annually to get down to zero by 2018.Retrenchment is also covered by that statement no employees are losing jobs but the average market share is very stagnant because of the decrease in net worth.Fannie Mae is part of the federal government and one of many government lending companies like Freddie Mac.Concentric can remain strong with the government backing Fannie Mae they have the ability to take on loan markets that other companies could not. This is shown in their Single-Family market that is showing strong number and they are managing to take on less risk with these loans.

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CHAPTER 2 - ANNUAL REPORT STRUCTUREFinancial HighlightsChapter 2: Financial Highlights – Question 1

Review the financial highlights of your company’s annual report to the shareholders. Identify net sales or revenues, net income, basic earnings per share (BEPS), and total assets for the current and preceding years. These are the most common values included in financial highlights. If your company reports something different, simply cross out an item here and recap what is reported. SEC Form 10-K does not provide financial highlights. You may find this information on the company website. If not available put N/A in the first row of boxes.

Categories Current Year One Year Prior Two Years Prior

Net sales or revenues $21,409,000,000 $19,968,000,000 $22,404,000,000

Net income $10,955,000,000 $14,209,000,000 $83,982,000,000

Basic EPS $.05 $.19 $.25

Total Assets $3,221,917,000 3,248,176,000 3,270,108,000

Based on your preliminary review, is your company performing better than, equal to, or less favorably than in the prior year? Briefly explain.

The outlook for Fannie Mae is looking grim. Total assets and Net Income are down from years past.

General Company and Marketing InformationChapter 2: General Company and Marketing Information – Question 1

Look for pictures of product and people that are colorful and send a positive company signal to the reader.

Category

Example: Volunteer Activities

Message

Ongoing and contributing to the success of the community

Single-Family Guaranty Increase in underwriting policy to better manage risk and avoid bad loans.

Providing Access to Credit to Credit Worthy Borrowers

Introduced HomeReady guidelines to provide credit oppurtunities to minorities and lower income households.

2015 Market Share Fannie Mae owns about 28% of the Single-Family Market

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Serving Customers Needs and Improving Our Business

Expediting newly acquired performing loans to see how well the loan is performing.

Helping to Build a Sustainable Housing Finance System

Maintain credit for those who are creditworthy and bring down foreclosures. Reduce taxpayer risk in housing market.

What is the broader message from this information?

Fannie Mae does not feel the need the need to the same as other companies because they are backed by the government so they do not need to.

Management’s Discussion and AnalysisChapter 2: Management’s Discussion and Analysis – Question 1

Results of Operations:

Identify the primary drivers/issues that explain current and future results of operations discussed in the MD&A. For example, the gross profit percentage increased because of improved buyer/supplier relations resulting in greater overall operating performance. Or an increase in operating expenses because of increased fuel costs reduced profits. List the six major drivers/issues of performance you find in the MD&A section of the annual report.

Net Interest Income comes from two sources. First from Gauranty Fees by managing credit risk and

Fees and Other Income are from transaction fees, multifamily fees, and other miscellaneous fees.

Investments are decresing due to the nature of the “conservatorship” business method.

Increase of risk assessments on derivatives to be able to better hedge against changing rates leads to a more stable future.

Losses are impacted from period to period due to housing prices and house buying habits in the current economy.

Troubled debt has gone down from 2014 which suggests Fannie Mae is making better decisions in their loan process.

Liquidity:

Recap what you find about your company’s liquidity in the MD&A section of the annual report. Look for information about the ability of the company to satisfy short-term cash needs and the ability to generate operating cash flows, for example.

The company has a framework set up to maintain adequate funds to manage their

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liquidity risk and feels it has the funds to do so if need be. However, The FHFA or the Federal Reserve has the ability to step in and change that.

Capital Resources:

Recap what you find about your company’s capital resources in the MD&A section of the annual report. Look for information about cash reserves and credit availability. For example, your company’s MD&A section may have a disclosure about an established line of credit to fund future growth.

Fannie Mae is reducing their capital reserve amount per FHFA regulation to zero by 2018 by decreasing it annually by 600 million.

Reports by ManagementChapter 2: Reports by Management – Question 1

Review the Management’s Report (Responsibility) on Internal Control over Financial Reporting in your company’s annual report. Answer the following questions.

Who is responsible for maintaining the internal controls designed to provide reasonable assurance that the books and records reflect the transactions of the company?

The Management of Fannie is responsible for the assurance that the books and records reflect the transactions of the company.

Record the statement that identifies management’s conclusion about internal controls.

Management believes they have adequately met GAAP regulations as well as those of the Federal Housing Finance Agency (FHFA)

Who audited management’s assessment of the effectiveness of your company’s internal control over financial reporting?

Deloitte & Touche concluded that the internal controls of Fannie Mae are not adequate.

Independent Auditors’ ReportChapter 2: Independent Auditors’ Report – Question 1

Review the Independent Auditors’ Report of your company’s annual report and answer the following questions.

Who was the company’s auditor and where is it located?

Deloitte & Touche McLean, Virginia

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What is the responsibility of the auditor?

The auditor’s responsibility is to make sure the integrity of the financial statements presented.

Who is responsible for the preparation of and information within the company’s financial statement?

Fannie Mae’s management is responsible for the control of the financial reporting.

The audit was conducted in accordance with what?

The audit was done in accordance to the Public Company Accounting Oversight Board

What was the opinion of the auditor?

The auditor gave the opinion that the financial statements are presented fairly.

Five- or Ten-Year Summary of Operating ResultsChapter 2: Five- or Ten-Year Summary of Operating Results – Question 1

Identify the major components provided in the five- or ten-year summary. Summarize the insight provided by each. Look for stable, increasing or decreasing trends. Consistent, slightly improving performance signals management has control of the business. Inconsistent performance signals management does not have control of the business.

Component

Example: The Home Depot

Summary of Insight

Sales and earnings have grown significantly over time. Operating expenses are decreasing.

