FIN 500 Class Web Page, Fall '16
Business Finance Online, an interactive learning tool for the
Corporate Finance Student https://www.zenwealth.com/BusinessFinanceOnline/index.htm
Weekly SCHEDULE, LINKS, FILES and Questions
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Week |
Coverage, HW, Supplements -
Required |
Equations |
Videos (optional) |
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Week 1, 2 |
Market Watch Game Use the information and directions below to join the game. 1. URL for your game: 2. Password for this private game: havefun. 3. Click on the 'Join Now' button to get
started. 4. If you are an existing MarketWatch
member, login. If you are a new user, follow the link for a Free account - it's easy! 5. Follow the instructions and start trading! 1. Chapter
5 Time value of money 1 Concept of FV, PV,
Rate, Nper Calculation of FV, PV,
Rate, Nper Concept of interest
rate, compounding rate, discount rate
Chapter
6 Time Value of Money 2 Concept of PMT, NPV Calculation of FV, PV,
Rate, Nper, PMT, NPV, NFV Concept of EAR, APR Calculation of EAR,
APR Week 1 In Class Exercise Solutions (FYI) HOMEWORK of Chapters 5
and 6 and Solution
(Detailed) (will not be collected
or graded) 1. 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)
Answer: (Rate = 6.5%/4,
NPER = 10*4, PMT=4740, PV=?, FV=0, so PV=abs(pv(6.5%/4, 10*4, 4740, 0)) 2. 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) Answer: (Rate = 6.75%/12,
NPER = 10*12, PMT=?, PV=249500*0.8, FV=0, so PMT=abs(pmt(6.75%/12, 10*12,
249500*0.8, 0))
Answer: (Rate = 8%, NPER
= 15, PMT=?, PV=70000, FV=0, so PMT=abs(pmt(8%,
15, 70000, 0)) 4. 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) PMT=abs(pmt(0.4%,
12*3, 0, 10000)) 5. 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) Annualized
Rate=rate (24, 20, -450,0) * 12 Or, Annualized
Rate=rate (24, -20, 450,0) * 12 6. 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) Answer: (Rate = ?, NPER = 25, PMT=2000, PV=-19000, FV=0, so Annualized
Rate=rate (25, 2000, -19000,0) Or, Annualized
Rate= rate (25, -2000, 19000,0)
Answer: (Rate = ?, NPER = 8, PMT=10000, PV=-57000, FV=0, so Annualized
Rate=rate (8, 10000, -57000,0) Or, Annualized
Rate=rate (8, -10000, 57000,0)
Answer: (Rate =
8.25%/12, NPER = ?, PMT=2379.45, PV=-97000, FV=0, so # of years= nper (8.25%/12, 2379.45, -97000,0) /12 Or, # of years= nper (8.25%/12, -2379.45,
97000,0)/12 9. 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) Answer: (Rate =
6.5%, NPER = ?, PMT=67000, PV=-310000, FV=0, so # of years= nper (6.5%, 67000,
-310000,0) Or, # of years= nper (6.5%, -67000, 310000,0)
Age = nper (11%, 4500, -500000,
0) + 25 Or, Age = nper (11%, 4500, -500000,
0) + 25
# of months = nper (12.8%/12, 110, -6000, 0) Or, # of months
= nper (12.8%/12, -110, 6000, 0) 12. 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) # of months_1 = nper (15.1%/12, 70, -5150, 0) So, nper (15.1%/12, 70, -5150, 0)- nper (15.1%/12,
85, -5150, 0) is the final answer 13. 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) FV for Bridget =
abs(fv(8%/12, 10*12, 150, 0,1)) FV for Jordan =
abs(fv(8%/12, 10*12, 175, 0)) So, abs(fv(8%/12, 10*12, 150, 0,1)) -
abs(fv(8%/12, 10*12, 175, 0))
is the final answer.
