FIN301 Class Web Page, Spring ' 22
Instructor: Maggie Foley
Jacksonville University
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
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Chapter |
Coverage, HW, Supplements -
Required |
References |
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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, 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. The
factors that could cause the next financial crisis are · Pandemic · Global warming · War · Inflation · QE · student loan · government debt · tax reform · What else? 1)
Natural
disaster 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 |
1/11Class
video: syllabus and market watch game 1/13
class video: financial crisis, chapter 1, chapter 2, no
homework 1/18
Class video: chapter
5 1/20
class video: chapter 5 homework (Q1-10) 1/25
Class video: chapter 5 homework (Q11-20), Quiz 1 1/27
class video: chapter
3 Income statement, balance sheet 2/1
Class video: quiz 2,
chapter 3 cash flow statement 2/3
class video: chapter 3 in class exercise, homework 2/8
Class video: quiz 3,
chapter 3 homework 2/10
class video: chapter 4 ratio analysis 2/15
Class video review
for the first mid-term exam (study guide posted on blackboard) 2/17 class
video: first mid-term exam
(on blackboard as well as in classroom, chapters 3, 4, 5) 2/22
Class video chapter 6 risk and return: single stocks, a
portfolio with 2 stocks, correlations 2/24
class video chapter 6: portfolio return, beta 3/1 Class video quiz 4, chapter 6:
CAPM, homework part i 3/3 Class video chapter 6 homework
part ii 3/8 Class video quiz 5, chapter 7 3/10 Class video chapter 7 homework 3/15 Class video Spring Break 3/17 Class video Spring Break 3/22 Class video no quiz,
chapter 8 3/24 Class video chapter 8 homework 3/29 Class video review for the 2nd
midterm exam Study Guide Review Notes here FYI 3/31 Class video second midterm exam, homework
due 4/5 Class video chapter 9, WACC 4/7
Class video
Class is cancelled.
Instructor will attend the EFA conference. 4/12 Class video quiz 6,
Chapter 10 Capital Budgeting, In class exercise 4/14
Class video Happy Charter Day 4/19 Class video quiz 7,
Chapter 10 Homework 4/21
Class video Final Exam Review In class review File FYI
only Final Exam on 4/26 on blackboard |
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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? ($14594.50) 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. 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 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) 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
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 |
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Chapter 3 Financial Statement Analysis Experts
Explain: Financial Statements (well explained, video) *************
Introduction *************** Let’s
compare Nike with GoPro based on 10K (www.nasdaq.com) https://www.nasdaq.com/market-activity/stocks/nke/financials Income Statement – Nike
Balance sheet - Nike
Cash flow statement - Nike
For discussion: Which company is
better? Let’s
find it out by comparing stock performance between the two firms. Nike Stock Performance (google.com)
What
is your conclusion? Financial Ratios of Nike
(finviz.com)
******* 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 |
Income statement –
GoPro
Balance
sheet - GoPro
Cash
flow statement – GoPro
GoPro
Stock performance (google.com)
Financial
Ratios of GoPro (finviz.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 |
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********* Part II: Cash Flow Statement ******************
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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:
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
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 mid-term)
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. Long-term 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
Solution:
NI =
EBIT – Interest – Tax = 120-20-10=90
Chapter 4: Ratio Analysis
3 Minutes! Financial Ratios & Financial
Ratio Analysis Explained & Financial Statement 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. =
(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 |
|
|
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 |
Homework of chapter 4 (due with first mid term exam)
1. 1 .A firm has total
equity of $2000 and a debt-equity 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 |
|
Long-Term Debt to Equity |
125.06 |
|
Long-Term Debt to Total Capital |
54.52 |
First
Mid Term Exam (2/17/2022,
in class and online, posted on blackboard)
First Mid Term – FIN301 Study Guide
2. Compute compound interest on 1000 invested at 5% for two years with annual compounding.
1st year interest is ________________
Principal now is _______________
2nd year interest is ________________
Principal now is _______________
3. What will be the FV of $1000 in 5 years at interest rate of 5%?
4. You have $5000 but need $10000 three years later. To achieve this goal, interest rate should be how much?
5. The mortgage quoted rate (APR) is 10% annually. How much is the actual rate (EAR)?
6. What is the NPV of the following cash flows. The discount rate is 10%.
Year CF
1. 100
2. 150
3. 200
7. What is the NFV of the following cash flows. The discount rate is 5%.
Year CF
1. 100
2. 150
3. 200
8. At
10% interest, how long would it take to double your money?
9.
You are
borrowing $20,000 to buy a car. The terms of the loan call for monthly
payments for 3 years at 6 percent interest (APR=3%). What is actual
(effective) annual rate?
10. You are borrowing $20,000 to buy a car. The
terms of the loan call for monthly payments for 3 years at 6 percent interest
(APR=3%). How much shall you pay to the credit company each month?
11. You receive an offer to transfer your $5,000 balance from
your current credit card, which charge an annual rate of 10%, to a new credit
card charge a rate of 3%. How long does it take to payoff the debt with the
new card by making your monthly payment of $100?
12. 3 year ago, you invested $1,000. Today it is worth $1,200.00. What rate of interest did you earn?
13. You agree to make 10 deposits of $1200 at the beginning of each month into a bank account. At the end of the 10th month, you will have $15,000 in your account. If the bank compounds interest monthly, what is your monthly interest rate?
14. Some time ago, you purchased eleven acres of land costing $110,000. Today, that land is valued at $500,000. How long has she owned this land if the price of the land has been increasing at 15 percent per year?
15.
What is the effective annual rate if a bank
charges you 12 percent compounded quarterly?
16. The Pawn Shop loans money at an annual rate of 12 percent and compounds interest weekly. What is the actual rate being charged on these loans?
17. You just signed a consulting contract that will pay you $11000, 12,000, and $10,000 annually at the end of the next 3 years, respectively. What is the present value of these cash flows given a 5 percent discount rate?
Firm
AAA
2020 2021
Sales
$1000 $2000
COGs
500
600
Depreciation 50
50
Taxes
200
300
Accounts
Receivable 300
400
Inventory
400
400
Net
fixed
assets
300
400
Current
Liability
300
400
Long
term
debt
300
400
Common
stock
300
400
Dividend paid in 2021 to investors is $200.
18. What is the taxable income
of AAA Co. in 2021? (hint: taxable income is EBT)
19. Calculate the tax rate of AAA in 2021. (Hint: tax rate =
tax / taxable income)
20. Accounts receivables have increased. Use or source of
cash?