Short term Debt Short term debt continues to fluctuate as different amount of loans become due.

Senior Preferred Stock Senior preferred stock remains constant under guidelines set by FHFA.

Mortgage loans net Remains constant as Fannie Mae becomes stricter on loans they acquire.

Investments in Securities Securities continues to go down under the conservatorship.

New Business Purchases FHFA completely controls this number as they determine how much Fannie Mae can spend.

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Total assets Total assets are have been going down since 2013 as the company mentioned it has to reduce its net worth by 2018.

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CHAPTER 3 - FINANCIAL STATEMENTSThe Balance SheetChapter 3: Balance Sheet – Question 1

Identify the date shown at the top of your selected company’s balance sheet.

Current Year Prior Year

2015 2014

Does the company’s fiscal year follow the calendar year? Yes, No : Yes

If not, why do you think it is different?


Chapter 3: Balance Sheet – Question 2

Review the current asset section of your selected company’s balance sheet. Explain why the order of individual items begins with cash. In your opinion, would it be more or less appropriate to order these items according to dollar magnitude? Explain.

The order begins with cash because the order has to do with liquidity. No it would be most appropriate to bring up things in order of liquidity. This is because a company needs to be able to meet current debt and have cash to take on new projects.


Review your company’s balance sheet (or SEC Form 10-K) and compare accumulated depreciation to the historical cost of Plant and Equipment (PE) using the following ratio.

Compute the following:

Accumulated depreciation /

Plant and Equipment

N/A

Percentage of Asset Life Remaining

High percentage means older assets

Low percentage means newer assets

Is the investment in fixed assets, on average, relatively recent? If not, can we assume that these assets will be replaced shortly?

N/A

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Since property, plant, and equipment (PPE) and long-term investments in stock represent a company’s investment, why do we distinguish between them in the balance sheet?

PPE has set definitions of being tangible products such as a factory, a piece of land, or a truck. Long-term investments can be intangible consisting of goodwill. It can also consist of a note recievable which is a payment that will be received in the coming years.


Review the noncurrent asset section of your company’s balance sheet. Are any intangible assets listed? If so, identify the types of intangible assets and the percent of total assets that the intangible assets represent.

Intangible Asset 1: No Intangible Assets on the Balance Sheet.

Intangible Asset 2: N/A

Intangible Asset 3: N/A

Total Intangible Assets Total Assets = N/A

If this company were to be acquired by another company, would the intangible assets influence the purchase price? Explain your answer.

N/A


Now review your company’s total assets for the most recent year. What percentage of total assets is current? Noncurrent?

Current Noncurrent

60,138/3,221,917=1.87% 3,161,779/3,221,917=98.13

Should companies have a greater investment in current assets or noncurrent assets, or does it depend on the nature of their business? Explain your answer.

This depends on the business because a produce company needs more current assets to maintain revenue. A investment firm could be looking for more long-term assets to add to its balance sheet. This all depends on the core business for a firm and how it wants to create revenue.


Review your company’s balance sheet. Does it report a deferred tax asset? A deferred tax liability? If so, are the deferred tax assets and/or liabilities reported as current or noncurrent?

Deferred tax asset? Yes or No : Yes Current or Noncurrent* Noncurrent

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Deferred tax liability? Yes or No : No Current or Noncurrent* N/A

*Note: If your company reports a current deferred tax asset (liability), it will realize an income tax benefit (obligation) in the next accounting period because of a previously reported event.

If your company reports a noncurrent deferred tax asset (liability), it will realize an income tax benefit (obligation) in future accounting periods (beyond the next) because of a previously reported event.


Identify the information that relates to the stockholders’ equity section of your company’s balance sheet.

Par value per share of common stock? Common stock has no Par value

Number of common shares authorized? No maximum authorized

Number of common shares issued? 1,308,762,703

Number of common shares outstanding? 1,158,082,750

Number of treasury shares held by the company? 150,679,953


Answer the following questions relative to the stockholders’ equity section of the balance sheet.

By what amount did retained earnings increase or decrease from the prior year?

127,618-126,942=676,000,000

Was the increase or decrease in retained earnings equal to the company’s current year net income or net loss?

Yes or N

No*

* If No, then dividends were paid (or declared) by your selected company or certain events took place during the year where the accounting for the events directly affected the retained earnings account.


List (write-in) each financial statement element as shown in your company’s balance sheet.

Assets Liabilities Stockholders’ Equity

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Cash and Cash Equivalents Accrued interest payable (includes $8,194 and $8,292, respectively, related to consolidated trusts)

Senior preferred stock, 1,000,000 shares issued and outstanding

Restricted Cash (includes $25,865 and $27,515, respectively, related to consolidated trusts)

Federal Funds sold and securities purchased under agreements to resell or similar arrangements

Debt:

Of Fannies Mae ($11,133 and $6,403, respectively, at fair value)

Of consolidated trusts (includes $23,609 and $19,483, respectively, at fair value)

Preferred stock, 700,000,000 shares are authorized – 555,374,922 shares issued and outstanding

Common stock, no par value, no maximum authorization – 1,308,762,703 shares issued and 1,158,082,750 shares outstanding

Investment Securites:

Trading, at fair value

Available-for-sale, at fair value (includes $285 and $596, respectively, related to consolidated trusts)

Total investments in securities

Other Liabilities (includes $448 and $503, respectively, related to consolidated trusts)

Accumulated defecit

Accumulated other comprehensive Income

Mortgage loans:

Loans held for sale, at lower of cost or fair value

Loans held for investment, at amortized cost:

Of Fannie Mae

Of consolidated trusts

Total loans held for investment (includes $14,075 and $15,629, respectively, at fair value)

Allowance for Loan losses

Total Liabilities Treasury stock, at cost, 150,679,953 shares

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Total loans held for investment, net of allowance

Total Mortgage Loans

Click here to enter text. Total Fannie Mae stockholders’ equity

Deferred tax asset

Accrued interest receivable, net (includes $6,974 and $7,169, respectively, related to consolidated trusts)

