FIN301 Class Web Page, Fall ' 23
Instructor: Maggie Foley
Jacksonville University
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 · Natural disaster · Covid · War between Ukraine and Russia · College tuition · Potential war between Taiwan and China · Supply chain issues · Used car price · AI · Banking crisis · Extreme Weather · Life style changes · ? Expect recession around year end: JPMorgan's Bob Michele (youtube)
85% probability of recession over next 12 months, don't expect a severe
one: BMO's Adatia (youtube) (FYI)
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
No homework for chapters 1, 2 |
The Bank Failures, Explained (FYI
only) SVB Fallout: Wall Street Debates Moral Hazard (video)
https://www.nytimes.com/2023/03/14/briefing/silicon-valley-bank.html By German Lopez, March 14, 2023 The collapse of Silicon Valley Bank and
others — and the government’s rescue over the weekend — left many of us again
rushing to understand the arcane details of the financial system. It can be
maddeningly complex, so I want to use today’s newsletter to explain some
of the basics. First, the latest: Bank stocks plummeted
yesterday, hitting midsize and smaller institutions in particular. Other
financial markets gyrated as well, despite U.S. policymakers’ emergency help for customers of the closed banks. “It didn’t put calm back in the
system,” said my colleague Maureen Farrell, who covers business. Why does this matter to
everyday Americans? After all, SVB is
relatively small and most of us keep no money in it. The short answer is the
potential for wider fallout. When banks collapse, other people
sometimes fear that their own banks and investments will follow. Even healthy banks don’t keep enough cash on hand
to pay out all depositors, so if too many people panic at once and pull out
their money — a classic bank run — it could lead to broader financial and economic calamity. And that is what the Biden administration and the Federal Reserve are
trying to stop: a financial crisis largely prompted by plunging confidence. How did we get to this
point? To answer that, I need to dive into more detail about Silicon
Valley Bank. As its name suggests, the bank portrayed
itself as focused on the leading edge of technology. And it served thousands
of tech firms. Yet SVB invested their
money in something much less exciting, as Paul Krugman wrote: U.S. bonds,
effectively I.O.U.s from the federal government. Because the federal government has always
paid its bills, U.S. bonds are widely considered the safest investment. SVB’s experience shows there are
moments when even these safe investments may not pay off. The details get
technical, but they’re worth unpacking to understand what went
wrong. Bonds are effectively money that the
government borrows from buyers — the public — before paying them back
later, with interest. Market conditions and the Federal Reserve, America’s central bank, help
determine that interest rate. When SVB bought bonds,
interest rates were very low. Since then, the Federal Reserve, which sets
certain influential rates, increased those to combat rising prices. Now, new
bonds can carry interest multiple times higher than those SVB bought. Imagine, then, that you want
to buy bonds today. You would want the newer bonds because they have a higher
payout. So when SVB needed to sell bonds, to raise cash that it could use for
its customers’ withdrawals, it could do so only for a discount, taking a
loss. The bank failed to follow
basic financial advice: Diversify your portfolio. “It’s not fraud,” said Joseph Gagnon, a
senior fellow at the Peterson Institute for International Economics. “But it’s an extremely risky, and
obviously risky, strategy.” In the past few weeks, venture capitalists
and other wealthy customers on social media and in private chats started
discussing concerns that SVB could no longer pay its depositors. Some began to move their money out of the
bank, and the situation spiraled quickly. “Once you start asking, ‘Are we having a bank run?,’ it’s too late,” my colleague David Enrich,
a business editor, said. A regulatory failure Financial regulations are
supposed to stop these kinds of crises. But Silicon Valley Bank’s problems were not caught
until it was too late — which many experts say was a result of insufficient
oversight. Under pressure from banks in
2018, Congress passed bipartisan legislation that Donald Trump signed into
law shielding smaller banks, like SVB, from more stringent rules. The banks
argued that they were so small that they posed little risk to the broader
financial system. SVB’s collapse and the aftermath
suggest the banks’ claims were wrong: Even smaller bank failures can threaten
the financial system as a whole, prompting some experts — but not all — to call for the federal
government to get more involved. Controlled slowdown To readers of this newsletter, the Federal
Reserve’s involvement in containing the fallout of Silicon Valley Bank’s collapse may be puzzling. The Fed, after all, has been raising
interest rates to slow the economy. An economic slowdown inherently involves
businesses, including banks, failing. The Fed’s concern is that the bank
collapses could go too far and pose bigger systemic risks beyond SVB. Think of it this way: You
can stop a runaway car by blowing out its tires, potentially causing a crash.
But it would be better if the car stopped by simply braking. Officials are
trying to get the economy to brake to a safer speed — one in which inflation isn’t so high. The economic slowdown that the Fed hopes
for would still affect everyday Americans, in both lower prices and also
potentially higher unemployment rates. But that outcome is better than an
uncontrolled bank run that topples the financial system and takes the rest of
the economy, and your 401(k), down with it. In class exercise: 1. Why did
Silicon Valley Bank collapse? A) Insufficient
customers B) Inadequate oversight C) Foreign
investments 2. How did the
government assist customers of closed banks? A) Lowering
interest rates B) Providing emergency help C) Imposing
strict regulations 3. What potential
fallout worries people when banks collapse? A) Banks lacking
in technology B) Wider financial impact C) Decreased
interest rates 4. How did
Silicon Valley Bank primarily invest its money? A) U.S. bonds B) Technology
startups C) Foreign
currencies 5. What's the
main goal of the Biden administration and the Federal Reserve? A) Encourage bank
runs B) Prevent financial calamity C) Promote high
inflation 6. Why did SVB
face challenges selling bonds for cash? A) Low buyer interest B) Favorable
market conditions C) High bond
demand 7. How did
experts describe SVB's investment strategy? A) Fraudulent B) Risky C) Innovative 8. What triggered
concerns about SVB's ability to pay depositors? A) Social media discussions B) Government
warnings C) SVB's
advertising 9. Why did
Congress pass legislation in 2018? A) Encourage
risk-taking B) Protect smaller banks C) Promote bigger
banks 10. What's the
primary concern for the Federal Reserve in this situation? A) Lowering
unemployment B) Stopping
inflation C) Avoiding uncontrolled bank runs |
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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, FYI） Chapter 5 in class exercise
(updated) Solution (newly added) Chapter 5 Homework (due with the
first mid term) Homework VIDEOS FOR questions 11,
13, 20, 19, 3, 10 on 8/29/2023 Homework VIDEOS FOR questions on 8/31/2023 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 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 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 |
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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/market-activity/stocks/nke/financials Income
Statement
Balance Sheet
Cash flow statement
Financial Ratios
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 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 |
https://www.nasdaq.com/market-activity/stocks/gpro/financials
GoPro Income
Statement
Balance
Sheet
Cash
Flow Statement
Financial
Ratios
* 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 |
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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 midterm exam)
Video for homework questions
3, 10, 11, 2, 6, 9, 7, 8 (9/12/2023 in class)
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 2021 balance
sheet showed net fixed assets of $2.2 million, and the 2022 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 2022? （$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
Cash flow in class exercise
solution
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 = 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)
(optional)
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).