FV=abs(Fv(10%/52,
6*52, 25, 0)) 15. 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) Answer: Rate = 10%/52,
NPER = 6*52, PMT=25, PV=0, FV=?, so FV=abs(Fv(10%/52,
6*52, 25, 0)) 16. 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? pmt=abs(pmt(7%/2,
10*2, 90000, 0,1)) 17. 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) Answer: Rate = 5.5%,
NPER = 30, PMT=5000, PV=?, FV=0, type=1, so pv=abs(pv(5.5%, 30, 5000,
0,1)) 18. You want to
save $75 a month for the next 15 years and hope to earn an average rate of
return of 14 percent. How much more will you have at the end of the 15 years
if you invest your money at the beginning of each month rather than the end
of each month? ($530.06) Answer: Invest at the
beginning of each month: Rate = 14%/12,
NPER = 15*12, PMT=75, PV=0, FV=?, type=1, so fv=abs(fv(5.5%,
30, 5000, 0,1)) Invest by the
end of each month: Rate = 14%/12,
NPER = 15*12, PMT=75, PV=0, FV=?, type=0 or default, so fv=abs(fv(5.5%,
30, 5000, 0)) So, abs(fv(5.5%, 30, 5000, 0,1)) - abs(fv(5.5%, 30, 5000, 0)) is the final answer. 19. What is the
effective annual rate of 10.5 percent compounded semi-annually? (10.78
percent) APR=Norminal=10.5%, NPERY=2, so EAR=effect(nominal, NPERY) =
effect(10.5%, 2) Or, EAR =
(1+10.5%/2)2-1
APR=Norminal=9%, NPERY=4, so EAR=effect(nominal, NPERY) =
effect(9%, 4) Or, EAR =
(1+9%/4)4-1
Answer: APR=Norminal=1.65%*12, NPERY=12, so EAR=effect(nominal,
NPERY) = effect(1.65%*12, 12) Or, EAR
= (1+1.65%)12-1 22. What is the
effective annual rate of 12.75 percent compounded daily? (13.60 percent) Answer: APR=Norminal=12.75%, NPERY=365, so EAR=effect(nominal, NPERY)
= effect(12.75%, 365) Or, EAR =
(1+16.75%/365)365 -1 23. Your
grandparents loaned you money at 0.5 percent interest per month. The APR on
this loan is _____ percent and the EAR is _____ percent. (6.00; 6.17) APR=Norminal=0.5%*12, NPERY=12, so EAR=effect(nominal, NPERY)
= effect(0.5%*12, 12) Or, EAR =
(1+0.5%)12-1
Answer: Rate=?,
NPER=12*3, PMT=11826/36, PV=-9000, FV=0, So monthly rate
= rate(12*3, 11826/36, -9000, 0) APR = rate(12*3, 11826/36, -9000, 0)* 12 is the final answer. |
Math Formula 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) WSJ paper FYI Opinion: The
stock market could crash if Donald Trump is elected president Published: Oct 31, 2016 3:09 p.m. ET Trump’s policies would curtail imports and slam
the brakes on the U.S. economy The precise consequences of
bad policies are hard to predict, but it’s still not good. By SIMONJOHNSON COLUMNIST WASHINGTON, D.C. (Project
Syndicate) — With the United States’ presidential election on Nov. 8,
and a series of elections and other political decisions fast approaching in
Europe, now is a good time to ask whether the global economy is in good
enough shape to withstand another major negative shock. The answer, unfortunately, is that growth and employment
around the world look fragile. A big adverse surprise — like the election of
Donald Trump in the U.S. — would likely cause the stock market DJIA, -0.10%
to crash and plunge the world into recession. There is always a great deal
of insight in the International Monetary Fund’s semiannual economic outlook,
which is based on detailed data from around the world. And, because the
latest version was published in early October, it is particularly relevant.
(I was previously the IMF’s chief economist and oversaw the forecasting
process, but I left that position in August 2008.) Table 1.1 of the Fund’s World Economic Outlook covers
the main points: a baseline forecast of 3.1% global GDP growth this year and
3.4% in 2017. This represented a nudge down from the projections in April,
with signs of weakening perceived in the U.S., the eurozone,
and of course the United Kingdom (grappling with the consequences of
impending Brexit — the big and potentially
traumatic step of leaving the European Union). The most obvious dark cloud
on the global horizon is Europe. The British issues are not helping, but the
deeper issues continue to be related to the eurozone
itself (Britain never adopted the euro). The headline growth number in Spain
is somewhat encouraging, continuing to show some rebound. But the ongoing
gloom about Italy — the third-largest eurozone economy,
growing at less than 1% a year — is a serious matter. Compounding these
macroeconomic issues is the continuing pressure on eurozone
banks. These banks have never fully recovered from earlier losses, and their
equity capital levels remain low relative to international competitors (like
the U.S.) and to what investors regard as reasonable. The bigger problem remains
uncertainty about who is on the hook if a bank’s losses imply potential
insolvency. These banks are clearly too big to fail — no European government
in its right mind would allow a default on bank debt. But there is no
agreement on how to share bank losses across countries. Taken as a whole, the
eurozone has enough fiscal capacity to stand behind
its banks. But, unfortunately, doing so is still a country-by-country
decision — the collective mechanisms for recapitalizing European banks remain
partial and far too weak. Compounding these
difficulties, growth in middle-income emerging markets is not strong. Slower
growth in these countries is reflected in lower projected imports and lower
expected commodity prices, which will negatively affect countries that export
raw materials and energy resources. The Nigerian economy, just to take one
example, is expected to contract by 1.7% this year. Growth in the U.S., as
reported by the IMF, was 2.6% in 2015, and is forecast to slip to 1.6% this
year before rebounding slightly to 2.2% in 2017. There has been a long steady
recovery from the 2008 financial crisis, but the effects of that collapse
still linger. Even in the
best of times, U.S. policy makers often do not think enough about the impact
of their actions on the rest of the world. Trump promises to boost U.S.
