FIN301 Class Web Page, Fall ' 20
Instructor: Maggie Foley
Jacksonville University
Business
Finance Online, an interactive learning tool for the Corporate Finance
Student http://www.zenwealth.com/BusinessFinanceOnline/index.htm
Weekly SCHEDULE, LINKS, FILES and Questions
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Chapter |
Coverage, HW, Supplements -
Required |
References
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Chapter
1, 2 |
Discussion: How to pick stocks (finviz.com) Daily earning announcement: http://www.zacks.com/earnings/earnings-calendar IPO schedule: http://www.marketwatch.com/tools/ipo-calendar FYI: MarketWatch Stock
Game written by Maelyn O’Connor (Thanks, Maelyn) Chapter 1: Introduction
Flow
of funds describes the financial assets flowing from various sectors through
financial intermediaries for the purpose of buying physical or financial
assets. *** Household, non-financial business, and our government Financial
institutions facilitate exchanges of funds and financial products. ***
Building blocks of a financial system. Passing and transforming funds and
risks during transactions. ***
Buy and sell, receive and deliver, and create and underwrite financial
products. ***
The transferring of funds and risk is thus created. Capital utilization for
individual and for the whole economy is thus enhanced. Chapter 2 Introduction of Financial Market 1.
What
are the six parts of the financial markets
Money: · To pay for purchases and store wealth (fiat money, fiat currency) Financial Instruments: · To transfer resources from savers to investors and to transfer risk to those best equipped to bear it. Financial
Markets: · Buy and sell financial instruments · Channel funds from savers to investors, thereby promoting economic efficiency · Affect personal wealth and behavior of business firms. Example? Financial Institutions. · Provide access to financial markets, collect information & provide services · Financial Intermediary: Helps get funds from savers to investors Central Banks · Monitor financial Institutions and stabilize the economy Regulatory Agencies · To provide oversight for financial system. 2.
What
are the five core principals of finance
Introduction
to Capital Markets - ION Open Courseware (Video) How the stock market works (video) No homework
for chapters 1, 2 |
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Chapter 5 Time value of Money The
time value of money - German Nande (video)
Tutoring of
Time Value of Money calculation in Excel （video） Chapter
5 Homework (due with first mid term) 1.
You
deposit $5,000 in a saving account at 10% compounded annually. How much is
your first year interest? How much is your second year interest? (500, 550) 2.
What
is the future value of $5,000 invested for 3 years at 10% compounded
annually? ( 6,655) 3.
You
just bought a TV for $518.4 on credit card. You plan to pay back of $50 a
month for this credit card debt. The credit card charges you 12% of interest
rate on the monthly basis. So how long does it take to pay back your credit
card debt? (11 months) 4.
You
are going to deposit certain amount in the next four years. Your saving
account offers 5% of annual interest rate. First year: $800 Second year: $900 Third year: $1000 Fourth year: $1200. How much you can withdraw four years later? (4168.35) 5.
You
are going to deposit certain amount in the next four years. Your saving
account offers 5% of annual interest rate. First year: $800 Second year: $900 Third year: $1000 Fourth year: $1200. How much is the lump sum value as of today (NPV)? (3429.31) 6.
Ten
years ago, you invested $1,000. Today it is worth $2,000. What rate of interest
did you earn? (7.18%) 7.
At
5 percent interest, how long would it take to triple your
money? (22.52) 8.
What
is the effective annual rate if a bank charges you 12 percent compounded
monthly? (12.68%) 9.
Your
father invested a lump sum 16 years ago at 8% interest for your education.
Today, that account worth $50,000.00. How much did your father deposit 16
years ago? ($14594.50) 10.
You
are borrowing $300,000 to buy a house. The terms of the mortgage call for
monthly payments for 30 years at 3% interest. What is the amount of each
payment? ($1264.81) 11.
You
deposit $200 at the beginning of each month into your saving account
every month. After two years (24 deposits total), your account value is
$6,000. Assuming monthly compounding, what is your monthly rate that the bank
provides? (1.74%) 12.
You want to buy a fancy car. For this goal,
you plan to save $5,500 per year, beginning immediately. You will make 4 deposits in an account that
pays 8% interest. Under these assumptions,
how much will you have 4 years from today? ($26,766) 13.
Citi
card is giving you a good deal. You can transfer your balance from your
current credit card to Citi new card with $50 balance transfer fee. The new
card charges at 5% a year. But your old card charges at 12% a year. Your
balance in your old card is $5,000. If you can afford to pay back to the
credit card of $250 a month. How much quicker does it take you to pay back
your debt with the new card? (Hint: for the new card, your debt = 5000+50=5050;
Assume monthly compounding by credit card companies). (1.28 months) 14. Your girlfriend just won the Florida
lottery. She has the choice of
$40,000,000 today or a 20-year annuity of $2,850,000, with the first payment
coming one year from today. If the mutual fund of hers provides 4% of return
each year for the next 20 years, which payment option is more attractive to
her? ($40million) 15. The Thailand Co. is considering the
purchase of some new equipment. The quote consists of a quarterly payment of
$4,740 for 10 years at 6.5 percent interest. What is the purchase price of
the equipment? ($138,617.88) 16. The condominium at the beach that you
want to buy costs $249,500. You plan to make a cash down payment of 20
percent and finance the balance over 10 years at 6.75 percent. What will be
the amount of your monthly mortgage payment? ($2,291.89) 17. Today, you are purchasing a 15-year, 8
percent annuity at a cost of $70,000. The annuity will pay annual payments.
What is the amount of each payment? ($8,178.07) 18. Shannon wants to have $10,000 in an
investment account three years from now. The account will pay 0.4 percent
interest per month. If Shannon saves money every month, starting one month
from now, how much will she have to save each month? ($258.81) 19. Trevor's Tires is offering a set of 4
premium tires on sale for $450. The credit terms are 24 months at $20 per
month. What is the interest rate on this offer? (6.27 percent) 20. Top Quality Investments will pay you
$2,000 a year for 25 years in exchange for $19,000 today. What interest rate
are you earning on this annuity? (9.42 percent) 21. You have just won the lottery! You can
receive $10,000 a year for 8 years or $57,000 as a lump sum payment today.
What is the interest rate on the annuity? (8.22 percent) 22. Around Town Movers recently purchased a
new truck costing $97,000. The firm financed this purchase at 8.25 percent
interest with monthly payments of $2,379.45. How many years will it take the
firm to pay off this debt? (4.0 years) 23. Expansion, Inc. acquired an additional
business unit for $310,000. The seller agreed to accept annual payments of
$67,000 at an interest rate of 6.5 percent. How many years will it take
Expansion, Inc. to pay for this purchase? (5.68 years) 24. You want to retire early so you know you
must start saving money. Thus, you have decided to save $4,500 a year,
starting at age 25. You plan to retire as soon as you can accumulate
$500,000. If you can earn an average of 11 percent on your savings, how old
will you be when you retire? (49.74 years) 25. You just received a credit offer in an
email. The company is offering you $6,000 at 12.8 percent interest. The
monthly payment is only $110. If you accept this offer, how long will it take
you to pay off the loan? (82.17 months) 26. Fred was persuaded to open a credit card
account and now owes $5,150 on this card. Fred is not charging any additional
purchases because he wants to get this debt paid in full. The card has an APR
of 15.1 percent. How much longer will it take Fred to pay off this balance if
he makes monthly payments of $70 rather than $85? (93.04 months) 27. Bridget plans to save $150 a month,
starting today, for ten years. Jordan plans to save $175 a month for ten
years, starting one month from today. Both Bridget and Jordan expect to earn
an average return of 8 percent on their savings. At the end of the ten years,
Jordan will have approximately _____ more than Bridget. ($4,391) 28. What is the future value of weekly
payments of $25 for six years at 10 percent? ($10,673.90) 29. At the end of this month, Bryan will
start saving $80 a month for retirement through his company's retirement
plan. His employer will contribute an additional $.25 for every $1.00 that
Bryan saves. If he is employed by this firm for 25 more years and earns an
average of 11 percent on his retirement savings, how much will Bryan have in
his retirement account 25 years from now? ($157,613.33) 30. Sky Investments offers an annuity due
with semi-annual payments for 10 years at 7 percent interest. The annuity
costs $90,000 today. What is the amount of each annuity payment? ($6,118.35) 31.
