FIN301 Class Web Page, Fall ' 22
Instructor: Maggie Foley
Jacksonville University
Weekly SCHEDULE, LINKS, FILES and Questions
Chapter 
Coverage, HW, Supplements 
Required 
References 

Chapter
1, 2 
Chapter 1: Introduction Flow
of funds describes the financial assets flowing from various sectors through
financial intermediaries for the purpose of buying physical or financial
assets. *** Household, nonfinancial 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. The
factors that could cause the next financial crisis are · Pandemic · Global warming · War · Inflation · QE · student loan · government debt · tax reform · Natural disaster · Covid · War between Ukraine and Russia · College tuition · Potential war between Tai Wan and China · Supply chain issues · Used car price · ? Why a 2022 Recession Would
Be Unlike Any Other  WSJ (youtube)
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. · 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
Introduction to Capital Markets  ION Open Courseware
(Video) How the stock market works (video) No homework
for chapters 1, 2 


Chapter 5 Time value of Money The time value of money  German Nande (video)
Tutoring of Time Value of Money
calculation in Excel （video） Chapter 5 Homework (due with first
mid term) 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? ($14594.52) 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? ($26,766.31) 13. 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) 14. Today, you are purchasing a 15year, 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) 15. 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) 16. 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) 17. 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) 18. 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) 19. 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) 20. What is the future value of weekly
payments of $25 for six years at 10 percent? ($10,673.90) 
Summary of math and excel equations Math Formula FV = PV *(1+r)^n PV = FV / ((1+r)^n) N = ln(FV/PV) / ln(1+r) Rate = (FV/PV)^{1/n} 1 Annuity: N = ln(FV/C*r+1)/(ln(1+r)) Or N = ln(1/(1(PV/C)*r)))/ (ln(1+r))
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 3 Financial Statement Analysis Explaining 4
Financial Statements (youtube)
*************
Introduction *************** Let’s
compare Nike with GoPro based on 10K (www.nasdaq.com) https://www.nasdaq.com/marketactivity/stocks/nke/financials For discussion: Which company is
better? Let’s
find it out by comparing stock performance between the two firms. Nike Stock Performance (finance.yahoo.com) What
is your conclusion? ******* Part I: Balance Sheet and
Income Statement ************** Home Depot (Ticker in the
market: HD) reported the following information for the year ended January 30^{th},
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 30^{th}, 2011 Home Depot (Ticker in the
market: HD) reported the following information for the year ended January 30^{th},
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 30^{th}, 2011 
https://www.nasdaq.com/marketactivity/stocks/gpro/financials
GoPro * GoPro
Stock performance ( finance.yahoo.com
) http://www.jufinance.com/10k/bs http://www.jufinance.com/10k/is http://www.jufinance.com/10k/cf Ratio Analysis (plus balance sheet, income statement) https://www.jufinance.com/ratio 

********* Part II: Cash Flow Statement ******************

In Millions of USD (except for per share items) 
52 weeks ending 20140202 
Net Income/Starting Line 
5,385.00 
Depreciation/Depletion 
1,757.00 
Amortization 
 