Click here to enter text. Noncontrolling Interest

Aqcuired Property, net

Other Assets

Click here to enter text. Total equity

Total Assets Click here to enter text. Total liabilities and equity


Identify the combined carrying values (dollar amounts) of the following selected account groups taken from your company’s balance sheet:

Account Groups Current Year

Prior Year

Increase or Decrease(in dollars)

Current Assets14,674+30,879+27,350=

72,903 mil

22,023+32,542+30,950=

85,515 mil

(12,612 mil)

Net Fixed Assets N/A N/A N/A

Intangible and Other Noncurrent Assets3,149,014,00

0,0003,162,661,00

0,000

(13,647 mil)

Current Liabilities 9,794 mil 10,232 mil (438 mil)

Long-term Liabilities 3,208,064 mil

3,234,224 mil

(26,160 mil)

Common Stock 687 mil 687 mil 0

Additional Paid in Capital* N/A N/A N/A

Retained Earnings (126,942 mil)

(127,618 mil) 676 mil

Other Equity Components (5,965 mil) (5,628 mil) (337 mil)

*Note again that additional paid in capital is known as share premium in IFRS based financial statements.

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Identify the three major balance sheet accounts, for example accounts receivable, accounts payable, inventory, etc. that changed the most from the prior year. What events might explain these changes? Working to explain why these changes occurred contributes to a greater understanding about a company.

Account Explanation

Example:

Account Receivable

Example:

An increase in accounts receivable should coincide with an increase in sales, i.e., a 10% increase in sales would explain a 10% increase in accounts receivable. If accounts receivable are increasing and sales decreasing, the signal is unfavorable.

Investment in Securities

This section includes mortgage-related activities. Fannie Mae has said that they have invested in “subprime private-label mortgage-related securities”. This could be the increase to Investment in securities however, investors should be aware that these subprime loans will be the first to take a hit if the housing market dips again.

Debt: Of consolidated trusts

Debt seems to be growing amid everything else being cut down that is because Fannie Mae has said “We fund our business primarly through the issuance of short-term and long-term debt”

Allowance for Loan Losses

This account is the sum of the “credit losses related to our loans held for investment” this account is a contra-asset that shows the bad loans that are being purchased. This is a good sign for the company that the number is lower.


Prepare a common-sized balance sheet (expressed in percentages) using the following account groups shown in your selected company’s balance sheet.

Account Group Current Year

Prior Year

Increase or Decrease(current year percent minus

prior year percent)

Current Assets 2.26% 2.63% (.37%)

Net Fixed Assets N/A N/A N/A

Intangible and Other Noncurrent Assets 97.74% 97.37% .37%

Total Assets 100% 100%

Current Liabilities .3% .3% 0

Long-term Liabilities 99.57% 99.57% 0

Common Stock .02% .02% 0

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Additional Paid in Capital N/A N/A N/A

Retained Earnings (3.93%) (3.93%) 0

Other Equity Components (.19%) (.17%) (.02%)

Total Liabilities and Stockholders’ Equity

100% 100%


Identify the three balance sheet groups from question 13 above that changed most significantly. Within each of these groups, identify the primary balance sheet element that drove this change. What events might explain these changes?

Group Name:

Current Assets

Explanation:

(Example – sales increased by 22%, thus accounts receivable increased by approximately 22%)

Current Assets Current assets changed by is down by .37%. This is because those assets have been reclassified into long-term assets.

Intangible and Other noncurrent assets

Intangible and Other noncurrent assets is up by .37% because those assets were reclassified from current to long-term.

Other Equity Components

Other Equity Components is down by .02%. This could just be a rounding error.


Did your company become more or less liquid when comparing this year to last year?

Current Year:

Current Assets minus Current Liabilities =

63,109 mil

Prior Year:

Current Assets minus Current Liabilities =

75,283 mil

Explain why?

Fannie Mae decided to invest in more mortgage securities using cash and other current assets to fund the purchases. So this is what caused the companies liquidity to go down.


Did your company increase or decrease its financial leverage when comparing total debt to total stockholders’ equity from this year to last?

Current Year: Prior Year:

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Total debt Total stockholders’ equity =

3,217,858/4059=79277.11%

Total debt Total stockholders’ equity = 3,244,456/3720=87216.56%

Explain why:

This number is down because the company has borrowed less from the U.S. Treasury in the recent year. However, as an investor I would be concerned why this number is so high to begin with. According to the MD+A the company tries to fund spending with debt and is backed by the federal government so these numbers can be this high and withstand a downturn in the market.

The Income Statement or Statement of EarningsChapter 3: Income Statement – Question 1

Review the heading of your company’s income statement. Does the company’s income statement provide two or three years of comparative information? (Insert number to the right.)

3 ___ yrs.

Why do you think the SEC requires that balance sheets provide two years of comparative financial information and income statements provide three years of comparative financial information?

The Income statement contains more information that investors would be interested in like Net Income. The Income statement also shows the expenses and revenues of the company which can give an investor an idea of where the money is going and how that has changed over the years.

Chapter 3: Income Statement – Question 2

Review the middle section of your company’s income statement. Did operating income (loss) increase or decrease from the prior year and by how much? You may have to compute operating income (loss).

Increased by $ N/A Decreased by $ 9,205,000,000


Does the middle section of your company’s income statement show a non-operating income (loss) increase or decrease from the prior year and by how much? You may have to compute non-operating income (loss).

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Increased by $ ___ Click here to enter text. Decreased by $ ___ 856,000,000 ___________


In reference to why you are studying this company, is it important to know the different sources of income—operating or non-operating?

Yes I want to know where the money is coming from. Since Fannie Mae has a majority of income coming from operating. If I were an investor in Fannie Mae it would worry me if the majority of their income was coming from things other than investing and interest. It would be the same if I were to invest in Nike and I saw that the majority of their income was not coming from apparel and other sporting equipment.