Mr. Jones just won a lottery prize that
will pay him $5,000 a year for thirty years. He will receive the first
payment today. If Mr. Jones can earn 5.5 percent on his money, what are his
winnings worth to him today? ($76,665.51) |
Summary of math and excel equations Math
Equations FV
= PV *(1+r)^n PV
= FV / ((1+r)^n) N
= ln(FV/PV) / ln(1+r) Rate
= (FV/PV)1/n -1 Annuity:
N = ln(FV/C*r+1)/(ln(1+r)) Or
N = ln(1/(1-(PV/C)*r)))/ (ln(1+r)) EAR
= (1+APR/m)^m-1 APR
= (1+EAR)^(1/m)*m
Excel
Formulas To get FV, use FV function. =abs(fv(rate, nper,
pmt, pv)) To get PV, use PV
function = abs(pv(rate, nper,
pmt, fv)) To get r, use rate
function =
rate(nper, pmt, pv, -fv) To get number of years,
use nper function = nper(rate, pmt, pv,
-fv) To
get annuity payment, use PMT function = pmt(rate, nper, pv,
-fv) To
get Effective rate (EAR), use Effect function =
effect(nominal_rate, npery) To
get annual percentage rate (APR), use nominal function =
nominal(effective rate, npery) NPV NFV calculator(FYI, might be
helpful) Time Value of Money
Calculator |
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Chapter 3 Financial Statement Analysis Experts Explain: Financial Statements (well
explained, video) *************
Introduction *************** Let’s
compare Nike with GoPro based on 10K (www.nasdaq.com) Nike Income
Statement (values in 000's)
Nike Balance
Sheet (values in 000's)
Nike Cash
Flow Statement (values in 000's)
For discussion: Which company is
better? Let’s
find it out by comparing stock performance between the two firms. What
is your conclusion? ******* Part I: Balance Sheet and
Income Statement ************** Home Depot (Ticker in the
market: HD) reported the following information for the year ended January 30th,
2011 (expressed in millions). Sales: $67,977 Cost of goods sold: $44,693 Marketing, general and
administrative expenses: $15,885 Depreciation expenses:
$1,616 Interest expense: $530 Tax rate: 36.70% Number of shares
outstanding: 1,623 Dividends paid to
stockholders: $1,569. Use the above information
to try to prepare the income statement of Home Depot
for the year ended January 30th, 2011 Home Depot (Ticker in the
market: HD) reported the following information for the year ended January 30th,
2011 (expressed in millions). Cash: $545 Accounts receivables:
$1,085 Inventories: $10625 Other current assets:
$1,224 Gross fixed assets: $38,471 Accumulated depreciation:
$13,411 Other fixed assets: $1,586 Accounts payable: $9,080 Short term notes payable:
$1,042 Long term debt: $11,114 Total common stock: $3,894 Retained earnings: $14,995 Use
the above information to try to prepare the balance
sheet of Home Depot for the year ended January 30th, 2011 |
GoPro Income
Statement (values in 000's)
GoPro
Balance Sheet (values in 000's)
GoPro Cash
flow Statement (values in 000's)
http://www.jufinance.com/10k/bs http://www.jufinance.com/10k/is http://www.jufinance.com/10k/cf Ratio
Analysis (plus balance
sheet, income statement) https://www.jufinance.com/ratio |
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********* Part II: Cash Flow Statement ******************
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In Millions of USD (except for per share items) |
52 weeks ending 2014-02-02 |
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Net Income/Starting Line |
5,385.00 |
|
Depreciation/Depletion |
1,757.00 |
|
Amortization |
- |
|
Deferred Taxes |
-31 |
|
Non-Cash Items |
228 |
|
Changes in Working Capital |
289 |
|
Cash from Operating Activities |
7,628.00 |
|
Capital Expenditures |
-1,389.00 |
|
Other Investing Cash Flow Items, Total |
-118 |
|
Cash from Investing Activities |
-1,507.00 |
|
Financing Cash Flow Items |
-37 |
|
Total Cash Dividends Paid |
-2,243.00 |
|
Issuance (Retirement) of Stock, Net |
-8,305.00 |
|
Issuance (Retirement) of Debt, Net |
3,933.00 |
|
Cash from Financing Activities |
-6,652.00 |
|
Foreign Exchange Effects |
-34 |
|
Net Change in Cash |
-565 |
|
Cash Interest Paid, Supplemental |
639 |
|
Cash Taxes Paid, Supplemental |
2,839.00 |
Discussion:
2. What does net change in cash mean?
Now
let’s learn how to calculate cash changes in each session
Source
of cash
- Decrease
in an Asset
- Example: Selling inventories or
collecting receivables provides cash
- Increase
in Liability or Equity
- Example: Borrowing funds or selling
stocks provides cash
Use
of Cash
- Increase
in an Asset
- Example: Investing in fixed assets
or buying more inventories uses cash
- Decrease in Liability or Equity
- Example: Paying off a loan or
buying back stock uses cash
Cash
Flow from Operations: Five Steps
1. Add back depreciation.
2. Subtract (add) any increase (decrease) in accounts
receivable.
3. Subtract (add) any increase (decrease) in inventory.
4. Subtract (add) any increase (decrease) in other current
assets.
5. Add (subtract) any increase (decrease) in accounts payable
and other accrued expenses
Chapter 3
HW (due with first mid term)
1.
Firm AAA just showed how it
operated in the prior year.
Sales = $2,000; Cost of Goods Sold =
$1,000; Depreciation Expense = $200; Administrative Expenses = $180; Interest
Expense = $30; Marketing Expenses = $50; and Taxes = $200. Prepare income statement
2. A firm has $2000 in current assets, $3000 in fixed assets, $300 in accounts receivables, $300 accounts payable, and $800 in cash. What is the amount of the inventory? (hint: 900)
3.
A
firm has net working capital of $1000. Long-term debt is $5000, total assets
are $8000, and fixed assets are $5000. What is the amount of the total
equity? (Hint: to find total equity, you need to calculate total debt, which
is a sum of long term debt and short term debt. Short term can be found from
new working capital.) (hint: 1000)
4. Andre's Bakery has sales of $100,000 with costs of $50,000. Interest expense is $20,000 and depreciation is $10,000. The tax rate is 35 percent. What is the amount of tax paid? (hint: 7000)(hint: tax = taxable income * tax rate and taxable income = EBT)
5.
Andre's Bakery has sales of $100,000 with
costs of $50,000. Interest expense is $20,000 and depreciation is $10,000.
The tax rate is 35 percent. The company also paid $3,000 for dividend. What
is the retained earning? (hint: retained earning = net income -
dividend)(hint: 10,000)
|
Cash
Flow Statement Answer |
calculation for changes |
||
|
Cash
at the beginning of the year |
2060 |
||
|
Cash from operation |
|||
|
net
income |
3843 |
||
|
plus
depreciation |
1760 |
||
|
-/+ AR
|
-807 |
807 |
|
|
-/+ Inventory |
-3132 |
3132 |
|
|
+/- AP |
1134 |
1134 |
|
|
net change in cash from operation |
2798 |
||
|
Cash from investment |
|||
|
-/+ (NFA+depreciation) |
-1680 |
1680 |
|
|
net change in cash from investment |
-1680 |
||
|
Cash from finaning |
|||
|
+/- long term debt |
1700 |
1700 |
|
|
+/- common stock |
2500 |
2500 |
|
|
- dividend |
-6375 |
6375 |
|
|
net change in cash from investment |
-2175 |
||
|
Total net change of cash |
-1057 |
||
|
Cash at the end of the year |
1003 |
||
(The excel file of the above cash flow statement is here)
More
exercises of chapter 3 (word file here)
More exercise
Prepare cash flow statement based on information
given
Increase in accounts receivable $20
Decrease in inventory 10
Operating income 120
Interest expense 20
Decrease in accounts payable 20
Dividend 10
Increase in common stock 30
Increase in net fixed asset 10
Depreciation 5
Income tax 10
Beginning cash 100
First
Mid Term Exam (9-22)
Chapter 6 Risk and Return
Risk
and Return in class exercise
Excel file here will be provided soon
Steps: In class exercise
1. Pick three stocks. Has to be the leading firm
in three different industries.
2. From finance.yahoo.com, collect stock prices
of the above firms, in the past five years
Steps:
·
Goto finance.yahoo.com,
search for the company
·
Click on “Historical prices” in the left
column on the top and choose monthly stock prices.
·
Change the starting date and ending date to
“Oct 9th, 2014” and “Oct 9th, 2019”, respectively.
