FIN 500 Class Web Page, Spring '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 |
Videos (optional) |
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Week 1 |
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.
Note: 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
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 (Updated) HOMEWORK of Chapters 5
and 6 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) 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) 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) 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)
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) 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) 14. What is the
future value of weekly payments of $25 for six years at 10 percent? ($10,673.90) 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) 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? 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) 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) 19. What is the
effective annual rate of 10.5 percent compounded semi-annually? (10.78
percent) 22. What is the
effective annual rate of 12.75 percent compounded daily? (13.60 percent) 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) |
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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 Pricing 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
HW due
on 3/30 before 6pm Refer to the above table and answer questions
1-8 (Use 2015 as current year; Sorry for not updating). 1. How much is the coupon? 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. 4. Calculate the current yield based on the above
table. (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). ($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). ($947.95) 7. Imagine that the price is $850. Calculate the
new yield to maturity. (semi-annual,
coupon rate = 3.3%, 9 years left). (5.43%) 8. Imagine that the price is $850. Calculate the
new yield to maturity. (annual, coupon rate = 3.3%,
9 years left). (5.45%) 9. 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? (5.88%) 10. For a zero coupon bond, use the following
information to calculate its yield to maturity. (14.35%) Years left to maturity = 10 years. Price = $250. 11. For a zero coupon bond, use the following
information to calculate its price. ($456.39) Years left to maturity = 10 years. Yield = 8%. 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% 14. IBM 10 year 4% semi-annual coupon bond is selling for $950. How much is
this IBM bond’s YTM? 4.63% 15. IBM 10 year 5% annual coupon bond offers 8% of return. How much is the price of this
bond? 798.7 16. IBM 5 year 5% semi-annual coupon bond offers 8% of return. How much is
the price of this bond? $878.34 17. IBM 20 year zero coupon bond offers 8% return.
How much is the price of this bond? 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%) 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) 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) 21. 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 implicit interest, in dollars, for the first year of the bond's
life? (6.29%) 22. 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%) |
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Week 3 |
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Week 4 – Mar 28 |
Chapter
8 Stock Valuation 1.
Introduction from
google.com/finance for Tesla
Motors Inc (NASDAQ:TSLA)
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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: 1. 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? 2. 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? 5. Avoid emotional investing 1) Herding 2) Overconfidence 3) Mental accounting 4) Anchoring 5) Gambler’s
fallacy 6) Momentum 6. How to pick stocks – Does it work? PE ratio PEG ratio (peg
ratio vs. PE ratio – video) Relative Strength Index (How To Profit
From The Relative Strength Index - RSI - Like A Pro Part 4)
HOMEWORK (Due next week) 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? (14.60 percent) 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? ($2.12) 4. 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? (10%) 5. 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? ($70.67) |
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Week 5 |
Chapter 9 Capital Budgeting NPV,
IRR, Payback, PI, MIRR template (excel, simple, my contribution, updated) 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.
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 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? Chapter
14 Cost of Capital ppt 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 $)) +g, or Ke = Rrf + Beta*MRP)) Why no tax adjustment like cost of debt? 4) WACC=Cost of capital = Percentage of Debt * cost of debt + percentage of stock * cost of stock = Wd*Kd + We* Ke Meaning:
For a dollar raised in the capital market from debt holders and stockholders,
the cost is WACC (or WACC * 1$ = several cents, and of course, the lower the
better but many companies do not have good credits) No homework for chapter 14 |
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‘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.” After that, only the “maybes” were sent to management.
This dramatically decreased the amount of time management spend evaluating
these projects–that time was decreased by almost a
factor of 10. 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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Week 6 |
Chapter 13 Return, Risk and Security Market
Line Video
of Class on 11/24/2015
(www.jufinance.com/fin500_15f) Study
Guide 1. Pick
three stocks. Has to be the leading firm in three different industries. (We chose Tesla, MNKD, and Wal-mart) 2. From
finance.yahoo.com, collect stock prices of the above firms, in the past five
years (Here is the excel solution, from March 2011 to April
2016) Steps: Goto finance.yahoo.com Search for the company Click on “Historical prices” in the left
column on the tope Change the starting date and ending date
to “April 13th, 2016” and “April 13th, 2011”, respectively.
(Download it to Excel Delete all inputs, except “adj close” –
this is the closing price adjusted for dividend. (Tesla raw data, Wal-mart
raw data , MNKD raw data, and SP500 are here) Merge the three datasets (Here is
the final dataset with closing prices of the three firms) 3.
Evaluate the performance of each stock:
average return, and risk (standard deviation) (return and risk results in
excel here) 4.
Let’s draw a normal distribution CURVE using the average
return and the standard deviation of each firm and the portfolio (1/3 of
investment in each stock)
5. What
is your conclusion? 6. Imagine
you are rational and hold a highly diversified portfolio: return and risk of
this portfolio? Systematic risk vs. idiosyncratic risk; Beta and its calculation Use
slope function to find beta in Excel
beta = slope(return of each stock, market return)
7. SML(Security
market line) and CAPM (Capital asset pricing model) Stock
return = risk free rate + beta *(market return – risk free rate) ---- CAPM
HOMEWORK: 1.
An investor currently holds the following portfolio:
He invested 30% of the fund in Apple with Beta equal 1.1. He also invested
40% in GE with Beta equal 1.6. The rest of his fund goes to Ford, with Beta
equal 2.2. Use the above information to answer the following questions. The
beta for the portfolio is? 1.63. The three month Treasury bill rate (this is
risk free rate) is 2%. S&P500 index return is 10% (this is market
return). Now calculate the portfolio’s
return. 15.04% 2.
The three month Treasury bill rate (this is risk
free rate) is 2%. S&P500 index return is 10% (this is market
return).
2. What is the value of A? 2% 3. What is the value of B? 10% 4. How much is the slope of the
above security market line? 8% 5. Your uncle bought Apple in
January, year 2000 for $30. The current price of Apple is $480 per share.
Assume there are no dividend ever paid. Calculate your uncle’s holding period
return. 15 times 6. Your current portfolio’s BETA
is about 1.2. Your total investment is worth around $200,000. You uncle just
gave you $100,000 to invest for him. With this $100,000 extra funds in hand,
you plan to invest the whole $100,000 in additional stocks to increase your
whole portfolio’s BETA to 1.5 (Your portfolio now worth $200,000 plus
$100,000). What is the average BETA of the new stocks to achieve your goal?
(hint: write down the equation of the portfolio’s Beta first) 2.10 7. Years Market r Stock A Stock B 1 3% 16% 5% 2 -5% 20% 5% 3 1% 18% 5% 4 -10% 25% 5% 5 6% 14% 5%
·
Calculate the average returns of the market r
and stock A and stock B. · Calculate the standard deviations of the market, stock A, and stock B. · Calculate the correlation of stock A and stock B. ·
Assume you invest 50% in stock A and 50% in
stock B. Calculate the average return and the standard deviation of the
portfolio. · Calculate beta of stock A and beta of stock B, respectively. |
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Week 7 ,8 |
Chapter 2 and 3: Financial Statement Analysis ******* 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. ******* Part II: Cash
Flow Statement **************
Use the above information to prepare cash flow
statement. Answer is here |
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Cash
flow template (new and
simple, my contribution)
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