FIN 534 Class
Web Page, Spring '15
Jacksonville
University
Instructor:
Maggie Foley
Reference website: https://www.jufinance.com/fin500_14f
(has excel functions and sample questions)
https://www.jufinance.com/fin534_14s
& https://www.jufinance.com/fin534
(prior semesters)
Term Project 1 – Efficient Frontier using Solver
(required) Study
of Efficient Frontier based on Matrix in Excel
Term Project 2 – Factor Analysis (optional for extra
credits)
Weekly SCHEDULE, LINKS, FILES and Questions
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Week |
Coverage, HW, Supplements -
Required |
WSJ Papers Reference |
Videos (optional) |
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Week 1 |
You should review time value of money by yourself. Get familiar with the subject by working on in class exercise of chapter 5 and 6 from here: https://www.jufinance.com/fin500_14f Subject:
Flow of Funds, Financial Crisis, Fed and Interest Rate
Dodd Frank Act - ppt The financial crisis
explained (video)
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. Section two: Fed and Monetary Policy (PPT) – Brief introduction ·
Reference chapters: Financial Market and Institution by
Mishkin, 7th edition, chapter 9 and chapter 10 (copies of the two
chapters will be available in class) ·
PPT of the two chapters chapter
9 ppt chapter
10 ppt ·
Fractional
banking and the Fed system explained (Video) Section Three: Interest rate Interest rate PPT (from Intermediate Financial Management, by Brigham, chapter 4) Formula r = r* + IP + DRP + LP + MRP r = required return on a debt security r* = real risk-free rate of interest IP = inflation premium DRP = default risk premium LP = liquidity premium MRP = maturity risk premium MRPt = 0.1% (t – 1); DRPt + LPt = Corporate
spread * (1.02)(t−1) Summary of Yield Curve Shapes and Explanations Normal Yield Curve
Steep Curve – Economy is improving
Inverted Curve – Recession is coming
To become inverted, the
yield curve must pass through a period where long-term yields are the same as
short-term rates. When that happens the shape will appear to be flat or, more
commonly, a little raised in the middle. Unfortunately, not all
flat or humped curves turn into fully inverted curves. Otherwise we'd all get
rich plunking our savings down on 30-year bonds the second we saw their
yields start falling toward short-term levels. On the other hand, you
shouldn't discount a flat or humped curve just because it doesn't guarantee a
coming recession. The odds are still pretty good that economic slowdown and
lower interest rates will follow a period of flattening yields.
HW
of first week: 1.
Draw the yield curve as of 3/2/2015.
Describe the shape of the yield curve and make prediction of the economy in
the next several years. 2.
Read the paper titled “Slapped in the Face
by the Invisible hand: Banking and the Panic of 2007”. Answer the following questions: ·
What is the research question in this
paper? ·
Why is this question important? ·
How does the author answer this question
in this paper? ·
Do you agree or disagree with the author? |
First Week WSJ Papers (word
file here) China’s Central Bank Cuts Interest Rates PBOC
lowers benchmark rates for second time in four months Fed Up: How Will Rising Interest Rates Affect Stocks? Beware of Investing Based on
Rising Interest Rates Fed Flags Midyear
Rate Hike—Or Later Central Bank Faces Confounding Landscape
of Solid Domestic Economy but Troubles Abroad Market data website: http://finra-markets.morningstar.com/BondCenter/Default.jsp (FINRA
bond market data) Market watch on Wall
Street Journal has daily yield curve and interest rate information. http://www.marketwatch.com/tools/pftools/ https://www.youtube.com/watch?v=yph8TRldW6k ****************** Fed Balance Sheet ******************** http://www.federalreserve.gov/releases/h41/20071129/ Fed Balance Sheet as
of Nov 29th, 2007 (At that time, Fed assets = 882,848) http://www.federalreserve.gov/releases/h41/20081128/ Fed Balance Sheet as
of Nov 28th, 2008 http://www.federalreserve.gov/releases/h41/20091127/ Fed Balance Sheet as
of Nov 27th, 2009 http://www.federalreserve.gov/releases/h41/20101126/ Fed Balance Sheet as
of Nov 26th, 2010 http://www.federalreserve.gov/releases/h41/20111125/ Fed Balance Sheet as
of Nov 25th, 2011 http://www.federalreserve.gov/releases/h41/Current/ Fed Balance Sheet as
of Nov 29th, 2012 http://www.federalreserve.gov/releases/h41/current/h41.htm Fed Balance Sheet as
of Nov 27th, 2013 http://www.federalreserve.gov/releases/h41/current/h41.htm Fed Balance Sheet as of Feb 26th, 2015 |