·
Download it to Excel
·
Delete all inputs, except “adj close” – this is
the closing price adjusted for dividend.
·
Merge the three sets of data just downloaded
3. Evaluate the performance of each stock:
·
Calculate the monthly stock returns.
·
Calculate the average return
·
Calculate standard deviation as a proxy for
risk
·
Calculate correlation among the three stocks.
·
Calculate beta. But you need to download
S&P500 index values in the past
five years from finance.yahoo.com.
·
Calculate stock
returns based on CAPM.
·
Draw SML
·
Conclusion and take
away?
Effect
of Diversification
Please refer to template
Chapter 6 In Class Exercise(Word file here )
HW
of chapter 6 (Due with the second mid
Term exam)
Chapter
6 Homework
1)
Stock A has the following returns for various states of the economy:
State
of
the
Economy Probability Stock
A's Return
Recession 10% -30%
Below
Average 20% -2%
Average 40% 10%
Above
Average 20% 18%
Boom 10% 40%
Stock
A's expected return is? (ANSWER: 8.2%)
2)
Joe purchased 800 shares of Robotics Stock at $3 per share on 1/1/09. Bill
sold the shares on 12/31/09 for $3.45. Robotics stock has a beta of 1.9, the
risk-free rate of return is 4%, and the market risk premium is 9%. Joe's
holding period return is? (ANSWER:
15%)
3. You
own a portfolio with the following expected returns given the various states
of the economy. What is the overall portfolio expected return? (ANSWER:
9.05%)
State
of
economy probability
of state of
economy rate
of return if state occurs
Boom 27% 14%
Normal 70% 8%
Recession 3% -11%
4)
The prices for the Electric Circuit Corporation for the first quarter of 2009
are given below. The price of the stock on January 1, 2009 was
$130. Find the holding period return for an investor who purchased the stock
onJanuary 1, 2009 and sold it the last day of March 2009. (ANSWER: 2.12%)
Month
End Price
January $125.00
February 138.50
March 132.75
5)
Collectibles Corp. has a beta of 2.5 and a standard deviation of returns of
20%. The return on the market portfolio is 15% and the risk free rate is 4%.
What is the risk premium on the market?
(ANSWER: 11%)
6)
An investor currently holds the following portfolio:
Amount
Invested
8,000
shares of
Stock A $16,000 Beta = 1.3
15,000
shares of Stock B $48,000 Beta = 1.8
25,000
shares of Stock C $96,000 Beta = 2.2
The
beta for the portfolio is? (ANSWER:
1.99)
7)
Assume that you have $165,000 invested in a stock that is returning 11.50%,
$85,000 invested in a stock that is returning 22.75%, and $235,000 invested
in a stock that is returning 10.25%. What is the expected return of your
portfolio? (ANSWER: 13%)
8)
If you hold a portfolio made up of the following stocks:
Investment
Value Beta
Stock
A $8,000 1.5
Stock
B $10,000 1.0
Stock
C $2,000 .5
What
is the beta of the portfolio? (ANSWER:
1.15)
9. The risk-free rate of
return is 3.9 percent and the market risk premium (rm –rf)
is 6.2 percent. What is the expected rate of return on a stock with a beta of
1.21? (ANSWER: 11.4%)
10. You own a portfolio consisting of the stocks below.
Stock Percentage
of
portfolio Beta
1. 20% 1
2. 30% 0.5
3. 50% 1.6
The risk free rate is 3% and
market return is 10%.
a. Calculate
the portfolio beta. (ANSWER:
1.15)
b. Calculate
the expected return of your portfolio. (ANSWER: 11.05%)
11. Computing holding period return for Jazman and
Solomon for period 1 through 3 (bought in period 1 and sold in period 3).
Show the holding period returns for each company. (ANSWER: 50%, -25%)
Period Jazman Solomon
1 $10 $20
2 $12 $25
3 $15 $15
12. Calculate expected return
(ANSWER:
12%)
|
State of the economy |
Probability of the states |
% Return (Cash Flow/Inv. Cost) |
|
Economic Recession |
30% |
5% |
|
Strong and moderate Economic Growth |
70% |
15% |
13. Calculate the expected returns of the
following cases, respectively
1) Invest
$10,000 in Treasury bill with guaranteed return of 4%. (ANSWER: 4%)
2) Investment
$10,000 in Apple. 50% possibility to earn 20% return and 50% possibility to
lose 10% of investment.(ANSWER: 5%)
3) Investment
$10,000 in Wal-Mart. 50% possibility to earn 5% return and 50% possibility to
earn 0% of investment.(ANSWER: 2.5%)
14. Rank the risk of the following cases, from
the least risky one the most risky one
(ANSWER: 1, 3, 2)
1) Invest
$10,000 in Treasury bill with guaranteed return of 4%.
2) Investment
$10,000 in Apple. 50% possibility to earn 20% return and 50% possibility to
lose 10% of investment.
3) Investment
$10,000 in Wal-Mart. 50% possibility to earn 5% return and 50% possibility to
earn 0% of investment.
15. An
investor currently holds the following portfolio:
Amount
Invested
8,000
shares of
Stock A $10,000 Beta = 1.5
15,000
shares of Stock B $20,000 Beta = 0.8
25,000
shares of Stock C $20,000 Beta = 1.2
Calculate
the beta for the portfolio.(ANSWER:
1.1)
Excel
Command:
sumproduct(array1,
array2)
stdev(observation1,
obv2, obv3,….)
correl(stock
1’s return, stock 2’s return)
beta
= slope(stock return, sp500 return)
Holding Period Return Calculator
Two Stock Portfolio Return and
Standard Deviation
Chapter 7 Bond pricing
Simplified Balance Sheet of WalMart
|
In Millions of USD |
As
of 2019-01-31 |
|
Total Assets |
219,295,000 |
|
Total Current Liabilities |
77,477,000 |
|
Long Term Debt |
43,520,000 |
|
Total Liabilities |
139,661,000 |
|
Total Equity |
72,496,000 |
|
Total Liabilities & Shareholders' Equity |
219,295,000 |
For discussion:
· What is this “long term debt”?
· Who is the lender of this “long term debt”?
So this long term debt is called bond in the financial
market. Where can you find the pricing information and other specifications
of the bond issued by WMT?
Investing Basics: Bonds(video)
FINRA
– Bond market information
http://finra-markets.morningstar.com/BondCenter/Default.jsp
Chapter 7 Study guide
1. Go to http://finra-markets.morningstar.com/BondCenter/Default.jsp , the bond market data website of FINRA to find bond
information. For example, find bond sponsored by Wal-mart
Or, just go to www.finra.org, è Investor center è market data è bond è corporate bond
Corporate
Bond
|
|
|
|
|
|
|
ratings |
last sale |
||
|
Issuer Name |
Symbol |
Callable |
Sub-Product Type |
Coupon |
Maturity |
Moody's® |
S&P |
Price |
Yield |
|
WMT.GP |
Corporate Bond |
7.55 |
2/15/2030 |
Aa2 |
AA |
152.43 |
1.487 |
||
|
WMT.GP |
Corporate Bond |
6.75 |
10/15/2023 |
Aa2 |
AA |
117.932 |
0.744 |
||
|
WMT.GP |
Corporate Bond |
5.25 |
9/1/2035 |
Aa2 |
AA |
144,457 |
3.272 |
||
|
WMT.IA |
Corporate Bond |
5.875 |
4/5/2027 |
Aa2 |
AA |
128.842 |
1.229 |
||
|
WMT.IC |
No |
Corporate Bond |
6.5 |
8/15/2037 |
Aa2 |
AA |
159.745 |
2.228 |
|
|
WMT4117477 |
Yes |
Corporate Bond |
3.3 |
4/22/2024 |
Aa2 |
AA |
157.688 |
2.210 |
|
2. 2.
Understand what is coupon, coupon rate, yield, yield to maturity, market
price, par value, maturity, annual bond, semi-annual bond, current yield.
3. 3.
Understand how to price bond
Bond price = abs(pv(yield,
maturity, coupon, 1000)) -------
annual coupon
Bond price = abs(pv(yield/2,
maturity*2, coupon/2, 1000)) ------- semi-annual coupon
Also change the yield and
observe the price changes. Summarize the price change pattern and draw a
graph to demonstrate your findings.
Again, when yield to maturity
of this semi_annual coupon bond is 3%, how should this WMT
bond sell for?
