­­FIN301 Class Web Page, Summer ' 20

Instructor: Maggie Foley

Jacksonville University

 

The Syllabus    

Business Finance Online, an interactive learning tool for the Corporate Finance Student http://www.zenwealth.com/BusinessFinanceOnline/index.htm

 

Weekly SCHEDULE, LINKS, FILES and Questions

Chapter

Coverage, HW, Supplements

-        Required

References

 

Chapter 1, 2

 

·         Chapter 5 in class exercises (PV,FV, Rate, Nper, Annuity, EAR, APR)

 

 

 

Week 1 Tuesday class (video)

·        Marketwatch.com simulation game

·        Chapters 1, 2

·        Chapter 5 (math equation, Excel, calculator)

 

Week 1 Thursday class (video)

·        In class exercise part I

 

Week 2 Tuesday class (video)

·        In class exercise part II

·        Chapter 5 Homework (all questions discussed in class)

 

Week 2 Thursday class (video)

·          Chapter 6 In class exercise I

(finance.yahoo.com, historical price, monthly return,

average return, standard deviation, correlation, portfolio return)

 

Week 3 Tuesday class (video)

·         Chapter 6 In class exercise II

(beta calculation, CAPM, SML)

·        Chapter 6 In class exercise III

·        Chapter 6 homework #1

 

Week 3 Thursday class (video)

·          Chapter 6 homework (all included)

 

Week 4 Tuesday class (video)

·         Review of the midterm (chapters 5, 6)

 

 

Week 4 Thursday class

·       Midterm (posted on blackboard under course introduction, starting on Thursday at 8 pm, due at 11:59 pm Thursday (send your answer sheet to mfoley3@ju.edu)

·       Note: If you are unable to take the exam on Thursday, you can take it between 8 am and 11:59 pm on Friday

 

Week 5 Tuesday class (video)

·        Chapter 3 in class exercises:

Balance sheet, income statement, cash flow statements

·        Chapter 4 brief introduction

 

 

Week 5 Thursday class (video)

·        Chapter 3 homework

·        Chapter 7 -  bond pricing and YTM

 

Week 6 Tuesday class (video)

·        Chapter 7 homework

·        Chapter 8 – Stock valuation (Dividend Growth Model)

 

Week 6 Thursday class (video)

·        Chapter 8 homework 

·        Chapter 9 - WACC

 

Week 7 Tuesday class (video)

·        Chapter 9 homework

·        Chapter 10

– NPV, IRR, payback period, theory

– NPV, IRR, payback period, calculator

– NPV, IRR, payback period, in class exercise

 

 

Week 7 Thursday class

·        Final Exam – Non-cumulative

·       Final (posted on blackboard under course introduction, starting on Thursday at 8 pm, due at 11:59 pm Thursday (send your answer sheet to mfoley3@ju.edu)

·       Note: If you are unable to take the exam on Thursday, you can take it between 8 am and 11:59 pm on Friday

·       Winner of the stock trading competition will be announced at 8am on 8/13

 

 

 

 

Marketwatch Stock Trading Game (Pass code: havefun)

Use the information and directions below to join the game.

1.     URL for your game: 
https://www.marketwatch.com/game/jufin301-20summer

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!

Discussion:  How to pick stocks (finviz.com)

Daily earning announcement: http://www.zacks.com/earnings/earnings-calendar

IPO schedule:  http://www.marketwatch.com/tools/ipo-calendar

 

FYI:  MarketWatch Stock Game written by Maelyn O’Connor (Thanks, Maelyn)

 

 

Chapter  1: Introduction

 

ppt

 

image001.jpg

 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 2 Introduction of Financial Market

 

ppt

 

1.     What are the six parts of the financial markets

Money:

·         To pay for purchases and store wealth (fiat money, fiat currency)

Financial Instruments:

·         To transfer resources from savers to investors and to transfer risk to those best equipped to bear it.  

Financial Markets:

·         Buy and sell financial instruments

·         Channel funds from savers to investors, thereby promoting economic efficiency

·         Affect personal wealth and behavior of business firms. Example?

Financial Institutions.

·         Provide access to financial markets, collect information & provide services

·         Financial Intermediary: Helps get funds from savers to investors

Central Banks

·         Monitor financial Institutions and stabilize the economy

Regulatory Agencies

·         To provide oversight for financial system.

 

2.      What are the five core principals of finance

  • Time has value
  • Risk requires compensation
  • Information is the basis for decisions
  • Markets determine prices  and allocation resources
  • Stability improves welfare

 

Introduction to Capital Markets - ION Open Courseware (Video)

How the stock market works (video)

 

No homework for chapter 2

 

  

Chapter 5 Time value of Money

ppt

Time value of money (Video)

The time value of money - German Nande (video)

 

Tutoring of Time Value of Money calculation in Excel video

 

 

Chapter 5 in class exercise

 

 

Chapter 5 Homework (due on mid term in week 4 Thursday)  

 

1.      You deposit $5,000 in a saving account at 10% compounded annually. How much is your first year interest? How much is your second year interest? (500, 550)

 

2.      What is the future value of $5,000 invested for 3 years at 10% compounded annually? ( 6,655)

 

3.      You just bought a TV for $518.4 on credit card. You plan to pay back of $50 a month for this credit card debt. The credit card charges you 12% of interest rate on the monthly basis. So how long does it take to pay back your credit card debt? (11 months)

 

4.      You are going to deposit certain amount in the next four years. Your saving account offers 5% of annual interest rate.

First year:        $800

Second year:   $900

Third year:       $1000

Fourth year:     $1200.

How much you can withdraw four years later? (4168.35)

 

5.      You are going to deposit certain amount in the next four years. Your saving account offers 5% of annual interest rate.

First year:        $800

Second year:   $900

Third year:       $1000

Fourth year:     $1200.