growth immediately to 4%-5%, but this is pure fantasy. It is far more likely
that his anti-trade policies would cause a sharp slowdown, much like the
British are experiencing. In fact, the impact of a
Trump victory on the U.S. could well be worse. Whereas British Prime Minister
Theresa May’s government wants to close the U.K.’s borders to immigrants from
the EU, it does want trade with the world. Trump, on the other hand, is
determined to curtail imports through a variety of policies, all of which are
well within the power of a president. He would not need congressional
approval to slam the brakes on the U.S. economy. Even in the best of times,
U.S. policy makers often do not think enough about the impact of their
actions on the rest of the world. Trump’s trade-led recession would tip
Europe back into full-blown recession, which would likely precipitate a
serious banking crisis. If this risk were not contained — and the probability
of a European banking debacle is already disconcertingly high — there would
be a further negative spiral. Either way, the effects on emerging markets and
all lower-income countries would be dramatic. Investors in the stock market SPX, -0.01% currently
regard a Trump presidency as a relatively low-probability development. But
while the precise consequences of bad policies are always hard to predict, if
investors are wrong and Trump wins, we should expect a big markdown in
expected future earnings for a wide range of stocks — and a likely crash in
the broader market. Simon Johnson is a professor
at MIT’s Sloan School of Management and the co-author of “White House
Burning: The Founding Fathers, Our National Debt, and Why It Matters to
You.” |
Fall of Lehman Brother part i https://www.youtube.com/watch?v=aPOtQkSiCk8 Fall of Lehman Brother part ii https://www.youtube.com/watch?v=l0N_FX0kUMI&feature=relmfu Fall of Lehman Brother part iii https://www.youtube.com/watch?v=YmZd3vVoPgY&feature=relmfu Fall of Lehman Brother part iv https://www.youtube.com/watch?v=FcO_dQCJ3HA&feature=relmfu Fall of Lehman Brother part v https://www.youtube.com/watch?v=L4gqzRePtes Fall of Lehman Brother part vi https://www.youtube.com/watch?v=Ms_tnEe4wFk&feature=relmfu
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Week 2, 3 |
Chapter 7 Bond Market 1. Definition 2. FINRA.org (www.finra.org è Investor center è market data è bond è corporate bond) 3. Cash flows of a bond Annual coupon bond, semi-annual coupon bond. Zero coupon
bond. 4. Bond Pricing Annual coupon bond, semi-annual coupon bond. Zero coupon
bond. 5. Bond Yield Annual coupon bond, semi-annual coupon bond. 6. Bond rating agencies Three rating agencies; how to understand the ratings 7. Term Structure (yield curve) Simplified Balance Sheet of WalMart
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? How Bonds Work (video) FINRA – Bond market information http://finra-markets.morningstar.com/BondCenter/Default.jsp
WAL-MART STORES INC Coupon Rate 3.300% Maturity
Date 04/22/2024
Credit and Rating Elements
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 number of years left(semi-annual
coupon bond) Coupon = pmt(yield to maturity/2, number of years left*2,
-price, 1000)*2 Coupon rate = coupon / 1000 Risk of Bonds: Is bond market safe? Bond risk (video) Bond risk – credit risk (video) Bond risk – interest rate risk (video) Is there a bond bubble? When will it
burst? We
are in a bond bubble now (video) There's Going to be a
Collapse in the Bond Market Like We've Never Seen Before (video) Homework (will not be collected or graded) WAL-MART STORES INC Coupon Rate 3.300% Maturity Date 04/22/2024
Credit and Rating
Elements
Refer to the above table and answer questions
1-8. 1. How
much is the coupon? $33 2. This
WMT bond is callable. This means that when interest rate increases, Wal-Mart
might call this bond back from bondholders. True _____ False _____ 3. Moody’s
rating of this bond is Aa2 for this bond. Assume that GE’s bond rating is A. JEA’s