Deferred Taxes 
31 
NonCash 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:
2. What does net change in cash mean?
Now
let’s learn how to calculate cash changes in each session
Source
of cash
Use
of 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
Chapter 3
HW (due with the first midterm)
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.
A
firm has net working capital of $1000. Longterm debt is $5000, total assets
are $8000, and fixed assets are $5000. What is the amount of the total
equity? (Hint: to find total equity, you need to calculate total debt, which
is a sum of long term debt and short term debt. Short term can be found from
new working capital.) (hint: 1000)
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. What is the amount of tax paid? (hint:
7000)(hint: tax = taxable income * tax rate and taxable income = EBT)
5.
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)
6.
The Blue Bonnet's 2018 balance
sheet showed net fixed assets of $2.2 million, and the 2019 balance sheet
showed net fixed assets of $2.6 million. The company's income statement
showed a depreciation expense of $1,000,000. What was the amount of the net
capital spending for 2019? （$1,400,000）
7.
A firm has $500 in inventory,
$1,860 in fixed assets, $190 in accounts receivables, $210 in accounts
payable, and $70 in cash. What is the amount of the current assets? (760)
8.
A firm has net working capital
of $640. Total liability is $5,860. Total assets are $6,230, and fixed assets
are $3,910. What is the amount of long term debt? (4180)
9.
Which one of the following is
a use of cash? (answer: B)
A. decrease in accounts receivable
B. decrease in accounts payable
C. increase in common stock
D. decrease in inventory
10. A firm generated net income of $878. The depreciation
expense was $40 and dividends were paid in the amount of $25. Accounts
payables decreased by $13, accounts receivables increased by $20, inventory
decreased by $14, and net fixed assets decreased by $8. There was no interest
expense. What was the net cash flow from operating activity? (899)
11.
Teddy’s Pillows has beginning net fixed assets of $480 and ending net fixed
assets of $530. Assets valued at $300 were sold during the year. Depreciation
was $40. What is the amount of capital spending? (90)
12.
Art’s Boutique has sales of $640,000 and costs of
$480,000. Interest expense is $40,000 and depreciation is $60,000. The tax
rate is 34%. What is the net income? (39,600)
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) (solution)
In class exercise
1.
Refer to the above table. Inventory has increased from $18,776
to $21,908. This is ____________ of cash;
Long term
debt has increased from $9,800 to $11,500. This is ____________ of
cash.
A. use; use
B. use; source
C. source; source
D. source; use
2.
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
Why is
Investment Cash flow $15?
Assume
that Net fixed assets =$10 in previous year.
Depreciation
= $5 è Net fixed assets will drop by $5 due to depreciation, so net fixed assets should be $10$5=$5,
if the company has done nothing on fixed assets.
However,
increase in Net Fixed Asset = $10 è net fixed assets = $10 + $10 = $20 this
year.
How
much has been spent on fixed assets?
$20$5=$15
è It is a cash outflow, so $15.
Solution: see above
Note:
NI = EBIT – Interest – Tax = 1202010=90
Chapter 4: Ratio
Analysis
Ratio
analysis template ( https://www.jufinance.com/ratio)
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. =
(CAInventory)/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 

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 
LongTerm Debt to Equity 
35.34 
LongTerm Debt to Total Capital 
25.46 
In class exercise
How much is ROA in 2009? ROA in 2009? Quick
Ratio? Current Ratio? Debt Ratio? Payout Ratio? Operating margin? Net profit
margin?
If the company’s stock is traded at $40 per
share and there are 2,000 shares outstand. How much is PE?
Homework of chapter 4 (due
with first mid term exam)
1. 1 .A firm has total
equity of $2000 and a debtequity ratio of 2. What is the value of the total
assets?
2, The Co. has sales =
$50 million, total assets = $30 million, and total debt = $15 million. The
profit margin = 20%. What is the return on equity (ROE)?
GoPro 
VALUATION 

P/E Current 
N/A 
P/E Ratio (w/ extraordinary items) 
3.85 
P/E Ratio (w/o extraordinary items) 
N/A 
Price to Sales Ratio 
1.38 
Price to Book Ratio 
5.79 
Price to Cash Flow Ratio 
13.16 
Enterprise Value to EBITDA 
41.27 
Enterprise Value to Sales 
1.14 
Total Debt to Enterprise Value 
0.24 
EFFICIENCY 

Revenue/Employee 
$1.177M 
Income Per Employeee 
($88,104.00) 
Receivables Turnover 
5.79 
Total Asset Turnover 
1.13 
LIQUIDITY 

Current Ratio 
2.12 
Quick Ratio 
1.75 
Cash Ratio 
1.25 
PROFITABILITY 

Gross Margin 
37.31% 
Operating Margin 
0.63% 
Pretax Margin 
6.95% 
Net Margin 
7.49% 
Return on Assets 
8.49% 
Return on Equity 
29.71% 
Return on Total Capital 
1.19% 
Return on Invested Capital 
14.34% 
CAPITALIZATION 