How much is the lump sum value as of today (NPV)? (3429.31)

 

6.      Ten years ago, you invested $1,000. Today it is worth $2,000. What rate of interest did you earn? (7.18%)

 

7.      At 5 percent interest, how long would it take to triple your money? (22.52)

 

8.      What is the effective annual rate if a bank charges you 12 percent compounded monthly? (12.68%)

 

9.      Your father invested a lump sum 16 years ago at 8% interest for your education. Today, that account worth $50,000.00. How much did your father deposit 16 years ago? ($14594.50)

 

10.  You are borrowing $300,000 to buy a house. The terms of the mortgage call for monthly payments for 30 years at 3% interest. What is the amount of each payment?  ($1264.81)

 

11.  You deposit $200 at the beginning of each month into your saving account every month. After two years (24 deposits total), your account value is $6,000. Assuming monthly compounding, what is your monthly rate that the bank provides?  (1.74%)

 

12.   You want to buy a fancy car. For this goal, you plan to save $5,500 per year, beginning immediately.  You will make 4 deposits in an account that pays 8% interest.  Under these assumptions, how much will you have 4 years from today? ($26,766)

 

13.  Citi card is giving you a good deal. You can transfer your balance from your current credit card to Citi new card with $50 balance transfer fee. The new card charges at 5% a year. But your old card charges at 12% a year. Your balance in your old card is $5,000. If you can afford to pay back to the credit card of $250 a month. How much quicker does it take you to pay back your debt with the new card? (Hint: for the new card, your debt = 5000+50=5050; Assume monthly compounding by credit card companies). (1.28 months)

14.  Your girlfriend just won the Florida lottery.  She has the choice of $40,000,000 today or a 20-year annuity of $2,850,000, with the first payment coming one year from today. If the mutual fund of hers provides 4% of return each year for the next 20 years, which payment option is more attractive to her? ($40million)

15.  The Thailand Co. is considering the purchase of some new equipment. The quote consists of a quarterly payment of $4,740 for 10 years at 6.5 percent interest. What is the purchase price of the equipment? ($138,617.88)

16.  The condominium at the beach that you want to buy costs $249,500. You plan to make a cash down payment of 20 percent and finance the balance over 10 years at 6.75 percent. What will be the amount of your monthly mortgage payment? ($2,291.89)

17.  Today, you are purchasing a 15-year, 8 percent annuity at a cost of $70,000. The annuity will pay annual payments. What is the amount of each payment? ($8,178.07)

18.  Shannon wants to have $10,000 in an investment account three years from now. The account will pay 0.4 percent interest per month. If Shannon saves money every month, starting one month from now, how much will she have to save each month? ($258.81)

19.  Trevor's Tires is offering a set of 4 premium tires on sale for $450. The credit terms are 24 months at $20 per month. What is the interest rate on this offer? (6.27 percent)

20.  Top Quality Investments will pay you $2,000 a year for 25 years in exchange for $19,000 today. What interest rate are you earning on this annuity? (9.42 percent)

21.  You have just won the lottery! You can receive $10,000 a year for 8 years or $57,000 as a lump sum payment today. What is the interest rate on the annuity? (8.22 percent)

22.  Around Town Movers recently purchased a new truck costing $97,000. The firm financed this purchase at 8.25 percent interest with monthly payments of $2,379.45. How many years will it take the firm to pay off this debt? (4.0 years)

23.  Expansion, Inc. acquired an additional business unit for $310,000. The seller agreed to accept annual payments of $67,000 at an interest rate of 6.5 percent. How many years will it take Expansion, Inc. to pay for this purchase? (5.68 years)

24.  You want to retire early so you know you must start saving money. Thus, you have decided to save $4,500 a year, starting at age 25. You plan to retire as soon as you can accumulate $500,000. If you can earn an average of 11 percent on your savings, how old will you be when you retire? (49.74 years)

25.  You just received a credit offer in an email. The company is offering you $6,000 at 12.8 percent interest. The monthly payment is only $110. If you accept this offer, how long will it take you to pay off the loan? (82.17 months)

26.  Fred was persuaded to open a credit card account and now owes $5,150 on this card. Fred is not charging any additional purchases because he wants to get this debt paid in full. The card has an APR of 15.1 percent. How much longer will it take Fred to pay off this balance if he makes monthly payments of $70 rather than $85? (93.04 months)

27.  Bridget plans to save $150 a month, starting today, for ten years. Jordan plans to save $175 a month for ten years, starting one month from today. Both Bridget and Jordan expect to earn an average return of 8 percent on their savings. At the end of the ten years, Jordan will have approximately _____ more than Bridget. ($4,391)

28.  What is the future value of weekly payments of $25 for six years at 10 percent? ($10,673.90)

29.  At the end of this month, Bryan will start saving $80 a month for retirement through his company's retirement plan. His employer will contribute an additional $.25 for every $1.00 that Bryan saves. If he is employed by this firm for 25 more years and earns an average of 11 percent on his retirement savings, how much will Bryan have in his retirement account 25 years from now? ($157,613.33)

30.  Sky Investments offers an annuity due with semi-annual payments for 10 years at 7 percent interest. The annuity costs $90,000 today. What is the amount of each annuity payment? ($6,118.35)

 

31.     Mr. Jones just won a lottery prize that will pay him $5,000 a year for thirty years. He will receive the first payment today. If Mr. Jones can earn 5.5 percent on his money, what are his winnings worth to him today? ($76,665.51)

Summary of math and excel equations

 

Math Equations 

FV = PV *(1+r)^n

PV = FV / ((1+r)^n)

N = ln(FV/PV) / ln(1+r)

Rate = (FV/PV)1/n -1

Annuity: N = ln(FV/C*r+1)/(ln(1+r))

Or N = ln(1/(1-(PV/C)*r)))/ (ln(1+r))

 

EAR = (1+APR/m)^m-1

APR = (1+EAR)^(1/m)*m

 

image002.jpg

 

Excel Formulas 

To get FV, use FV function.   