Fed
Exit Strategy: How Challenging Will it Be? 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 |
Subject:
Risk, market efficiency, stock market and the project part I Risk,
market efficiency, stock market and the project part II PPT
of risk and return Part II Common risk factor
research paper by Fama, Nobel winner of 2013 Need to know the three factors. ·
The
traditional asset pricing model, known formally as the capital asset pricing
model (CAPM) uses only one
variable to describe the returns of a portfolio or stock with the returns of t he market as a
whole. ·
In
contrast, the Fama–French model uses three variables. Fama and French started
with the observation that two classes of stocks have tended to do better than the market as a
whole: (i) small caps and (ii) stocks with a high book-to-market ratio (BtM, customarily called value stocks, contrasted with growth stocks). They then added two factors
to CAPM to reflect a portfolio's exposure to these two classes:
·
Here
r is the portfolio's expected rate of return, Rf is the risk-free return rate, and Km is the return of the market portfolio. ·
The "three factor" ·
β is analogous to the classical β but not equal to it,
since there are now two additional factors to do some of the work. 1.
β is analogous to the classical β but not equal to it, since there are now two additional factors
to do some of the work. 2.
SMB stands for "Small minus Big”; they measure the historic excess returns of small caps over
big caps 3.
Minus Big" and HML for "High [book-to-market ratio] Minus Low"; they measure of value stocks over
growth stocks ·
These factors are calculated with
combinations of portfolios composed by ranked stocks (BtM ranking, Cap
ranking) and available historical market data. Historical values may be
accessed on Kenneth French's web page. ·
The
Fama–French three-factor model explains over 90% of the diversified
portfolios returns, compared with the average 70% given by the CAPM (within
sample). ·
The
signs of the coefficients suggested that small cap and value portfolios have higher expected
returns — and arguably higher expected risk — than those of large cap and
growth portfolios ------ From
wikipedia Behavior
finance guide (PPT) 1. What
is anchoring? Example? 2. What
is mental accounting? Example? 3. What
is gambler’s fallacy? Example? 4. What
is herding? Example? 5. What
is disposition effect? HW
of week 2: Read Fama’s common risk factor paper and
answer the following questions. 1.
How difficult is it to explain stock
returns? Do you have any trading strategies that worked well in the past? 2.
What are the 3 factors? What percentage of
stock returns can be explained by the three factors? 3.
Use one example to explain anchoring,
mental accounting, gambler’s fallacy, herding, and disposition effect,
respectively. References only: Solver example (Thanks, Tripp) Arbitrage
Pricing Theory and Strategic Portfolio Planning (By Roll and Ross, 1995) Capital
asset prices: A theory of market equilibrium under conditions of risk
(Sharpe, 1964) |
Math Equations:
Week 2 WSJ Papers
(word file here) Computer-Driven,
Automatic Trading Strategies Score Big So-Called
Quant Traders Take Advantage of Volatility WSJ: The Cheap Way to Hedge Against
Stock-Market Volatility Have
Investors Finally Cracked the Stock-Picking Code?
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Efficient
Frontier using Solver Optimal portfolio with solver https://www.youtube.com/watch?v=OGhGz8trZtw Markowtiz's Portfolio Risk Minimization with Excel
Solver
https://www.youtube.com/watch?v=yFge0qK1YZg Markowitz portfolio optimisation –
Solver http://people.brunel.ac.uk/~mastjjb/jeb/finance/markowitz_qp.pdf Portfolio Optimization in Excel (highly recommend)https://www.youtube.com/watch?v=FZyAXP4syD8 Generating the Variance-Covariance Matrix(highly recommend) https://www.youtube.com/watch?v=ZfJW3ol2FbA Portfolio Optimization with Two Assetshttps://www.youtube.com/watch?v=bsFZ9umZaJA Fama French factors website for historical data http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html Fama
French 3 Factor Model
https://www.youtube.com/watch?v=ovpvIg_xwdA Behavioral
Finance for Everyday Investors: Availability Bias
Behavioral Finance for Everyday Investors:
Herding
Trading
Psychology Explained
Prospect Theory https://www.youtube.com/watch?v=P2aMrBZi0xc
Mental Accounting https://www.youtube.com/watch?v=K8SkCh-n4rw
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Week 4 |
Efficient Frontier
Project Demonstration Video
Part II (Sorry for not showing the screen.