21. Inventories have increased. Use or source of cash?
22. Long term debt have increased. Use or source of cash?
23. Calculate the cash flow from operation.
24. Calculate cash flow from investment.
25. Calculate cash flow from financing.
26. A firm has total equity of $2000 and a debt-equity ratio
of 2. What is the value of the total assets?
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)?
Chapter 6 Risk and Return
Risk
and Return in class exercise
Excel file here will be provided soon
Steps: In class exercise
Excel
files are here (FYI)
· Stock Price
Normal Distribution (FYI) ( https://homepage.divms.uiowa.edu/~mbognar/applets/normal.html)
·
Stock Price In
Class exercise all included (Beta, CAPM)
3.
Pick three stocks. Has to be the leading firm
in three different industries.
We chose Apple, Dell,
and Boeing.
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 “Sept 30th, 2016” and “Sept 30th, 2021”,
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?
Effect
of Diversification
Conclusion:
More than 25 stocks should do the trick for diversification.
Please refer to template
What Is the
Capital Asset Pricing Model?
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.
Ri = Rf + βi *
(Rm - Rf) ------ CAPM model
Ri = Expected return
of investment
Rf =
Risk-free rate
βi =
Beta of the investment
Rm =
Expected return of market
(Rm -
Rf) = Market risk premium
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
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 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 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)
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.
- 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 7 Bond pricing
Yield Curve http://finra-markets.morningstar.com/BondCenter/Default.jsp
Balance Sheet of WalMart https://www.nasdaq.com/market-activity/stocks/wmt/financials
|
Period Ending: |
1/31/2021 |
1/31/2020 |
1/31/2019 |
1/31/2018 |
|
Current Assets |
|
|
|
|
|
Cash and Cash Equivalents |
$17,741,000 |
$9,465,000 |
$7,722,000 |
$6,756,000 |
|
Short-Term Investments |
-- |
-- |
-- |
-- |
|
Net Receivables |
$6,516,000 |
$6,284,000 |
$6,283,000 |
$5,614,000 |
|
Inventory |
$44,949,000 |
$44,435,000 |
$44,269,000 |
$43,783,000 |
|
Other Current Assets |
$20,861,000 |
$1,622,000 |
$3,623,000 |
$3,511,000 |
|
Total Current Assets |
$90,067,000 |
$61,806,000 |
$61,897,000 |
$59,664,000 |
|
Long-Term Assets |
|
|
|
|
|
Long-Term Investments |
-- |
-- |
-- |
-- |
|
Fixed Assets |
$109,848,000 |
$127,049,000 |
$111,395,000 |
$114,818,000 |
|
Goodwill |
$28,983,000 |
$31,073,000 |
$31,181,000 |
$18,242,000 |
|
Intangible Assets |
-- |
-- |
-- |
-- |
|
Other Assets |
$23,598,000 |
$16,567,000 |
$14,822,000 |
$11,798,000 |
|
Deferred Asset Charges |
-- |
-- |
-- |
-- |
|
Total Assets |
$252,496,000 |
$236,495,000 |
$219,295,000 |
$204,522,000 |
|
Current Liabilities |
|
|
|
|
|
Accounts Payable |
$87,349,000 |
$69,549,000 |
$69,647,000 |
$68,859,000 |
|
Short-Term Debt / Current Portion of Long-Term Debt |
$3,830,000 |
$6,448,000 |
$7,830,000 |
$9,662,000 |
|
Other Current Liabilities |
$1,466,000 |
$1,793,000 |
-- |
-- |
|
Total Current Liabilities |
$92,645,000 |
$77,790,000 |
$77,477,000 |
$78,521,000 |
|
Long-Term Debt |
$45,041,000 |
$48,021,000 |
$50,203,000 |
$36,825,000 |
|
Other Liabilities |
$12,909,000 |
$16,171,000 |
-- |
-- |
|
Deferred Liability Charges |
$14,370,000 |
$12,961,000 |
$11,981,000 |
$8,354,000 |
|
Misc. Stocks |
$6,606,000 |
$6,883,000 |
$7,138,000 |
$2,953,000 |
|
Minority Interest |
-- |
-- |
-- |
-- |
|
Total Liabilities |
$171,571,000 |
$161,826,000 |
$146,799,000 |
$126,653,000 |
|
Stock Holders Equity |
|
|
|
|
|
Common Stocks |
$282,000 |
$284,000 |
$288,000 |
$295,000 |
|
Capital Surplus |
$88,763,000 |
$83,943,000 |
$80,785,000 |
$85,107,000 |
|
Retained Earnings |
-- |
-- |
-- |
-- |
|
Treasury Stock |
$3,646,000 |
$3,247,000 |
$2,965,000 |
$2,648,000 |
|
Other Equity |
($11,766,000) |
($12,805,000) |
($11,542,000) |
($10,181,000) |
|
Total Equity |
$80,925,000 |
$74,669,000 |
$72,496,000 |
$77,869,000 |
|
Total Liabilities & Equity |
$252,496,000 |
$236,495,000 |
$219,295,000 |
$204,522,000 |
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
Yield Curve
What is yield curve? (youtube)
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.org, è Investor center è market data è bond è corporate bond
Corporate
Bond
4.
Understand
what is coupon, coupon rate, yield, yield to maturity, market price, par
value, maturity, annual bond, semi-annual bond, current yield.
Refer to the following bond at http://finra-markets.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))
------- 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?