Total Debt to Total Equity 
129.4 
Total Debt to Total Capital 
56.41 
Total Debt to Total Assets 
35.85 
LongTerm Debt to Equity 
125.06 
LongTerm Debt to Total Capital 
54.52 
First
Mid Term Exam – 9/22/2022
First Mid Term Exam Study Guide
Multiple Choice Questions (4*19=76, plus 2*5=10. Total 86 points)
12. Similar to
homework question, given cash flows in the next four years, calculate NPV and
NFV.
3. Calculate PV, given rate, years to go, and FV.
4. Calculate FV, given rate, years to go and PV
5. Calculate rate given years to go, PV and FV
6. Calculate years left, given rate, PV and FV
7. Calculate monthly payment, given annual
rate, years to go, loan amount
8. Calculate EAR given APR and number of times
compounded in a year.
9. Calculate NPV given cash flows each
year and rate
10. Calculate interest earned each year given
initial deposit and interest rate. Similar to in class exercise.
11. Given FV, PV, and years, calculate rate.
1215. Conceptual questions: what are the
definitions of income statement, cash flow statement, balance sheet? What are
the major items on balance sheet?
16. Given total equity, NWC, long term debt,
total debt, calculate current debt.
17. Given total equity, NWC, long term debt,
total debt, calculate total asset.
18. Given total equity, NWC, long term debt,
total debt, calculate current asset.
19. A challenging question. I will leave it
for you to figure it out during the test.
2025: Choose between use of cash and source
of cash given changes in accounts receivable, for example.
Short answer question (14 points) – Similar to
in class 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 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.
We chose Tesla,
Amazon, and Walmart.
· Stock Prices Raw Data, Risk, Beta, CAPM (Amazon, WalMart, Tesla, S&P500)
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 “10/1/2017” and “9/1/2022”,
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
· Conclusion and take away?
Topic 1  Effect of Diversification
Conclusion:
More than 25 stocks should do the trick for diversification.
Please refer to template
The Capital Asset Pricing Model (CAPM)
describes the relationship between systematic risk and expected
return for assets, particularly stocks. CAPM is widely used throughout
finance for pricing risky securities and generating expected
returns for assets given the risk of those assets and cost of capital.
R_{i} = R_{f} + β_{i} *
(R_{m}  R_{f})  CAPM model
R_{i} = Expected return
of investment
R_{f} =
Riskfree rate
β_{i} =
Beta of the investment
R_{m} =
Expected return of market
(R_{m} 
R_{f}) = Market risk premium
Stock Price Normal Distribution (FYI) ( https://homepage.divms.uiowa.edu/~mbognar/applets/normal.html)
For
example: from our in class exercise