If any of the irregular events are shown on your company’s income statement, describe the nature and the amount. Select the most current year affected by the event if multiple years are affected.

Irregular Event Amount Nature of the Change

Restructuring charge? N/A N/A

Discontinued operation? N/A N/A

Extraordinary event? N/A N/A


Review the lower section of your selected company’s income statement. Did net income (loss) increase or decrease from the prior year and by how much?

Increased by $ Click here to enter text. Decreased by $ 3,254,000,000


Prepare a common-sized income statement for the categories below.

Account/Category Current Year

Prior Year Increase or Decrease

(current year percent minus prior year percent)

Net Sales (revenues) 100% 100%

Cost of Goods/Services (if applicable) N/A N/A N/A

Gross Profit N/A N/A N/A

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Operating Expenses 94,333 mil 98,731 mil (4,398 mil)

Operating Income (Loss) 111,154 mil 120,359 mil (9,205 mil)

Non-operating Income (Loss) (326 mil) 530 mil (856 mil)

Income Tax Expense 5,253 mil 6,941 mil (1,706 mil)

Net Income 10,955 mil 14,209 mil (3,254 mil)


Identify the three income statement accounts/categories that changed the most in Question 7. What events might explain these changes?

Account or Category:

Explanation:

(Hint – the MD&A section will provide good information to answer this question.)

Operating Expenses

Administration expenses increased by “305 million, previously recorded in Accumulated other comprehensive income”. The transfer was for defined pension plan obligations.

Operating Income (Loss)

Net Interest Income is Fannie Maes second largest source of income and in the MD&A management discussed how the “guaranty fees we receive for managing the credit risk on loans” and “the difference between interest income earned… and interest expense”. Fannie Mae

Net Income The MD&A did not touch on net Income however, the company continues to focus on its investments so Net Interest Income was the main driver for Net Income and the company did touch on that.


Identify your company’s Basic and Diluted EPS amounts. Place a N/A in Diluted EPS if not reported.

Basic EPS Diluted EPS

Current year (.05) (.05)

Preceding year 1 (.19) (.19)

Preceding year 2 (.25) (.25)

Why is diluted EPS always equal to or less than basic EPS?

Dilutive EPS has to be the same or less than basic EPS because EPS can be effected by dilutive securities such as a convertible bond. This will cause dilutive EPS to go down.

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Statement of Cash Flows (SCF)Chapter 3: SCF – Question 1

Is the SCF dated in the title for a period of time similar to the income statement or for a point in time similar to the balance sheet? Why?

It is dated in a three year period like the Income Statement. A company should should the difference in where the money is going in the company because that will impact the investors decision on whether or not the company is investing properly.

Chapter 3: SCF – Question 2

Identify the following sections of the SCF and record the amounts. Check the math by summing to the cash balance at end of year. Verify that the ending cash balance reported on the SCF is the same as reported on the balance sheet.

Section Current Year

Prior Year Second Prior Year

Net operating cash flows (6,673 mil) (1,338 mil) 12,903 mil

Net investing cash flows 248,324 mil 224,667 mil 452,754 mil

Net financing cash flows (249,000 mil)

(220,534 mil) (467,546)

Net increase (decrease) in cash flows (7,349 mil) 2,795 mil (1,889 mil)

Cash balance at beginning of year 22,023 mil 19,228 mil 21,117

Cash balance at end of year 14,674 mil 22,023 mil 19,228 mil

Does the total match balance sheet cash? Yes / No : Yes

Yes / No : Yes


Record net sales, net income and net operating cash flows below. All three should be trending in approximately the same direction. If so, this is a sign of a well-run business. If one or more are going in a different direction, or random, then you must keep an eye open for an explanation why.

Item Current Year Prior Year Second Prior Year

Net Sales N/A N/A N/A

Net Income 10,955 14,209 83,982

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Net Operating Cash Flows

(6,673 mil) (1,338 mil) 12,903 mil

Explain why net sales, net income and net operating cash flows are trending together or differently. (Hint: Look at depreciation expense and substantial changes in inventory, accounts receivable and accounts payable balances. Explaining why is a key learning point.)

The trend may be flaud because 2013 was a major difference in net income than 2014 and 2015. The accounts on the Statement of Cash Flows that seem to have a large variance and impact on the net operating cash flow are current and deferred federal income taxes and Net change in securities. In 2013 there was a major expense in current and deferred federal income taxes of $47,766,000,000 which in turn drasticly brought down net operating cash flows. The next account is the net change in trading securities which has increased to $(10,153,000,000) in 2015. The company had mentioned that they have taken on more subprime lending than previously and this could be a result of it.


Identify the primary cash outflows and inflows from investing activities.

Description of Activity Amount

Cash outflow: Purchases of loans held for investment

187,194,000,000

Cash inflow: Proceeds from repayments and

sales of loans acquired as held

for investment of consolidated trusts

484,230,000,000

Consider three key issues at this point. Is the company adding assets? This is a sign of growth. Is the company replacing assets? This is a sign of growth and stability. Is the company only selling assets? This is a sign of retrenchment.

The inflow is from proceeds from repayments and sales of loans acquired as held for investment of consolidated trusts. This is the primary business of Fannie Mae so that is encouraging to see. Also in the Executive Summary they have stressed that they have changed and strictened their way of investing in mortgages and it seems that this is paying off with the dramatic increase. For the cash outflows Fannie Mae looks to be investing more because of the increase to purchases of loans held for investment. This could suggest growth and confidence in the market. As an investment company an

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investor would think that increased spend in new mortgages with these stricter policies would lead to higher revenue going forward.


Identify the primary cash inflow and outflow from financing activities.

Description of Activity Amount

Cash inflow: Proceeds from issuance of debt of

Fannie Mae

443,371,000,000

Cash outflow: (Note: cash dividends paid are reported here.) Payments to redeem debt of

Fannie Mae

518,575,000,000

Consider two key issues at this point. How is the company being financed, through debt or equity? Can you determine which is growing faster and why? A sound corporate strategy is to finance a company with debt during stable times, because this demands regular payment of principal and interest, and to finance a company with equity during unstable times, because leadership can elect to pay or not pay dividends.