4. Understand
how to calculate bond returns
Yield to maturity =
rate(maturity, coupon, -market price, 1000) – annual coupon
Yield to maturity =
rate(maturity*2, coupon/2, -market price, 1000)*2 – semi-annual
coupon
For example, when the annual
coupon bond is selling for $1,200, what is its return to investors?
For example, when the semi-annual
coupon bond is selling for $1,200, what is its return to investors?
5. Current
yield: For the above bond, calculate current yield.
6. Zero
coupon bond: coupon=0 and treat it as semi-annual coupon bond.
Example: A ten year zero coupon bond is selling for $400. How
much is its yield to maturity?
A ten year zero coupon
bond’s yield to maturity is 10%. How much is its price?
7. Understand
what is bond rating and how to read those ratings. (based on z
score. What is z score?)
a. Who
are Moody, S&P and Fitch?
b. What
is IBM’s rating?
c. Is
the rating for IBM the highest?
d. Who
earned the highest rating?
Chapter 7 Home Work
(due with the second mid-term)
1. IBM
5 year 2% annual coupon bond is selling for $950. How much
this IBM bond’s YTM? 3.09%
2. IBM
10 year 4% semi_annual coupon bond is selling for $950. How
much is this IBM bond’s YTM? 4.63%
3. IBM
10 year 5% annual coupon bond offers 8% of return. How much
is the price of this bond? 798.7
4. IBM
5 year 5% semi-annual coupon bond offers 8% of return. How
much is the price of this bond? $878.34
5. IBM
20 year zero coupon bond offers 8% return. How much is the price of this
bond? 208.29
6. Collingwood
Homes has a bond issue outstanding that pays an 8.5 percent coupon and
matures in 18.5 years. The bonds have a par value of $1,000 and a market
price of $964.20. Interest is paid semiannually. What is the yield to
maturity? 8.9%
7. Grand
Adventure Properties offers a 9.5 percent coupon bond with annual payments.
The yield to maturity is 11.2 percent and the maturity date is 11 years from
today. What is the market price of this bond if the face value is
$1,000? 895
8. The
zero coupon bonds of D&L Movers have a market price of $319.24, a face
value of $1,000, and a yield to maturity of 9.17 percent. How many years is
it until these bonds mature? 12.73 years
9. A
zero coupon bond with a face value of $1,000 is issued with an initial price
of $212.56. The bond matures in 25 years. What is the yield to
maturity? 6.29%
10. The bonds issued by Stainless
Tubs bear a 6 percent coupon, payable semiannually. The bonds
mature in 11 years and have a $1,000 face value. Currently, the bonds sell
for $989. What is the yield to maturity? 6.14%
Summary of bond pricing EXCEL functions
To calculate bond price (annual coupon bond):
Price=abs(pv(yield to maturity, years left to
maturity, coupon rate*1000, 1000)
To calculate yield to maturity (annual coupon
bond)::
Yield to maturity = rate(years left to
maturity, coupon rate *1000, -price, 1000)
To calculate bond price (semi-annual
coupon bond):
Price=abs(pv(yield to maturity/2, years
left to maturity*2, coupon rate*1000/2, 1000)
To calculate yield to maturity (semi-annual
coupon bond):
Yield to maturity = rate(years left to
maturity*2, coupon rate *1000/2, -price, 1000)*2
To calculate number of years left(annual
coupon bond)
Number of years =nper(yield to maturity, coupon
rate*1000, -price, 1000)
To calculate number of years left(semi-annual
coupon bond)
Number of years =nper(yield to
maturity/2, coupon rate*1000/2, -price, 1000)/2
To calculate coupon (annual coupon bond)
Coupon = pmt(yield to maturity, number of
years left, -price, 1000)
Coupon rate = coupon / 1000
To calculate coupon (semi-annual coupon bond)
Coupon = pmt(yield to maturity/2, number of
years left*2, -price, 1000)*2
Coupon rate = coupon / 1000
Math Formula (FYI)
C: Coupon, M: Par, $1,000; i: Yield to maturity; n:
years left to maturity
For Semi-annual, F=2 for semi-annual coupon
M: Par, $1,000; i: Yield to maturity; n:
years left to maturity
Bond calculation (Thanks to Dr. Lane)
Second mid Term Exam (10/20, take it online,
on blackboard)
Chapter 8 Stock Valuation
Wal-Mart
Dividend History
|
Date |
Dividends |
|
8/13/2020 |
0.54 |
|
5/7/2020 |
0.54 |
|
3/19/2020 |
0.54 |
|
12/5/2019 |
0.53 |
|
8/08/2019 |
0.53 |
|
9/05/2019 |
0.53 |
|
14/03/2019 |
0.53 |
|
6/12/2018 |
0.52 |
|
9/08/2018 |
0.52 |
|
10/05/2018 |
0.52 |
|
8/03/2018 |
0.52 |
|
7/12/2017 |
0.51 |
|
9/08/2017 |
0.51 |
|
10/05/2017 |
0.51 |
|
8/03/2017 |
0.51 |
|
7/12/2016 |
0.5 |
|
10/08/2016 |
0.5 |
|
11/05/2016 |
0.5 |
|
9/03/2016 |
0.5 |
|
2/12/2015 |
0.49 |
|
5/08/2015 |
0.49 |
|
6/05/2015 |
0.49 |
|
11/03/2015 |
0.49 |
|
3/12/2014 |
0.48 |
|
6/08/2014 |
0.48 |
|
7/05/2014 |
0.48 |
|
7/03/2014 |
0.48 |
|
4/12/2013 |
0.47 |
|
7/08/2013 |
0.47 |
|
8/05/2013 |
0.47 |
|
8/03/2013 |
0.47 |
For class discussion:
What
conclusions can be drawn from the above information?
Can
we figure out the stock price of Wal-Mart based on dividend, with reasonable
assumptions?
Dividend Growth Model
Po= D1/(r-g) or Po= Do*(1+g)/(r-g)
R = D1/Po+g = Do*(1+g)/Po+g
D1=Do*(1+g); D2= D1*(1+g)…
Dividend growth model Calculator
Chapter 8 Study Guide
Imagine you bought 100 shares of Wal-Mart (Ticker: WMT) a
year ago.
1. How is your holding period return in the prior year?
Price in 11/7/2018
was $104.88 and price of 11/7/2019 is $119.50
2. The
followings are from google/finance about WMT. https://finance.yahoo.com/quote/WMT?p=WMT&.tsrc=fin-srch
|
|||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||
What does each item
indicate?
From finviz.com https://finviz.com/quote.ashx?t=WMT
3. You
own 100 shares of WMT. Are you a significant shareholder of WMT? What type of
rights you have as minor shareholders?
4. If
WMT runs into trouble, how risky is your investment in WMT? Compare with
Treasury bill investors, Treasury bond investors, WMT bond investors, Apple
stock holders, etc.
5. Doug McMillon is the
CEO of Wal-Mart. Do you have any suggestive advices for him? How can you let
him hear from you? How much do you trust him not to abuse your investment?
Are there any ways to discipline him?
6. More
exercise about the dividend growth model.
Consider the valuation of a
common stock that paid $1.00 dividend at the end of the last year and is
expected to pay a cash dividend in the future. Dividends are expected to grow
at 10% and the investors required rate of return is 17%. How much is the
price?
7. The
current market price of stock is $90 and the stock pays dividend of $3 with a
growth rate of 5%. What is the return of this stock?
HW of chapter 8 (due with the
third mid term exam)
1.
Northern Gas recently paid a $2.80 annual
dividend on its common stock. This dividend increases at an average rate of
3.8 percent per year. The stock is currently selling for $26.91 a share. What
is the market rate of return? (answer:
14.6%)
2.
Douglass Gardens pays an annual dividend
that is expected to increase by 4.1 percent per year. The stock commands a
market rate of return of 12.6 percent and sells for $24.90 a share. What is
the expected amount of the next dividend? (answer:
2.12)
3.
IBM just paid $3.00 dividend per share to
investors. The dividend growth rate is 10%. What is the expected dividend of
the next year? (answer: 3.3)
4.
You bought 1 share of HPD for $20 in May
2008 and sold it for $30 in May 2009. How much is the holding period return? (answer: 50%)
5.
The current market price of stock is $50
and the stock is expected to pay dividend of $2 with a growth rate of 6%. How
much is the expected return to stockholders? (answer: 10%)
6.