Total assets turnover = Sales/TA
Inventory turnover ratio = Sales/Inventory
Fixed assets turnover ratio = Cost of goods sold / Fixed assets
|
Nike
--- Valuation Valuation
Efficiency
Liquidity
Profitability
Capital Structure
|
https://www.wsj.com/market-data/quotes/NKE/financials
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 the FIRST midterm 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? (answer: 6000)
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)? (answer: 66.7%)
|
GoPro --- Valuation
Efficiency
Liquidity
Profitability
Capital Structure
|
|||||||||||||||||||
|
https://www.wsj.com/market-data/quotes/GPRO/financials |
|||||||||||||||||||
First
Mid Term Exam – 9/21, Thursday
(chapters 5, 3, 4)
First Midterm Exam – cash flow solution
First Midterm Exam – Time Value of Money solution)
Cash flow in class exercise quiz
First Mid Term Exam Study Guide Review Video (FYI)
Multiple Choice Questions (25*4 = 100. There are 27
questions in total, with 2 question being optional and not counted towards
your grade.)
- The three components of the
cash flow statements.
- The basic concepts of the balance
sheet and income statement
- Concept of new working
capital
- Given equity, NWC, long term
debt, total debt, current debt? Total debt? NFA? Current asset?
- Given sales, COG, other
costs, depreciation, tax rate, dividend. RE? NI?
- Choose between source and use
by given changes in AR, CL, inventory, debt, dividend.
- Time value of money question:
- given pmt, rate, nper,
calculate pv, fv
- how long to triple
investment, given pmt, rate .
- given apr, calculate EAR
- given pv, rate, nper,
calculate pmt
- given CF0, CF1-CF3, rate,
calculate npv, nfv
- given total loan and
calculate monthly auto payment
Chapter 6 Risk and Return
Quiz on
Correlations – 9:30-10:45
Quiz on
Correlations – 11:00-12:15
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
· PLUG, LMT, GME
(9:30-10:45):
· TESLA, NIKE, GME (11-12:15)
· Stock Prices Raw Data, return, Risk, correlation, Beta,
CAPM ‘
· PLUG, LMT, GME (9:30-10:45) –
Excel - Final File 10/3/2023
· TESLA, NIKE, GME (11-12:15) – Excel -Final File 10/3/2023
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 “9/1/2018” and “9/1/2023”, 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
Topic 2 - 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
Topic 3 – “Normal Distribution” – Predict Stock
Returns (FYI
only)
Stock Price Normal Distribution (FYI) ( https://homepage.divms.uiowa.edu/~mbognar/applets/normal.html)
For
example: from our in class exercise
|
|
McDonald |
DISNEY |
Duke Energy |
|
Mean |
1.23% |
0.52% |
0.86% |
|
standard
deviation |
5.52% |
9.99% |
5.43% |
Excel
command to get the probability to earn less than 0% for MCD:
=NORM.DIST(0%,
1.23%, 5.52%, 1)
Excel
command to get the probability to earn less than 0% for DIS:
=NORM.DIST(0%,
0.52%, 9.99%, 1)
Excel
command to get the probability to earn less than 0% for DUKE:
=NORM.DIST(0%,
0.86%, 5.43%, 1)
HW
of chapter 6 (Due with the second mid
Term exam)
Chapter 6 Homework
Homework Help Video 10/5/2023 Questions
1, 6, 10, 9, 14, 13, 2, 4, 5, 11, 7
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 1/1/22. Bill
sold the shares on 12/31/22 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 2023 are given below. The price of the
stock on January 1, 2023 was $130. Find the holding period return for an investor who purchased
the stock on January 1, 2023 and sold it the last day of March 2023. (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.
2023 High Beta Stocks List
(FYI)
|
Company |
Current
Price |
Beta |
PE
Ratio |
Market
Cap |
Volume |
Average
Volume |
Indicator(s) |
|
Permian
Resources |
$13.57
|
4.47 |
9.17 |
$7.68
billion |
9.37
million |
7.72
million |
Insider
Selling |
|
SM
Energy |
$38.27
|
4.36 |
4.33 |
$4.54
billion |
741,057 |
1.79
million |
Positive
News |
|
Direct
Digital Holdings, Inc. |
$2.17
|
4.15 |
36.17 |
$30.97
million |
10,138 |
69,635 |
Gap Up |
|
Fidelity
Crypto Industry and Digital Payments ETF |
$15.79
|
3.84 |
10.94 |
$28.42
million |
50,796 |
40,899 |
|
|
Eastman
Kodak |
$4.17
|
3.7 |
6.32 |
$331.39
million |
261,115 |
600,250 |
News
Coverage |
|
Matador
Resources |
$58.40
|
3.53 |
7.62 |
$6.96
billion |
750,907 |
1.39
million |
Analyst
Revision |
|
APA
Co. |
$41.02
|
3.53 |
8.78 |
$12.60
billion |
1.89
million |
5.34
million |
Analyst
Revision |
|
Antero
Resources Co. |
$24.09
|
3.49 |
5.43 |
$7.24
billion |
4.15
million |
5.51
million |
|
|
Nine
Energy Service, Inc. |
$4.27
|
3.43 |
10.17 |
$150.94
million |
400,489 |
1.07
million |
Positive
News |
|
Vital
Energy, Inc. |
$53.62
|
3.36 |
1.06 |
$996.80
million |
535,636 |
681,608 |
Positive
News |
|
Rayonier
Advanced Materials Inc. |
$3.19
|
3.2 |
12.27 |
$208.44
million |
968,513 |
977,080 |
|
|
Oil
States International, Inc. |
$8.41
|
2.95 |
70.08 |
$537.40
million |
571,301 |
718,097 |
|
|
Caesars
Entertainment, Inc. |
$46.12
|
2.91 |
14.55 |
$9.93
billion |
2.06
million |
2.78
million |
|
|
VanEck
Digital Transformation ETF |
$5.38
|
2.9 |
2.89 |
$40.73
million |
160,976 |
124,447 |
|
|
Oceaneering
International, Inc. |
$25.64
|
2.85 |
40.06 |
$2.58
billion |
1.45
million |
944,567 |
Analyst
Report, News Coverage, Gap Up |
|
Big
5 Sporting Goods Co. |
$6.98
|
2.82 |
18.86 |
$156.70
million |
175,540 |
266,452 |
|
|
Ovintiv
Inc. |
$46.46
|
2.81 |
3.51 |
$12.72
billion |
1.92
million |
3.58
million |
Positive
News |
|
Adient
plc |
$37.10
|
2.81 |
30.66 |
$3.51
billion |
794,553 |
841,699 |
Positive
News |
|
Western
Midstream Partners, LP |
$26.96
|
2.76 |
10.1 |
$10.37
billion |
2.60
million |
1.04
million |
News
Coverage, High Trading Volume |
https://www.marketbeat.com/market-data/high-beta-stocks/
Negative Beta Stocks of 2023
https://www.marketbeat.com/market-data/negative-beta-stocks/
|
Company |
Current Price |
Beta |
PE Ratio |
Market Cap |
Volume |
Average Volume |
Indicator(s) |
|
SKYX Platforms Corp. |
$1.42 |
-2,431.67 |
-3.3 |
$130.43 million |
134,142 |
222,326 |
Gap Down |
|
Molekule Group, Inc. |
$0.29 |
-5.86 |
-0.28 |
$10.05 million |
102,265 |
68,357 |
|
|
Direxion Daily TSLA Bull 1.5X Shares |
$15.18 |
-5.14 |
0 |
