­­FIN301 Class Web Page, Summer ' 20

Instructor: Maggie Foley

Jacksonville University

Business Finance Online, an interactive learning tool for the Corporate Finance Student

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)

 ·        Marketwatch.com simulation game ·        Chapters 1, 2 ·        Chapter 5 (math equation, Excel, calculator) ·        In class exercise part I ·        In class exercise part II ·        Chapter 5 Homework (all questions discussed in class) ·          Chapter 6 In class exercise I (finance.yahoo.com, historical price, monthly return, average return, standard deviation, correlation, portfolio return) ·         Chapter 6 In class exercise II (beta calculation, CAPM, SML) ·        Chapter 6 In class exercise III ·        Chapter 6 homework #1 ·          Chapter 6 homework (all included) ·         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 ·        Chapter 3 in class exercises: Balance sheet, income statement, cash flow statements ·        Chapter 4 brief introduction ·        Chapter 3 homework ·        Chapter 7 -  bond pricing and YTM ·        Chapter 7 homework ·        Chapter 8 – Stock valuation (Dividend Growth Model) ·        Chapter 8 homework  ·        Chapter 9 - WACC ·        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

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

Chapter  1: Introduction

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

# 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.

·         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

How the stock market works (video)

No homework for chapter 2

Chapter 5 Time value of Money

Time value of money (Video)

# The time value of money - German Nande (video)

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

Excel Formulas

To get FV, use FV function.

=abs(fv(rate, nper, pmt, pv))

To get PV, use PV function

= abs(pv(rate, nper, pmt, fv))

To get r, use rate function

= rate(nper,  pmt, pv, -fv)

To get number of years, use nper function

= nper(rate,  pmt, pv, -fv)

To get annuity payment, use PMT function

= pmt(rate, nper, pv, -fv)

To get Effective rate (EAR), use Effect function

= effect(nominal_rate, npery)

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

= nominal(effective rate,  npery)

NPV NFV calculator(FYI, might be helpful)

Time Value of Money Calculator

Chapter 6 Risk and Return

Risk and Return in class exercise

Excel file here will be provided soon

Steps:   In class exercise

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

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

Steps:

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

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

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

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

3.      Evaluate the performance of each stock:

·        Calculate the monthly stock returns.

·        Calculate the average return

·        Calculate standard deviation as a proxy for risk

·        Calculate correlation among the three stocks.

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

·        Calculate stock returns based on CAPM.

·        Draw SML

·        Conclusion and take away?

Effect of Diversification

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)

Holding Period Return Calculator

www.jufinance.com/capm

Equations (FYI)

Excel for standard deviation:

stdev(array of returns)

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:

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

• 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.

• 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

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.

(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?

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

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

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

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

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

Chapter 3 HW (due with 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

 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

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 Stock screening tools FINVIZ.com 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 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 Chapter 7 Bond pricing Simplified Balance Sheet of WalMart  In Millions of USD As of 2019-01-31 Total Assets 219,295,000 Total Current Liabilities 77,477,000 Long Term Debt 43,520,000 Total Liabilities 139,661,000 Total Equity 72,496,000 Total Liabilities & Shareholders' Equity 219,295,000 For discussion: · What is this “long term debt”? · Who is the lender of this “long term debt”? So this long term debt is called bond in the financial market. Where can you find the pricing information and other specifications of the bond issued by WMT? Investing Basics: Bonds(video) FINRA – Bond market information 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.orgč Investor center č market data č bond č corporate bond Corporate Bond  ratings last sale Issuer Name Symbol Callable Sub-Product Type Coupon Maturity Moody's® S&P Price Yield WMT.GP Corporate Bond 7.55 2/15/2030 Aa2 AA 157.119 1.196 WMT.GP Corporate Bond 6.75 10/15/2023 Aa2 AA 119.600 0.585 WMT.GP Corporate Bond 5.25 9/1/2035 Aa2 AA 148.571 1.610 WMT.IA Corporate Bond 5.875 4/5/2027 Aa2 AA 129.394 1.270 WMT.IC No Corporate Bond 6.5 8/15/2037 Aa2 AA 166.969 1.866 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)

C: Coupon, M: Par, $1,000; i: Yield to maturity; n: years left to maturity For Semi-annual, F=2 for semi-annual coupon M: Par,$1,000;  i: Yield to maturity; n: years left to maturity

Chapter 8 Stock Valuation

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

 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%) (very useful) Useful website www.finance.yahoo.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 The Gordon growth model is a simple discounted cash flow (DCF) model which can be used to value a stock, mutual fund, or even the entire stock market. The model is named after Myron Gordon who first published the model in 1959. The Gordon model assumes that a financial security pays a periodic dividend (D) which grows at a constant rate (g). These growing dividend payments are assumed to continue forever. The future dividend payments are discounted at the required rate of return (r) to find the price (P) for the stock or fund. Under these simple assumptions, the price of the security is given by this equation: In this equation, 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: Multiplying both sides of the previous equation by (1+g)/(1+r) gives: We can then subtract the second equation from the first equation to get: Rearranging and simplifying: Finally, we can simplify further to get the Gordon growth model equation dividend growth model: · Now let’s apply this Dividend growth model in problem solving. Chapter 9 WACC 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? One option (if beta is given, refer to chapter 13) Another option (if dividend is given): WACC Formula 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)

(both annual and semi-annual)

WACC calculator (annual coupon bond)

WACC calculator (semi-annual coupon bond)

(www.jufinance.com/wacc_1)

Walmart Inc  (NYSE:WMT) WACC %:3% 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.

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.

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.

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%