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 mid-term)
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 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 (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
Bond calculation (Thanks to Dr. Lane)
Chapter 8 Stock Valuation
Wal-Mart
Dividend History
· Refer to the
following table for Wal-mart (WMT’s
dividend history)
http://stock.walmart.com/investors/stock-information/dividend-history/default.aspx
|
Record Dates |
Payable Dates |
Amount |
Type |
|
March 19, 2021 |
April 5, 2021 |
$0.55 |
Regular Cash |
|
May 7, 2021 |
June 1, 2021 |
$0.55 |
Regular Cash |
|
Aug. 13, 2021 |
Sept. 7, 2021 |
$0.55 |
Regular Cash |
|
Dec. 10, 2021 |
Jan. 3, 2022 |
$0.55 |
Regular Cash |
|
Record Dates |
Payable Dates |
Amount |
Type |
|
March 20, 2020 |
April 6, 2020 |
$0.54 |
Regular Cash |
|
May 8, 2020 |
June 1, 2020 |
$0.54 |
Regular Cash |
|
Aug. 14, 2020 |
Sept. 8, 2020 |
$0.54 |
Regular Cash |
|
Dec. 11, 2020 |
Jan. 4, 2021 |
$0.54 |
Regular Cash |
|
Record Dates |
Payable Dates |
Amount |
Type |
|
March 15, 2019 |
April 1, 2019 |
$0.53 |
Regular Cash |
|
May 10, 2019 |
June 3, 2019 |
$0.53 |
Regular Cash |
|
Aug. 9, 2019 |
Sept. 3, 2019 |
$0.53 |
Regular Cash |
|
Dec. 6, 2019 |
Jan. 2, 2020 |
$0.53 |
Regular Cash |
|
Record Dates |
Payable Dates |
Amount |
Type |
|
March 9, 2018 |
April 2, 2018 |
$0.52 |
Regular Cash |
|
May 11, 2018 |
June 4, 2018 |
$0.52 |
Regular Cash |
|
Aug. 10, 2018 |
Sept. 4, 2018 |
$0.52 |
Regular Cash |
|
Dec. 7, 2018 |
Jan. 2, 2019 |
$0.52 |
Regular Cash |
|
Record Dates |
Payable Dates |
Amount |
Type |
|
March 10, 2017 |
April 3, 2017 |
$0.51 |
Regular Cash |
|
May 12, 2017 |
June 5, 2017 |
$0.51 |
Regular Cash |
|
Aug. 11, 2017 |
Sept. 5, 2017 |
$0.51 |
Regular Cash |
|
Dec. 8, 2017 |
Jan. 2, 2018 |
$0.51 |
Regular Cash |
|
Record Dates |
Payable Dates |
Amount |
Type |
|
March 11, 2016 |
April 4, 2016 |
$0.50 |
Regular Cash |
|
May 13, 2016 |
June 6, 2016 |
$0.50 |
Regular Cash |
|
Aug. 12, 2016 |
Sep. 6, 2016 |
$0.50 |
Regular Cash |
|
Dec. 9, 2016 |
Jan. 3, 2017 |
$0.50 |
Regular Cash |
|
Record Dates |
Payable Dates |
Amount |
Type |
|
March 13, 2015 |
April 6, 2015 |
$0.490 |
Regular Cash |
|
May 8, 2015 |
June 1, 2015 |
$0.490 |
Regular Cash |
|
Aug. 7, 2015 |
Sep. 8, 2015 |
$0.490 |
Regular Cash |
|
Dec. 4, 2015 |
Jan. 4, 2016 |
$0.490 |
Regular Cash |
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?
Chapter 8 Study Guide
Can you estimate the expected dividend in 2022? And in 2023? And
on and on…
Can
you write down the math equation now?
WMT
stock price = ?
WMT stock price = npv(return, D1, D2, …D∞)
WMT stock price = D1/(1+r) + D2/(1+r)2 + D3/(1+r)3 + D4/(1+r)4 + …
Can
you calculate now? It is hard right because we assume dividend payment goes
to infinity. How can we simplify the calculation?
We
can assume that dividend grows at certain rate, just as the table on the
right shows.
Discount
rate is r (based on Beta and CAPM that we will learn in chapter 6)
From finance.yahoo.com
https://finance.yahoo.com/quote/WMT?p=WMT&.tsrc=fin-srch
What does each item indicate?
From finviz.com https://finviz.com/quote.ashx?t=WMT
Part
II: Constant Dividend Growth-Dividend growth model
Calculate stock prices
1) Given next dividends and price
Po= 
Po= 
+
Po= +
+
Po= + +
+
……
Refer to http://www.calculatinginvestor.com/2011/05/18/gordon-growth-model/
· Now let’s apply this
Dividend growth model in problem solving.
Constant dividend growth
model calculator (www.jufinance.com/stock)
Equations
·
Po= D1/(r-g) or Po= Do*(1+g)/(r-g)
·
r = D1/Po+g = Do*(1+g)/Po+g
·
g= r-D1/Po = r- Do*(1+g)/Po
·
D1 = Po *(r-g);
D0 = Po*(r-g)/(1+g)
·
Capital Gain yield = g
·
Dividend Yield = r – g = D1 / Po = Do*(1+g) / Po
·
D1=Do*(1+g); D2= D1*(1+g);
D3=D2*(1+g)…
For discussion:
§
You
own 100 shares of WMT. Are you a significant shareholder of WMT? What type of
rights you have as minor shareholders?
§
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.
§
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?
§
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?
§
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 stockholder’s 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 stockholder’s 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)
Useful website
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:
In this equation, I’ve 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:
Refer
to http://www.calculatinginvestor.com/2011/05/18/gordon-growth-model/
· Now let’s apply this
Dividend growth model in problem solving.
Stock
Splits (FYI)
|
SYMBOL |
COMPANY |
RATIO |
PAYABLE ON |
EX-DATE |
ANNOUNCED |
|
Alphabet Inc. |
20 : 1 |
07/15/2022 |
07/18/2022 |
12/27/2021 |
|
|
Alphabet Inc. |
20 : 1 |
07/15/2022 |
07/18/2022 |
01/27/2022 |
|
|
Canadian Imperial Bank of Commerce |
2 : 1 |
05/13/2022 |
05/16/2022 |
N/A |
|
|
Mitsui O S K Lines Ltd. ADR |
3 : 1 |
04/08/2022 |
04/11/2022 |
N/A |
|
|
MFA Financial, Inc. |
1 : 4 |
04/05/2022 |
04/05/2022 |
04/05/2022 |
|
|
Colfax Corporation |
1 : 3 |
04/05/2022 |
04/05/2022 |
04/05/2022 |
|
|
America First Multifamily Investors, L.P. |
1 : 3 |
04/04/2022 |
04/04/2022 |
04/04/2022 |
|
|
P.A.M. Transportation Services, Inc. |
2 : 1 |
03/29/2022 |
03/30/2022 |
03/08/2022 |
|
|
MOGU Inc. |
1 : 12 |
03/28/2022 |
03/28/2022 |
03/28/2022 |
|
|
Direxion Daily Semiconductor Bear 3x
Shares |
1 : 10 |
03/28/2022 |
03/28/2022 |
03/28/2022 |
|
|
Direxion Daily S&P Oil & Gas Exp.