WMT 
Tesla 
Amazon 
Mean 
1.02% 
6.19% 
1.70% 
standard
deviation 
5.74% 
20.77% 
9.63% 
Excel
command to get the probability to earn 5% or higher returns for WMT:
=1NORM.DIST(5%,
1.02%, 5.74%, 1)
Excel
command to get the probability to earn 5% or higher returns for TESLA:
=1NORM.DIST(5%,
6.19%, 20.77%, 1)
Excel
command to get the probability to earn 5% or higher returns for AMAZON:
=1NORM.DIST(5%,
1.7%, 9.63%, 1)
HW
of chapter 6 (Due with the second mid
Term exam)
Chapter
6 Homework
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 1/1/19. Bill
sold the shares on 12/31/19 for $3.45. Robotics stock has a beta of 1.9, the
riskfree 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 2019
are given below. The price of the stock on January 1, 2019 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 2019. (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 riskfree rate of
return is 3.9 percent and the market risk premium (r_{m} –r_{f})
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 WalMart. 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 WalMart. 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)
Excel Command:
sumproduct(array1,
array2)  to get expected returns
stdev(observation1,
obv2, obv3,….)  to get standard deviation
correl(stock
1’s return, stock 2’s return)  to get correlation between stocks
beta
= slope(stock return, sp500 return)  to get the stock’s beta
Holding
Period Return Calculator
Two
Stock Portfolio Return and Standard Deviation
FYI only
W1 and W2 are the percentage of each stock in the
portfolio.
2022 High Beta Stocks List  The 100 Highest Beta S&P 500
Stocks (FYI)
Updated
on September 15th, 2022 by Bob Ciura
https://www.suredividend.com/highbetastocks/
#5: Fortinet, Inc. (FTNT)
Fortinet,
Inc. provides broad, integrated, and automated cybersecurity solutions around
the world. It offers FortiGate hardware and software licenses that provide
various security and networking functions. Fortinet is a largecap stock with
a market cap above $40 billion.
In
the 2022 second quarter, Fortinet generated revenue of $1.03 billion, up 29%
from the same quarter last year. Product and service revenue grew 34% and
25%, respectively. Adjusted earningspershare increased 26% yearoveryear.
For
2022, Fortinet expects revenue of $4.25 billion to $4.40 billion, consisting
of $2.62 billion to $2.67 billion in service revenue. Billings are expected
between $5.56 billion and $5.64 billion. Adjusted earningspershare are
expected in a range of $1.01 to $1.06 for the full year.
FTNT
has a Beta value of 1.71.
#4: Paycom Software Inc. (PAYC)
Paycom
is a technology stock that produces cloudbased human capital management
(HCM) asaservice software. Services help employers manage a variety of HCM
tasks such as talent acquisition, and time and labor management.
In
the most recent quarter, Paycom generated $317 million in revenue, up 31%
yearoveryear. Recurring revenue grew 31%, and represented 98% of total
revenue. Earningspershare of $1.26 increased 30% compared with $0.97 in the
yearago quarter.
PAYC
has a Beta
value of 1.71.
#3: ServiceNow (NOW)
ServiceNow
is a highquality technology company, which transforms old, manual ways of
working into modern digital workflows. It reduces the complexity of jobs and
makes work more pleasant to employees, thus resulting in increased productivity.
ServiceNow
currently has more than 7,400 enterprise customers, which include about 80%
of the Fortune 500. All these customers use the Now Platform, which is an
intelligent cloud platform that carries out their digital transformation.
ServiceNow
is a leader in the digital transformation of companies towards making work
better for their employees. According to a research of IDC, more than $3
trillion has been invested in digital transformation initiatives but only 26%
of the investments have delivered acceptable returns.
NOW has
a Beta value of 1.77.
#2: Advanced Micro Devices (AMD)
Advanced
Micro Devices was founded in 1959 and in the decades since it has become a
sizable player in the chip market. AMD is heavy in gaming chips, competing with
others like NVIDIA for the lucrative, but competitive market.
In
the 2022 second quarter, AMD reported revenue of $6.6 billion. This was a 70%
yearoveryear increase, driven by organic growth as well as the contribution
from Xilinx. Gross margin contracted two percentage points to 46% for the
quarter. Operating income rose 22% to $526 million. Adjusted
earningspershare of $1.05 increased 67%.
AMD has
a Beta value of 2.09.
#1: NVIDIA Corporation (NVDA)
NVIDIA
Corporation is a specialized semiconductor company that designs and
manufactures graphics processors, chipsets and related software products.
Its
products include processors that are specialized for gaming, design,
artificial intelligence, data science and big data research, as well as chips
designed for autonomous vehicles and robots.
Over
the last five years, NVIDIA’s growth exploded. This
growth was partially driven by cryptocurrency mining, although that has
mostly ceased to be a tailwind, and future growth will be centered on other
growth drivers. NVIDIA’s GPUs are very versatile in
AI applications, which was an unintended benefit of the company’s research and development efforts.
The
company has immediately started to capitalize on this trend by offering GPUs
that are optimized for deep learning and other specialized applications.
These GPUs act as the brains of computers, robots, and selfdriving cars.
Those GPUs are, among others, utilized in professional visualization and data
centers. The markets NVIDIA supplies GPUs for have strong growth tailwinds,
which bodes well for NVIDIA’s longterm revenue
outlook.
NVDA
has a Beta value of 2.31.
Negative Beta Stocks  The 1 Negative Beta S&P 500 Stock
In 2022 (FYI)
Updated
on January 19th, 2022 by Bob Ciura
https://www.suredividend.com/negativebetastocks/
Negative
Beta Stock: Clorox Company (CLX)
With
over 40 years of dividend increases, Clorox is on the exclusive Dividend
Aristocrats list.