The stockholder’s
expected return is 8% and the stock is expected to pay dividend of $2 with a
growth rate of 4%. How much should the stock be traded for? (answer: 50)
7.
The stockholder’s
expected return is 8% and the stock is expected to pay dividend of $2 with a
growth rate of 4%. How much is the
dividend expected to be three years from now? (Hint: D3 = D2*(1+g)
= D1*(1+g)2 )(answer:
2.16)
8.
Kilsheimer
Company just paid a dividend of $5 per share. Future dividends are expected
to grow at a constant rate of 7% per year. The value of the stock is $42.80.
What is the required return of this stock?(answer: 19.5%)
9.
Investors
of Creamy Custard common stock earns 15% of return. It just paid a dividend
of $6.00 and dividends are expected to grow at a rate of 6% indefinitely.
What is expected price of Creamy Custard's stock?(answer: 70.67)
10.
Douglass Gardens pays an annual dividend
that is expected to increase by 6 percent per year. The stock commands a
market rate of return of 12.6 percent and sells for $24.90 a share. What is
the dividend yield of this stock? (answer:
6.6%)
Dividend growth model Calculator
(very useful)
Useful website
money.msn.com/investing
zacks.com
minyanville.com
moneychimp.com
navellier.investor.com/portfolio-grader/
nasdaq.com
marketwatch.com
superstockscreener.com
gurufocus.com
portfoliomoney.com
stockconsultant.com
marketgrader.com
moderngraham.com
stockpickr.com
stockta.com
thestreet.com
askstockguru.com
quotes.wsj.com
oldschoolvalue.com
fool.com
analystratings.com
barchart.com
stock2own.com
theonlineinvestor.com
seekingalpha.com
Details
about how to derive the model mathematically (FYI)
The Gordon growth model is a simple discounted cash flow (DCF)
model which can be used to value a stock, mutual fund, or even the entire
stock market. The model is named after Myron Gordon who first published
the model in 1959.
The Gordon model assumes that a
financial security pays a periodic dividend (D) which
grows at a constant rate (g). These growing dividend payments are
assumed to continue forever. The future dividend payments are discounted at
the required rate of return (r) to find the price (P) for the stock
or fund.
Under these simple assumptions, the
price of the security is given by this equation:
In this equation, I’ve
used the “0” subscript
on the price (P) and the “1” subscript
on the dividend (D) to indicate that the price is calculated at time zero and
the dividend is the expected dividend at the end of period one. However, the
equation is commonly written with these subscripts omitted.
Obviously, the assumptions built
into this model are overly simplistic for many real-world valuation
problems. Many companies pay no dividends, and, for those that do,
we may expect changing payout ratios or growth rates as the
business matures.
Despite these
limitations, I believe spending some time experimenting with the Gordon
model can help develop intuition about the relationship between
valuation and return.
Deriving the Gordon Growth Model Equation
The Gordon growth model calculates the
present value of the security by summing an infinite series of discounted
dividend payments which follows the pattern shown here:
Multiplying both sides of the previous
equation by (1+g)/(1+r) gives:
We can then subtract the second equation
from the first equation to get:
Rearranging and simplifying:
Finally, we can simplify further to get
the Gordon growth model equation
dividend growth model:
Refer to http://www.calculatinginvestor.com/2011/05/18/gordon-growth-model/
· Now let’s apply this
Dividend growth model in problem solving.
Chapter 9 WACC
in class Walmart Example (excel)
For class discussion:
· What
is WACC? Let’s compare WACC among WMT, Apple, Amazon, Testla.
·
Why is WACC important?
·
If WACC decreases, is it a good or a bad news
to the stock holders?
·
How to apply WACC to figure out a firm’s
intrinsic value?
·
What is DCF (discounted cash flow) approach?
One option (if beta is given, refer to chapter
13)
Another option (if dividend is given):
WACC Formula
Discount rate to figure out the value of projects is called WACC
(weighted average cost of capital)
WACC = weight of debt * cost of debt + weight
of equity *( cost of equity)
Wd=
total debt / Total capital = total borrowed / total capital
We=
total equity/ Total capital
Cost of debt = rate(nper, coupon, -(price – flotation costs),
1000)*(1-tax rate)
Cost of Equity = D1/(Po – Flotation Cost) +
g
D1: Next period dividend; Po: Current stock price; g: dividend
growth rate
Note:
flotation costs = flotation percentage * price
Or if
beta is given, use CAPM model (refer to chapter 6)
Cost
of equity = risk free rate + beta *(market return – risk free rate)
Cost
of equity = risk free rate + beta * market risk premium
Discussion:
· Cheaper
to raise capital from debt market. Why? Why not 100% financing via borrowing?
· Why
tax rate cannot reduce firms’ cost of equity?
In Class Exercise
IBM financed 10m via debt coupon 5%, 10 year,
price is $950 and flotation is 7% of the price, tax 40%.
IBM financed 20m via equity. D1=$5. Po=50, g
is 5%. Flotation cost =0. So WACC?
Wd=1/3. We=2/3.
Kd = rate(10, 5%*1000, -(950-950*7%),
1000)*(1-40%) = 3.98%
Ke = 5/(50 – 0) + 5% =15%
WACC = Wd*Kd +We*Ke = 11 %
HOMEWORK
of Chapter 9 (due with the third mid term)
1. Firm AAA sold a noncallable bond now has 20
years to maturity. 9.25% annual coupon rate, paid semiannually,
sells at a price = $1,075, par = $1,000. Tax rate = 40%, calculate
after tax cost of debt (5.08%)
2. Firm AAA’s equity
condition is as follows. D1 = $1.25; P0 =
$27.50; g = 5.00%; and Flotation = 6.00% of price. Calculate cost
of equity (9.84%)
3. Firm AAA raised 10m from the capital market.
In it, 3m is from the debt market and the rest from the equity market.
Calculate WACC.
Weighted
Average Cost of Capital (WACC) Calculator (FYI)
http://www.ultimatecalculators.com/weighted_average_cost_of_capital_WACC_calculator.html
(both annual and semi-annual)
WACC calculator (annual coupon bond)
WACC calculator (semi-annual coupon bond)
(www.jufinance.com/wacc_1)
Walmart Inc (NYSE:WMT) WACC %: 3.28% As of
Today
As of today (2020-10-29), Walmart's weighted average cost of
capital is 3.28%. Walmart's ROIC % is 8.73% (calculated using TTM income statement data). Walmart
generates higher returns on investment than it costs the company to raise the
capital needed for that investment. It is earning excess returns. A firm that
expects to continue generating positive excess returns on new investments in
the future will see its value increase as growth increases.https://www.gurufocus.com/term/wacc/WMT/WACC/Walmart%2BInc
Let’s calculate the WACC of Walmart from scratch.
Excel (coming soon)
Amazon.com Inc (NAS:AMZN) WACC %:8.36% As of
Today
As of today (2020-10-29), Amazon.com's weighted average cost of
capital is 8.36%. Amazon.com's ROIC % is 10.01% (calculated using TTM income statement data).
Amazon.com generates higher returns on investment than it costs the company
to raise the capital needed for that investment. It is earning excess
returns. A firm that expects to continue generating positive excess returns
on new investments in the future will see its value increase as growth
increases.https://www.gurufocus.com/term/wacc/AMZN/WACC-Percentage/Amazon.com%20Inc
Apple Inc (NAS:AAPL) WACC %:8.15% As of
Today
As of today (2020-10-29), Apple's weighted average cost of
capital is 8.15%. Apple's ROIC % is 24.02% (calculated using TTM income statement data). Apple
generates higher returns on investment than it costs the company to raise the
capital needed for that investment. It is earning excess returns. A firm that
expects to continue generating positive excess returns on new investments in
the future will see its value increase as growth increases..https://www.gurufocus.com/term/wacc/AAPL/WACC/Apple%2Binc
Tesla WACC %: 12.01% As of Today
As of today (2020-10-29),
Tesla's weighted average cost of capital is 12.01%. Tesla's ROIC % is 4.60% (calculated
using TTM income statement data). Tesla earns returns that do not match up to
its cost of capital. It will destroy value as it grows.