      =abs(fv(rate, nper, pmt, pv))

 

To get PV, use PV function                           

     = abs(pv(rate, nper, pmt, fv))

 

To get r, use rate function                          

     = rate(nper,  pmt, pv, -fv)

 

To get number of years, use nper function       

     = nper(rate,  pmt, pv, -fv)

 

To get annuity payment, use PMT function

     = pmt(rate, nper, pv, -fv)

 

To get Effective rate (EAR), use Effect function

 = effect(nominal_rate, npery)

 

To get annual percentage rate (APR), use nominal function

 = nominal(effective rate,  npery)

 

 

NPV NFV calculator(FYI, might be helpful)

www.jufinance.com/nfv

 

 

 

Time Value of Money Calculator

http://www.jufinance.com/tvm/

Chapter 6 Risk and Return

ppt

 

Risk and Return in class exercise

 

Excel file here will be provided soon

 

Steps:   In class exercise  

1.      Pick three stocks. Has to be the leading firm in three different industries. 

2.      From finance.yahoo.com, collect stock prices of the above firms, in the past five years 

Steps:

·        Goto finance.yahoo.com, search for the company

·        Click on “Historical prices” in the left column on the top and choose monthly stock prices.

·        Change the starting date and ending date to “6/1/2019” and “6/1/2020”, respectively.

·        Download it to Excel

·        Delete all inputs, except “adj close” – this is the closing price adjusted for dividend.

·        Merge the three sets of data just downloaded

3.      Evaluate the performance of each stock:

·        Calculate the monthly stock returns.

·        Calculate the average return

·        Calculate standard deviation as a proxy for risk

·        Calculate correlation among the three stocks.

·         Calculate beta. But you need to download S&P500 index values  in the past five years from finance.yahoo.com.

·        Calculate stock returns based on CAPM.

·        Draw SML

fig0609

·        Conclusion and take away?

 

 

Effect of Diversification

 

fig0603

 

 

 

Please refer to template

 

 

  Chapter 6 In Class Exercise(Word file here )  

 

 

Chapter 6 Homework 

 

(Due with mid Term exam in week 4 on Thursday 7/21/2020)

 

1) Stock A has the following returns for various states of the economy:

 State of

the Economy         Probability       Stock A's Return

Recession              10%                 -30%

Below Average     20%                 -2%

Average                 40%                 10%

Above Average     20%                 18%

Boom                    10%                 40%

Stock A's expected return is? (ANSWER: 8.2%)

 

2) Joe purchased 800 shares of Robotics Stock at $3 per share on 1/1/09. Bill sold the shares on 12/31/09 for $3.45. Robotics stock has a beta of 1.9, the risk-free rate of return is 4%, and the market risk premium is 9%. Joe's holding period return is? (ANSWER: 15%)

 

3. You own a portfolio with the following expected returns given the various states of the economy. What is the overall portfolio expected return? (ANSWER: 9.05%)

State of economy            probability of state of economy                rate of return if state occurs

Boom                                    27%                                                                        14%

Normal                                 70%                                                                        8%

Recession                            3%                                                                          -11%

 

4) The prices for the Electric Circuit Corporation for the first quarter of 2009 are given below. The price of the stock on January 1, 2009 was $130. Find the holding period return for an investor who purchased the stock onJanuary 1, 2009 and sold it the last day of March 2009. (ANSWER: 2.12%)

      Month End   Price

      January     $125.00

      February     138.50

      March         132.75

 

5) Collectibles Corp. has a beta of 2.5 and a standard deviation of returns of 20%. The return on the market portfolio is 15% and the risk free rate is 4%. What is the risk premium on the market?  (ANSWER: 11%)

  

6) An investor currently holds the following portfolio:

                                       Amount

                                      Invested

8,000 shares of Stock    A $16,000    Beta = 1.3

15,000 shares of Stock  B $48,000    Beta = 1.8

25,000 shares of Stock  C $96,000    Beta = 2.2

 The beta for the portfolio is? (ANSWER: 1.99)

  

7) Assume that you have $165,000 invested in a stock that is returning 11.50%, $85,000 invested in a stock that is returning 22.75%, and $235,000 invested in a stock that is returning 10.25%. What is the expected return of your portfolio? (ANSWER: 13%)

  

8) If you hold a portfolio made up of the following stocks:

            Investment Value Beta

Stock A      $8,000           1.5

Stock B      $10,000          1.0

Stock C       $2,000             .5

 What is the beta of the portfolio? (ANSWER: 1.15)

 

9. The risk-free rate of return is 3.9 percent and the market risk premium (rm –rf) is 6.2 percent. What is the expected rate of return on a stock with a beta of 1.21? (ANSWER: 11.4%)
  

10.              You own a portfolio consisting of the stocks below.

Stock                     Percentage of portfolio                 Beta

1.                                  20%                                                         1

2.                                  30%                                                         0.5

3.                                 50%                                                          1.6

The risk free rate is 3% and market return is 10%.

a.                   Calculate the portfolio beta.  (ANSWER: 1.15)

b.                  Calculate the expected return of your portfolio. (ANSWER: 11.05%)

  

11.  Computing holding period return for Jazman and Solomon for period 1 through 3 (bought in period 1 and sold in period 3). Show the holding period returns for each company. (ANSWER: 50%, -25%)

Period             Jazman           Solomon

1                      $10                  $20

2                      $12                  $25

3                      $15                  $15

  

12.  Calculate expected return  (ANSWER: 12%)

State of the economy

Probability of the states

% Return (Cash Flow/Inv. Cost)

Economic Recession

30%

5% 

Strong and moderate Economic Growth

70%

15% 

 

 13.  Calculate the expected returns of the following cases, respectively

1)      Invest $10,000 in Treasury bill with guaranteed return of 4%. (ANSWER: 4%)

2)      Investment $10,000 in Apple. 50% possibility to earn 20% return and 50% possibility to lose 10% of investment.(ANSWER: 5%)

3)      Investment $10,000 in Wal-Mart. 50% possibility to earn 5% return and 50% possibility to earn 0% of investment.(ANSWER: 2.5%)

 

14.  Rank the risk of the following cases, from the least risky one the most risky one  (ANSWER: 1, 3, 2)

1)      Invest $10,000 in Treasury bill with guaranteed return of 4%.