The companies major inflows and outflows in the financing section are through debt and in the MD+A section Fannie Mae came out and said they fund themselves primarily through debt. This is to be expected and with the backing of the federal government Fannie Mae has the ability to take on more debt than the average company.

The Statement of Stockholders’ Equity (SSE)

Chapter 3: SSE – Question 1

Identify the elements that comprise the statement of stockholders’ equity section of your company. Hint: These items are generally illustrated across the top of the page using a columnar format. (Example. Common stock – shares and dollar amount.)

Shares OutstandingSenior Preferred, Preferred, Common, Senior Preferred Stock, Preferred Stock, Common Stock, Retained Earnings (Accumulated Defecit), Accumulated Other Comprehensive Income (Loss), Treasury Stock, Non Controlling Interest, Total Equity

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Chapter 3: SSE – Question 2

Identify the cash dividends per share. N/A

Determine the dividend payout percentage. A company’s dividend payout percentage is computed by dividing dividend per common share by net income or earnings per common share. (Hint: If your company reported a net loss for the year, the answer lacks meaning.)

N/A

Compute dividend yield. A company’s dividend yield is computed by dividing dividend per common share by market price per common share. (Hint: Use the current per share price for your selected company.)

N/a

Is your company’s dividend yield a reasonable return given current market conditions?

My company does not give out a dividend for common stock holders.

Notes to the Financial Statements Chapter 3: Notes to the Financial Statements – Question 1

How does your company define “cash and cash equivalents”?

Fannie Mae describes cash and cash equivalents as investments with less than three month maturity and are readily convertible into cash. They also include any security they acquire with an agreement to resell on an overnight basis.

Chapter 3: Notes to the Financial Statements – Question 2

How does your company value its “inventories”? Explain the meaning of the inventory valuation method. Are domestic and international inventories valued the same? Service companies will typically not have inventory.

N/A the company does not keep an inventory.


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Does your company report any investments in marketable securities? Identify the respective amount(s) invested.

Category Current Year Amount

Trading Securities 39,908,000,000

Available-for-Sale Securities 20,230,000,000

Held-to-Maturity Debt Securities N/A


Note 1 and a separate note on income taxes should provide the information to answer this question.

What was your company’s income tax expense for the current year?

5,253,000,000

How much cash was paid for income taxes in the current year? (Hint: Review the SCF. The difference generally relates to the accrual basis of accounting.)

1,170,000,000

Identify the three major elements, such as depreciation or other post-employment benefits, that gave rise to deferred tax assets or deferred tax liabilities:

Deferred Tax Assets Deferred Tax Liabilities

Mortgage and Mortgage related assets 16,956,000,000

Unrealized gains on AFS securities, net 731,000,000

Allowance for loan losses and basis in acquired property, net 11,760,000,000


Debt and derivative instruments 3,512,000,000


What is this year’s effective tax rate for your company? What is the current year statutory rate?

Effective Tax Rate: __ 32.4 ____%

Statutory Tax Rate: ___ 35 ___%


Reviewing note #1, any related supporting notes, and/or the 10-K, identify the fixed asset group(s), depreciation methods used, and the estimated useful lives of these fixed assets.

Fixed Asset Group Depreciation Method Estimated Lives (range)

N/A Click here to enter text. Click here to enter text.


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Review the balance sheet, note #1, and any related notes and identify the amount of goodwill reported in the current year.

Amount reported in current year. N/A

Identify the amount of any significant write-down of goodwill that occurred during the current year.

N/A

How does management describe how it accounts for goodwill as disclosed in the note(s) to the financial statements?

N/A


Given present executive compensation packages, why would the user of financial information prefer a company follow SFAS No. 123(R) instead of APBO No.25? Explain.

SFAS No. 123(R) is the preferred method because it offers a lump sum amount for compensation packages and gives a compensation schedule. APBO No.25 does not have the lump sum amount it uses the contract date and fair value of given time. As an investor a set schedule and knowing what is going to impact the bottom line.


Review your company’s lease note (and related balance sheet information), then identify the following amounts:

Minimum lease payments under operating leases 44,000,000

Minimum lease payments under capital leases 58,715,000,000

Ratio of operating lease payments to capital lease payments

.07%

As a user of reported financial information, would you be concerned about a significant amount of operating leases that are not reported in the balance sheet? Explain.

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Yes because because those could be expenses that will impact the bottom line and could be more liabilities that the company may not be able to pay for.


Review your company’s long-term debt note and identify the following (consider the three most significant liabilities only):

Instrument Maturity Date Rate Amount Due

Debt of consolidated trusts

2016-2054 2.94% 2,810,593,000,000

Bench notes and bonds

2016-2030 2.49% 154,057,000,000

Medium-term notes 2016-2025 1.53% 96,997,000,000

How much interest expense was recognized in the current year?

88,033,000,000

How much cash was paid for interest in the current year? (Hint: Look in the SCF.*)

104,928,000,000

*The difference between interest expense and cash paid for interest is due to the accrual basis of accounting (and in some cases, the capitalization of interest).


Review your company’s pension and OPEB note (if applicable) and answer the following questions.

Pensions OPEB

How much is the Projected Benefit Obligation (PBO) and Accumulated Postretirement Benefit Obligation (APBO) for your company at the end of the current year?

N/A In 2013 the FHFA suspended the PBO and

OPEB.

N/A

What was the amount of pension or OPEB benefits paid to plan participants during the current year?

N/A N/A

What amount of cash did the company contribute to the respective funds during the current year? This is known as “employer contributions.”

N/A N/A

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What is the value of the plan assets at the end of the current year?