rating is B+. Treasury bond’s rating is AAA. Rank the risk of the four bonds
from low to high.(WMT, GE, JEA) 4. Calculate
the current yield based on the above table. (33/1061.8=3.11%) 5. Imagine
that the interest rate has increased to 4%. Calculate the new bond price. (semi-annual, coupon rate = 3.3%, 9 years left). (abs(pv(4%/2, 9*2, 33/2, 1000) = $947.53) 6. Imagine
that the interest rate has increased to 4%. Calculate the new bond price. (annual, coupon rate = 3.3%, 9 years left). ( abs(pv(4%, 9, 33, 1000) = $947.95) 7. Imagine
that the price is $850. Calculate the new yield to maturity. (semi-annual, coupon rate = 3.3%, 9 years left). ((rate(9*2, 33/2,
-850,1000))*2 = 5.43%) 8. Imagine
that the price is $850. Calculate the new yield to maturity. (annual, coupon rate = 3.3%, 9 years left) .(rate(9, 33, -850,1000) = 5.45%) 9.
Firm AAA’s bonds price = $850. Coupon rate is 5% and par is
$1,000. The bond has six years to maturity. Calculate for current
yield? (50/850 = 5.88%) 10. For
a zero coupon bond, use the following information to calculate its yield to
maturity. Years left to maturity = 10 years. Price = $250. ((Rate(10*2, 0, -250, 1000)
)*2= 14.35%) 11. For
a zero coupon bond, use the following information to calculate its
price. Years left to maturity = 10 years. Yield = 8%. (abs(pv(8%/2, 10*2, 0, 1000) = $456.39) 12. Imagine
that an annual coupon bond’s coupon rate = 5%, 15 years left. Draw
price-yield profile. (hint: Change interest rate,
calculate new price and draw the graph). 13. IBM
5 year 2% annual coupon bond is selling for $950. How much
this IBM bond’s YTM? 3.09% (rate(5, 20, -950, 1000) 14. IBM
10 year 4% semi-annual coupon bond is selling for $950. How
much is this IBM bond’s YTM? 4.63% (rate(10*2, 40/2, -950, 1000)*2 15. IBM
10 year 5% annual coupon bond offers 8% of return. How much is
the price of this bond? 798.7 (abs(pv(8%,
10, 50, 1000)) 16. IBM
5 year 5% semi-annual coupon bond offers 8% of return. How
much is the price of this bond? $878.34 (abs(pv(8%/2, 5*2, 50/2, 1000) 17. IBM
20 year zero coupon bond offers 8% return. How much is the price of this
bond? ((abs(pv(8%/2, 20*2, 0, 1000)) 18. 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? (8.90%) (rate(18.5*2, 85/2, -964.2, 1000)*2 19. 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? ($895.43) (abs(pv(11.2%, 11, 95, 1000)) 20. 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) (nper(9.17%/2, 0, -319.24, 1000)/2 21. 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%)
(rate (11*2 ,60, -989, 1000)*2) |
WSJ
papers: FYI
Traders watching to see if that's the air
beginning to leak from bond bubble
How
you should learn to stop worrying about the bond bubble and love the market |
Treasury Bond Auction
Website How to calculate bond
prices using exact date? (not required but useful) Use price function in
Excel. Returns the price per $100 face value of a security that pays periodic
interest. Syntax PRICE(settlement,
maturity, rate, yld, redemption, frequency,
[basis]) Excel
How to use the PRICE formula video https://www.youtube.com/watch?v=4UzFPKv2Tnw Calculate bond yield
using exact date?(not required but useful) Use YIELD to
calculate bond yield. Syntax YIELD(settlement,maturity,rate,pr, redemption,
frequency, basis) Excel yield function video https://www.youtube.com/watch?v=vi27yLPgwZc Risk of Bonds Bond risk (video) Bond risk – credit risk (video) Bond risk – interest rate risk (video) |
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Week 4,5 |
Chapter
8 Stock Valuation from google.com/finance
--- Wal-Mart (Ticker: WMT)
1. Comparison between bond and
stock
2. Stockholders’ rights 3. Risk and return – where to find how
risky the stock is 4. Calculate stock prices 1) Given next dividends and price
2) Given all
dividends – Dividend growth model Where Po:
current stock price; D1: next period dividend; r: stock return; g: dividend
growth rate Exercise: 5. Avoid irrational activities 1) Herding 2) Overconfidence 3) Mental
accounting 4) Anchoring 5) Gambler’s fallacy 6) Momentum 6.