& Prod. Bear 2X Shares |
1 : 10 |
03/28/2022 |
03/28/2022 |
03/28/2022 |
https://www.nasdaq.com/market-activity/stock-splits
Dividend
Calendar (FYI)
Second Midterm Exam 3/31 on blackboard 2nd
midterm exam folder
Second
Mid Term Exam Study Guide
Chapters 6, 7, 8
Study
Guide Review Notes here FYI
Multiple
Choices (34 questions)
|
company 1 |
company 2 |
market |
|
|
1/1/2020 |
1% |
7% |
11% |
|
12/1/2019 |
2% |
3% |
12% |
|
11/1/2019 |
5% |
5% |
13% |
1. How much is company 1’s average return?
2. How much is company 1’s risk level in the past five months (standard deviation) if it is evaluated individually?
3. What is the beta of the company 1? (hint: check slope)
4. What is the correlation between company 1 and company 2?
5. What is the beta of the company 2? (hint: check slope)
6. Assume that market return = 10%, risk free rate = 4%. If Beta of company 1 = 1.5, what is company 1’s expected return?
7. What is the definition of correlation?
8.
Stock A has the following
returns for various states of the economy:
Economy Probability Stock
A's Return
Recession 30% 10%
Average 40% 30%
Boom 30% 50%
Stock A's expected return is?
9.
Similar to the homework:
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
10. Calculate the portfolio’s beta
Amount invested in each stock stock’s beta
$2000 2
$2000 5
$4000 2.8
11. Definition about systematic risk.
12. Calculate bond price given years to maturity, YTM, zero
coupon bond .
13. Calculate annual
bond price, given coupon rate, years to
maturity, YTM
14. Calculate
semi-annual bond price, given coupon rate, years
to maturity, YTM
15. Calculate current yield, given semi-annual bond price, given coupon rate, years to maturity,
16. Rank bond risks based on bond rating. Bond rating will be given
17. Calculate zero coupon bond price, given YTM, years left to maturity.
18. Calculate YTM, given bond price, coupon, years left to maturity.
19. Given bond price, coupon rate, and years to maturity. Calculate current yield.
20. Given coupon rate, ask for coupon.
21. Definition of bonds: what is coupon, what is par value, what is YTM
22. Calculate stock price, given D1, r, and g.
23. Given D1, g, Po, and calculate for dividend yield.
24. Given Do, g, Po and calculate for r
25. Given D1, g, beta, market risk premium, risk free rate, calculate stock price.
26. Definition of stock market: what is dividend, what is retained earning, what is profit, etc.
27. Given D0, g, and Po. How much is r?
28. Given r, Do, g, and calculate for dividend yield.
29. Given r, Po and g, calculate for D1.
30. Given Po, D1, g, calculate for r.
31. Given r, D1, and g, calculate for Po.
32. Given r, D1, g, how much is D3?
33. Given D1, r, and g, calculate stock price
34. Given Do, g, Po, find r
Chapter 9 WACC
in class Walmart Example (excel)
For class discussion:
· What
is WACC? Let’s compare WACC among WMT, Apple, Amazon, Testla.
·
Why is WACC important?
·
If WACC decreases, is it a good or a bad news
to the stock holders?
·
How to apply WACC to figure out a firm’s
intrinsic value?
·
What is DCF (discounted cash flow) approach?
One option (if beta is given, refer to chapter
13)
Another option (if dividend is given):
WACC Formula
Discount rate to figure out the value of projects is called WACC
(weighted average cost of capital)
WACC =
weight of debt * after tax 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 the third mid term)
Part 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%)
Part 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%)
Part 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
(both annual and semi-annual)
WACC calculator (annual coupon bond)
WACC calculator (semi-annual coupon
bond)
(www.jufinance.com/wacc_1)
Wal-Mart Inc (NYSE:WMT) WACC %: 5.05% As of 4/4/2022
As of today (2022-4-4), Walmart's
weighted average cost of capital is 5.05%. Walmart's ROIC % is 11.37% (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 %:7.32% As of
4/4/2022
As of today (2022-4-4), Amazon.com's
weighted average cost of capital is 7.32%. Amazon.com's ROIC % is 9.33% (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 %:7.41% As of 4/4/2022
As of today (2022-4-4), Apple's
weighted average cost of capital is 7.41%. Apple's ROIC % is 35.38% (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
Tesla WACC %:
19.09% As of 4/4/2022
As of today (2022-4-4), Tesla's weighted average cost of capital is 19.09%. Tesla's ROIC % is 15.26% (calculated using TTM income statement data). Tesla earns returns that do not match up to its cost of capital. It will destroy value as it grows.
https://www.gurufocus.com/term/wacc/NAS:TSLA/WACC-/Tesla