$886.51 million |
13.37 million |
14.39 million |
Dividend Announcement |
|
GraniteShares 1.5x Long NVDA Daily ETF |
$81.27 |
-4.63 |
0 |
$160.10 million |
419,864 |
305,742 |
|
|
Simplify Bitcoin Strategy PLUS Income ETF |
$15.27 |
-4.61 |
0 |
$21.53 million |
6,337 |
6,965 |
|
|
Pharvaris |
$20.67 |
-3.83 |
-7.28 |
$658.13 million |
35,411 |
45,926 |
Analyst Report, Gap Up |
|
Blue Apron Holdings, Inc. |
$6.45 |
-3.01 |
-0.24 |
$41.22 million |
113,294 |
553,446 |
Gap Down |
|
ProShares UltraPro Short QQQ |
$20.18 |
-2.89 |
0 |
$4.66 billion |
114.60 million |
127.40 million |
Dividend Announcement, News Coverage |
|
Safe & Green Holdings Corp. |
$1.10 |
-2.81 |
-1.06 |
$17.54 million |
852,030 |
161,330 |
Positive News, Gap Down, High Trading Volume |
|
Direxion Daily GOOGL Bull 1.5X Shares |
$29.80 |
-2.73 |
27.7 |
$30.40 million |
29,387 |
93,599 |
Dividend Announcement, Positive News |
|
Ambrx Biopharma Inc. |
$10.74 |
-2.66 |
0 |
$665.99 million |
432,495 |
1.86 million |
Analyst Report, Analyst Revision, News Coverage, Gap Down |
|
Direxion Daily AMZN Bull 1.5X Shares |
$22.91 |
-2.52 |
0 |
$35.51 million |
146,312 |
183,357 |
Dividend Announcement |
|
Yatsen Holding Limited |
$1.03 |
-2.5 |
-12.81 |
$393.50 million |
579,979 |
1.39 million |
Gap Down |
|
TOP Financial Group Limited |
$4.57 |
-2.48 |
0 |
$160.00 million |
308,977 |
1.55 million |
|
|
Direxion Daily MSFT Bull 1.5X Shares |
$31.53 |
-2.33 |
0 |
$43.51 million |
56,752 |
86,040 |
Dividend Announcement |
|
Belite Bio, Inc |
$31.27 |
-2.1 |
0 |
$851.48 million |
75,199 |
43,017 |
News Coverage |
|
Rallybio Co. |
$4.66 |
-2.02 |
-2.39 |
$176.15 million |
31,682 |
67,018 |
|
|
Day One Biopharmaceuticals, Inc. |
$12.83 |
-2.01 |
-5.6 |
$1.12 billion |
551,534 |
914,712 |
|
|
Direxion AAPL Bull 1.5X Shares |
$24.61 |
-1.95 |
0 |
$32.73 million |
79,834 |
134,112 |
Dividend Announcement, Positive News |
|
AOT Growth & Innovation ETF |
$28.79 |
-1.84 |
24.68 |
$23.03 million |
503 |
492 |
|
|
AdvisorShares Dorsey Wright Short ETF |
$9.15 |
-1.63 |
0 |
$24.98 million |
24,149 |
67,166 |
News Coverage |
|
AXS Short Innovation Daily ETF |
$40.50 |
-1.62 |
0 |
$243 million |
761,889 |
2.07 million |
|
|
Iveda Solutions |
$0.93 |
-1.57 |
-4.88 |
$14.84 million |
65,598 |
448,352 |
Positive News, Gap Up |
|
KALA BIO |
$9.86 |
-1.5 |
-140.86 |
$25.04 million |
8,681 |
477,952 |
Gap Down |
|
Eltek Ltd. |
$8.84 |
-1.49 |
11.05 |
$51.71 million |
51,041 |
29,928 |
Gap Down |
|
NeoVolta Inc. |
$2.55 |
-1.42 |
-31.88 |
$84.53 million |
40,881 |
72,198 |
Positive News, Gap Down |
|
Anebulo Pharmaceuticals, Inc. |
$3.27 |
-1.39 |
-6.96 |
$83.81 million |
1,444 |
5,578 |
Analyst Report, Gap Up |
FYI: Gap Up vs. Gap
Down
Gap Up:
Imagine a game store. When it opens in the morning, the first kid rushes in and
pays a lot more for a video game than it cost the night before. This happens
because everyone really wants that game, and it's like a thumbs-up for the
store.
Gap Down:
On the flip side, picture the same game store opening, but the first kid only
wants to pay a tiny bit for a game that used to be expensive. This happens
when people aren't excited about the game anymore or if there's some bad news
about it. It's like a not-so-great start for the store.
So,
gap up is like a super start, and gap down is like a not-so-awesome start for
trading in a stock or market.
Chapter 7 Bond pricing
Quiz on Credit Risk 9:30-10:45
(plug,
gmt, lmt, apple, American airline, ford)
(testla,
gmt, nike, apple, American airline, ford)
Yield Curve http://finra-markets.morningstar.com/BondCenter/Default.jsp 10/6/2023
Understanding
the yield curve (youtube)
Balance Sheet of WalMart https://www.nasdaq.com/market-activity/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 https://www.finra.org/finra-data/fixed-income
Chapter 7 Study guide
·
Go
to https://www.finra.org/finra-data/fixed-income/corp-and-agency
for
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 fixed
income data è Corporate and
Agency Bond Data
Corporate
Bond
Understand what is coupon,
coupon rate, yield, yield to maturity, market price, par value, maturity,
annual bond, semi-annual bond, current yield. https://www.finra.org/finra-data/fixed-income/corp-and-agency
WALMART INC
Symbol:WMT5571329CUSIP:931142FE8Bond Type:CORP
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)
Homework Video in October 2023 (in
class)
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%
Optional for extra credits (10 extra points added to this
homework):
·
Please watch
the following video and answer the following questions.
·
Bond yields and the stock market: How to position
porfolios now 10/4/2023
1.
Why are higher yields bad for stocks?
a)
They make stocks more valuable.
b) They have no effect on stocks.
c) They reduce the current value of future
cash flows.
2.
Which type of stocks suffer the most from higher yields, according to David
Speaker?
a)
Defensive stocks.
b)
Tech stocks with distant earnings.
c)
Consumer goods stocks.
3.
What's the main concern about yields, as per David Speaker?
a) High yield volatility.
b)
Unpredictable yields.
c)
Low yields.
4.
Why does David Speaker suggest investing in defensive companies during an
economic downturn?
a)
Because they offer higher returns.
b)
Because investors are willing to pay more for growth.
c)
Because they are unaffected by economic changes.
5.
What kind of credit is attractive in today's yield environment?
a) Short-term and short-duration
investment-grade credit.
b) High-risk credit.
c)
Long-term investment-grade credit. .
6.
According to Jerry Castellini, why might traditional defensive sectors like
consumer goods not be as safe as they seem?
a)
Because they're now highly profitable.
b)
Because they have become more stable.
c)
Because their cash generation has changed.
7.
What type of companies does Jerry Castellini recommend as safe investments?
a)
Small startups with high potential.
b)
Large, cash-rich companies with good valuations.
c)
Companies with significant debt. .
8.
What sector does Jerry Castellini suggest considering despite oil price
fluctuations?
a)
Technology.
b)
Energy.
c)
Healthcare.
9.
