Verizon Overview of the Firm Term Paper

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The latter is typically used for network equipment for local telephone operations. Depreciation policies include the recording of plant, property and equipment at cost. Local telephone operations again are subject to different depreciation methods, and use the straight line method and the group remaining life method, depending on the asset. The company also chooses to capitalize all software that has a useful life of over one year. The straight line method is used and the period will be between 2 and 7 years depending on the software.

The company has a significant amount of intangible assets of its balance sheet. These consist primarily of wireless licenses. These licenses are typically granted for a fixed period of time, but renewals occur routinely. Therefore, Verizon treats wireless licenses as indefinite intangible assets and therefore the licenses are subject to re-evaluation each reporting period.

Verizon also enters into derivative contracts in order to manage its exchange rate and interest rate risk. These derivatives are recorded at fair value, and as such they are recorded on the balance sheet as either assets or liabilities depending on whether or not they are under water.

Summary of Findings

Verizon's financial policies are in line with GAAP and there is little out of the ordinary about the company's treatment of inventories, derivatives or intangible assets. The company has grown rapidly in recent years, but there is a cost associated with that growth. Verizon's long-term debt has increased steadily, while its equity has not. That said, Verizon is a profitable company and the investments have been necessary for the company to retain its current favorable position in the market. The industry is driven by technology investment, so Verizon has been compelled to continue its intense investments as a means of retaining competitiveness. The long-term outlook for Verizon is generally positive as it has a large balance of wireless licenses that provide the company with the opportunity for growth, but this must be tempered with the knowledge that Verizon is increasing its costs faster than its revenues and its debt faster than its equity.

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Recommendation

Verizon is a long-term investment. The company's income statement and balance sheet indicate that it has fluctuated in terms of profitability, even though it has grown steadily. This is likely due to the massive amount of investment that the company has needed to undertake in order to grow its network and offer innovative products and services. In the coming years, the expansion of 4G and the continuing increase in demand for wireless data service look to fuel continued expansion of Verizon's revenues and its balance sheet. Despite the increase in long-term debt, the company is not yet in a dangerous financial position. However, the capital structure is weighted towards debt financing significantly, so an investor should exercise some caution when investing in Verizon.

The conditions of Verizon's industry are such that the firm is going to need to continue making substantial investments in the coming years in order to maintain its competitive position. The success of the firm from a financial perspective will depend on its ability to pass these costs along to its customers. However, it is worth noting that competition in the industry is intense. Many players are competing at least somewhat on price, which limits the ability of Verizon to increase its prices. Thus, Verizon most likely faces an environment similar to the past couple of years, characterized by increased costs associated with investment in infrastructure, combined with a relative inability to pass those costs on to the customer. This will cut into the firm's profits and it could lead to an increase in debt to more dangerous levels.

The company, essentially, is spending substantially simply to maintain market position rather than enhance it. This is not sustainable over the long run. Investors in Verizon are recommended to hold there shares in the company, but it is questionable whether or not a new investor….....

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