Cost of Capital by Sector (US)
Date of Analysis: Data used is as of January 2022
Download as an excel
file instead: https://www.stern.nyu.edu/~adamodar/pc/datasets/wacc.xls
For global datasets: https://www.stern.nyu.edu/~adamodar/New_Home_Page/data.html
|
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 |
49 |
1.34 |
7.19% |
66.02% |
56.70% |
3.58% |
5.76% |
2.61% |
33.98% |
5.64% |
|
Aerospace/Defense |
73 |
1.28 |
6.94% |
77.25% |
38.23% |
3.16% |
6.83% |
2.31% |
22.75% |
5.89% |
|
Air
Transport |
21 |
1.58 |
8.22% |
39.47% |
40.19% |
3.58% |
5.32% |
2.61% |
60.53% |
4.83% |
|
Apparel |
39 |
1.23 |
6.71% |
75.99% |
43.49% |
3.58% |
12.06% |
2.61% |
24.01% |
5.73% |
|
Auto
& Truck |
26 |
1.13 |
6.30% |
83.43% |
54.78% |
3.58% |
3.88% |
2.61% |
16.57% |
5.69% |
|
Auto
Parts |
38 |
1.4 |
7.44% |
75.94% |
37.14% |
3.16% |
13.62% |
2.31% |
24.06% |
6.20% |
|
Bank
(Money Center) |
7 |
1.12 |
6.25% |
36.98% |
22.23% |
2.50% |
14.69% |
1.83% |
63.02% |
3.46% |
|
Banks
(Regional) |
563 |
0.7 |
4.47% |
74.31% |
19.68% |
2.50% |
19.29% |
1.83% |
25.69% |
3.79% |
|
Beverage
(Alcoholic) |
21 |
0.82 |
4.98% |
82.36% |
37.87% |
3.16% |
7.93% |
2.31% |
17.64% |
4.51% |
|
Beverage
(Soft) |
32 |
1.22 |
6.66% |
85.73% |
48.27% |
3.58% |
4.53% |
2.61% |
14.27% |
6.09% |
|
Broadcasting |
28 |
1.35 |
7.24% |
46.12% |
48.77% |
3.58% |
11.54% |
2.61% |
53.88% |
4.75% |
|
Brokerage
& Investment Banking |
31 |
1.17 |
6.49% |
35.40% |
31.74% |
3.16% |
14.76% |
2.31% |
64.60% |
3.79% |
|
Building
Materials |
44 |
1.19 |
6.54% |
84.21% |
34.54% |
3.16% |
17.03% |
2.31% |
15.79% |
5.87% |
|
Business
& Consumer Services |
160 |
1.09 |
6.13% |
81.71% |
41.17% |
3.58% |
10.17% |
2.61% |
18.29% |
5.48% |
|
Cable
TV |
11 |
0.93 |
5.47% |
62.46% |
20.07% |
2.50% |
18.08% |
1.83% |
37.54% |
4.10% |
|
Chemical
(Basic) |
35 |
1.16 |
6.44% |
69.08% |
45.02% |
3.58% |
10.02% |
2.61% |
30.92% |
5.26% |
|
Chemical
(Diversified) |
4 |
1.5 |
7.88% |
67.84% |
37.29% |
3.16% |
3.90% |
2.31% |
32.16% |
6.09% |
|
Chemical
(Specialty) |
81 |
1.1 |
6.19% |
83.70% |
40.72% |
3.58% |
10.12% |
2.61% |
16.30% |
5.60% |
|
Coal
& Related Energy |
18 |
0.92 |
5.39% |
70.60% |
58.57% |
3.58% |
0.74% |
2.61% |
29.40% |
4.57% |
|
Computer
Services |
83 |
1.2 |
6.59% |
78.78% |
48.44% |
3.58% |
8.19% |
2.61% |
21.22% |
5.75% |
|
Computers/Peripherals |
46 |
1.29 |
6.97% |
92.96% |
51.27% |
3.58% |
4.96% |
2.61% |
7.04% |
6.66% |
|
Construction
Supplies |
48 |
1.11 |
6.21% |
78.16% |
40.01% |
3.58% |
13.00% |
2.61% |
21.84% |
5.42% |
|
Diversified |
22 |
0.75 |
4.71% |
81.55% |
30.11% |
3.16% |
7.24% |
2.31% |
18.45% |
4.27% |
|
Drugs
(Biotechnology) |
581 |
0.99 |
5.72% |
86.73% |
50.80% |
3.58% |
0.53% |
2.61% |
13.27% |
5.31% |
|
Drugs
(Pharmaceutical) |
298 |
1.08 |
6.07% |
87.19% |
56.17% |
3.58% |
2.18% |
2.61% |
12.81% |
5.63% |
|
Education |
35 |
1.13 |
6.28% |
79.55% |
41.50% |
3.58% |
7.64% |
2.61% |
20.45% |
5.53% |
|
Electrical
Equipment |
104 |
1.25 |
6.79% |
87.96% |
57.66% |
3.58% |
4.98% |
2.61% |
12.04% |
6.29% |
|
Electronics
(Consumer & Office) |
16 |
0.98 |
5.65% |
92.92% |
52.54% |
3.58% |
4.87% |
2.61% |
7.08% |
5.43% |
|
Electronics
(General) |
137 |
1.09 |
6.11% |
88.69% |
43.45% |
3.58% |
6.66% |
2.61% |
11.31% |
5.72% |
|
Engineering/Construction |
48 |
1.06 |
6.00% |
79.62% |
36.36% |
3.16% |
13.53% |
2.31% |
20.38% |
5.24% |
|
Entertainment |
108 |
1.01 |
5.80% |
86.78% |
59.63% |
3.58% |
2.64% |
2.61% |
13.22% |
5.38% |
|
Environmental
& Waste Services |
58 |
1.24 |
6.77% |
82.74% |
43.01% |
3.58% |
5.90% |
2.61% |
17.26% |
6.05% |
|
Farming/Agriculture |
36 |
1.03 |
5.88% |
73.09% |
46.45% |
3.58% |
7.65% |
2.61% |
26.91% |
5.00% |
|
Financial
Svcs. (Non-bank & Insurance) |
223 |
0.93 |
5.44% |
12.10% |
28.52% |
3.16% |
15.60% |
2.31% |
87.90% |
2.69% |
|
Food
Processing |
92 |
0.75 |
4.69% |
76.62% |
27.69% |
3.16% |
10.54% |
2.31% |
23.38% |
4.14% |
|
Food
Wholesalers |
15 |
1.4 |
7.45% |
68.06% |
54.01% |
3.58% |
8.60% |
2.61% |
31.94% |
5.91% |
|
Furn/Home
Furnishings |
32 |
1.11 |
6.21% |
77.73% |
44.77% |
3.58% |
11.74% |
2.61% |
22.27% |
5.41% |
|
Green
& Renewable Energy |
20 |
1.59 |
8.24% |
60.01% |
81.76% |
8.12% |
1.43% |
5.93% |
39.99% |
7.32% |
|
Healthcare
Products |
244 |
0.94 |
5.49% |
92.07% |
43.81% |
3.58% |
4.15% |
2.61% |
7.93% |
5.26% |
|
Healthcare
Support Services |
131 |
1.06 |
6.00% |
80.29% |
46.86% |
3.58% |
7.72% |
2.61% |
19.71% |
5.33% |
|
Heathcare
Information and Technology |
142 |
0.94 |
5.50% |
91.14% |
46.28% |
3.58% |
3.57% |
2.61% |
8.86% |
5.25% |
|
Homebuilding |
29 |
1.69 |
8.66% |
81.99% |