https://www.gurufocus.com/term/wacc/NAS:TSLA/WACC-/Tesla
Cost of Capital by Sector (US)
Date
of Analysis:
Data used is as of January 2019
|
Industry Name |
Number of Firms |
Beta |
Cost of Equity |
E/(D+E) |
Std Dev in Stock |
Cost of Debt |
Tax Rate |
After-tax Cost of Debt |
D/(D+E) |
Cost of Capital |
|
Advertising |
48 |
1.22 |
9.93% |
58.46% |
66.44% |
5.43% |
5.69% |
4.07% |
41.54% |
7.49% |
|
Aerospace/Defense |
85 |
1.24 |
10.07% |
79.75% |
40.77% |
4.56% |
11.40% |
3.42% |
20.25% |
8.72% |
|
Air
Transport |
18 |
1.02 |
8.77% |
52.68% |
34.19% |
4.18% |
6.48% |
3.14% |
47.32% |
6.10% |
|
Apparel |
50 |
0.93 |
8.23% |
74.07% |
48.89% |
4.56% |
14.19% |
3.42% |
25.93% |
6.98% |
|
Auto
& Truck |
14 |
0.79 |
7.41% |
33.85% |
38.24% |
4.18% |
10.15% |
3.14% |
66.15% |
4.58% |
|
Auto
Parts |
52 |
1.17 |
9.63% |
71.45% |
44.28% |
4.56% |
11.57% |
3.42% |
28.55% |
7.86% |
|
Bank
(Money Center) |
10 |
0.71 |
6.93% |
32.91% |
18.29% |
3.58% |
26.01% |
2.69% |
67.09% |
4.08% |
|
Banks
(Regional) |
633 |
0.57 |
6.07% |
56.65% |
20.60% |
3.58% |
26.99% |
2.69% |
43.35% |
4.60% |
|
Beverage
(Alcoholic) |
31 |
1.3 |
10.42% |
74.53% |
33.49% |
4.18% |
2.55% |
3.14% |
25.47% |
8.57% |
|
Beverage
(Soft) |
37 |
1.18 |
9.70% |
80.95% |
50.32% |
4.56% |
3.87% |
3.42% |
19.05% |
8.50% |
|
Broadcasting |
24 |
1.02 |
8.76% |
40.89% |
37.29% |
4.18% |
2.54% |
3.14% |
59.11% |
5.44% |
|
Brokerage
& Investment Banking |
38 |
1.21 |
9.87% |
25.21% |
32.08% |
4.18% |
22.47% |
3.14% |
74.79% |
4.83% |
|
Building
Materials |
42 |
1.1 |
9.21% |
75.19% |
33.40% |
4.18% |
16.11% |
3.14% |
24.81% |
7.70% |
|
Business
& Consumer Services |
168 |
1.22 |
9.94% |
73.70% |
44.86% |
4.56% |
7.60% |
3.42% |
26.30% |
8.22% |
|
Cable
TV |
14 |
1.13 |
9.43% |
58.58% |
26.32% |
4.18% |
3.61% |
3.14% |
41.42% |
6.82% |
|
Chemical
(Basic) |
39 |
1.55 |
11.92% |
60.07% |
54.33% |
4.56% |
7.33% |
3.42% |
39.93% |
8.52% |
|
Chemical
(Diversified) |
6 |
1.82 |
13.51% |
73.10% |
32.60% |
4.18% |
3.18% |
3.14% |
26.90% |
10.72% |
|
Chemical
(Specialty) |
89 |
1.17 |
9.65% |
75.40% |
42.33% |
4.56% |
10.71% |
3.42% |
24.60% |
8.12% |
|
Coal
& Related Energy |
23 |
1.17 |
9.64% |
59.74% |
53.58% |
4.56% |
1.75% |
3.42% |
40.26% |
7.14% |
|
Computer
Services |
119 |
1.27 |
10.25% |
71.85% |
41.69% |
4.56% |
8.75% |
3.42% |
28.15% |
8.32% |
|
Computers/Peripherals |
57 |
1.68 |
12.69% |
79.92% |
49.87% |
4.56% |
6.60% |
3.42% |
20.08% |
10.83% |
|
Construction
Supplies |
48 |
1.45 |
11.34% |
68.55% |
32.24% |
4.18% |
13.21% |
3.14% |
31.45% |
8.76% |
|
Diversified |
23 |
1.36 |
10.78% |
73.82% |
39.46% |
4.18% |
7.41% |
3.14% |
26.18% |
8.78% |
|
Drugs
(Biotechnology) |
481 |
1.51 |
11.69% |
84.09% |
68.96% |
5.43% |
0.93% |
4.07% |
15.91% |
10.48% |
|
Drugs
(Pharmaceutical) |
237 |
1.47 |
11.41% |
87.44% |
72.45% |
5.43% |
2.26% |
4.07% |
12.56% |
10.49% |
|
Education |
35 |
1.28 |
10.29% |
76.49% |
37.66% |
4.18% |
6.14% |
3.14% |
23.51% |
8.61% |
|
Electrical
Equipment |
116 |
1.32 |
10.56% |
81.87% |
57.29% |
4.56% |
4.36% |
3.42% |
18.13% |
9.27% |
|
Electronics
(Consumer & Office) |
19 |
1.19 |
9.78% |
91.10% |
62.71% |
4.56% |
7.67% |
3.42% |
8.90% |
9.21% |
|
Electronics
(General) |
160 |
1.02 |
8.74% |
83.77% |
46.69% |
4.56% |
11.67% |
3.42% |
16.23% |
7.87% |
|
Engineering/Construction |
52 |
1.01 |
8.68% |
67.17% |
40.14% |
4.56% |
7.62% |
3.42% |
32.83% |
6.96% |
|
Entertainment |
120 |
1.33 |
10.61% |
83.43% |
54.34% |
4.56% |
1.93% |
3.42% |
16.57% |
9.42% |
|
Environmental
& Waste Services |
91 |
1.19 |
9.78% |
74.83% |
46.15% |
4.56% |
3.23% |
3.42% |
25.17% |
8.18% |
|
Farming/Agriculture |
33 |
0.72 |
6.95% |
60.15% |
29.07% |
4.18% |
9.64% |
3.14% |
39.85% |
5.43% |
|
Financial
Svcs. (Non-bank & Insurance) |
259 |
0.7 |
6.87% |
8.08% |
27.33% |
4.18% |
20.38% |
3.14% |
91.92% |
3.44% |
|
Food Processing |
83 |
0.81 |
7.51% |
68.12% |
27.46% |
4.18% |
5.17% |
3.14% |
31.88% |
6.12% |
|
Food Wholesalers |
18 |
1.62 |
12.36% |
69.03% |
40.99% |
4.56% |
4.71% |
3.42% |
30.97% |
9.59% |
|
Furn/Home
Furnishings |
30 |
0.88 |
7.95% |
66.37% |
43.51% |
4.56% |
16.96% |
3.42% |
33.63% |
6.43% |
|
Green
& Renewable Energy |
21 |
1.62 |
12.34% |
40.58% |
69.48% |
5.43% |
0.00% |
4.07% |
59.42% |
7.43% |
|
Healthcare
Products |
248 |
1.12 |
9.37% |
87.06% |
56.32% |
4.56% |
5.46% |
3.42% |
12.94% |
8.60% |
|
Healthcare
Support Services |
111 |
1.15 |
9.56% |
73.41% |
48.13% |
4.56% |
8.33% |
3.42% |
26.59% |
7.92% |
|
Heathcare
Information and Technology |
119 |
1.29 |
10.36% |
85.30% |
53.01% |
4.56% |
5.65% |
3.42% |
14.70% |
9.34% |
|
Homebuilding |
31 |
0.98 |
8.53% |
61.64% |
34.08% |
4.18% |
24.35% |
3.14% |
38.36% |
6.46% |
|