According to Jerry Castellini, how can you balance risk in today's market?
a)
By investing only in low-valued stocks.
b)
By avoiding cash-rich companies.
c)
By having a diverse portfolio with both low-valued and cash-rich stocks.
10.
What's the main message of the discussion regarding investment strategies in
the current market?
a)
Look for defensive options and visible earnings growth.
b)
Focus on risky investments.
c)
Take big risks for high returns.
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 calculator (Thanks to Dr. Lane)
March 15, 20233:00 AM EDT
Column: Deeply inverted US curve flashed bank danger for months
(FYI)
By Jamie McGeever
It's a lesson many investors
seem reluctant to learn as there's always a tendency to assume it's different
this time.
But whether it's stress in the
banks, financial markets or the wider economy, an inversion of long-term bond
yields below short-term funding rates is almost always a signal that a
credit-driven economy faces trouble ahead. And that's mainly because it
causes the problem.
The volatility crashing
through the U.S. banking sector, which triggered late night intervention from
U.S. regulators on Sunday to curb a contagious flight of deposits from
smaller, weaker banks to larger ones, is just the latest example.
The implosion of Silicon
Valley Bank (SVB) SIVB.O - America's 16th largest bank - prompted the
Treasury and Federal Deposit Insurance Corp (FDIC) on Sunday to say that all
customers will be able to access their funds, while the Fed unveiled a new
program offering institutions cheap and easy access to loans.
These steps were taken after
SVB was shut down, forced to realize losses on its holdings of longer-dated
Treasuries at the same time its deposit base was under threat. The aim was to
ward off contagion spreading through the $23 trillion banking sector.
Ultimately, though, liquidity
does not guarantee profitability. If longer-term profitability is
authorities' goal, they may have to engineer a lasting re-steepening of the
yield curve back into positive territory
Deutsche Bank's Jim Reid says
inverted curves are almost always an ominous sign - they signal an eventual
unwind of carry trades somewhere in the financial system or economy, meaning
investors and economic agents are about to draw in their horns.
"I don't care why the
curve inverts, I just care that it does," he said on Monday.
While SVB's failure may not be
a direct casualty of the inverted yield curve, an inverted curve is a sign
that wider financial conditions are not so easy, presenting banks with a far
more challenging economic and financial environment.
There are several measurements
of the gap between short- and longer-dated yields but the '2-year/10-year' is
the benchmark - it goes back decades, captures highly liquid parts of both
ends of the curve, and its inversion has preceded every recession of the past
45 years.
The two-year Treasury yield
has been higher than the 10-year yield since last July as the Fed has
embarked on its most aggressive rate-raising campaign in decades. The gap
reached 110 basis points (bps) last week, the deepest inversion since 1981.
In that light, Treasury
Secretary Janet Yellen, Federal Reserve Chair Jerome Powell and FDIC Chairman
Martin Gruenberg may have welcomed the 2s/10s curve steepening by 40 bps on
Monday, the most in decades - only another 50 bps to go and the curve will be
sloping up for the first time since last summer.
Banks make money when the
yield curve slopes positively, borrowing cheaply via customer deposits,
central bank windows or the short end of the curve, and lending longer term
at higher rates - a classic 'carry trade'.
A downward-sloping curve stymies
this 'carry' and curbs lending, and the consequences are clear when that
lasts for as long as eight months.
Analysts at JP Morgan say
regulators' actions successfully targeted a specific carry trade in a
specific area, but there are many others and not all can be backstopped.
Private equity, venture
capital, auto loans, levered loans, and credit card lending have all been
profitable in the era of cheap short-term funding. But rising financing costs
put the squeeze on them and hasten the end of the cycle.
"We believe we are in
that stage and remain negative on risky asset classes," the JP Morgan
analysts wrote in a note on Monday.
REASONS TO BE FEARFUL?
When banks' cost of funding
exceeds the rate of return, they will naturally be less inclined to lend.
Tighter credit conditions and lending standards mean consumers borrow and
spend less, and firms hire and invest less and the risk of recession
increases.
There are good reasons for
caution right now.
Outstanding credit card debt
has hit its highest on record at almost $1 trillion, in nominal terms, and
average credit card rates have already hit a record high above 20%.
Average 30-year mortgage rates
are back above 7%, having doubled in the last 18 months, while the personal
savings rate remains anchored near multi-year lows below 5%.
The Fed's last Senior Loan
Officer Survey shows that the net percentage of banks reporting tightening
standards for commercial and industrial loans in the fourth quarter of last
year jumped above 40%, levels consistent with past recessions.
"When you have record
inversions for a prolonged period of time it does point to slower financial
intermediation, slower credit and loan provisions," said Gregory Daco,
chief economist at EY.
(The opinions expressed here are those of
the author, a columnist for Reuters.)
Let’s have some fun with ChatGPT – generate Bond
Pricing Calculator by ChatGPT
Here are step-by-step instructions:
1. Ask
ChatGPT to generate a bond pricing calculator using JavaScript in HTML
format. You can ask something like: "Hey ChatGPT, could you please
generate a bond pricing calculator using JavaScript in HTML format to
calculate the bond pricing, given face value, coupon rate, yield to maturity,
and years left to maturity?"
2. ChatGPT
should respond with the code for the calculator. Copy the code to your
clipboard.
3. Open
Notepad or any other text editor and paste the code into a new document.
4. Save
the file as an HTML file. You can name it anything you like, but make sure
the file extension is ".html". For example, you can name it
"bond_calculator.html".
5. Open
the saved HTML file in your web browser (e.g. Chrome, Firefox, etc.) by
double-clicking on the file or right-clicking and selecting "Open
with". The bond calculator should load and be ready to use.
6. Test
the calculator by entering different values for all the inputs. Make sure the
calculated bond price is correct and matches your expectations.
7. If
you find any issues with the calculator, you can ask ChatGPT to generate it
again with the desired changes.
Or use the code from my experiment with
ChatGPT earlier this week to get bond prices.
<!DOCTYPE
html>
<html>
<head>
<title>Bond Pricing Calculator</title>
<script
type="text/javascript">
function calculate() {
var
faceValue = parseFloat(document.getElementById("faceValue").value);
var
couponRate =
parseFloat(document.getElementById("couponRate").value) / 100;
var yearsToMaturity
= parseFloat(document.getElementById("yearsToMaturity").value);
var
yieldToMaturity =
parseFloat(document.getElementById("yieldToMaturity").value) / 100;
var
presentValue = 0;
var
annualInterest = couponRate * faceValue;
var
discountFactor = 1 / Math.pow(1 + yieldToMaturity, yearsToMaturity);
presentValue
= annualInterest * (1 - discountFactor) / yieldToMaturity + faceValue *
discountFactor;
document.getElementById("result").innerHTML
= "Bond Price: $" + presentValue.toFixed(2);
}
</script>
</head>
<body>
<h1>Bond Pricing
Calculator</h1>
<p>Enter the following
information:</p>
<form>
<label
for="faceValue">Face Value:</label>
<input
type="number" id="faceValue"
value="1000"><br>
<label
for="couponRate">Coupon Rate (%):</label>
<input
type="number" id="couponRate" step="0.01"
value="5"><br>
<label
for="yearsToMaturity">Years to Maturity:</label>
<input
type="number" id="yearsToMaturity"
value="2"><br>
<label
for="yieldToMaturity">Yield to Maturity (%):</label>
<input
type="number" id="yieldToMaturity" step="0.01"
value="2"><br><br>
<input
type="button" value="Calculate"
onclick="calculate()">
</form>
<p
id="result"></p>
</body>
</html>
Chapter 8 Stock Valuation
Pick the Stock
that PAYS Dividend (game)
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?