2)      Investment $10,000 in Apple. 50% possibility to earn 20% return and 50% possibility to lose 10% of investment.

3)      Investment $10,000 in Wal-Mart. 50% possibility to earn 5% return and 50% possibility to earn 0% of investment.

 

15.  An investor currently holds the following portfolio:

                                       Amount

                                      Invested

8,000 shares of Stock    A $10,000    Beta = 1.5

15,000 shares of Stock  B $20,000    Beta = 0.8

25,000 shares of Stock  C $20,000    Beta = 1.2

Calculate the beta for the portfolio.(ANSWER: 1.1)

 

 

Expected return calculator

www.jufinance.com/return

 

Image result for expected return"

 

Holding Period Return Calculator

www.jufinance.com/hpr

 

 

 

 

CAPM Model Calculator

www.jufinance.com/capm

Capital Asset Pricing Model Formula

 

 

Two Stock Portfolio Return and Standard Deviation

www.jufinance.com/portfolio

 

 

Equations (FYI)

 

image013.jpg

Excel for standard deviation:

stdev(array of returns)

 

 

 

 

image035.jpg

 

 

Excel for beta used in CAPM

slope(array of stock returns, array of market returns)

 

 

 

Portfolios – two stocks

 

Calculator

http://www.jufinance.com/portfolio/

 

 

Equations:

image026.jpg

W1 and W2 are the percentage of each stock in the portfolio.

image028.jpg

 

image031.gif

  • r12 = the correlation coefficient between the returns on stocks 1 and 2,
  • s12 = the covariance between the returns on stocks 1 and 2,
  • s1 = the standard deviation on stock 1, and
  • s2 = the standard deviation on stock 2.

 

image022.jpg

  • s12 = the covariance between the returns on stocks 1 and 2,
  • N = the number of states,
  • pi = the probability of state i,
  • R1i = the return on stock 1 in state i,
  • E[R1] = the expected return on stock 1,
  • R2i = the return on stock 2 in state i, and

E[R2] = the expected return on stock 2.

Chapter 3 Financial Statement Analysis

 

Ppt

 

Experts Explain: Financial Statements (well explained, video)

 

 

 

******* 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.

Balance Sheet Template  

http://www.jufinance.com/10k/bs

 

Income Statement Template  

http://www.jufinance.com/10k/is

 

 

Cash flow template

http://www.jufinance.com/10k/cf

 

 

Ratio Analysis   (plus balance sheet, income statement)

http://www.jufinance.com/ratio

 

********* Part II: Cash Flow Statement  ******************
Cash flow animation
 (video)

 

Here is the cash flow statement of home depot as of 2/2/2014.

 

In Millions of USD (except for per share items)

52 weeks ending 2014-02-02

Net Income/Starting Line

5,385.00

Depreciation/Depletion

1,757.00

Amortization

-

Deferred Taxes

-31

Non-Cash Items

228

Changes in Working Capital

289

Cash from Operating Activities

7,628.00

Capital Expenditures

-1,389.00

Other Investing Cash Flow Items, Total

-118

Cash from Investing Activities

-1,507.00

Financing Cash Flow Items

-37

Total Cash Dividends Paid

-2,243.00

Issuance (Retirement) of Stock, Net

-8,305.00

Issuance (Retirement) of Debt, Net

3,933.00

Cash from Financing Activities

-6,652.00

Foreign Exchange Effects

-34

Net Change in Cash

-565

Cash Interest Paid, Supplemental

639

Cash Taxes Paid, Supplemental

2,839.00

 

Discussion:

1.      What are the three components of cash flow statement?

2.      What does net change in cash mean?

 

 

image007.jpg

 

Now let’s learn how to calculate cash changes in each session

Source of cash

  • Decrease in an Asset
    • Example: Selling inventories or collecting receivables provides cash
  • Increase in Liability or Equity
    • Example: Borrowing funds or selling stocks provides cash

Use of Cash

  • Increase in an Asset
    • Example: Investing in fixed assets or buying more inventories uses cash
    • Decrease in Liability or Equity
    • Example: Paying off a loan or buying back stock uses cash

 Cash Flow from Operations: Five Steps

1.      Add back depreciation.

2.      Subtract (add) any increase (decrease) in accounts receivable.

3.      Subtract (add) any increase (decrease) in inventory.

4.      Subtract (add) any increase (decrease) in other current assets.

5.      Add (subtract) any increase (decrease) in accounts payable and other accrued expenses

 image008.jpg

 

 

 

Chapter 3 HW (due with final)

1.      Firm AAA just showed how it operated in the prior year.

Sales = $2,000; Cost of Goods Sold = $1,000; Depreciation Expense = $200; Administrative Expenses = $180; Interest Expense = $30; Marketing Expenses = $50; and Taxes = $200.  Prepare income statement

2.      A firm has $2000 in current assets, $3000 in fixed assets, $300 in accounts receivables, $300 accounts payable, and $800 in cash. What is the amount of the inventory? (hint: 900)

3.      Andre's Bakery has sales of $100,000 with costs of $50,000. Interest expense is $20,000 and depreciation is $10,000. The tax rate is 35 percent. What is the amount of tax paid? (hint: 7000)(hint: tax = taxable income * tax rate and taxable income = EBT)

4.      Andre's Bakery has sales of $100,000 with costs of $50,000. Interest expense is $20,000 and depreciation is $10,000. The tax rate is 35 percent. The company also paid $3,000 for dividend. What is the retained earning?  (hint: retained earning = net income - dividend)(hint: 10,000)

 

 

5.      Prepare cash flow statement based on information given

 

Decrease in accounts receivable                   $20

Increase in inventory                                   10

Operating income                                        100

Interest expense                                           20

Increase in accounts payable                        20

Dividend                                                     20

Decrease in common stock                          30

Decrease in net fixed asset                           10

Depreciation                                                10

Income tax                                                  15

Beginning cash                                            200

 

image005.jpg

 

image006.jpg

 

 