How
to pick stocks – Does it
work? Stock screening tools Reuters stock screener
to help select stocks http://stockscreener.us.reuters.com/Stock/US/ FINVIZ.com http://finviz.com/screener.ashx WSJ stock screen http://online.wsj.com/public/quotes/stock_screener.html Simply the Web's Best Financial
Charts HOMEWORK (None) Mid term
Exam Questions Here (Due on 11/22) |
What Apple’s
Stock Split Means for You · By STEVEN RUSSOLILLO WHAT IF APPLE NEVER SPLIT ITS STOCK? Apple has now split its
stock four times throughout its history. It previously conducted 2-for-1
splits on three separate occasions: February 2005, June 2000 and June 1987.
According to some back-of-the-envelop math by S&P’s Howard Silverblatt, if Apple never split its stock, you’d have eight shares for
each original one prior to the most recent split. So Friday’s $645.57 closing
level would translate to $5164.56 unadjusted for splits. NoHere are five things you need to know about Apple’s
stock split. WHO DOES THE STOCK SPLIT IMPACT? Investors who owned Apple
shares as of June 2 qualify for the stock split, meaning they get six
additional shares for every share held. So if an investor held one Apple
share, that person would now hold a total of seven shares. Apple also
previously paid a dividend of $3.29, which now translates into a new
quarterly dividend of $0.47 per share. WHY IS APPLE DOING THIS? The iPhone and iPad maker says it is trying to attract a wider
audience. “We’re taking this action to make Apple stock more accessible to a
larger number of investors,” Apple CEO Tim Cook said in April. But the comment also marked an
about-face from two years earlier. At Apple’s shareholder meeting in February
2012, Mr. Cook said he didn’t see the point of splitting his company’s stock,
noting such a move does “nothing” for shareholders. WILL APPLE GET ADDED TO THE DOW? It’s unclear at the moment,
although a smaller stock price certainly makes Apple a more attractive candidate
to get added to blue-chip Dow. Apple, the bigge, your screens aren’t lying to you. Shares of
Apple Inc. now trade under $100, a development that hasn’t happened in years. Apple’s unorthodox 7-for-1 stock split, announced at the end of April,
has finally arrived. The stock started trading on a split-adjusted basis
Monday morning, and recently rose 1% to $93.14. In a stock split, a company increases the number of shares
outstanding while lowering the price accordingly. Splits don’t change
anything fundamentally about a company or its valuation, but they tend to
make a company’s stock more attractive to mom-and-pop investors. Apple shares
rallied 23% from late April, when the company announced the split in
conjunction with a strong quarterly report, through Friday. A poll conducted by our colleagues at MarketWatch found 50% of respondents said they would buy Apple shares after
the split. Some 31% said they already owned the stock and 19% said they
wouldn’t buy it. The survey received more than 20,000 responses. st U.S. company by market
capitalization, has never been part of the historic 30-stock index, a factor
that many observers attributed to its high stock price. The Dow is a
price-weighted measure, meaning the bigger the stock price, the larger the
sway for a particular component. That is different from indexes such as the
S&P 500, which are weighted by market caps (each company’s stock price
multiplied by shares outstanding). WILL APPLE KEEP RALLYING? Since the financial crisis, companies
that have split their stocks have struggled in the short term and
outperformed the broad market over a longer time horizon. Since 2010, 57
companies in the S&P 500 have split their shares. Those stocks have
averaged a 0.2% gain the day they started trading on a split-adjusted basis,
according to New York research firm Strategas Research Partners. A month later, they have
risen just 0.5%. But longer term, the average gains are more pronounced.
Since 2010, these stocks have averaged a 5.4% increase three months after a
split and a 28% surge one year later,Strategas says. WHAT IF APPLE NEVER SPLIT ITS STOCK? Apple has now split its
stock four times throughout its history. It previously conducted 2-for-1
splits on three separate occasions: February 2005, June 2000 and June 1987.