F Dividend History
|
Ex/EFF DATE |
CASH AMOUNT |
DECLARATION DATE |
RECORD DATE |
PAYMENT DATE |
|
|
07/24/2023 |
$0.15 |
07/13/2023 |
07/25/2023 |
09/01/2023 |
|
|
04/25/2023 |
$0.15 |
04/06/2023 |
04/26/2023 |
06/01/2023 |
|
|
02/10/2023 |
$0.65 |
02/13/2023 |
03/01/2023 |
||
|
02/10/2023 |
$0.15 |
02/02/2023 |
02/13/2023 |
03/01/2023 |
|
|
11/14/2022 |
$0.15 |
10/26/2022 |
11/15/2022 |
12/01/2022 |
|
|
08/10/2022 |
$0.15 |
07/27/2022 |
08/11/2022 |
09/01/2022 |
|
|
04/25/2022 |
$0.10 |
04/07/2022 |
04/26/2022 |
06/01/2022 |
|
|
01/28/2022 |
$0.10 |
01/10/2022 |
01/31/2022 |
03/01/2022 |
|
|
11/18/2021 |
$0.10 |
10/27/2021 |
11/19/2021 |
12/01/2021 |
|
|
01/29/2020 |
$0.15 |
01/08/2020 |
01/30/2020 |
03/02/2020 |
|
|
10/21/2019 |
$0.15 |
10/11/2019 |
10/22/2019 |
12/02/2019 |
|
|
07/22/2019 |
$0.15 |
07/12/2019 |
07/23/2019 |
09/03/2019 |
|
|
04/23/2019 |
$0.15 |
04/09/2019 |
04/24/2019 |
06/03/2019 |
|
|
01/30/2019 |
$0.15 |
01/17/2019 |
01/31/2019 |
03/01/2019 |
|
|
10/22/2018 |
$0.15 |
10/11/2018 |
10/23/2018 |
12/03/2018 |
|
|
07/20/2018 |
$0.15 |
07/13/2018 |
07/23/2018 |
09/04/2018 |
|
|
04/19/2018 |
$0.15 |
04/10/2018 |
04/20/2018 |
06/01/2018 |
https://www.nasdaq.com/market-activity/stocks/f/dividend-history
Apple Dividend History
|
Ex/EFF DATE |
CASH AMOUNT |
DECLARATION DATE |
RECORD DATE |
PAYMENT DATE |
|
|
08/11/2023 |
$0.24 |
08/03/2023 |
08/14/2023 |
08/17/2023 |
|
|
05/12/2023 |
$0.24 |
05/04/2023 |
05/15/2023 |
05/18/2023 |
|
|
02/10/2023 |
$0.23 |
02/02/2023 |
02/13/2023 |
02/16/2023 |
|
|
11/04/2022 |
$0.23 |
10/27/2022 |
11/07/2022 |
11/10/2022 |
|
|
08/05/2022 |
$0.23 |
07/28/2022 |
08/08/2022 |
08/11/2022 |
|
|
05/06/2022 |
$0.23 |
04/28/2022 |
05/09/2022 |
05/12/2022 |
|
|
02/04/2022 |
$0.22 |
01/27/2022 |
02/07/2022 |
02/10/2022 |
|
|
11/05/2021 |
$0.22 |
10/28/2021 |
11/08/2021 |
11/11/2021 |
|
|
08/06/2021 |
$0.22 |
07/27/2021 |
08/09/2021 |
08/12/2021 |
|
|
05/07/2021 |
$0.22 |
04/28/2021 |
05/10/2021 |
05/13/2021 |
|
|
02/05/2021 |
$0.205 |
01/27/2021 |
02/08/2021 |
02/11/2021 |
|
|
11/06/2020 |
$0.205 |
10/29/2020 |
11/09/2020 |
11/12/2020 |
|
|
08/07/2020 |
$0.82 |
07/30/2020 |
08/10/2020 |
08/13/2020 |
|
|
05/08/2020 |
$0.82 |
04/30/2020 |
05/11/2020 |
05/14/2020 |
|
|
02/07/2020 |
$0.77 |
01/28/2020 |
02/10/2020 |
02/13/2020 |
|
|
11/07/2019 |
$0.77 |
10/30/2019 |
11/11/2019 |
11/14/2019 |
|
|
08/09/2019 |
$0.77 |
07/30/2019 |
08/12/2019 |
08/15/2019 |
|
|
05/10/2019 |
$0.77 |
04/30/2019 |
05/13/2019 |
05/16/2019 |
|
|
02/08/2019 |
$0.73 |
01/29/2019 |
02/11/2019 |
02/14/2019 |
https://www.nasdaq.com/market-activity/stocks/aapl/dividend-history
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
https://www.nasdaq.com/market-activity/stocks/wmt/dividend-history
https://www.nasdaq.com/market-activity/stocks/wmt/dividend-history
WMT Dividend History
|
Ex/EFF DATE |
CASH AMOUNT |
DECLARATION DATE |
RECORD DATE |
PAYMENT DATE |
|
|
12/07/2023 |
$0.57 |
02/21/2023 |
12/08/2023 |
01/02/2024 |
|
|
08/10/2023 |
$0.57 |
02/17/2023 |
08/11/2023 |
09/05/2023 |
|
|
05/04/2023 |
$0.57 |
02/21/2023 |
05/05/2023 |
05/30/2023 |
|
|
03/16/2023 |
$0.57 |
02/21/2023 |
03/17/2023 |
04/03/2023 |
|
|
12/08/2022 |
$0.56 |
02/17/2022 |
12/09/2022 |
01/03/2023 |
|
|
08/11/2022 |
$0.56 |
02/17/2022 |
08/12/2022 |
09/06/2022 |
|
|
05/05/2022 |
$0.56 |
02/17/2022 |
05/06/2022 |
05/31/2022 |
|
|
03/17/2022 |
$0.56 |
02/17/2022 |
03/18/2022 |
04/04/2022 |
|
|
12/09/2021 |
$0.55 |
02/18/2021 |
12/10/2021 |
01/03/2022 |
|
|
08/12/2021 |
$0.55 |
02/18/2021 |
08/13/2021 |
09/07/2021 |
|
|
05/06/2021 |
$0.55 |
02/18/2021 |
05/07/2021 |
06/01/2021 |
|
|
03/18/2021 |
$0.55 |
02/18/2021 |
03/19/2021 |
04/05/2021 |
|
|
12/10/2020 |
$0.54 |
02/18/2020 |
12/11/2020 |
01/04/2021 |
|
|
08/13/2020 |
$0.54 |
02/18/2020 |
08/14/2020 |
09/08/2020 |
|
|
05/07/2020 |
$0.54 |
02/18/2020 |
05/08/2020 |
06/01/2020 |
|
|
03/19/2020 |
$0.54 |
02/18/2020 |
03/20/2020 |
04/06/2020 |
|
|
12/05/2019 |
$0.53 |
02/19/2019 |
12/06/2019 |
01/02/2020 |
|
|
08/08/2019 |
$0.53 |
02/19/2019 |
08/09/2019 |
09/03/2019 |
|
|
05/09/2019 |
$0.53 |
02/19/2019 |
05/10/2019 |
06/03/2019 |
|
|
03/14/2019 |
$0.53 |
02/19/2019 |
03/15/2019 |
04/01/2019 |
|
|
12/06/2018 |
$0.52 |
02/21/2018 |
12/07/2018 |
01/02/2019 |
|
|
08/09/2018 |
$0.52 |
02/21/2018 |
08/10/2018 |
09/04/2018 |
|
|
05/10/2018 |
$0.52 |
02/20/2018 |
05/11/2018 |
06/04/2018 |
|
|
03/08/2018 |
$0.52 |
02/20/2018 |
03/09/2018 |
04/02/2018 |
|
|
12/07/2017 |
$0.51 |
02/21/2017 |
12/08/2017 |
01/02/2018 |
|
|
08/09/2017 |
$0.51 |
02/21/2017 |
08/11/2017 |
09/05/2017 |
|
|
05/10/2017 |
$0.51 |
02/21/2017 |
05/12/2017 |
06/05/2017 |
|
|
03/08/2017 |
$0.51 |
02/21/2017 |
03/10/2017 |
04/03/2017 |
|
|
12/07/2016 |
$0.50 |
02/18/2016 |
12/09/2016 |
01/03/2017 |
|
|
08/10/2016 |
$0.50 |
02/18/2016 |
08/12/2016 |
09/06/2016 |
|
|
05/11/2016 |
$0.50 |
02/18/2016 |
05/13/2016 |
06/06/2016 |
|
|
03/09/2016 |
$0.50 |
02/18/2016 |
03/11/2016 |
04/04/2016 |
Can you estimate the expected dividend in 2024?