Cash Flow Statement Answer

calculation for changes

Cash at the beginning of the year

2060

Cash from operation

net income

3843

plus depreciation

1760

  -/+ AR 

-807

807

  -/+ Inventory

-3132

3132

 +/- AP

1134

1134

net change in cash from operation

2798

Cash from investment

 -/+ (NFA+depreciation)

-1680

1680

net change in cash from investment

-1680

Cash from finaning

 +/- long term debt

1700

1700

 +/- common stock

2500

2500

 - dividend

-6375

6375

net change in cash from investment

-2175

Total net change of cash

-1057

Cash at the end of the year

1003

 

(The excel file of the above cash flow statement is here)

 

More exercises of chapter 3 (word file here)

 

 

 

 

 

More exercise

Prepare cash flow statement based on information given

 

Increase in accounts receivable                                 $20

Decrease in inventory                                                 10

Operating income                                                       120

Interest expense                                                         20

Decrease in accounts payable                                                20

Dividend                                                                      10

Increase in common stock                                          30

Increase in net fixed asset                                          10

Depreciation                                                               5

Income tax                                                                  10

Beginning cash                                                            100

 

 

Chapter 4: Ratio Analysis

 

 

Ppt

 

 

Stock screening tools

FINVIZ.com

http://finviz.com/screener.ashx

We will focus on the following several ratios:

P/E (price per share/earning per share, P/E < 15, a bargain)

PEG (PE ratio / growth rate. PEG<1, undervalued stock)

EPS (earning per share)

ROA (Return on Asset = NI/TA, ROA>10% should be a nice benchmark)

ROE (return on equity = NI/TE, ROE>15% should be good)

Current ratio (liquidity measure. = CA/CL, has to be greater than one)

Quick ratio (liquidity measure. = (CA-Inventory)/CL, has to be greater than one)

Debt Ratio (Leverage measure. = TD/TA, need to be optimal, usually between 30% and 40%)

Gross margin (profit measure. = EBITDA/sales, or = Gross margin/sales, has to be positive)

Operating margin (profit measure. = EBIT/sales, or = operating income/sales, has to be positive)

Net profit margin (profit measure. = NI/sales, has to be positive)

Payout ratio (= dividend / NI, measures distribution to shareholders. No preferences. Usually value stocks have high payout ratio; Growth stocks have low payout ratio).

 

Nike ---  Valuation

P/E Current

70.74

P/E Ratio (w/o extraordinary items)

61.37

Price to Sales Ratio

3.28

Price to Book Ratio

11.72

Price to Cash Flow Ratio

24.04

Enterprise Value to EBITDA

25.71

Enterprise Value to Sales

3.62

Total Debt to Enterprise Value

0.03

Efficiency

Revenue/Employee

497,442.00

Income Per Employee

26,443.00

Receivables Turnover

10.14

Total Asset Turnover

1.59

Liquidity

Current Ratio

2.51

Quick Ratio

1.63

Cash Ratio

0.87

Profitability

Gross Margin

44.03

Operating Margin

12.38

Pretax Margin

11.89

Net Margin

5.32

Return on Assets

8.44

Return on Equity

17.4

Return on Total Capital

30.17

Return on Invested Capital

13.26

Capital Structure

Total Debt to Total Equity

38.83

Total Debt to Total Capital

27.97

Total Debt to Total Assets

16.91

Long-Term Debt to Equity

35.34

Long-Term Debt to Total Capital

25.46

www.marketwatch.com

 

No homework for chapter 4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GoPro ---

Valuation

P/E Current

-5.55

P/E Ratio (with extraordinary items)

-6.59

Price to Sales Ratio

0.89

Price to Book Ratio

3.47

Enterprise Value to EBITDA

-10.29

Enterprise Value to Sales

0.83

Total Debt to Enterprise Value

0.14

Efficiency

Revenue/Employee

926,741.00

Income Per Employee

-143,655.00

Receivables Turnover

8.5

Total Asset Turnover

1.33

Liquidity

Current Ratio

1.55

Quick Ratio

1.14

Cash Ratio

0.67

Profitability

Gross Margin

34.86

Operating Margin

-11.37

Pretax Margin

-14.95

Net Margin

-15.5

Return on Assets

-20.63

Return on Equity

-49.05

Return on Total Capital

-30.64

Return on Invested Capital

-41.77

Capital Structure

Total Debt to Total Equity

43.54

Total Debt to Total Capital

30.33

Total Debt to Total Assets

15.3

Long-Term Debt to Equity

43.54

Long-Term Debt to Total Capital

30.33

www.marketwatch.com

Chapter 7 Bond pricing

 

Ppt

 

Simplified Balance Sheet of WalMart

 

In Millions of USD 

As of 2019-01-31

Total Assets

219,295,000

Total Current Liabilities

77,477,000

Long Term Debt

43,520,000

Total Liabilities

139,661,000

Total Equity

72,496,000

Total Liabilities & Shareholders' Equity

219,295,000

 

For discussion:

·         What is this “long term debt”?

·         Who is the lender of this “long term debt”?

So this long term debt is called bond in the financial market. Where can you find the pricing information and other specifications of the bond issued by WMT?

 

Investing Basics: Bonds(video)

 

FINRA – Bond market information

http://finra-markets.morningstar.com/BondCenter/Default.jsp

 

Chapter 7 Study guide  

1.      Go to http://finra-markets.morningstar.com/BondCenter/Default.jsp  , the bond market data website of FINRA to find bond information. For example, find bond sponsored by Wal-mart

Or, just go to www.finra.orgè Investor center è market data è bond è corporate bond

 

Corporate Bond

 

 

 

 

 

 

 

 

 

ratings

last sale

Issuer Name

Symbol

Callable

Sub-Product Type

Coupon

Maturity

Moody's®

S&P

Price

Yield

WALMART INC

WMT.GP

Corporate Bond

7.55

2/15/2030

Aa2

AA

157.119

1.196

WALMART INC

WMT.GP

Corporate Bond

6.75

10/15/2023

Aa2

AA

119.600

0.585

WALMART INC

WMT.GP

Corporate Bond

5.25

9/1/2035

Aa2

AA

148.571

1.610

WALMART INC

WMT.IA

Corporate Bond

5.875

4/5/2027

Aa2

AA

129.394

1.270

WALMART INC

WMT.IC

No

Corporate Bond

6.5

8/15/2037

Aa2

AA

166.969

1.866

WALMART INC

WMT4117477

Yes

Corporate Bond

3.3

4/22/2024

Aa2

AA

109.094

0.464

 

 

 

2.      2. Understand what is coupon, coupon rate, yield, yield to maturity, market price, par value, maturity, annual bond, semi-annual bond, current yield.