39.47% |
3.16% |
18.63% |
2.31% |
18.01% |
7.51% |
|
Hospitals/Healthcare
Facilities |
31 |
1.41 |
7.50% |
58.49% |
52.31% |
3.58% |
8.99% |
2.61% |
41.51% |
5.47% |
|
Hotel/Gaming |
66 |
1.79 |
9.12% |
68.49% |
43.87% |
3.58% |
6.02% |
2.61% |
31.51% |
7.07% |
|
Household
Products |
118 |
0.98 |
5.66% |
88.82% |
58.57% |
3.58% |
5.87% |
2.61% |
11.18% |
5.32% |
|
Information
Services |
79 |
1.25 |
6.81% |
90.60% |
46.44% |
3.58% |
11.22% |
2.61% |
9.40% |
6.42% |
|
Insurance
(General) |
23 |
0.92 |
5.42% |
78.96% |
37.15% |
3.16% |
11.43% |
2.31% |
21.04% |
4.77% |
|
Insurance
(Life) |
24 |
1.22 |
6.70% |
51.92% |
31.81% |
3.16% |
14.28% |
2.31% |
48.08% |
4.59% |
|
Insurance
(Prop/Cas.) |
52 |
0.86 |
5.16% |
80.99% |
29.24% |
3.16% |
13.37% |
2.31% |
19.01% |
4.62% |
|
Investments
& Asset Management |
687 |
1.05 |
5.95% |
78.17% |
31.97% |
3.16% |
1.42% |
2.31% |
21.83% |
5.16% |
|
Machinery |
111 |
1.25 |
6.80% |
87.63% |
34.75% |
3.16% |
10.58% |
2.31% |
12.37% |
6.24% |
|
Metals
& Mining |
74 |
1.17 |
6.48% |
84.62% |
68.08% |
4.67% |
2.07% |
3.41% |
15.38% |
6.01% |
|
Office
Equipment & Services |
18 |
1.38 |
7.38% |
67.45% |
31.01% |
3.16% |
8.96% |
2.31% |
32.55% |
5.73% |
|
Oil/Gas
(Integrated) |
4 |
1.47 |
7.72% |
78.91% |
28.71% |
3.16% |
19.34% |
2.31% |
21.09% |
6.58% |
|
Oil/Gas
(Production and Exploration) |
183 |
1.32 |
7.11% |
76.26% |
55.48% |
3.58% |
2.04% |
2.61% |
23.74% |
6.04% |
|
Oil/Gas
Distribution |
21 |
1.4 |
7.43% |
53.43% |
44.98% |
3.58% |
9.76% |
2.61% |
46.57% |
5.18% |
|
Oilfield
Svcs/Equip. |
100 |
1.5 |
7.85% |
64.88% |
49.63% |
3.58% |
3.89% |
2.61% |
35.12% |
6.01% |
|
Packaging
& Container |
26 |
1.01 |
5.79% |
66.81% |
26.38% |
3.16% |
17.09% |
2.31% |
33.19% |
4.63% |
|
Paper/Forest
Products |
11 |
1.21 |
6.66% |
70.76% |
30.61% |
3.16% |
12.01% |
2.31% |
29.24% |
5.38% |
|
Power |
50 |
0.83 |
5.04% |
58.30% |
19.49% |
2.50% |
15.61% |
1.83% |
41.70% |
3.70% |
|
Precious
Metals |
76 |
0.99 |
5.71% |
89.28% |
56.29% |
3.58% |
3.11% |
2.61% |
10.72% |
5.37% |
|
Publishing
& Newspapers |
21 |
1.69 |
8.69% |
73.10% |
30.80% |
3.16% |
11.64% |
2.31% |
26.90% |
6.97% |
|
R.E.I.T. |
238 |
1.35 |
7.23% |
65.02% |
32.65% |
3.16% |
1.94% |
2.31% |
34.98% |
5.51% |
|
Real
Estate (Development) |
19 |
1.06 |
6.02% |
55.57% |
51.32% |
3.58% |
2.60% |
2.61% |
44.43% |
4.50% |
|
Real
Estate (General/Diversified) |
10 |
0.91 |
5.35% |
79.11% |
30.70% |
3.16% |
9.94% |
2.31% |
20.89% |
4.72% |
|
Real
Estate (Operations & Services) |
51 |
1.15 |
6.37% |
63.95% |
41.43% |
3.58% |
6.54% |
2.61% |
36.05% |
5.01% |
|
Recreation |
60 |
1.23 |
6.71% |
77.17% |
50.35% |
3.58% |
7.75% |
2.61% |
22.83% |
5.78% |
|
Reinsurance |
2 |
1.37 |
7.32% |
72.02% |
25.95% |
3.16% |
22.96% |
2.31% |
27.98% |
5.92% |
|
Restaurant/Dining |
70 |
1.56 |
8.11% |
78.53% |
42.76% |
3.58% |
7.11% |
2.61% |
21.47% |
6.93% |
|
Retail
(Automotive) |
32 |
1.4 |
7.44% |
72.15% |
44.49% |
3.58% |
14.20% |
2.61% |
27.85% |
6.09% |
|
Retail
(Building Supply) |
16 |
1.52 |
7.97% |
88.15% |
44.73% |
3.58% |
15.50% |
2.61% |
11.85% |
7.34% |
|
Retail
(Distributors) |
68 |
1.28 |
6.94% |
75.54% |
43.10% |
3.58% |
11.70% |
2.61% |
24.46% |
5.88% |
|
Retail
(General) |
16 |
1.12 |
6.24% |
86.17% |
33.88% |
3.16% |
18.45% |
2.31% |
13.83% |
5.70% |
|
Retail
(Grocery and Food) |
15 |
0.3 |
2.78% |
59.44% |
34.27% |
3.16% |
13.31% |
2.31% |
40.56% |
2.59% |
|
Retail
(Online) |
60 |
1.1 |
6.19% |
92.46% |
58.82% |
3.58% |
4.76% |
2.61% |
7.54% |
5.92% |
|
Retail
(Special Lines) |
76 |
1.44 |
7.63% |
74.21% |
45.57% |
3.58% |
14.67% |
2.61% |
25.79% |
6.34% |
|
Rubber&
Tires |
2 |
1.16 |
6.41% |
39.28% |
47.06% |
3.58% |
17.42% |
2.61% |
60.72% |
4.11% |
|
Semiconductor |
67 |
1.16 |
6.44% |
93.65% |
37.46% |
3.16% |
6.80% |
2.31% |
6.35% |
6.18% |
|
Semiconductor
Equip |
34 |
1.34 |
7.19% |
95.20% |
33.22% |
3.16% |
9.19% |
2.31% |
4.80% |
6.95% |
|
Shipbuilding
& Marine |
8 |
0.99 |
5.71% |
72.48% |
51.04% |
3.58% |
3.19% |
2.61% |
27.52% |
4.86% |
|
Shoe |
12 |
1.19 |
6.54% |
94.54% |
34.71% |
3.16% |
9.86% |
2.31% |
5.46% |
6.31% |
|
Software
(Entertainment) |
88 |
1.2 |
6.62% |
98.00% |
54.61% |
3.58% |
2.21% |
2.61% |
2.00% |
6.54% |
|
Software
(Internet) |
36 |
1 |
5.77% |
92.87% |
38.09% |
3.16% |
1.29% |
2.31% |
7.13% |
5.52% |
|
Software
(System & Application) |
375 |
1.14 |
6.35% |
94.63% |
45.74% |
3.58% |
3.36% |
2.61% |
5.37% |
6.15% |
|
Steel |
28 |
1.13 |
6.31% |
75.26% |
33.13% |
3.16% |
13.30% |
2.31% |
24.74% |
5.32% |
|
Telecom
(Wireless) |
17 |
0.96 |
5.60% |
56.08% |
48.16% |
3.58% |
3.26% |
2.61% |
43.92% |
4.29% |
|
Telecom.