Clorox
is a manufacturer and marketer of consumer and professional products,
spanning a wide array of categories from charcoal to cleaning supplies to
salad dressing.
More
than 80% of its revenue comes from products that are #1 or #2 in their
categories across the globe, helping Clorox produce more than $7 billion in
annual revenue.
Clorox
reported first quarter earnings on November 1st, 2021, and results were
better than expected, although expectations were low.
Total
revenue declined nearly –6% year–over–year to $1.8 billion, as organic sales
fell –5% during the quarter. The decline was due to unfavorable pricing and
mix, a decline in volume, and forex translation.
Cleaning
and professional products were higher, but consumer products like vitamins
and supplements posted strong declines.
Clorox
stock has a Beta value of 0.24.
https://ycharts.com/companies/CLX/performance/price
Chapter 7 Bond pricing
Yield Curve http://finramarkets.morningstar.com/BondCenter/Default.jsp 10/10/2022
Understanding the yield curve
(youtube)
Balance Sheet of WalMart https://www.nasdaq.com/marketactivity/stocks/wmt/financials
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://finramarkets.morningstar.com/BondCenter/Default.jsp
Chapter 7 Study guide
1. Go to http://finramarkets.morningstar.com/BondCenter/Default.jsp , the bond market data website of FINRA to find bond
information. For example, find bond sponsored by Walmart
Or, just go to www.finra.org, è Investor center è market data è bond è corporate bond
Corporate
Bond
1.
Understand
what is coupon, coupon rate, yield, yield to maturity, market price, par
value, maturity, annual bond, semiannual bond, current yield.
Refer to the following bond at http://finramarkets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C104227&symbol=WMT.GP
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))
 semiannual 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 – semiannual coupon
For example, when the annual coupon bond is selling for
$1,200, what is its return to investors?
For example, when the semiannual 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 semiannual 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?
8.
Understand the cash flows from a bond as a bond investor
For
example, a five year, annual coupon bond, with 5% coupon rate. Its cash flows
are as follows.
Chapter 7 Home
Work (due with the second midterm)
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% semiannual 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 yield to
maturity? 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 (semiannual
coupon bond):
Price=abs(pv(yield to maturity/2, years
left to maturity*2, coupon rate*1000/2, 1000)
To calculate yield to maturity (semiannual
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(semiannual
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 (semiannual 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 Semiannual, F=2 for semiannual coupon
M: Par, $1,000; i: Yield to maturity; n:
years left to maturity
Bond calculation (Thanks to Dr. Lane)
Benchmark bond yields are ‘bad news’ for investors as the Fed hikes
rates by 0.75%. What it means for your portfolio
(FYI)
PUBLISHED WED, SEP 21
20222:00 PM EDTUPDATED WED, SEP 21 20223:32 PM EDT, Kate Dore, CFP®
https://www.cnbc.com/2022/09/21/whattheinvertedyieldcurvemeansforyourportfolio.html
KEY POINTS
·
Ahead of news from the Federal Reserve on
Wednesday, the 2year Treasury yield climbed to 4.006%, the highest level
since October 2007, and the 10year Treasury reached 3.561% after hitting an
11year high this week.
·
When shorterterm government bonds have higher
yields than longterm, which is known as yield curve inversions, it’s viewed
as a warning sign for a future recession.
·
“Higher bond yields are bad news for the stock
market and its investors,” said certified financial planner Paul Winter,
owner of Five Seasons Financial Planning.
·
Young woman analyzing bills while writing in
diary.
“Higher bond yields are bad news for the stock
market and its investors,” said certified financial
planner Paul Winter, owner of Five Seasons Financial Planning in Salt Lake
City.
Higher bond yields create more competition for funds
that may otherwise go into the stock market, Winter said, and
with higher Treasury yields used in the calculation to assess stocks,
analysts may reduce future expected cash flows.
What’s more, it may be less attractive for companies
to issue bonds for stock buybacks, a way for profitable companies to return
cash to shareholders, Winter said.
How Federal Reserve rate
hikes affect bond yields
Market interest rates and
bond prices typically move in opposite directions, which means higher rates
cause bond values to fall. There’s also an inverse relationship between bond
prices and yields, which rise as bond values drop.
Fed rate hikes have
somewhat contributed to higher bond yields, Winter said, with the impact
varying across the Treasury yield curve.
Markets will see higher 10year treasury yields,
says Komal SriKumar
“The farther you move out on the yield curve and the
more you go down in credit quality, the less Fed rate hikes affect interest
rates,” he said.
That’s a big reason for the inverted yield curve
this year, with 2year yields rising more dramatically than 10year or
30year yields, he said.
Consider these smart moves
for your portfolio
It’s a good time to revisit your portfolio’s
diversification to see if changes are needed, such as realigning assets to
match your risk tolerance, said Jon Ulin, a CFP and CEO of Ulin & Co.
Wealth Management in Boca Raton, Florida.
On the bond
side, advisors watch socalled duration, measuring bonds’ sensitivity to
interest rate changes. Expressed in years, duration factors in the
coupon, time to maturity and yield paid through the term.
Above all, investors must
remain disciplined and patient, as always, but more specifically if they
believe rates will continue to rise.
While clients welcome higher bond yields, Ulin