 

3.      3. Understand how to price bond

Bond price = abs(pv(yield, maturity, coupon, 1000))  ------- annual coupon

Bond price = abs(pv(yield/2, maturity*2, coupon/2, 1000)) ------- semi-annual coupon

 

Also change the yield and observe the price changes. Summarize the price change pattern and draw a graph to demonstrate your findings.

 

Again, when yield to maturity of this semi_annual coupon bond is 3%, how should this WMT bond sell for?

 

4.      Understand how to calculate bond returns

Yield to maturity = rate(maturity, coupon,  -market price, 1000) – annual coupon

Yield to maturity = rate(maturity*2, coupon/2,  -market price, 1000)*2 – semi-annual coupon

 

For example, when the annual coupon bond is selling for $1,200, what is its return to investors?

 

For example, when the semi-annual coupon bond is selling for $1,200, what is its return to investors?

 

5.      Current yield: For the above bond, calculate current yield.

6.      Zero coupon bond: coupon=0 and treat it as semi-annual coupon bond.

Example: A ten year zero coupon bond is selling for $400. How much is its yield to maturity?

A ten year zero coupon bond’s yield to maturity is 10%. How much is its price?

 

7.      Understand what is bond rating and how to read those ratings. (based on z score. What is z score?)

a.       Who are Moody, S&P and Fitch?

b.      What is IBM’s rating?

c.       Is the rating for IBM the highest?

d.      Who earned the highest rating?

 

Chapter 7 Home Work  (due with final)

1.                  IBM 5 year 2% annual coupon bond is selling for $950. How much this IBM bond’s YTM?  3.09%

2.                  IBM 10 year 4% semi_annual coupon bond is selling for $950. How much is this IBM bond’s YTM? 4.63%

3.                  IBM 10 year 5% annual coupon bond offers 8% of return. How much is the price of this bond?   798.7

4.                  IBM 5 year 5% semi-annual coupon bond offers 8% of return. How much is the price of this bond? $878.34

5.                  IBM 20 year zero coupon bond offers 8% return. How much is the price of this bond? 208.29

6.                  Collingwood Homes has a bond issue outstanding that pays an 8.5 percent coupon and matures in 18.5 years. The bonds have a par value of $1,000 and a market price of $964.20. Interest is paid semiannually. What is the yield to maturity? 8.9%

7.                  Grand Adventure Properties offers a 9.5 percent coupon bond with annual payments. The yield to maturity is 11.2 percent and the maturity date is 11 years from today. What is the market price of this bond if the face value is $1,000? 895

8.                  The zero coupon bonds of D&L Movers have a market price of $319.24, a face value of $1,000, and a yield to maturity of 9.17 percent. How many years is it until these bonds mature?  12.73 years

9.                  A zero coupon bond with a face value of $1,000 is issued with an initial price of $212.56. The bond matures in 25 years. What is the implicit interest, in dollars, for the first year of the bond's life? 6.29%

10. The bonds issued by Stainless Tubs bear a 6 percent coupon, payable semiannually. The bonds mature in 11 years and have a $1,000 face value. Currently, the bonds sell for $989. What is the yield to maturity?  6.14%

Summary of bond pricing EXCEL functions

 

To calculate bond price (annual coupon bond):

Price=abs(pv(yield to maturity, years left to maturity, coupon rate*1000, 1000)

 

To calculate yield to maturity (annual coupon bond)::

Yield to maturity = rate(years left to maturity, coupon rate *1000, -price, 1000)

 

To calculate bond price (semi-annual coupon bond):

Price=abs(pv(yield to maturity/2, years left to maturity*2, coupon rate*1000/2, 1000)

 

To calculate yield to maturity (semi-annual coupon bond):

Yield to maturity = rate(years left to maturity*2, coupon rate *1000/2, -price, 1000)*2

 

To calculate number of years left(annual coupon bond)

Number of years =nper(yield to maturity,  coupon rate*1000, -price, 1000)

 

To calculate number of years left(semi-annual coupon bond)

Number of years =nper(yield to maturity/2,  coupon rate*1000/2, -price, 1000)/2

 

To calculate coupon (annual coupon bond)

Coupon = pmt(yield to maturity, number of years left, -price, 1000)

Coupon rate = coupon / 1000

 

To calculate coupon (semi-annual coupon bond)

Coupon = pmt(yield to maturity/2, number of years left*2, -price, 1000)*2

Coupon rate = coupon / 1000

 

 

Math Formula (FYI)

 

image027.jpg

C: Coupon, M: Par, $1,000; i: Yield to maturity; n: years left to maturity

 

 

image028.jpg

For Semi-annual, F=2 for semi-annual coupon

 

 

image029.jpg

M: Par, $1,000;  i: Yield to maturity; n: years left to maturity

 

image030.jpg

 

 

Bond calculation  

www.jufinance.com/bond

 

Chapter 8 Stock Valuation

 

ppt

 

Wal-Mart Dividend History

https://finance.yahoo.com/quote/WMT/history?period1=83563200&period2=1573102800&interval=div%7Csplit&filter=div&frequency=1d

 

 

        Date                         Dividends

       5/7/2020                   0.54

      3/15/2020                  0.54

     12/5/2019              0.53

8/08/2019

0.53

9/05/2019

0.53

14/03/2019

0.53

6/12/2018

0.52

9/08/2018

0.52

10/05/2018

0.52

8/03/2018

0.52

7/12/2017

0.51

9/08/2017

0.51

10/05/2017

0.51

8/03/2017

0.51

7/12/2016

0.5

10/08/2016

0.5

11/05/2016

0.5

9/03/2016

0.5

2/12/2015

0.49

5/08/2015

0.49

6/05/2015

0.49

11/03/2015

0.49

3/12/2014

0.48

6/08/2014

0.48

7/05/2014

0.48

7/03/2014

0.48

4/12/2013

0.47

7/08/2013

0.47

8/05/2013

0.47

8/03/2013

0.47

 

For class discussion:

What conclusions can be drawn from the above information?