Equipment |
82 |
1.08 |
6.10% |
91.97% |
40.53% |
3.58% |
5.29% |
2.61% |
8.03% |
5.82% |
|
Telecom.
Services |
42 |
0.85 |
5.10% |
49.88% |
38.67% |
3.16% |
5.86% |
2.31% |
50.12% |
3.70% |
|
Tobacco |
16 |
1 |
5.74% |
79.38% |
24.88% |
2.50% |
8.23% |
1.83% |
20.62% |
4.93% |
|
Transportation |
17 |
0.79 |
4.86% |
81.37% |
28.34% |
3.16% |
14.40% |
2.31% |
18.63% |
4.39% |
|
Transportation
(Railroads) |
4 |
0.73 |
4.62% |
83.38% |
16.39% |
2.50% |
17.34% |
1.83% |
16.62% |
4.15% |
|
Trucking |
34 |
1.44 |
7.61% |
79.20% |
32.99% |
3.16% |
16.04% |
2.31% |
20.80% |
6.51% |
|
Utility
(General) |
16 |
0.89 |
5.29% |
59.10% |
18.83% |
2.50% |
9.75% |
1.83% |
40.90% |
3.87% |
|
Utility
(Water) |
14 |
0.77 |
4.75% |
74.44% |
27.09% |
3.16% |
10.01% |
2.31% |
25.56% |
4.13% |
|
Total
Market |
7229 |
1.09 |
6.15% |
71.38% |
41.01% |
3.58% |
7.05% |
2.61% |
28.62% |
5.14% |
|
Total
Market (without financials) |
5619 |
1.15 |
6.38% |
83.34% |
44.99% |
3.58% |
6.01% |
2.61% |
16.66% |
5.75% |
http://people.stern.nyu.edu/adamodar/New_Home_Page/datafile/wacc.htm
|
Chapter 10 Capital Budgeting Chapter 10 In Class Exercise Question 1: Project with an
initial cash outlay of $20,000 with following free cash flows for 5 years. Year Cash flows 1 $8,000 2 4,000 3 3,000 4 5,000 5 10,000 1) How
much is the payback period (approach one)? · Does
this method consider time value of money? · Easy
to explain to outsiders? 2) If
the firm has a 10% required rate of return. How much is NPV (approach
2)? · What
does NPV means? NPV>0 indicates what? Otherwise? · Does
this method consider time value of money? · Easy
to explain to outsiders? 3) If
the firm has a 10% required rate of return. How much is IRR (approach
3)? · What
does IRR mean? IRR > 10% indicates what? Otherwise? · Does
this method consider time value of money? · Easy
to explain to outsiders? Question 2: Project with an initial cash
outlay of $60,000 with following free cash flows for 5 years. Year FCF Initial
outlay –60,000 1 25,000 2 24,000 3 13,000 4 12,000 5 11,000 The firm has a 15% required rate of
return. Calculate payback period, NPV, IRR.
Analyze your results. Question 3: Mutually
Exclusive Projects 1) Consider
the following cash flows for one-year Project A and B, with required rates of
return of 10%. You have limited capital and can invest in one but one
project. Which one? § Initial
Outlay: A = $200; B = $1,500 § Inflow: A
= $300; B = $1,900 2) Example:
Consider two projects, A and B, with initial outlay of $1,000, cost of
capital of 10%, and following cash flows in years 1, 2, and 3: A:
$100 $200 $2,000 B:
$650 $650 $650 Which project should you choose if they
are mutually exclusive? Independent? Crossover rate? Chapter 10 Homework (due with final) 1. Consider
the following two projects, calculate the NPVs of the two projects. If the
two projects are mutually exclusive, which one should you choose? What about they
are independent projects?(answer: NPVa: -8.67; NPVb: 12.65; Mutually
exclusive: B; Independent:B)
2. You are considering an
investment with the following cash flows. If the required rate of return for
this investment is 15.5 percent, should you accept the investment based solely
on the internal rate of return rule? Why? (answer: 17.53%; Yes,
rate<IRR, accept) 4. An investment
project provides cash flows of $1,190 per year for 10 years. If the initial
cost is $8,000, what is the payback period? (answer: 6.72) 5. A firm evaluates all
of its projects by using the NPV decision rule. At a required return of 14
percent, the NPV for the following project is _____ and the firm should _____
the project. (answer: 7264.95, accept)
What is
the NPV of each project? What is the IRR of each project? (answer: A-
922.78; 15.33%; B- 871.47; 14.68%) 7. Cash Flow in Period Initial
Outlay 1 2 3 4 $4,000,000 $1,546,170 $1,546,170 $1,546,170 $1,546,170 The
Internal Rate of Return (to nearest whole percent) i? (answer:
20.03%) Welltran Corp.
can purchase a new machine for $1,875,000 that will provide an annual net
cash flow of $650,000 per year for five years. The machine will be sold for
$120,000 after taxes at the end of year five. What is the net present value
of the machine if the required rate of return is 13.5%. (Answer:
$447,291.91. Hint: year 5’s cash flow is 650k+120k = 770k) |
NPV, IRR, Payback Calculator https://www.jufinance.com/capital/ NPV, IRR, Payback Excel Template https://www.jufinance.com/npv_1/ Math
Equation
Here’s what
each symbol means:
NPV
Excel syntax Syntax NPV(rate,value1,value2,
...) Rate
is the rate of discount over the length of one period. Value1, value2, ...