suggests keeping durations short and minimizing exposure to longterm bonds
as rates climb. “Duration risk may take a bite out of your savings over the next year
regardless of the sector or credit quality,” he said.
Winter suggests tilting stock allocations toward
“value and quality,” typically trading for less than the asset is worth, over
growth stocks, that may be expected to provide aboveaverage returns. Often,
value investors are seeking undervalued companies expected to appreciate over
time.
“Above all, investors must
remain disciplined and patient, as always, but more specifically if they
believe rates will continue to rise,” he added.
Analysis: U.S. yield curve flashing more
warning signs of recession risks ahead
By Davide Barbuscia, 7/28/2022
NEW YORK, July 27 (Reuters)  The U.S. government bond market is
sending a fresh batch of signals that investors are increasingly convinced
the Federal Reserve's aggressive actions to tame inflation will result in
recession.
The shape of the yield curve, which plots the return
on all Treasury securities, is seen as an indicator of the future state of
health of the economy, as inversions
of the curve have been a reliable sign of looming recession.
While Fed Chair Jerome Powell on Wednesday said
that he does not see the economy currently in a recession, spreads between
different pairings of Treasury securities  and derivatives tied to them 
have in past weeks moved into or toward an "inversion" when the
shorter dated of the pair yields more than the longer one. These join another
widely followed yield spread relationship  between 2 and 10year notes 
that has been in inversion for most of this month. read more
"Curves are flattening and some are negative.
They're ultimately all telling you the same thing," said Eric Theoret,
global macro strategist at Manulife Investment Management.
A
steepening curve typically reflects expectations of stronger economic
activity, higher inflation and interest rates. A flattening curve can signal
expectations of rate hikes in the near term and a weaker economic outlook.
The
Fed is aiming to achieve a socalled "soft landing" that does not
entail an outright contraction in U.S. economic output and the rise in
joblessness that typically accompanies that. But the moves in the bond market
over the past week show waning confidence in the Fed's ability to achieve so
benign an outcome.
Some of those moves reversed slightly on Wednesday,
with rates at the short end of the curve turning lower on expectations of the
Fed being less likely to continue with supersized hikes.
On Wednesday the Fed raised its benchmark overnight
interest rate by 0.75% to a range of between 2.25% and 2.50% as it flagged
weakening economic data. Powell said on Wednesday that achieving a soft
landing for the economy was challenging.
The
curve is indicating that the Fed will have to start cutting rates after
hiking.
The
part of the U.S. Treasury yield curve that compares yields on twoyear
Treasuries with yields on 10year government bonds has been inverted for most
of the past month and is around the most negative its been since 2000 on a
closing price basis.
Powell, however, has in recent months said that
the shortend of the yield curve was a more reliable warning of an upcoming
recession.
"The first 18 months of the yield curve has
100% of the explanatory power of the yield curve, and it makes sense ... because
if it's inverted that means the Fed is going to cut which means the economy
is weak", he said in March.
Some
analysts pointed to another measure, the differential between what money
markets expect the threemonth federal funds rate to be in 18 months and the
current threemonth federal funds rate. That went briefly into negative
territory on Tuesday, said George Goncalves, head of U.S. Macro Strategy at
MUFG.
That
spread  measured through overnight indexed swap (OIS) rates, which reflect
traders' expectations on the federal funds rate  was about 230 basis points
in March.
"It's very similar to looking at the Treasury
curve, these are all curves that trade with tiny spreads with each other,"
said Subadra Rajappa head of U.S. rates strategy at Societe Generale.
Another
measurement of the curve, the 2year forward rate for 3month bills , is
around the flattest since June 2021.
Fed
economists have said that nearterm forward yield spreads  namely the
differential between the threemonth Treasury yield and what the market
expects that yield to be in 18 months  are more reliable predictors of a
recession than the differential between longmaturity Treasury yields and
their shortmaturity counterparts.
That spread has not gone negative, though it has
narrowed significantly from over 250 basis points in March to about 70 basis
points this week, said MUFG's Goncalves.
Another part of the curve that compares the yield
on threemonth Treasury bills and 10year notes has flattened dramatically
over the past few weeks, from nearly 220 basis points in May to around 15
basis points this week although it steepened after Powell's remarks.
Separately, futures contracts tied to the Fed's
policy rate showed this week that benchmark U.S. interest rates will peak in
January 2023, earlier than the February reading they gave last week. read
more
"Inverting yield curves, rising inflation,
weakening housing data, and slumping surveys have all driven the increase (in
recession probability) in the US," wrote Credit Suisse analysts in a
research note on Tuesday, forecasting that the probability of the United
States being in recession 6 and 12 months ahead is approximately 25%.
"It
is likely recession probabilities rise further in the coming months if policy
rate hikes cause further curve inversion and cyclical data continue to
deteriorate," they added.
Chapter 8 Stock Valuation
Part I Dividend payout and
Stock Valuation
For class discussion:
· Why can we
use dividend to estimate a firm’s intrinsic value?
· Are future dividends predictable?
·
EXDIVIDEND DATE 08/10/2022
·
DIVIDEND YIELD 4.92%
·
ANNUAL DIVIDEND $0.60
·