N/A N/A

Based on your review of the plan assets and the projected benefit obligation (or accumulated postretirement benefit obligation), has your company sufficiently funded its employee benefit plans (this is known as funded status)?

According to the 10K pension benefits section the company has allocated 305,000,000 to settle their pension benefit obligation so it no longer exists.

An expected average return on invested plan assets is used to reduce the volatility in the reporting of pension or OPEB expense. Higher expected average returns reduce pension or OPEB expense, and lower expected returns increase pension expense. What rate of return on plan assets does your company use to compute pension or OPEB expense? Does this appear reasonable, given present market conditions?

Rate employed? _____ N/A ___

Response:N/A


Based on your review of the contingencies note, briefly identify specific events that have led to the accrual of contingent liabilities in your selected company’s the balance sheet.

Commitments and contingencies do not contain any specific numbers because the company considers pending litigation to contain “to many uncertain factors”


Based on your review of the segment-reporting note to the financials, identify the reported operating segments, their related revenues, and operating income. Identify the largest three if more than three are disclosed.

Reportable Operating Segments Net Sales Revenue Net Operating Income

Single-Family N/A 13,326,000,000

Multifamily N/A 1,612,000,000

Capital Markets N/A 5,174,000,000

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Based on your review of the segment-reporting note to the financials, identify the geographical segments and their related revenues. Identify the largest three if more than three are disclosed.

Country Net Sales Revenue

N/A Click here to enter text.N/A Click here to enter text.N/A Click here to enter text.

Chapter 3: Notes to the Financial Statements—Question 14

Based on your review of the notes to the financials or the statement of stockholders’ equity, identify the components (no more than four) that comprise Other Comprehensive Income for your company.

Component Amount

Net unrealized gains on AFS securities for which we have not OTTI, net of tax

455,000,000

Net unrealized gains on AFS securities for which we have OTTI, net of tax

903,000,000

Prior service credit (cost) and actuarial gains (losses), net of amortization, and other, net of tax

49,000,000

Other comprehensive income before reclassifications (280,000,000)

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CHAPTER 4 - FINANCIAL ANALYSIS

Evaluating the financial performance of your company consists of interpreting current measures compared to prior years and industry average benchmarks. You can locate industry average data at:

http://investing.money.msn.com/investments/key-ratios?symbol=ibm

o Reported on a rolling four quarter basis.

Your library holdings

Other sources from the web

Summary Financial Analysis Report

Profit Margin % - Identify source for industry data Msn Money

Answers how well the business performed.

Company Two Years Prior

Company One Year Prior Company Industry

Gross Margin

Gross Profit /Total Revenue

N/A N/A N/A N/A

Pre-Tax Margin

Operating Income / Total Revenue

1.05 4.98 72.60 81.73

Net Profit Margin

Net Income /Total Revenue

N/A .1% -1.17% -.2%

Sales Financial Statement

N/A N/A N/ANot required

Operating Income

Financial Statement

120,359,000,000

111,154,000,000

N/ANot required

Operating Cash Flows

Financial Statement

(1,338,000,000)

(6,673,000,000)

N/ANot required

Evaluate Profitability (Think about the corporate strategy in providing a response. Following

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http://investing.money.msn.com/investments/key-ratios?symbol=ibm


are general guidelines, yet each company situation is unique. For a company with a growth strategic focus you will likely find increasing performance, above or below industry average. For a company with a stability strategic focus you will likely find stable performance, above or below industry average. For a company in a retrenchment strategic focus you will likely find poor performance, below industry average with efforts to improve and approach industry average. Note: Sales, operating income and operating cash flows should trend in approximately the same direction. This signals a stable operating business environment. If the three measures are not trending together, this signals lack of control by management.) An analysis stock report may also provide useful insight.

The ratios are showing below average earnings. That is to be expected with the current state of Fannie Mae. They have stated throughout the 10K that under the current regulations of the FHFA. The pretax margin shows Fannie Mae is operating less efficient than the market. Freddie Mac was the only company incorporated in the industry average. They are comparable because they are also under this FHFA ruling. If a another publicly traded company or a privately held company the ratios would show a much more efficient company. Net Profit margin is a negative for both the industry and Fannie Mae. Fannie Mae has no reason to profit. Sales and gross margin are not available because Fannie Mae is only currently making money off of the interest it accumulates in its mortgages. They do not have cost of goods sold so gross profit is also unavailable. This is no surprise to investors Fannie Mae has never had cost of goods sold so that ratio would not alarm an investor nor has that changed under the conservatorship that Fannie Mae is currently under. Management is consistently showing retrenchment so this issue is not to blame on management. However, given that Fannie Mae has to reduce its equity to zero by 2018 it seems as though management is setting up the company for a soft landing with the 2018 date coming. Management seems to be on the right track. It is hard to say Fannie Mae has profitability left with the conservatorship in place and by definition they shouldn’t be maximizing their profits like a regular company. In the executive summary the company has said “we expect to be profitable for the foreseeable future”. They did have a net income of 11 billion in 2015. Operating income is down from 2014 because of a number of factors but Fannie Mae has addressed them in their 10K one major expense that has cut into operating income was the settlement of the retirement fund for employees with a 305,000,000 settlement. Net Income has been declining since 2013 understandably. Fannie Mae had a deferred tax asset that they were able to use in 2013 from losses in the housing crisis. One can see the spike up to 83 billion, which would throw the ratios off. But as it is shown in 2014 Fannie Mae is back on track with its retrenchment pattern. This pattern will continue until 2018 when the FHFA makes a new ruling on what Fannie Mae is allowed to do as a business.

Financial Condition - Identify source for industry data MorningStar

Signals ability to take on additional debt and Company Two

Years Prior

Company One Year Prior

Company Industry

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liquidity.