Hospitals/Healthcare
Facilities |
34 |
1.12 |
9.34% |
41.71% |
49.69% |
4.56% |
6.88% |
3.42% |
58.29% |
5.89% |
|
Hotel/Gaming |
70 |
1.01 |
8.68% |
61.01% |
35.01% |
4.18% |
9.55% |
3.14% |
38.99% |
6.52% |
|
Household
Products |
141 |
1.13 |
9.42% |
82.56% |
54.64% |
4.56% |
7.14% |
3.42% |
17.44% |
8.37% |
|
Information Services |
71 |
1.12 |
9.36% |
86.91% |
37.11% |
4.18% |
10.37% |
3.14% |
13.09% |
8.55% |
|
Insurance (General) |
20 |
0.87 |
7.88% |
67.63% |
24.63% |
3.58% |
13.97% |
2.69% |
32.37% |
6.20% |
|
Insurance (Life) |
23 |
1.11 |
9.29% |
48.84% |
27.64% |
4.18% |
3.47% |
3.14% |
51.16% |
6.14% |
|
Insurance (Prop/Cas.) |
50 |
0.74 |
7.09% |
79.71% |
23.90% |
3.58% |
15.95% |
2.69% |
20.29% |
6.20% |
|
Investments
& Asset Management |
172 |
1.1 |
9.26% |
59.76% |
35.43% |
4.18% |
7.09% |
3.14% |
40.24% |
6.79% |
|
Machinery |
127 |
1.17 |
9.66% |
78.78% |
34.36% |
4.18% |
13.62% |
3.14% |
21.22% |
8.27% |
|
Metals
& Mining |
94 |
1.32 |
10.56% |
70.53% |
75.46% |
8.43% |
3.06% |
6.32% |
29.47% |
9.31% |
|
Office Equipment & Services |
24 |
1.81 |
13.49% |
61.97% |
39.46% |
4.18% |
13.71% |
3.14% |
38.03% |
9.55% |
|
Oil/Gas
(Integrated) |
5 |
1.16 |
9.58% |
85.29% |
17.62% |
3.58% |
8.91% |
2.69% |
14.71% |
8.57% |
|
Oil/Gas
(Production and Exploration) |
301 |
1.45 |
11.34% |
64.44% |
57.36% |
4.56% |
1.93% |
3.42% |
35.56% |
8.52% |
|
Oil/Gas
Distribution |
20 |
1.07 |
9.06% |
49.68% |
36.03% |
4.18% |
8.05% |
3.14% |
50.32% |
6.08% |
|
Oilfield
Svcs/Equip. |
134 |
1.33 |
10.59% |
68.13% |
49.29% |
4.56% |
4.22% |
3.42% |
31.87% |
8.31% |
|
Packaging & Container |
27 |
1.07 |
9.09% |
60.09% |
27.47% |
4.18% |
13.01% |
3.14% |
39.91% |
6.71% |
|
Paper/Forest
Products |
20 |
1.4 |
11.00% |
67.40% |
42.72% |
4.56% |
8.42% |
3.42% |
32.60% |
8.53% |
|
Power |
51 |
0.54 |
5.92% |
55.74% |
20.53% |
3.58% |
13.59% |
2.69% |
44.26% |
4.49% |
|
Precious
Metals |
91 |
1.19 |
9.78% |
82.48% |
74.54% |
5.43% |
2.08% |
4.07% |
17.52% |
8.78% |
|
Publishing
& Newspapers |
33 |
1.26 |
10.16% |
58.78% |
39.32% |
4.18% |
12.00% |
3.14% |
41.22% |
7.26% |
|
R.E.I.T. |
238 |
0.68 |
6.72% |
52.44% |
21.22% |
3.58% |
2.42% |
2.69% |
47.56% |
4.80% |
|
Real Estate (Development) |
18 |
1.19 |
9.80% |
59.01% |
40.78% |
4.56% |
0.00% |
3.42% |
40.99% |
7.19% |
|
Real Estate (General/Diversified) |
11 |
1.36 |
10.81% |
66.74% |
21.50% |
3.58% |
7.10% |
2.69% |
33.26% |
8.11% |
|
Real
Estate (Operations & Services) |
59 |
1.35 |
10.70% |
60.48% |
42.49% |
4.56% |
8.46% |
3.42% |
39.52% |
7.82% |
|
Recreation |
72 |
0.98 |
8.51% |
73.36% |
42.73% |
4.56% |
7.43% |
3.42% |
26.64% |
7.16% |
|
Reinsurance |
2 |
0.97 |
8.46% |
77.00% |
16.27% |
3.58% |
9.80% |
2.69% |
23.00% |
7.13% |
|
Restaurant/Dining |
78 |
0.8 |
7.44% |
73.79% |
38.18% |
4.18% |
8.96% |
3.14% |
26.21% |
6.31% |
|
Retail
(Automotive) |
24 |
1.15 |
9.56% |
58.17% |
33.22% |
4.18% |
8.89% |
3.14% |
41.83% |
6.87% |
|
Retail
(Building Supply) |
17 |
1.12 |
9.34% |
81.41% |
46.94% |
4.56% |
20.08% |
3.42% |
18.59% |
8.24% |
|
Retail (Distributors) |
88 |
1.44 |
11.26% |
60.37% |
44.59% |
4.56% |
8.15% |
3.42% |
39.63% |
8.15% |
|
Retail
(General) |
19 |
0.91 |
8.12% |
74.58% |
39.63% |
4.18% |
10.85% |
3.14% |
25.42% |
6.85% |
|
Retail
(Grocery and Food) |
12 |
0.45 |
5.37% |
54.52% |
33.06% |
4.18% |
3.01% |
3.14% |
45.48% |
4.35% |
|
Retail
(Online) |
79 |
1.42 |
11.12% |
89.29% |
54.22% |
4.56% |
3.85% |
3.42% |
10.71% |
10.30% |
|
Retail
(Special Lines) |
91 |
1.07 |
9.06% |
65.95% |
49.17% |
4.56% |
13.81% |
3.42% |
34.05% |
7.14% |
|
Rubber&
Tires |
4 |
0.42 |
5.17% |
45.53% |
29.03% |
4.18% |
25.00% |
3.14% |
54.47% |
4.06% |
|
Semiconductor |
72 |
1.34 |
10.64% |
87.61% |
42.66% |
4.56% |
10.19% |
3.42% |
12.39% |
9.75% |
|
Semiconductor
Equip |
41 |
1.39 |
10.96% |
85.78% |
48.66% |
4.56% |
13.77% |
3.42% |
14.22% |
9.88% |
|
Shipbuilding & Marine |
9 |
1.08 |
9.10% |
63.81% |
55.89% |
4.56% |
0.00% |
3.42% |
36.19% |
7.05% |
|
Shoe |
10 |
0.75 |
7.18% |
93.08% |
38.65% |
4.18% |
18.57% |
3.14% |
6.92% |
6.90% |
|
Software
(Entertainment) |
92 |
1.26 |
10.18% |
97.86% |
65.58% |
5.43% |
3.47% |
4.07% |
2.14% |
10.04% |
|
Software
(Internet) |
44 |
1.46 |
11.37% |
82.20% |
51.90% |
4.56% |
0.85% |
3.42% |
17.80% |
9.95% |
|
Software
(System & Application) |
355 |
1.23 |
10.00% |
88.60% |
50.68% |
4.56% |
4.62% |
3.42% |
11.40% |
9.25% |
|
Steel |
37 |
1.62 |
12.33% |
66.56% |
44.32% |
4.56% |
4.18% |
3.42% |
33.44% |
9.35% |
|
Telecom
(Wireless) |
21 |
1.26 |
10.21% |
46.34% |
44.49% |
4.56% |
2.38% |
3.42% |
53.66% |
6.57% |
|
Telecom.
Equipment |
98 |
1.09 |
9.18% |
84.71% |
45.72% |
4.56% |
6.20% |
3.42% |
15.29% |
8.30% |
|
Telecom.