Can we figure out the stock price of Wal-Mart based on dividend, with reasonable assumptions?

 

 

Dividend Growth Model

        Po= D1/(r-g) or Po= Do*(1+g)/(r-g)

     R = D1/Po+g = Do*(1+g)/Po+g

     D1=Do*(1+g); D2= D1*(1+g)…

 

 

 

 

Chapter 8 Study Guide

 

 

Imagine you bought 100 shares of Wal-Mart (Ticker: WMT) a year ago.

 

1.      How is your holding period return in the prior year?

Price in 8/5/2019  was $105.82 and price of 8/3/2020 is$129.30

 

2.      The followings are from google/finance about WMT.  https://finance.yahoo.com/quote/WMT?p=WMT&.tsrc=fin-srch

Previous Close

129.40

Open

129.91

Bid

0.00 x 800

Ask

0.00 x 800

Day's Range

128.27 - 130.12

52 Week Range

102.00 - 134.13

Volume

4,901,221

Avg. Volume

8,886,703

Market Cap

365.888B

Beta (5Y Monthly)

0.30

PE Ratio (TTM)

24.59

EPS (TTM)

5.26

Earnings Date

Aug 18, 2020

Forward Dividend & Yield

2.16 (1.67%)

Ex-Dividend Date

Aug 13, 2020

1y Target Est

137.81

 

What does each item indicate?

3.      You own 100 shares of WMT. Are you a significant shareholder of WMT? What type of rights you have as minor shareholders?

4.      If WMT runs into trouble, how risky is your investment in WMT? Compare with Treasury bill investors, Treasury bond investors, WMT bond investors, Apple stock holders, etc.

5.   Doug McMillon is the CEO of Wal-Mart. Do you have any suggestive advices for him? How can you let him hear from you? How much do you trust him not to abuse your investment? Are there any ways to discipline him?

6.      More exercise about the dividend growth model.

Consider the valuation of a common stock that paid $1.00 dividend at the end of the last year and is expected to pay a cash dividend in the future. Dividends are expected to grow at 10% and the investors required rate of return is 17%. How much is the price?

7.      The current market price of stock is $90 and the stock pays dividend of $3 with a growth rate of 5%. What is the return of this stock?

 

 

 

HW of chapter 8   (due with final)

1. Northern Gas recently paid a $2.80 annual dividend on its common stock. This dividend increases at an average rate of 3.8 percent per year. The stock is currently selling for $26.91 a share. What is the market rate of return? (answer: 14.6%)

2. Douglass Gardens pays an annual dividend that is expected to increase by 4.1 percent per year. The stock commands a market rate of return of 12.6 percent and sells for $24.90 a share. What is the expected amount of the next dividend? (answer: 2.12)

3. IBM just paid $3.00 dividend per share to investors. The dividend growth rate is 10%. What is the expected dividend of the next year? (answer: 3.3)

 

4. You bought 1 share of HPD for $20 in May 2008 and sold it for $30 in May 2009. How much is the holding period return? (answer: 50%)

 

5. The current market price of stock is $50 and the stock is expected to pay dividend of $2 with a growth rate of 6%. How much is the expected return to stockholders? (answer: 10%)

 

6. The stockholders expected return is 8% and the stock is expected to pay dividend of $2 with a growth rate of 4%. How much should the stock be traded for? (answer: 50)

 

7. The stockholders expected return is 8% and the stock is expected to pay dividend of $2 with a growth rate of 4%.  How much is the dividend expected to be three years from now? (Hint: D3 = D2*(1+g) = D1*(1+g)2 )(answer: 2.16)

 

8.  Kilsheimer Company just paid a dividend of $5 per share. Future dividends are expected to grow at a constant rate of 7% per year. The value of the stock is $42.80. What is the required return of this stock?(answer: 19.5%)

 

9.  Investors of Creamy Custard common stock earns 15% of return. It just paid a dividend of $6.00 and dividends are expected to grow at a rate of 6% indefinitely. What is expected price of Creamy Custard's stock?(answer: 70.67)

 

10.  Douglass Gardens pays an annual dividend that is expected to increase by 6 percent per year. The stock commands a market rate of return of 12.6 percent and sells for $24.90 a share. What is the dividend yield of this stock? (answer: 6.6%)

Dividend growth model Calculator  

(very useful)

www.jufinance.com/stock

 

 

 

Useful website 

www.finance.yahoo.com

 

www.finviz.com

www.getaom.com

money.msn.com/investing

zacks.com

minyanville.com

moneychimp.com

navellier.investor.com/portfolio-grader/

nasdaq.com

marketwatch.com

superstockscreener.com

gurufocus.com

portfoliomoney.com

stockconsultant.com

marketgrader.com

moderngraham.com

stockpickr.com

stockta.com

thestreet.com

askstockguru.com

quotes.wsj.com

oldschoolvalue.com

fool.com

analystratings.com

barchart.com

stock2own.com

theonlineinvestor.com

seekingalpha.com

 

 

Details about how to derive the model mathematically (FYI)

The Gordon growth model is a simple discounted cash flow (DCF) model which can be used to value a stock, mutual fund, or even the entire stock market.  The model is named after Myron Gordon who first published the model in 1959.

The Gordon model assumes that a financial security pays a periodic dividend (D) which grows at a constant rate (g). These growing dividend payments are assumed to continue forever. The future dividend payments are discounted at the required rate of return (r) to find the price (P) for the stock or fund.

Under these simple assumptions, the price of the security is given by this equation:

image086.jpg

In this equation, Ive used the 0 subscript on the price (P) and the 1 subscript on the dividend (D) to indicate that the price is calculated at time zero and the dividend is the expected dividend at the end of period one. However, the equation is commonly written with these subscripts omitted.