According to some back-of-the-envelop math by S&P’s HowardSilverblatt, if Apple never
split its stock, you’d have eight shares for each original one prior to the
most recent split. So Friday’s $645.57 closing level would translate to $5164.56
unadjusted for splits. |
Apple Inc (NASDAQ: AAPL) Stock Split: WhenTo Buy
Shares
Is
Apple stock a buy after the annual Apple event?
Vanguard Founder Jack Bogle on Mutual Funds, Common Sense Investing and the
Stock Market Passive Investing: The
Evidence the Fund Management Industry Would Prefer You Not to See Stock screening tools Reuters stock screener
to help select stocks http://stockscreener.us.reuters.com/Stock/US/ FINVIZ.com http://finviz.com/screener.ashx WSJ stock screen http://online.wsj.com/public/quotes/stock_screener.html Simply the Web's Best Financial
Charts How to pick stocks Capital Asset Pricing Model (CAPM)Explained https://www.youtube.com/watch?v=JApBhv3VLTo Fama French 3 Factor Model Explained https://www.youtube.com/watch?v=zWrO3snZjuA Ranking stocks using PEG ratio https://www.youtube.com/watch?v=bekW_hTehNU |
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Week 6 |
Chapter 9 Capital Budgeting NPV,
IRR, Payback, PI, MIRR template (excel, simple, my
contribution, updated) 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 eter 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.
Chapter 9 Study Guide Part I: Single project Consider the following
scenario. You are reviewing a new
project and have estimated the following cash flows: — Year
0: CF
= -165,000 — Year
1: CF
= 63,120; NI = 13,620 — Year
2: CF
= 70,800; NI = 3,300 — Year
3: CF
= 91,080; NI = 29,100 Your required return for
assets of this risk level is 12%. 1) Using
payback period method to make capital budgeting decision. 2) Using
discounted payback period method to make capital budgeting decision. 3) Using
net present value method (NPV) 4) Using
profitable index method (PI) 5) Using
the Internal Rate of Return method (IRR) 6) Using
modified IRR method (MIRR) – on slide 75 Part II: Multi-Projects
If the required rate of return
is 10%. Which project shall you choose? 1) How
much is the cross over rate? 2) How
is your decision if the required rate of return is 13%? 3) Rule
for mutually exclusive projects: 4) What
about the two projects are independent? More on IRR –
(non-conventional cash flow) (slide 73) Suppose an investment will
cost $90,000 initially and will generate the following cash flows: – Year
1: 132,000 – Year
2: 100,000 – Year
3: -150,000 The required return is 15%.
Should we accept or reject the project? 1) How does the NPR profile look like? 2) IRR1= 3) IRR2= Exercise (slide
82) An investment project has the
following cash flows: CF0 = -1,000,000; C01 – C08 =
200,000 each If the required rate of return
is 12%, what decision should be made using NPV? How would the IRR decision
rule be used for this project, and what decision would be reached? How are the above two
decisions related? Homework (will not be collected or graded)
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)? 2) If the firm has a 10%
required rate of return. How much is NPV (approach 2)? 3) If the firm has a 10%
required rate of return. How much is IRR (approach 3)? 4) If the firm has a 10%
required rate of return. How much is PI (approach 4)? 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 and PI. 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? 4. Calculate NPV. WACC (required rate of return, or discount rate): 9% Year year0 year1 year2 year3 Cash flows -$1000.00 $500.00 $500.00 $500.00 ($265.65) WACC: 9.00% Year 0 1 2 3 Cash flows -$1,000 $500 $500 $500 NPV = $265.65 5. Find IRR Year year0 year1 year2 year3 Cash flows -$1000.00
$425.00 $425.00 $425.00 (13.21%) Year 0 1 2 3 Cash flows -$1,000 $425 $425 $425 IRR = 13.21% 6. Find payback period Year year0 year1 year2 year3 CF -$1150 $500 $500 $500 (2.30 years) Year 0 1 2 3 Cash flows -$1,150 $500 $500 $500
Cumulative CF -$1,150 -$650 -$150 $350 Payback = 2.30 - - - 2.30 Payback = last year before cum CF
turns positive + abs. val. last neg. cum CF/CF in payback year. 7. Find the changes in NPV due to
increase in WACC Old WACC: 10.00% New WACC: 11.25% Year 0 1 2 3 Cash flows -$1,000 $410 $410 $410 ( -22.03 dollars
) Old WACC: 10.00% New WACC:
11.25% Year 0 1 2 3 Cash flows -$1,000 $410 $410 $410 Old NPV = $19.61 New NPV = -$2.42 Change = -$22.03 8. Find MIRR WACC: 10% Year year0 year1 year2 year3 CF -$1000 $450.00 $450.00 $450.00 (14.20%) WACC: 10.00% Year 0 1 2 3 Cash flows -$1,000 $450 $450 $450 Compounded values, FVs $544.50 $495.00 $450.00 TV = Sum of compounded inflows: $1,489.50 MIRR = 14.20% Found as discount
rate that equates PV of TV to cost, discounted back 3 years @ WACC MIRR = 14.20% Alternative
calculation, using Excel's MIRR function 9. Find discounted payback
period WACC: 10% Year year0 year1 year2 year3 cf -$900 $500 $500 $500 (2.09 years) WACC: 10.00% Year 0 1 2 3 Cash flows -$900 $500 $500 $500 PV of CFs -$900 $455 $413 $376 Cumulative CF -$900 -$445 -$32 $343 Payback = 2.09 - - - 2.09 10. Find the crossover rate with the
following information WACC: 10.25% Year year0 year1 year2 year3 year4 CFS -$2,050 $750 $760 $770 $780 CFL -$4,300 $1,500 $1,518 $1,536 $1,554 (13.27%) WACC: 10.25% 13.275%
= crossover Year 0 1 2 3 4 CFS -$2,050 $750 $760 $770 $780 CFL -$4,300 $1,500 $1,518 $1,536 $1,554 CFs-CFl And then use IRR to get
crossover rate Chapter 14 Cost of
Capital A firm borrows money
from bond market. The price they paid is $950 for the bond with 5% coupon
rate and 10 years to mature. Flotation cost is $40. For the new
stocks, the expected dividend is $2 with a growth rate of 10% and price of
$40. The flotation cost is $4. The company raises capital in equal
proportions i.e. 50% debt and 50% equity (such as total $1m raised and half
million is from debt market and the other half million is from stock market).
Tax rate 34%. What is WACC (weighted average cost of capital,
cost of capital)? 1)
Why does the firm raise capital from the financial market? Is
there of any costs of doing so? What do you think? 2) What
is cost of debt? Kd = rate(nper, coupon, -(price –
flotation costs $)), 1000)*(1-tax rate)) 3) Cost
of equity? Ke = (D1/(Price – flotation costs $)) +g; or Ke = rrf +
β*MRP)) Why no tax adjustment
like cost of debt? 4) WACC=Cost
of capital = Weight of Debt * cost of debt + Weight of stock * cost of stock
= Wd*Kd + We* Ke WACC = Wd*Kd + We* Ke Meaning: For a dollar
raised in the capital market from debt holders and stockholders, the cost is
WACC (or WACC * 1$ = several cents, and of course, the lower the better but
many companies do not have good credits) No
homework for chapter 14 |
‘Simple Rules’ for Running a Business
From the 20-page cell phone 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. |
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 |
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Week 7 |
Chapter 13 Return, Risk and Security Market Line Study guide PART I: Single
stock’s risk and return 1. What is the probability of “Recession”? State Probability C(%) T(%) Boom 0.3 15 25 Normal 0.5 10 20 Recession ??? 2
1 2. What are the expected returns? Standard deviation? State Probability C(%) T(%) Boom 0.3 15 25 Normal 0.5 10 20 Recession 0.2 2 1 3. Consider the following information: State Probability ABC, Inc. (%) Boom .2 15 Normal .4 8 Slowdown .2 4 Recession .2 - 3 What is the expected return? Standard deviation? Part II: Portfolio’s risk and return 1. Why portfolio? What to consider to set up a portfolio? 2. Suppose you have $15,000 to invest and you have purchased securities in the following amounts: ·
$2000
of DCLK ·
$3000
of KO ·
$4000
of INTC ·
$6000
of KEI What are your portfolio weights in each security? 3. If the returns of the four stocks are the following: · DCLK: 19.69% · KO: 5.25% · INTC: 16.65% · KEI: 18.24% What is the expected return
on this portfolio? What is the standard
deviation of this portfolio? 4. Consider the following information: State Probability A
B
Boom .4 30% -5% Bust .6 -10% 25% Assume 50% of investment in A and 50% in B. · What is the expected return of this two stock portfolio? · What is the standard deviation? 5. Consider the following information: State Probability X Z Boom .25 15% 10% Normal .60 10% 9% Recession .15 5% 10% ·
What
are the expected return of a portfolio with an investment of $6,000 in asset
X and $4,000 in asset Z? ·
Standard
deviation? 6. What
type of risk should you consider for your portfolio? ·
The Boston
and Waco’s explosions will have a impact in your
portfolio? ·
What