Debt/ Equity Ratio

(Total Liabilities – Current Liabilities)

/ Total equity

340.63 796.05 796.05 245.03

Current Ratio

Current assets /Current liabilities

14.36 13.58 N/A N/A

Quick Ratio

(Cash and Short Term Investments

+Short Term

Investments + Total Receivables,

Net) /Current Liabilities

14.36 13.58 N/A N/A

Interest Coverage

(Net income + tax expense + interest expense) / interest

expense

.18 .22 1.2 N/A

Evaluate Financial Condition (often labeled liquidity and solvency analysis) (Think about the corporate strategy in providing a response. Following are general guidelines, yet each company situation is unique. For a company with a growth strategic focus you will likely find stable or slightly decreasing liquidity, above or below industry average. Debt to equity often is increasing in a growing company. For a company with a stability strategic focus you will likely find stable liquidity, above or below industry average. Debt to equity often is stable as well. For a company with a retrenchment strategic focus you will likely find poor liquidity, below industry average with efforts to improve and approach industry liquidity. Debt to equity often is decreasing in a company during retrenchment.) An analysis stock report may also provide useful insight.

Fannie Mae will continue to struggle with solvency as long as the FHFA continues to collect all of Fannie Mae’s annual income. Fannie Mae and the FHFA need to resolve this issue if Fannie Mae is to continue to avoid insolvency. Fannie Mae does not seem they would have trouble paying off their short-term liabilities. They also do not have the same worry as some companies their current assets come mainly from interest on mortgages this seems to be more of a secure way to generate a profit. In their 10K they addressed the bad loans that were being made and it seems through stricter policies Fannie Mae has turned around the bad debt on their books. Fannie Mae shows progress on their ability to pay off the interest they owe. This is a miniscule achievement but it is still an improvement. The interest coverage ratio shows promise in the current year. Debt to equity is high because Fannie Mae has to lower equity to zero by 2018. So it is not a surprise that this ratio seems outrageous but if the current terms of the FHFA are reversed this ratio should lower to a more normal ratio because equity will be able to rise. Fannie Mae seems to have the assets to support this large amount of debt. It is no surprise that the ratios show retrenchment.

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Investment Return % - Identify source for industry data Morningstar

Signals performance for managers and owners.

Company Two Years Prior

Company One Year Prior Company Industry

Average is defined: (beginning of the year + end of the year) / 2To compute “Company Two Years Prior” and “Company One Year Prior” go to the company website and pull the prior annual reports for the necessary data.

Return On Equity

Net Income /Average Total

Equity

2.15 2.76 N/A N/A

Return On Assets

Net Income /Average Total

Assets

.0043 .0033 -.01 .32

Evaluate Investment Return (Think about the corporate strategy in providing a response. Following are general guidelines, yet each company situation is unique. For a company with a growth strategic focus you will likely find increasing returns. For a company with a stability strategic focus you will likely find stable investment returns. For a company in a retrenchment strategic focus you will likely find poor and stable investment solvency, below industry average.) An analysis stock report may also provide useful insight.

Return on Equity is growing but does not mean that it is encouraging equity has gone up. On the other end of the ratio net income has gone down. Net income is expected to continue to go down under the conservatorship so it is not surprising but it is not a good thing for investors to see. The same thing is true for for the the return on assets total assets went down but so did net income. Fannie Mae is in full retrenchment with almost every category so the ratios are going to suffer because of it. The return on assets is lower than the industry average. Fannie Mae needs to bring up revenue with more short-term investments if they want net income to increase. On the expenses side most of the expenses are interest expenses so Fannie Mae have to maintain the interests payments on their long-term debt. Management has focused on more long-term safer investments so revenue will be down. Under the FHFA solvency will be a problem for Fannie Mae. Fannie Mae seems to be maxed out on what this company can handle without it going under and that is to be expected until 2018. These ratios are close to zero and that is one of the many reasons investors are not inclined to invest into Fannie Mae. If the convseratorship ends Fannie Mae can look more for short-term investments and really trying to maximize profits. That will increase net income and improve these ratios.

Management Efficiency - Identify source for industry data MorningStar

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Signals how well the company was run by

management.Company Two

Years PriorCompany One

Year Prior Company Industry

Average is defined: (beginning of the year + end of the year) / 2To compute “Company Two Years Prior” and “Company One Year Prior” go to the company website and pull the prior annual reports for the necessary data.

Receivable Turnover

Total Revenue /Average Accounts Receivable - Trade, Net

N/A N/A N/A N/A

Inventory Turnover

Cost of Revenue,

Total / Average Total Inventory

N/A N/A N/A N/A

Asset Turnover

Total Revenue / Average Total

Assets

.01 .01 .01 .01

Evaluate Management Efficiency (Think about the corporate strategy in providing a response. Following are general guidelines, yet each company situation is unique. For a company with a growth strategic focus you will likely find improving efficiency, above or below industry average. For a company with a stability strategic focus you will likely find stable efficiency, above or below industry average. For a company in a retrenchment strategic focus you will likely find poor efficiency, below industry average with efforts to improve and approach industry average.) An analysis stock report may also provide useful insight.

These ratios are not the best examples for Fannie Mae to determine efficiency. Fannie Mae does not have inventory nor do they have accounts receivable. This would not surprise investors nor would it be alarming. Asset turnover is also not the best ratio. It is not the best showing of performance for two reasons. Fannie Mae has over 3 quadrillion in assets and under a conservatorship they are not trying to maximize profits as of right now. However, without trying to maximize profits Fannie Mae still brought in almost 11 billion in net income. Fannie Mae does not have the best efficiency for the assets they have but they are in a retrenchment strategy. If the FHFA allows Fannie Mae return to a company without restrictions they do have the assets available to them for the potential to bring in big revenues going forward. But as of right now an investor needs to be cautious because there is no gauranty until the 2018 decision by the FHFA. As Fannie Mae moves toward the future their outlook could change first to growing their retained earnings and maximizing profits. Under current management they seem to be able to manage the company with a plethora of restrictions that a normal company would not be subject to. So going forward that team led by the CEO Tim Mayopoulos should be able to get Fannie Mae back to the earnings of before the housing crisis.