Obviously, the assumptions built into this model are overly simplistic for many real-world valuation problems. Many companies pay no dividends, and, for those that do, we may expect changing payout ratios or growth rates as the business matures.

Despite these limitations, I believe spending some time experimenting with the Gordon model can help develop intuition about the relationship between valuation and return.

Deriving the Gordon Growth Model Equation

The Gordon growth model calculates the present value of the security by summing an infinite series of discounted dividend payments which follows the pattern shown here:

image081.jpg

Multiplying both sides of the previous equation by (1+g)/(1+r) gives:

image082.jpg

We can then subtract the second equation from the first equation to get:

image083.jpg

Rearranging and simplifying:

image084.jpg

image085.jpg

Finally, we can simplify further to get the Gordon growth model equation

dividend growth model:

image086.jpg

Refer to http://www.calculatinginvestor.com/2011/05/18/gordon-growth-model/

 

·        Now let’s apply this Dividend growth model in problem solving.

 

Chapter 9 WACC

 

ppt

 

For class discussion:

What is WACC?

Why is it important?

WACC increases, good or bad to stock holders?

How to apply WACC to figure out firm value?

What is DCF?

 

image092.jpg

 

 

One option (if beta is given, refer to chapter 13)

image087.jpg

 

Another option (if dividend is given):

 

image088.jpg

 

WACC Formula

 

image089.jpg

 

 

 

Chapter 9 Review

Discount rate to figure out the value of projects is called WACC (weighted average cost of capital)

WACC = weight of debt * cost of debt   + weight of equity *( cost of equity)

Wd= total debt / Total capital  = total borrowed / total capital

We= total equity/ Total capital

 

Cost of debt = rate(nper, coupon, -(price – flotation costs), 1000)*(1-tax rate)

Cost of Equity = D1/(Po – Flotation Cost)  + g   

D1: Next period dividend; Po: Current stock price; g: dividend growth rate

Note: flotation costs = flotation percentage * price

 

Or if beta is given, use CAPM model (refer to chapter 6)

Cost of equity = risk free rate + beta *(market return – risk free rate)

Cost of equity = risk free rate + beta * market risk premium

 

 

Discussion:

·         Cheaper to raise capital from debt market. Why? Why not 100% financing via borrowing?

·         Why tax rate cannot reduce firms’ cost of equity?

 

In Class Exercise

IBM financed 10m via debt coupon 5%, 10 year, price is $950 and flotation is 7% of the price, tax 40%.

IBM financed 20m via equity. D1=$5. Po=50, g is 5%. Flotation cost =0. So WACC?

Wd=1/3. We=2/3.

Kd = rate(10, 5%*1000, -(950-950*7%), 1000)*(1-40%) = 3.98%

Ke = 5/(50 – 0) + 5% =15%

WACC = Wd*Kd +We*Ke = 11 %

 

 

 

 

 

 

HOMEWORK of Chapter 9 (due with final) 

1. Firm AAA sold a noncallable bond now has 20 years to maturity.  9.25% annual coupon rate, paid semiannually, sells at a price = $1,075, par = $1,000.  Tax rate = 40%, calculate after tax cost of debt (5.08%)

2.   Firm AAA’s equity condition is as follows. D1 = $1.25; P0 = $27.50; g = 5.00%; and Flotation = 6.00% of price.  Calculate cost of equity (9.84%)

3. Firm AAA raised 10m from the capital market. In it, 3m is from the debt market and the rest from the equity market. Calculate WACC.

 

Weighted Average Cost of Capital (WACC) Calculator (FYI)

http://www.ultimatecalculators.com/weighted_average_cost_of_capital_WACC_calculator.html

 

 

WACC Excel Template

(both annual and semi-annual)

 

WACC calculator (annual coupon bond)

(www.jufinance.com/wacc)

 

  

WACC calculator (semi-annual coupon bond)

(www.jufinance.com/wacc_1)

 

  

Walmart Inc  (NYSE:WMT) WACC %:3% As of Today 

 

As of today (2020-08-04), Walmart's weighted average cost of capital is 3%. Walmart's ROIC % is 8.56% (calculated using TTM income statement data). Walmart generates higher returns on investment than it costs the company to raise the capital needed for that investment. It is earning excess returns. A firm that expects to continue generating positive excess returns on new investments in the future will see its value increase as growth increases.

https://www.gurufocus.com/term/wacc/WMT/WACC/Walmart%2BInc

 

 

Amazon.com Inc  (NAS:AMZN) WACC %:7.98% As of Today 

 

As of today (2020-08-04), Amazon.com's weighted average cost of capital is 7.98%. Amazon.com's ROIC % is 10.01% (calculated using TTM income statement data). Amazon.com generates higher returns on investment than it costs the company to raise the capital needed for that investment. It is earning excess returns. A firm that expects to continue generating positive excess returns on new investments in the future will see its value increase as growth increases.

https://www.gurufocus.com/term/wacc/AMZN/WACC-Percentage/Amazon.com%20Inc

 

 

 

Apple Inc  (NAS:AAPL) WACC %:7.1% As of Today 

 As of today (2020-08-04), Apple's weighted average cost of capital is 7.1%. Apple's ROIC % is 24.02% (calculated using TTM income statement data). Apple generates higher returns on investment than it costs the company to raise the capital needed for that investment. It is earning excess returns. A firm that expects to continue generating positive excess returns on new investments in the future will see its value increase as growth increases.

https://www.gurufocus.com/term/wacc/AAPL/WACC/Apple%2Binc

 

 

Cost of Capital by Sector (US)

 

 Date of Analysis: Data used is as of January 2019

 

Industry Name

Number of Firms

Beta

Cost of Equity

E/(D+E)

Std Dev in Stock

Cost of Debt

Tax Rate

After-tax Cost of Debt

D/(D+E)

Cost of Capital

Advertising

48

1.22

9.93%

58.46%

66.44%

5.43%