about the nationwide alert of terrorist attack? ·
Mathew
hurricane? Can you see the benefits of
diversification? 7. What
are systematic risk and non-systematic risk? What is total risk? Which one is important to your portfolio? Which one should be totally
irrelevant? 8. Why can we use Beta to measure systematic
risk? Where to find Beta? How to
calculate Beta? 9. Consider the following information: Standard Deviation Beta Security C 20% 1.25 Security K 30% 0.95 ·
Which
security has more total risk? ·
Which
security has more systematic risk? ·
Which
security should have the higher expected return? (high
risk high return, but which risk?) 10. Consider the previous example with the following four securities: Security Weight Beta DCLK .133 2.685 KO .2 0.195 INTC .267 2.161 KEI .4 2.434 What is the portfolio beta? 11. The above is the SML
(Security market line). ·
What
is intercept? ·
What
is slope? ·
When
beta is 1, which portfolio is it? ·
When
Beta is 0, which portfolio? ·
Where
is Apple? ·
Where
is Google? ·
Where
is Walmart? ·
Where is S&P500 index (SPIDER)? 12. CAPM
model: E(RA) = Rf + bA(E(RM) – Rf) If you draw a graph of Beta * return, do you get SML? Consider the betas for each of the assets given earlier. If the risk-free rate is 4.15% and the market risk premium is 8.5%, What is the expected return for each?
Why do we use beta, not standard deviation anymore? Homework (will not be
collected or graded) 1. AAA firm’s
stock has a 0.25 possibility to make 30.00% return, a 0.50 chance to make 12%
return, and a 0.25 possibility to make -18% return. Calculate expected rate of return (9%)
Prob. Conditions Prob. Return × Return Good 0.25 30.0% 7.50% Average 0.50 12.0% 6.00% Poor 0.25 -18.0% -4.50% 1.00 9.00% =
Expected return 2. If
investors anticipate a 7.0% risk-free rate, the market risk premium = 5.0%,
beta = 1, Find the return. (12%) Risk free rate 7.00% Beta: 1.00 Required return = rRF + b(RPM) = r* + IP + b(RPM)
= 12.00% 3. AAA firm
has a portfolio with a value of $200,000 with the following four stocks.
Calculate the beta of this portfolio (0.988) Stock value β A $
50,000.00 0.9500 B 50,000.00 0.8000 C 50,000.00 1.0000 D 50,000.00 1.2000 Total $200,000.00 Stock Investment Percentage Beta Product A $50,000 25.00% 0.95 0.238 B $50,000 25.00% 0.80 0.200 C $50,000 25.00% 1.00 0.250 D $50,000 25.00% 1.20 0.300 Total $200,000 100.00% 0.988
= Portfolio Beta 4. A portfolio
with a value of $40,000,000 has a beta = 1. Risk free rate = 4.25%, market
risk premium = 6.00%. An additional $60,000,000 will be included in the
portfolio. After that, the expected return should be 13%. Find the average
beta of the new stocks to achieve the goal
(1.76) Old funds (millions) $40.00 40.00% New funds (millions) $60.00 60.00% Total new
funds $100.00 100.00% Beta on existing portfolio 1.00 Risk-free rate 4.25% Market risk premium 6.00% Desired required return 13.00% 13% = rRF
+ b(RPM); b = (13% − rRF)/RPM Required new portfolio beta 1.4583 beta =
(return − risk-free)/RPM Required beta on new stocks 1.76 Req b = (old$/total$) × old b + (new$/total$) × new b 5. 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? Standard deviation? 6.
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? 7.
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? 9. 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? 10. 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? 11. 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. b. Calculate
the expected return of your portfolio. 12. 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. |
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The Importance of
Diversification
https://www.youtube.com/watch?v=RoqAcdTFVFY
Understanding
Diversification in Stock Trading to Avoid Losses
https://www.youtube.com/watch?v=FrmoXog9zig
How to Build a Portfolio | by Wall Street
Survivor
https://www.youtube.com/watch?v=V48NECmT3Ns
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Week 8 |
Chapters 2, 3 Financial statement analysis Templates
(My contribution) Experts Explain: Financial Statements (well
explained, video) Balance
Sheet
Income
Statement
Cash Flow Statement
Exercises:
Solution
(Excel Solution)
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Week 8 |
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