And in 2025? And on and on…
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
· Can you estimate the expected
dividend in 2023? And in 2024? And on and on…
· Can you determine the market value
of WMT based on expected dividends using knowledge of the time value of
money?
WMT stock price = ?
WMT stock price = npv(return,
Div2024, Div2025, Div2006 …D∞)
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)
https://www.nasdaq.com/market-activity/stocks/wmt
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/dividend)
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 the second midterm exam)
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 2018 and sold it for $30 in May 2019. 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.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 Calendar (FYI)
10/15/2023
https://www.nasdaq.com/market-activity/stock-splits
|
SYMBOL |
COMPANY |
RATIO |
PAYABLE ON |
EX-DATE |
ANNOUNCED |
|
Altisource
Asset Management Corp |
17 : 10 |
10/31/2023 |
11/01/2023 |
9/08/2023 |
|
|
Mueller
Industries, Inc. |
2 : 1 |
10/20/2023 |
10/23/2023 |
9/26/2023 |
|
|
Addex
Therapeutics Ltd |
1 : 120.048 |
10/23/2023 |
10/23/2023 |
10/23/2023 |
|
|
Cyngn Inc. |
10.000% |
10/30/2023 |
10/20/2023 |
N/A |
|
|
Capricorn
Energy Plc ADR |
2 : 3 |
10/20/2023 |
10/20/2023 |
10/20/2023 |
|
|
Soluna
Holdings, Inc. |
1 : 25 |
10/16/2023 |
10/16/2023 |
10/16/2023 |
Dividend Calendar (FYI)
10/25/2022
https://www.nasdaq.com/market-activity/dividends
|
Symbol |
Name |
Ex-Dividend Date |
Payment Date |
Record Date |
Dividend |
Indicated Annual Dividend |
Announcement Date |
|
10/25/2022 |
11/09/2022 |
10/26/2022 |
0.225 |
0.9 |
10/12/2022 |
||
|
10/25/2022 |
11/16/2022 |
10/26/2022 |
0.38 |
1.52 |
10/13/2022 |
||
|
10/25/2022 |
11/10/2022 |
10/26/2022 |
0.853 |
3.412 |
09/27/2022 |
||
|
10/25/2022 |
11/10/2022 |
10/26/2022 |
1.18 |
4.72 |
09/20/2022 |
||
|
10/25/2022 |
11/09/2022 |
10/26/2022 |
0.035 |
0.14 |
09/15/2022 |
||
|
10/25/2022 |
11/24/2022 |
10/26/2022 |
0.925 |
3.701 |
08/24/2022 |
||
|
10/25/2022 |
11/09/2022 |
10/26/2022 |
0.45 |
1.8 |
10/12/2022 |
Second Midterm Exam (10/26/2023)
Second
Mid Term Exam Study Guide
Chapters 6, 7, 8
Review
video in class (Must watch) (10/24/2023 in class)
Multiple Choices (30*3.3=100. 3 questions will not
be graded. Total 33 questions)
|
company 1 |
company 2 |
company 3 |
company 4 |
Market |
|
|
2018 |
x |
x |
x |
x |
X |
|
2019 |
x |
x |
x |
x |
X |
|
2020 |
x |
x |
x |
x |
X |
|
2021 |
x |
x |
x |
x |
X |
|
2022 |
x |
x |
x |
x |
X |
Refer to the above table to answer questions 1-10.
1. How much is company 1’s average return in the past five months?
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 correlation between company 1 and company 3?
6. What is the correlation between company 1 and company 4?
7. If you must hold company 1, which other company is a better option than the others to be added to your portfolio?
8. What is the beta of the company 2? (hint: check slope)
9. What is the beta of the company 3? (hint: check slope)
10. Among company 1, 2, and 3, which one is the most risky one, based on beta?
11. Calculate stock return, given market return, risk free rate, beta
12.
Stock A has the
following returns for various states of the economy:
Economy Probability Stock
A's Return
Recession x x
Average x x
Boom x 40%
Stock A's expected return is?
13.
Calculate the portfolio’s beta
Amount invested in each stock stock’s beta
x x
x x
x x
14. Which of
the following is an example of unsystematic risk?
Chapter 7
Issuer Symbol Callable
Coupon _rate Maturity Moody
Rating Price Yield
aa
BRK3680632 Yes x x Aa3 x _____
Use the above information to answer the following
questions (1-7)
1.
This bond is callable. This means that
2.
How much is the bond price?
3.
Given price, coupon rate, ,years left to maturity, calculate the
yield to maturity for an annual coupon bond.
4. Same as above, but for a
semiannual coupon bond.
5. Same as above. Calculate the
current yield.
6.
Given yield to maturity, coupon rate, ,years left to maturity,
calculate bond price for an annual coupon bond. .
7. Given yield to maturity,
coupon rate, ,years left to maturity, calculate bond price for an semi-annual
coupon bond.
8. Calculate a zero coupon bond
price, given years left to maturity, yield to maturity.
9. Rank bond based on bond
rating.
10. Definition of bond coupon,
face value, par value, yield to maturity, market price.
Chapter 8
1. what is
dividend? Dividend yield?
2. Given D0,
g, Po, calculate r.
3. Given D0,
r, Po, calculate Po.
4. Given D0,
g, Po, calculate D3.
5. Given g, r,
Po. How much is D1?
6. Given r,
d1, g . How much is P0?
7. Given r,
capital gain yield, how much is dividend yield?
8. Given D1,
g, r. How much is Po?
9. Given r,
Po, g, ,how much is Do?
|
Chapter
9 WACC – Cost of Capital Drag and Drop Game for Cost of Capital (WACC) – 9:30 class Drag and Drop Game for Cost of Capital (WACC) – 11:00 class For class discussion: What is WACC? Why is it important? WACC increases, good or bad to stock holders? How to apply WACC to figure out firm value? What is DCF?