Battery died unexpected) |
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Week 3,4 |
Mid
Term (open book, word file here) Assigned
in the 3rd week. Due in the 4th week. |
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Week 4, 5 |
Final Materials Start from Here (week
5 – week 8) Let’s
watch this together about interest rate hike and stock market Week 5 Subject: Bond Pricing Duration
and Convexity PPT (supplement, not required) Excel
Calculator for Duration and Convexity 1. 1.
Go to the
bond market data website of FINRA to find bond information. 1)
Treasury bonds:
Name: United states treas bds go
to www.findra.org, è Investor center è market
data è bond è treasury
bond 2. Understand
how to price bond 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) Or to get partial year pricing of bond, use price function in
excel Price = price(date(year, month, date), date(year, month, date),
coupon rate, ytm, 100, frequency)) Syntax: PRICE(settlement, maturity, rate, yld,
redemption, frequency, [basis]) Settlement Required.
The security's settlement date. The security settlement date is the date after
the issue date when the security is traded to the buyer. Maturity Required. The
security's maturity date. The maturity date is the date when the security
expires. Rate Required. The
security's annual coupon rate. Yld Required. The
security's annual yield. Redemption Required.
The security's redemption value per $100 face value. Frequency Required.
The number of coupon payments per year. For annual payments, frequency = 1;
for semiannual, frequency = 2; for quarterly, frequency = 4. Basis Optional. The type
of day count basis to use 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) 3. Understand how to calculate
bond returns To calculate yield to
maturity (annual coupon bond):: Yield to maturity = rate(years left to maturity, coupon rate
*1000, -price, 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 Or use yield function in excel to get
partial year YTM. Syntax YIELD(settlement,maturity,rate,pr,redemption,frequency,basis) Settlement
is the security's settlement date. The security settlement date is the date
after the issue date when the security is traded to the buyer. Maturity
is the security's maturity date. The maturity date is the date when the
security expires. Rate
is the security's annual coupon rate Pr
is the security's price per $100 face value Redemption
is the security's redemption value per $100 face value Frequency
is the number of coupon payments per year. For annual payments, frequency =
1; for semiannual, frequency = 2; for quarterly, frequency = 4 Basis
is the type of day count basis to use To calculate yield to call (annual coupon bond):: Yield to maturity = rate(years left to call, coupon rate *1000,
-price, 1000+ premium)
When interest rates decline, straight bond prices
increase, but callable bonds are capped at the call price, 4.
4. Current yield: For the above bond, calculate current yield. 5. Zero coupon
bond: coupon=0 and treat it as semi-annual coupon bond. Risks in Fixed Income Market 1. Interest Rate Risk o Bond prices
have an inverse relationship with interest rates. When the Federal Reserve
raises rates, bond prices fall in response. This is because bonds have a
fixed interest rate, and new bond issues must offer higher interest payments to
investors to remain competitive when interest rates rise. This means older
bonds with lower fixed rates must sell at lower prices in the market to
compete with new bond issues. Default Risk o This occurs when
the issuer becomes insolvent, rendering it unable to meet its obligations.
Bond ratings agencies, such as Moody's and Standard and Poor's, rate bond
issues based on their safety. Government-issued bonds usually receive the
highest safety ratings, because they are less likely to default. Junk bonds
are low-grade bonds issued by companies and other entities with poor
financial status. Junk bonds usually pay higher interest, but the risk of
default is also higher. Inflation Risk o Fixed-income
funds are relatively stable, making them less prone to losing money than
other types of funds. However, they also grow more slowly, leaving their
owners more vulnerable to inflation. Even as the cost of living rises, fixed
income from these funds remains the same. As a result, the buying power of
fixed-income investors suffers. Call Risk o Some bonds are
callable. This means their issuer put in a provision that allows the issuer
to buy back the bond early if interest rates drop below a point designated by
the issuer. This allows bond issuers an opportunity to refinance at lower
rates. It also means bond owners lose their source of income. Fixed-income
funds can replace funds that have been called, but it is likely the new bonds
they buy will come with lower interest rates, which, in turn, reduces the
income for fund owners. Reinvestment Risk The risk that future coupons
from a bond will not be reinvested at the prevailing interest rate when the
bond was initially purchased. Reinvestment risk is more likely when interest
rates are declining. For discussion in class: Is there any
bond market bubble? When will it be bursting? What
happened to bond bubble (video) HOMEWORK 1. Refer to Transparency and the Corporate Bond
Market, and Corporate and Municipal Bonds,
and answer the following questions. §
Is bond market costly to retail investors?