are 1 to 29 arguments representing the payments and income. · Value1, value2,
... must be equally spaced in time and occur at the end of
each period. NPV uses the order of
value1, value2, ... to interpret the order of cash flows. Be sure
to enter your payment and income values in the correct sequence. IRR Excel syntax Syntax IRR(values,
guess) Values is an
array or a reference to cells that contain numbers for which you want to
calculate the internal rate of return. Guess
is a number that you guess is close to the result of IRR. Net Present Value NPV Explained with
NPV Example for NPV Calculation (Cartoon,
video)
http://www.youtube.com/watch?v=7FsGpi_W9XI Using Excel for Net Present Values, IRR's and MIRR's
https://www.youtube.com/watch?v=YgVQvn51noc ‘Simple Rules’ for Running a Business
From the 20-page cellphone contract to the five-pound employee
handbook, even the simple things seem to be getting more complicated. Companies have been
complicating things for themselves, too—analyzing hundreds of factors when
making decisions, or consulting reams of data to resolve every budget
dilemma. But those requirements might be wasting time and muddling priorities. So argues Donald Sull, a lecturer at the Sloan School
of Management at the Massachusetts Institute of Technology who has also
worked for McKinsey & Co. and Clayton, Dubilier & Rice LLC. In the book Simple
Rules: How to Thrive in a Complex World, out this week from Houghton
Mifflin Harcourt HMHC -1.36%,
he and Kathleen Eisenhardt of Stanford University claim that
straightforward guidelines lead to better results than complex formulas. Mr. Sull recently spoke with At Work about
what companies can do to simplify, and why five basic rules can beat a
50-item checklist. Edited excerpts: WSJ: Where, in the
business context, might “simple
rules” help more than a
complicated approach? Donald Sull: Well, a common
decision that people face in organizations is capital allocation. In many
organizations, there will be thick procedure books or algorithms–one company I
worked with had an algorithm that had almost 100 variables for every project.
These are very cumbersome approaches to making decisions and can waste time.
Basically, any decision about how to focus resources—either people or money
or attention—can benefit from simple rules. WSJ: Can you give an
example of how that simplification works in a company? Sull: There’s a German
company called Weima GmBH that makes shredders. At one point,
they were getting about 10,000 requests and could only fill about a thousand
because of technical capabilities, so they had this massive problem of
sorting out which of these proposals to pursue. They had a very
detailed checklist with 40 or 50 items. People had to gather data and if
there were gray areas the proposal would go to management. But because the
data was hard to obtain and there were so many different pieces, people didn’t always fill out the
checklists completely. Then management had to discuss a lot of these
proposals personally because there was incomplete data. So top management is
spending a disproportionate amount of time discussing this low-level stuff. Then Weima came up with guidelines that the
frontline sales force and engineers could use to quickly decide whether a
request fell in the “yes,” “no” or “maybe” category. They did it with five
rules only, stuff like “Weima had to collect at least 70% of the
price before the unit leaves the factory.” Or, take Frontier
Dental Laboratories in Canada. They were working with a sales force of two
covering the entire North American market. Limiting their sales guidelines to
a few factors that made someone likely to be receptive to Frontier—stuff like “dentists who have their own
practice” and “dentists with a website”—helped
focus their efforts and increase sales 42% in a declining market. WSJ: Weima used five factors—is that the optimal
number? And how do you choose which rules to follow? Sull: You should have
four to six rules. Any more than that, you’ll spend too much time trying to follow
everything perfectly. The entire reason simple rules help is because they
force you to prioritize the goals that matter. They’re easy to remember, they
don’t confuse or stress you, they save time. They should be
tailored to your specific goals, so you choose the rules based on what
exactly you’re trying to achieve. And you should of course talk to others.
Get information from different sources, and ask them for the top things that
worked for them. But focus on whether what will work for you and your
circumstances. WSJ: Is there a
business leader you can point to who has embraced the “simple rules” guideline? Donald Sull: Let’s look at
when Alex Behring took over America
Latina Logistica SARUMO3.BR +1.59%,
the Brazilian railway and logistics company. With a budget of $15 million,
how do you choose among $200 million of investment requests, all of which are
valid? The textbook
business-school answer to this is that you run the NPV (net present value)
test on each project and rank-order them by NPV. Alex Behring knows this. He
was at the top of the class at Harvard Business School. But instead Similarly, the
global-health arm of the Gates Foundation gets many, many funding requests.
But since they know that their goal is to have the most impact worldwide,
they focus on projects in developing countries because that’s where the money
will stretch farther. |
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Final Exam on 4/26 on blackboard FIN 301 Comprehensive Final Exam Study Guide Multiple Choice Questions: 2 points each,
total 100 points.) Chapter
3, chapter 4 1.
Given net income, depreciation, changes in AR, AP, and
inventory, calculate the company's change in cash from operation. 2.
Examples of use of cash,
source of cash. 3.
Calculate ROA. ROA = NI/TA. So look for NI, and TA. Hint: TE + TD = TA 4.
Given EBIT,
interest, tax rate, EBIT, and dividend paid,
calculate for RE 5.
Given CA, CL in two
continuous years, calculate changes in NWC 6-9 Concept about
income statement, balance sheet Chapter
5 10-11
Given PV, r, nper, calculate for FV 12. Given
PV, r, nper, calculate FV (hint: no pmt) 13. Given
FV, r, nper, calculate PV (hint: no pmt) 14. Given
PV, r, nper, calculate FV (hint: no pmt) 15. Given
FV, r, nper, pmt, calculate PV 16. Given
PV, FV, nper, no pmt, calculate for rate 17. Given
PV, rate (hint: if monthly, dividend by 12), pmt, calculate for nper (hint: FV=0) Chapter
6 18-19: What is systematic risk?
Unsystematic risk? 20. How to diversify to achieve the goal
for diversification? 21. Given beta, r of stock A, beta and r
of stock B, calculate market return 22. Given beta, r of stock A, beta and r
of stock B, calculate risk free rate 23. Given beta, r of stock A, beta and r
of stock B, and given stock C’s beta, calculate its return 24-25. Definition of beta 26, Calculate return given probability of
each state of economy, and return under each state of economy. Chapter
7 27-28. Bond conceptual questions 29. Bond: given nper, bond price, yield to
maturity, calculate for coupon rate (hint: use pmt function) 30-31. Given nper, bond price, coupon
rate, calculate for yield to maturity, for semi-annual coupon bond and annual
coupon bond . 32. Zero coupon bond: given nper, price,
calculate for yield to maturity. Chapter
8 33. Given dividend yield, Po, calculate
for D1. 34. Given r, D0, g, calculate for dividend
yield 35. Given D0, g, calculate for D5 36. Given Do, g, and r calculate for Po 37: given Do, g, r, calculate for Po 38: given D1, g, r, calculate for Po Chapter
9 39-41. Calculate for payback period, NPV,
IRR, given CFo – CF4 and r. 42-47. Calculate weight of debt, weight of
equity, cost of equity, after tax cost of debt, WACC. Chapter
10 48. Calculate for crossover rate, given
cash flows, and WACCs of the two projects. 49. Calculate the NPVs of the two
projects, given cash flows of the two projects 50. Calculate for the IRRS of the two
projects, given cash flows of the two projects. |
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