One option (if beta is given, refer to chapter 13)
Another option (if dividend is given):
WACC Formula
Discount rate to
figure out the value of projects is called WACC (weighted average cost of
capital) WACC = weight of debt
* cost of debt + weight of equity *( cost of equity) Wd= total debt / Total
capital = total borrowed / total capital We= total equity/ Total capital Cost of debt =
rate(nper, coupon, -(price – flotation costs), 1000)*(1-tax rate) Cost of Equity =
D1/(Po – Flotation Cost) + g D1: Next period
dividend; Po: Current stock price; g: dividend growth rate Note: flotation costs = flotation
percentage * price Or if beta is given, use CAPM model
(refer to chapter 6) Cost of equity = risk free rate + beta
*(market return – risk free rate) Cost of equity = risk free rate +
beta * market risk premium Discussion: · Cheaper to raise capital from debt market.
Why? Why not 100% financing via borrowing? · Why tax rate cannot reduce firms’ cost of
equity? In Class Exercise 1.
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 % 2. What components are typically included in the calculation
of WACC? a)
Only the cost of debt b)
The cost of equity and retained earnings c)
The cost of debt, cost of equity, and cost of preferred stock Answer: c Explanation:
WACC is calculated by considering the weighted average of the cost of debt,
cost of equity, and cost of preferred stock, each weighted by its proportion
in the capital structure. 3. Which component of WACC is influenced by a company's bond
yield and credit rating? a)
Cost of debt b)
Cost of equity c)
Cost of preferred stock Answer: a Explanation:
The cost of debt is influenced by a company's bond yield and credit rating
because it represents the interest cost on the company's debt. 4.
How
is the cost of equity calculated in WACC? a)
By taking the historical returns of the company's stock b)
Using the dividend growth model or the capital asset pricing model (CAPM) c)
By multiplying the market price of the stock by a fixed rate Answer:
b 5.
When
calculating the WACC, why is each component of capital multiplied by its
respective weight? a
To account for the proportion of each component in the company's capital
structure. b)
To determine the total capital of the company c)
To calculate the total liabilities of the company Answer:
a Explanation:
Multiplying each component by its weight reflects the proportion of each
component in the capital structure, which is essential for the weighted
average calculation. 6.
What
is the primary purpose of calculating the WACC for a company? a)
To determine the company's stock price b)
To assess the company's creditworthiness c)
To evaluate investment projects and make capital budgeting decisions answer: c Explanation:
The primary purpose of calculating WACC is to evaluate investment projects
and make capital budgeting decisions by discounting the future cash flows. 7.
What
happens to a company's WACC if it increases the proportion of debt in its
capital structure? a)
WACC decreases b)
WACC remains unchanged c)
WACC increases answer: a Explanation:
If a company increases the proportion of debt, it will generally decrease the
WACC because debt has a lower cost compared to equity, and the increased
weight of debt in the calculation reduces the overall WACC. 8.
Which
of the following factors can lead to a higher WACC for a company? a)
An decrease in the cost of equity b)
A reduction in the weight of debt in the capital structure c)
An increase in the weight of preferred stock answer: b Explanation:
A reduction in the weight of debt (an increase in the weight of equity) in
the capital structure can lead to a higher WACC because equity typically has a higher cost
compared to cost. HOMEWORK
of Chapter 9 (due with the final exam) Homework
help video (from the beginging to 6:00 in this video, 11.9.2023) 1.
Firm AAA sold a non-callable bond now has 20 years to
maturity. 9.25% annual coupon rate, paid semiannually, sells at a
price = $1,075, par = $1,000. Tax rate = 40%, calculate after tax
cost of debt (5.08%) 2.
Firm AAA’s equity condition is as follows. D1 =
$1.25; P0 = $27.50; g = 5.00%; and Flotation = 6.00% of
price. Calculate cost of equity (9.84%) 3.
Firm AAA raised 10m from the capital market. In it, 3m is from
the debt market and the rest from the equity market. Calculate WACC. 4.
Based on the WACC and ROIC of Walmart, Amazon, Apple, and Tesla,
answer the
following questions Question 1: Which company
generates higher returns on investment than its WACC? A) Amazon.com Inc B) Walmart Inc C) Tesla Question 2: Which company's ROIC exceeds
its WACC by the widest margin? A) Amazon.com Inc B) Walmart Inc C) Apple Inc Question 3: Which company
is expected to destroy value as it grows? A) Amazon.com Inc B) Walmart Inc C) Apple Question 4: Which company's WACC is the
lowest as of 10/30/2023? A) Amazon.com Inc B) Walmart Inc C) Apple Inc Question 5: Among the listed
companies, which one has the highest ROIC? A) Amazon.com Inc B) Walmart Inc C) Apple Inc Question 6: Which company's value is
expected to increase as it continues generating positive excess returns on
new investments? A) Amazon.com Inc B) Walmart Inc C) Apple Inc 5.
Answer the following questions for extra
credits, based on industrial WACC at https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/wacc.htm Question 1: In which industry is the cost of equity highest? A) Advertising B) Tobacco C) Healthcare Support Services
Question 2: In the "Retail (Building Supply)" industry,
what is the cost of capital? A) 12.69% B) 7.31% C) 16.65% Question 3: Which industry has the lowest cost of debt? A) Steel B) Oil/Gas Distribution C) Healthcare Support Services Question 4: In the "Electronics (Consumer &
Office)" industry, what is the D/(D+E) ratio? A) 11.76% B) 76.76% C) 8.27% Question 5: Which industry's cost of equity is closest to its
cost of debt? A) Retail (Automotive) B) Broadcasting C) Chemical (Specialty) Question 6: Which industry has the highest E/(D+E) ratio? A) Real Estate (Development) B) Green & Renewable
Energy C) Precious Metals Question 7: Which industry has the lowest cost of equity? A) Beverage (Alcoholic) B) Insurance (Prop/Cas.) C) Power Question 8: Which industry's cost of capital is the highest? A) Retail (Online) B) Food Wholesalers C) Environmental & Waste
Services |
WACC calculator (semi-annual coupon
bond) (www.jufinance.com/wacc_1) Wal-Mart
Inc (NYSE:WMT) WACC %: 8.13%
As of 10/30/2023 As of today (2023-7-13), Walmart's
weighted average cost of capital is 8.13%. Walmart's ROIC % is 8.22% (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 %:11.62% As of 10/30/2023 As of today (2023-7-13), Amazon.com's weighted average cost of capital is 11.62%. Amazon.com's ROIC % is 5.19% (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 %:12.01%
As of 10/30/2023 As of today (2023-7-13), Apple's
weighted average cost of capital is 11.68%. Apple's ROIC % is 31.88% (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 %: 18% As of 10/30/2023
As of today (2022-7-14), Tesla's weighted average cost of capital is 18%. Tesla's ROIC % is 19.82% (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 2023 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
http://people.stern.nyu.edu/adamodar/New_Home_Page/datafile/wacc.htm |
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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? Question 4:
If the required rate of return
is 10%. Which project shall you choose? 1) How much is the cross over
rate? (answer: 11.8%) 2) How is your decision if
the required rate of return is 13%? (answer: NPV of B>NPV of A) · Rule for
mutually exclusive projects: (answer: Choose B) · What about
the two projects are independent? (answer: Choose both) Solution:
In class Exercise: Comparisons between NPV
and IRR 1. What is the primary
purpose of NPV and IRR in investment analysis? A. To
evaluate the timing of cash flows B. To
compare investment projects based on profitability C. To
assess the liquidity of a company Answer: B Explanation:
Both NPV and IRR are used to assess the profitability of investment projects. 2. Which method accounts for
the time value of money by discounting cash flows to their present value? A. NPV B. IRR C. Both
NPV and IRR Answer: A Explanation:
NPV discounts future cash flows to their present value, considering the time
value of money. 3. IRR is the discount rate
that makes the: A. NPV
positive B. NPV
negative C. NPV
equal to zero Answer: C Explanation:
IRR is the rate at which the NPV of an investment becomes zero. 4. What does a positive NPV
indicate about an investment project? A. It
is profitable and should be accepted. B. It
is unprofitable and should be rejected. C. It
is uncertain, and further analysis is needed. Answer: A Explanation:
A positive NPV indicates that the project is expected to generate a profit. 5 If two investment projects have the same initial
investment and different cash flow patterns, which method should be used to
compare them effectively? A. NPV B. IRR C.