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CHAPTER 5 - DECISION-MAKING PROCESSN ow you must make two decisions.

Chapter 5: Decision-making Process – Question 1

Based upon your review, do the numbers support the company’s explicit strategic focus: a growth, stability or retrenchment focus? Why or why not?

The numbers support a retrenchment strategy. The ratio’s showed decline almost across the board. Fannie Mae has a major liquidity problem as shown by the return on the return on assets and the return on equity. Investors do not want to see a company that is close to being insolvent. The ratios were hard to determine a clear picture of how well Fannie Mae is doing. Any ratio dealing with equity is also off because of the conservatorship. Fannie Mae has to lower its equity to zero. It is hard to say definitively how the outcome of Fannie Mae because the dividend policy which moves all retained earnings into the U.S. treasury has been subject of a recent lawsuit by shareholders. The case is being discussed currently and in the 10K Fannie Mae did not want to disclose any specific numbers stating that they do not want to disclose anything with the uncertainity of the outcome. But with this case pending if the conservatorship is overruled Fannie Mae may be able to move on as a normal company so that would change every ratio, as well as the overall outlook on the company. An investor on Seeking Alpha stated that the share price should be around $20 so that would jump dramatically in Fannie Mae’s favor. They could then also move to a regular dividend for both common and preferred share holders. That would also be beneficial to shareholders because they would receive more of a return on their investment than just a rise in share price.

Chapter 5: Decision-making Process – Question 2

Return to the first question in this project.Chapter 1: Identify Why You Selected This Company—Question 1

A) What is/are your motivation(s) or interest(s) in selecting this company?

B) What question(s) are you seeking to answer?

You were asked to explain why you were investigating this company’s annual report. You have likely uncovered numerous pieces of information, some with conflicting insight. This may involve both financial and nonfinancial information. In addition, you may have found certain information to be incomplete for decision-making purposes. This is real world analysis. Most business decisions are made with as much reliable information as possible, yet common to the decision-maker is a desire for more information.

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Prepare a thorough, yet concise answer to your original questions A and B above. For example, would you work for this company, why or why not? Support your response with the information gathered throughout your annual report study.

A. My motivations for selecting this company was my interest in the housing market. This project has been able to show some light on how a top 50 U.S. company has fallen to $1.71 a share. At Fannie Mae’s peek it was trading at just under $80 so I was curious to find some answers as to why there was no bounce back for Fannie Mae. In my research into the company I found why the bounce back may never come for Fannie Mae. Under the FHFA ruling Fannie Mae has to lower it’s equity to zero in 2018, so that may be the end of this giant of a company. I also wanted to learn why Fannie Mae took a bail out but it never seemed to truly recover. Upon further research Fannie Mae has stated they have paid dividends to the U.S. Treasury in repayment of 147.6 billion dollars and they originally owed 116.1 billion dollars. This difference seems uncanny and that is the argument of current litigation facing Fannie Mae. B. As for Fannie Mae moving forward some questions I still have for them would be the plan for what happens if the conservatorship is overruled. How do they plan on repaying investors if at all. On the other side of that what is the plan if Fannie Mae has to go down to zero equity, for the company to survive. In the Introduction on the 10K Fannie Mae used phrases like “We do not know” and “our conservatorship has no specific termination date”. As an investor that worries me I would like more certainty in the company I am investing in. I do not think I would work there Fannie Mae’s settlement of retirement funds is not attractive as a prospective employee. It also may have left some people feeling betrayed by the company , which can lead to a toxic work environment. I would also need to know the future of Fannie Mae before deciding to work for them. So the role of the FHFA and the conservatorship would have to be settled before I would take a job with Fannie Mae. As an overall outlook on Fannie Mae from an investing stand point it is hard to overlook them. 3 quadrillion in assets seems like it should be able to bring in promising profits. If the FHFA leaves Fannie Mae alone to run the business like it has been run in the past, while keeping these stricter underwriting policies to avoid bad investments. An investor can see how this company could not only be profitable but a potential steal of a buy if Fannie Mae returns to normal business. This was once a top 50 U.S. and an investor can buy their share price at $1.71. So the ratios may show that Fannie Mae is dying but as stated before the ratios do not account for the policies in place at Fannie Mae.

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Chapter 5: Validate Your Conclusion – Question 1

The Altman Z-score is a predictive model created by Edward Altman in the 1960’s. The score combines and weights financial ratios and other measures to estimate the likelihood of a company going bankrupt. The lower the Altman Z-score the higher the odds of bankruptcy. Research findings suggest the Z-score predicts 72 - 80% of corporate bankruptcies two years prior to the actual filing.

Z-score > than 3 = considered healthy

Z-score between 1.8 and 3 = considered a warning sign

Z-score < than 1.8 = could be headed for bankruptcy

Computing the Z-score for your company is very simple. Go to one of the Websites listed below and compute the Z-scores for the respective years identified below. Print out your results and turn them in with this workbook.

www.jaxworks.com/calc2a.htm

www.ironwoodadvisory.com/zscore.htm

Two Years Prior One Year Prior Current Year

Z-score .632 .848 N/A*

Z-score interpretation compared to the financial analysis. Does the Z-score agree or disagree with your analysis?

I disagree with the Z-score results. First the retained earnings section of the formula is a zero. Second as I was looking for current year I found an investing website that said the Z-score does not apply to banks and insurance as Fannie Mae has described on its website they are “the bank of mom and dad”. Fannie Mae by no means is thriving but the Z-score does not account for companies under these conditions. My argument for Fannie Mae is only valid if the conservatorship ends. This company is dying but this company is not dying like a normal company where the company is outdated or management is running it into the ground. The government is running Fannie Mae into the ground and if the courts decide to reverse this ruling Fannie Mae can go back to being a power house in the housing market.

Congratulations.

Now submit to your instructor your completed workbook per the instructions provided at the beginning of this document.

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http://www.ironwoodadvisory.com/zscore.htm