Why? §
List the hidden costs as a retain
investors in the bond market. §
What is Trace? Why can TRACE help to
reduce the costs? 2.
Refer to www.treasurydirect.gov and answer
the following questions. What is Dutch auction. Assume you are a bidder. How can you
win this auction? Refer to the auction announcement
as an example. Refer to the
auction results, what is the final price? Final yield? What is high
yield? Median yield? Low yield? If you are desperate for this bond, your bid
should appear close to high yield or low yield? Why? |
Math Formula (reference only)
C: Coupon, M: Par, $1,000; i: Yield to maturity; n: years left to maturity
For Semi-annual, F=2 for semi-annual coupon
where: or,
Duration excel function syntax: DURATION(settlement,maturity,coupon,yld,frequency,basis) Settlement is the security's
settlement date. The security settlement date is the date after the issue
date when the security is traded to the buyer Maturity is the security's
maturity date. The maturity date is the date when the security expires. Coupon is the security's
annual coupon rate. Yld is the security's annual yield. Frequency is the number of coupon
payments per year. For annual payments, frequency = 1; for semiannual,
frequency = 2; for quarterly, frequency = 4. Basis is the type of day
count basis to use. R*e*f*e*r*e*n*c*e o*n*l*y Bond risk (video) Bond risk – credit risk (video) Bond risk – interest rate risk (video) |
A Theory on European Bond Market Turmoil
https://www.youtube.com/watch?v=4rsagKW2bIU Bond Bubble May Be Bursting Right Now! - Bud Conrad of Casey Research Interview https://www.youtube.com/watch?v=aX-D2_5KP4g |
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Week 6 |
Subject: Stock Valuation Part I: Stock
valuation ppt Stock
pricing EXCEL TEMPLATE FYI 1 Stock
pricing EXCEL TEMPLATE FYI 2 Problem1: 3M (MMM) is expected to pay paid dividends
of $1.92 per share in the coming year. You expect the stock price to be $85 per
share at the end of the year. Investments with equivalent risk have an
expected return of 11%. What is the most
you would pay today for 3M stock? What dividend
yield and capital gain rate would you expect at this price? Problem2: AT&T plans to pay $1.44 per share in
dividends in the coming year. Its equity cost of capital is 8%.Dividends are
expected to grow by 4% per year in the future. Estimate the stock price of
AT&T.
Part II: How to pick stocks? FINVIZ.com http://finviz.com/screener.ashx Simply the Web's Best Financial Charts Ranking stocks using PEG ratio https://www.youtube.com/watch?v=bekW_hTehNU Summary of stock
screening rules from class discussion PEG<1 PE<15 (? FB’s PE>100?) Growth
rate<20 ROE>10% Analyst
ranking: strong buy only Zacks average =1 (from Ranking stocks using PEG ratio) current
price>5 Part III: Efficient Market Hypothesis Efficient
Market Hypothesis PPT Paper
1 for reference: Efficient_Market_Hypothesis_Critics_Malkiel.pdf Paper
2 for reference: Efficient_Market_Hypothesis_survey_beechey.pdf Do you see a pattern that you want to put
money on?
When FED announces to decrease
interest rate by 1%, then … When FED announces to increase
interest rate by 1%, then …
Types
of Efficient Markets: Weak, semi-strong, strong.
http://www.tradingonlinemarkets.com/Articles/Technical_Analysis/Head_and_Shoulders_Stock_Pattern.htm Head and Shoulder Pattern
The formation of a head and shoulders pattern
normally begins after a nice rise in the stock share price. The left shoulder
forms when there is a pull back in the price after rising to a new high or
interim high. The price stops moving down after a brief drop in the price and
it turns back up to a new high. The new high forms the head of the formation.