Services |
67 |
1.22 |
9.94% |
52.85% |
54.23% |
4.56% |
3.72% |
3.42% |
47.15% |
6.87% |
|
Tobacco |
17 |
1.29 |
10.37% |
79.85% |
48.08% |
4.56% |
7.27% |
3.42% |
20.15% |
8.97% |
|
Transportation |
19 |
1.14 |
9.49% |
70.19% |
33.82% |
4.18% |
5.29% |
3.14% |
29.81% |
7.59% |
|
Transportation
(Railroads) |
10 |
2.47 |
17.39% |
78.78% |
20.12% |
3.58% |
0.00% |
2.69% |
21.22% |
14.27% |
|
Trucking |
28 |
1.22 |
9.94% |
49.24% |
41.51% |
4.56% |
1.23% |
3.42% |
50.76% |
6.63% |
|
Utility (General) |
18 |
0.27 |
4.27% |
58.36% |
15.34% |
3.58% |
14.66% |
2.69% |
41.64% |
3.61% |
|
Utility
(Water) |
19 |
0.42 |
5.21% |
69.93% |
22.94% |
3.58% |
9.49% |
2.69% |
30.07% |
4.45% |
|
Total
Market |
7209 |
1.12 |
9.38% |
60.01% |
42.67% |
4.56% |
8.76% |
3.42% |
39.99% |
7.00% |
|
Total
Market (without financials) |
6004 |
1.21 |
9.87% |
74.34% |
46.24% |
4.56% |
6.21% |
3.42% |
25.66% |
8.22% |
http://people.stern.nyu.edu/adamodar/New_Home_Page/datafile/wacc.htm
|
11/5
Third Mid Term exam on blackboard under course introduction Chapters 8 and 9 only |
||||||||||||||||||||||||||||||||||||||
|
Chapter 10 Capital Budgeting Chapter 10 In Class Exercise Question 1: Project
with an initial cash outlay of $20,000 with following free cash flows for 5
years. Year Cash
flows 1 $8,000 2 4,000 3 3,000 4 5,000 5 10,000 1) How
much is the payback period (approach one)? · Does
this method consider time value of money? · Easy
to explain to outsiders? 2) If
the firm has a 10% required rate of return. How much is NPV (approach
2)? · What
does NPV means? NPV>0 indicates what? Otherwise? · Does
this method consider time value of money? · Easy
to explain to outsiders? 3) If
the firm has a 10% required rate of return. How much is IRR (approach
3)? · What
does IRR mean? IRR > 10% indicates what? Otherwise? · Does
this method consider time value of money? · Easy
to explain to outsiders? Question 2: Project
with an initial cash outlay of $60,000 with following free cash flows for 5
years. Year FCF Initial
outlay –60,000 1 25,000 2 24,000 3 13,000 4 12,000 5 11,000 The
firm has a 15% required rate of return. Calculate
payback period, NPV, IRR. Analyze your results. Question 3: Mutually Exclusive Projects 1) Consider
the following cash flows for one-year Project A and B, with required rates of
return of 10%. You have limited capital and can invest in one but one
project. Which one? § Initial Outlay: A =
$200; B = $1,500 § Inflow: A
= $300; B = $1,900 2) Example:
Consider two projects, A and B, with initial outlay of $1,000, cost of
capital of 10%, and following cash flows in years 1, 2, and 3: A:
$100 $200 $2,000 B:
$650 $650 $650 Which
project should you choose if they are mutually exclusive? Independent?
Crossover rate? Chapter 10 Homework (due with final) 1. Consider the following two projects, calculate the NPVs of
the two projects. If the two projects are mutually exclusive, which one
should you choose? What about they are independent projects?(answer: NPVa:
-8.67; NPVb: 12.65; Mutually exclusive: B; Independent:B)
2. You
are considering an investment with the following cash flows. If the required
rate of return for this investment is 15.5 percent, should you accept the
investment based solely on the internal rate of return rule? Why?
(answer: 17.53%; Yes, rate<IRR, accept) 4. An
investment project provides cash flows of $1,190 per year for 10 years. If
the initial cost is $8,000, what is the payback period? (answer:
6.72) 5. A
firm evaluates all of its projects by using the NPV decision rule. At a
required return of 14 percent, the NPV for the following project is _____ and
the firm should _____ the project. (answer: 7264.95, accept)
What is the NPV of each project?
What is the IRR of each project? (answer: A- 922.78; 15.33%; B-
871.47; 14.68%) 7. Cash Flow in Period Initial
Outlay 1 2 3 4 $4,000,000 $1,546,170 $1,546,170 $1,546,170 $1,546,170 The Internal Rate of Return (to
nearest whole percent) i? (answer: 20.03%) Welltran Corp. can purchase a new machine
for $1,875,000 that will provide an annual net cash flow of $650,000 per year
for five years. The machine will be sold for $120,000 after taxes at the end
of year five. What is the net present value of the machine if the required
rate of return is 13.5%. (Answer: $447,291.91. Hint: year 5’s cash flow is
650k+120k = 770k) |
NPV,
IRR, Payback Calculator https://www.jufinance.com/capital/ NPV,
IRR, Payback Excel Template https://www.jufinance.com/npv_1/ Math Equation
Here’s what each symbol means:
NPV Excel syntax Syntax NPV(rate,value1,value2, ...) Rate is the rate of discount over the
length of one period. Value1, value2,
... are 1 to 29
arguments representing the payments and income. · Value1, value2, ... must be equally spaced in
time and occur at the end of each period. NPV uses the
order of value1, value2, ... to interpret the order of cash flows.
Be sure to enter your payment and income values in the correct sequence. IRR Excel syntax Syntax IRR(values, guess) Values is an array or a reference to cells that
contain numbers for which you want to calculate the internal rate of return. Guess is a number that you guess is
close to the result of IRR. Net Present Value NPV
Explained with
NPV Example for NPV
Calculation (Cartoon, video)
https://www.youtube.com/watch?v=7FsGpi_W9XI Using Excel for Net Present
Values, IRR's and MIRR's
https://www.youtube.com/watch?v=YgVQvn51noc ‘Simple Rules’ for
Running a Business
From the 20-page cellphone contract to the five-pound employee
handbook, even the simple things seem to be getting more complicated. Companies have been complicating things for themselves,
too—analyzing hundreds of factors when making decisions, or consulting reams
of data to resolve every budget dilemma. But those requirements might be
wasting time and muddling priorities. So argues Donald Sull,
a lecturer at the Sloan School of Management at the Massachusetts Institute
of Technology who has also worked for McKinsey & Co. and Clayton, Dubilier & Rice LLC. In the book Simple
Rules: How to Thrive in a Complex World, out this week from Houghton Mifflin Harcourt HMHC -1.36%, he and Kathleen Eisenhardt of Stanford University claim that
straightforward guidelines lead to better results than complex formulas. Mr. Sull recently spoke with At Work about
what companies can do to simplify, and why five basic rules can beat a 50-item
checklist. Edited excerpts: WSJ: Where, in the
business context, might “simple
rules” help more than a
complicated approach? Donald Sull: Well, a common decision that people face in organizations
is capital allocation. In many organizations, there will be thick procedure
books or algorithms–one company I worked with had an algorithm that had
almost 100 variables for every project. These are very cumbersome approaches
to making decisions and can waste time. Basically, any decision about how to
focus resources—either people or money or attention—can benefit from simple
rules. WSJ: Can you give an
example of how that simplification works in a company? Sull: There’s a
German company called Weima GmBH that makes shredders. At one point,
they were getting about 10,000 requests and could only fill about a thousand
because of technical capabilities, so they had this massive problem of
sorting out which of these proposals to pursue. They had a very detailed checklist with 40 or 50 items.
People had to gather data and if there were gray areas the proposal would go
to management. But because the data was hard to obtain and there were so many
different pieces, people didn’t
always fill out the checklists completely. Then management had to discuss a
lot of these proposals personally because there was incomplete data. So top
management is spending a disproportionate amount of time discussing this
low-level stuff. Then Weima came up with guidelines that the
frontline sales force and engineers could use to quickly decide whether a
request fell in the “yes,” “no” or “maybe” category. They did it with five
rules only, stuff like “Weima had to collect at least 70% of the
price before the unit leaves the factory.” Or, take Frontier Dental Laboratories in Canada. They were
working with a sales force of two covering the entire North American market.
Limiting their sales guidelines to a few factors that made someone likely to
be receptive to Frontier—stuff like “dentists
who have their own practice” and “dentists with a website”—helped
focus their efforts and increase sales 42% in a declining market. WSJ: Weima used five factors—is that the
optimal number? And how do you choose which rules to follow? Sull: You should
have four to six rules. Any more than that, you’ll spend too much time trying to follow
everything perfectly. The entire reason simple rules help is because they
force you to prioritize the goals that matter. They’re easy to remember, they
don’t confuse or stress you, they save time. They should be tailored to your specific goals, so you
choose the rules based on what exactly you’re trying to achieve. And you
should of course talk to others. Get information from different sources, and
ask them for the top things that worked for them. But focus on whether what
will work for you and your circumstances. WSJ: Is there a
business leader you can point to who has embraced the “simple rules” guideline? Donald Sull: Let’s look at when Alex Behring took over America Latina Logistica SARUMO3.BR +1.59%, the Brazilian
railway and logistics company. With a budget of $15 million, how do you
choose among $200 million of investment requests, all of which are valid? The textbook business-school answer to this is that you
run the NPV (net present value) test on each project and rank-order them by
NPV. Alex Behring knows this. He was at the top of the class at Harvard
Business School. But instead Similarly, the global-health arm of the Gates Foundation
gets many, many funding requests. But since they know that their goal is to
have the most impact worldwide, they focus on projects in developing
countries because that’s where the money will stretch farther. |
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Happy Holidays Happy Holidays |