Finally, the stock price turns down again before it reached the prior high
forming the right shoulder. The chart above of the DJIA or Dow Jones
Industrial Average shows the formation of a well-defined head and shoulders
stock pattern. In this case, two left shoulders and two right shoulders can
be identified. This is fairly common and serves to further refine the head
and shoulders top pattern. Another feature of the head and shoulders stock
pattern is the neckline that connects the bottom of the left and right
shoulders. This neckline is offers a support level that investors use to
trigger point to enter a short sale, to close long positions and/or add down
side protection such as protective put options and covered calls. The
neckline also helps to identify the potential drop in the price as defined by
the measured move rule. Volume is an important indicator for many head
and shoulder patterns. Usually the volume is higher on the left shoulder and
with the formation of the head. Then volume tends to taper off as buying
interest fades. However, there are times when volume on the right shoulder
can rise significantly, especially on the moves down. When this takes place,
it is a further indication the price of the stock is falling and you should
take action to protect their capital. Homework 1. Pick four stocks and describe why
you select the stocks. 2.
What are the
weak form, semi-strong form, and strong form of the efficient market
hypotheses, respectively As a disbeliever of market efficient hypothesis,
what is the evidence you have to support yourself? Refer to Efficient_Market_Hypothesis_Critics_Malkiel.pdf
and Efficient_Market_Hypothesis_survey_beechey.pdf |
Math Equations Stock
valuation
Valuing
the Enterprise
*R*e*f*e*r*e*n*c*e *O*n*l*y: 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 Ranking stocks using PEG ratio https://www.youtube.com/watch?v=bekW_hTehNU Summary of stock screening
rules from class discussion PEG<1 PE<15 (? FB’s PE>100?) Growth
rate<20 ROE>10% Analyst
ranking: strong buy only Zacks average =1 (from Ranking stocks using PEG ratio) current
price>5 You can find analyst rating from MSN money For instance, ANALYSTS RATINGS Zacks average
brokerage recommendation is Moderate Buy
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Week 7 |
Subjects: Capital Structure, Dividend
Policy Chapters for reading (reference)
By Berk and DeMarzo Part I: Capital Structure MM theory - PPT Part II: Capital Structure
other theories - ppt MM
Theory
(MM paper
(1958) here FYI) 1. Who
are Modigliani and Miller (MM), and what assumptions are embedded in the MM
and Miller models? 2. MM’s
1958 paper sets up the foundations for the theoretical studies in capital
structure. Their
paper is here. When there is no tax
WACC =
wdrd + wcers = (D/V)rd
+ (S/V)rs Conclusion: 1)
The more debt the firm adds to its capital structure, the riskier the equity becomes
and thus the higher its cost. 2) Although rd remains constant, rs
increases with leverage. The increase
in rs is exactly sufficient to keep the WACC constant.
With corporate tax added
Conclusion: 1. VL ≠ VU. VL increases as debt is added to
the capital structure, and the greater the debt usage, the higher the value
of the firm. 2. rsL increases with leverage at a slower rate
when corporate taxes are considered. With both corporate and personal tax added
Summary: ·
MM, No Taxes: Capital structure is irrelevant--no impact
on value or WACC. ·
MM, Corporate Taxes: Value increases, so firms should use
(almost) 100% debt financing. ·
Miller, Personal Taxes: Value increases, but less than under MM, so
again firms should use (almost) 100% debt financing. For discussion: Do
you know any company that uses 100% debt financing? Trade
off theory References: Jensen and Mekcling (1976),
Jensen (1986), and Hart and Moore (1994) There
is an optimal capital structure exists that balances these costs and
benefits. At low
leverage levels, tax benefits from issuing debt outweigh bankruptcy costs
from debt holding. At high
levels, bankruptcy costs outweigh tax benefits.
Marginal
benefit of debt declines as debt increases. There is an optimal capital
structure, D/E*.
Pecking
Order theory: References:
Donaldson (1961), Myers (1984) Asymmetric
information exists and it is costly. Managers have more information about the
quality of the firm. Companies
select financing according to the law of least effort. (1)
Internal financing (retained earnings),
first. (2)
Bank debt (in different levels, easiest:
bank debt) , second (3)
Equity, last resort. •
Myers (1984): when equity is
issued, investors think firm is overvalued (managers use the last resort
tool, only because firm is overvalued). Investors demand a higher return on
equity than on debt. Market
Timing Theory (signaling):
reference: Baker and Wrugler (2002) Firms
are indifferent between equity or debt financing. But, the market makes
pricing mistakes from time to time. •
Managers select the debt or
equity according to the relative mispricing. •
If neither market looks
favorable, manager may defer issuances. •
If conditions look unusually
favorable, managers may raise funds even if the firm has no need for funds. •
There are no firm specific
variables (“factors”) that influence D/E. Which theory is the most correct? –
results are mixed •
Fact 1:
Firms use debt financing too conservatively – Graham (2000), Strebulaev &
Yang (2007). •
Fact 2:
Negative relation between profitability and leverage - Myers (1993), Myers and
Shyam-Sunder (1999). •
Fact 3:
Firms mean-revert slowly towards target leverage –Fama and French (2002),
Flannery and Rangan (2006). •
Fact 4:
Changes in market leverage are largely explained by changes in equity prices
-Welch (2004)] •
Fact 5:
Leverage largely driven by unexplained firm-specific fixed effect - Lemmon,
Roberts, Zender (JF, 2006). •
Fact 6:
Link between governance mechanisms & leverage ambiguous - Berger, Ofek
& Yermack (JF, 1997), John and Litov (2008) No
HW Required |
Part III: Why Do Firms Pay Dividends?
Theory one: Indifference theory n Assuming: –
No transactions costs to buy
and sell securities –
No flotation costs on new
issues –
No taxes –
Perfect information –
Dividend policy does not
affect ke n Dividend
policy is irrelevant. If dividends are too high, investors may use some of
the funds to buy more of the firm’s stock. If dividends are too low,
investors may sell off some of the stock to generate additional funds. Theory two: bird in hand theory – High
dividend can increase firm value Dividends
are less risky. Therefore, high dividend payout ratios will lower ke
(reducing the cost of capital), and increase stock price Theory three: Tax effect theory – Low
dividend can increase firm value 1)
Dividends received are taxable in the
current period. Taxes on capital gains, however, are deferred into the future
when the stock is actually sold. 2)
The maximum tax rate on capital gains is
usually lower than the tax rate on ordinary income. Therefore, low dividend
payout ratios will lower ke (reducing the cost of capital), raise
g, and increase stock price. Which theory is most correct? – again,
results are mixed. 1)
Some research suggests that high payout
companies have high required return on stock, supporting the tax effect
hypothesis. 2)
But other research using an international
sample shows that in countries with poor investor protection (where agency
costs are most severe), high payout companies are valued more highly than low
payout companies. Stock
Repurchase: Buying
own stock back from stockholders. Reasons
for repurchases: ·
As an alternative to distributing cash as
dividends. ·
To dispose of one-time cash from an asset
sale. ·
To make a large capital structure change. ·
May be viewed as a negative signal (firm
has poor investment opportunities). ·
IRS could impose penalties if repurchases
were primarily to avoid taxes on dividends. ·
Selling stockholders may not be well
informed, hence be treated unfairly. ·
Firm may have to bid up price to complete
purchase, thus paying too much for its own stock. Stock Split: Firm
increases the number of shares outstanding, say 2:1. Sends shareholders more shares. Reasons
for stock split: ·
There’s a widespread belief that the
optimal price range for stocks is $20 to $80. ·
Stock splits can be used to keep the price
in the optimal range. ·
Stock splits generally occur when
management is confident, so are interpreted as positive signals. |
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Week 8 |
Final
(non cumulative) and project due Final Questions Question 1: The followings are APPLE, WMT, and Exxon
Mobile’s payout ratio (Payout ratio = Dividend/Net income)
Explain
why the three well known companies choose different dividend policies. (20
points)
Question 2: Refer to the following debt equity ratio
graphs of WMT, Apple, and Exxon (Debt ratio =
debt / equity) Explain why the three well
known companies choose different capital structure. (20 points)
Question
3 First, explain what is bond market bubble. Fed is going to increase interest rate in the near future. Do you worry about the burst of the bond market bubble? Why or why not? (20 points, hint: this is related to interest rate risk) Refer to this video. What
happened to bond bubble (video) Question
4 Imagine you are a stock analyst. Pick one stock only among WalMart, Apple, and Exxon Mobile and write your recommendation of (20 points) Here are the recommendations for reference from http://www.nasdaq.com/
Question
5 What is efficient market hypothesis. What are the weak form, semi-strong form, and strong form of the efficient market hypotheses, respectively (20 points) FINAL Questions(last
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