Either NPV or IRR Answer: A Explanation:
NPV considers the entire cash flow pattern and is better for comparing
projects with different cash flow profiles. 6. Which method may have
multiple solutions or no solution when assessing certain projects? A. NPV B. IRR C. Both
NPV and IRR Answer: B Explanation:
IRR can have multiple solutions or no solution when cash flows change
direction more than once. 7. In the case of mutually
exclusive projects (where you can choose only one), which method is more
reliable for decision-making? A. NPV B. IRR C. Both
NPV and IRR Answer: A Explanation:
NPV is more reliable for mutually exclusive projects as it directly compares
their profitability. 8. What happens when IRR is greater than the
required rate of return (hurdle rate)? A. The
project is attractive and should be accepted. B. The
project is unattractive and should be rejected. C. The
decision depends on other factors. Answer: A Explanation:
If IRR exceeds the hurdle rate, the project is considered attractive. 9. Which method is not
suitable for ranking projects when the investment scale differs significantly
between projects? A. NPV B. IRR C. Both
NPV and IRR Answer: B Explanation:
IRR can lead to misleading rankings when project scales differ significantly. 10. In cases where projects have
non-conventional cash flow patterns (e.g., more than one change in cash flow
direction), which method may result in multiple IRRs? A. NPV B. IRR C. Both
NPV and IRR Answer: B Explanation:
IRR may have multiple solutions or no solution when cash flows change
direction more than once. 11. What does the IRR of a
project represent? A. The
total dollar value of cash flows over the project's lifespan B. The
project's risk level C. The
rate at which the project breaks even Answer: C Explanation:
IRR represents the rate at which the project's NPV becomes zero, indicating
the break-even point. 12. What does a negative NPV
indicate about an investment project? A. It
is uncertain, and further analysis is needed. B. It
is profitable and should be accepted. C. It
is unprofitable and should be rejected. Answer: C Explanation:
A negative NPV indicates that the project is expected to result in a loss. 13. What
is the payback period in capital budgeting? A. The
time it takes for a project to generate profits. B. The
time it takes to recover the initial investment in a project. C. The
total duration of a project from start to finish. Answer: B Explanation:
The payback period is the time it takes to recover the initial investment in
a project. 14. What
is the main limitation of the payback period as an investment evaluation
metric? A. It doesn't
consider the timing of cash flows. B. It
is too complex and difficult to calculate. C. It
only focuses on the initial investment. Answer: A Explanation:
The main limitation of the payback period is that it does not consider the
timing of cash flows beyond the payback period, which can be important for
investment decision-making. 15. A
project with a payback period longer than its useful life is considered: A. A
high-risk investment. B. An
acceptable investment. C. An
unacceptable investment. Answer: C Explanation:
If the payback period is longer than the useful life of the project, it may
not be considered a viable investment because it doesn't recover the initial
investment during its lifetime. 16. The
payback period does not account for which of the following factors: A.
Initial investment. B.
Future cash flows. C.
Discount rate. Answer: C Explanation:
The payback period does not consider the discount rate when assessing the
time value of money. 17. A
shorter payback period is generally considered: A. Less
favorable. B. More
favorable. C.
Irrelevant for investment decisions. Answer: B Explanation:
In general, a shorter payback period is considered more favorable because it
indicates a quicker recovery of the initial investment. Chapter 10 Homework (due with final) Video for homework in class
(11/9/2023) (from 6:00 - …) 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)
https://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 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 (In class 11/18, from 8am-5pm) FIN 301 Comprehensive Final Exam Study Guide (please use the first and the second midterm exams as study guide for
chapters 3, 4, 5, 6, 7, 8. Please use homework questions as study guide for
chapters 9, 10)
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 5-8 Given balance sheet and income statement,
calculate cash flow from investment, cash flow from operation, cash flow from
financing. Similar to the in class exercise. 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
of the above question: 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 = 120-20-10=90 9-10 Concept about income statement,
balance sheet, cash flow statements Please refer to: https://www.jufinance.com/quiz/cash_flow_quiz.html
and https://www.jufinance.com/quiz/cash_flow_quiz.html Chapter 5 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
FV, r, nper, pmt, calculate PV 15. Given
PV, FV, nper, no pmt, calculate for rate 16. Given
PV, rate (hint: if monthly, dividend by 12), pmt, calculate for nper (hint: FV=0) Please
refer to: https://www.jufinance.com/quiz/time_value_of_money_quiz.html Chapter 6 17-18: What is systematic risk?
Unsystematic risk? 19. How to diversify to achieve the goal
for diversification? 20. Given beta, r of stock A, beta and r
of stock B, calculate market return 21. Given beta, r of stock A, beta and r
of stock B, and given stock C’s beta, calculate its return 22-23. Definition of beta, standard
deviation 24, Calculate return given probability of
each state of economy, and return under each state of economy. Please
refer to: https://www.jufinance.com/quiz/risk_return_quiz.html Chapter 7 25-26. Bond conceptual questions 27. Bond: given nper, bond price, yield to
maturity, calculate for coupon rate (hint: use pmt function) 28-29. Given nper, bond price, coupon
rate, calculate for yield to maturity, for semi-annual coupon bond and annual
coupon bond . 30. Zero coupon bond: given nper, price,
calculate for yield to maturity. 31. Calculate current yield Will use a table similar to the following
to ask the above questions
Please
refer to: https://www.jufinance.com/quiz/bond_valuation_quiz.html Chapter 8 32. Given dividend yield, Po, calculate
for D1. 33. Given r, D0, g, calculate for dividend
yield 34. Given D0, g, calculate for D5 35. Given D1, g, r, calculate for Po 36. Definitions: dividend yield, capital
gain yield Please refer to: https://www.jufinance.com/quiz/stock_valuation_quiz.html Chapter 10 37-42. Calculate for payback period, NPV,
IRR, given CF0 – CF5 and r, calculate crossover rate. 43-44. How to make a capital budgeting
decision based on NPV and IRR? Please
refer to: https://www.jufinance.com/quiz/capital_budgeting_quiz.html Chapter 9 – 45-50: Calculate for weight of debt,
weight of equity, after tax cost of debt, cost of equity, WACC Please
refer to: https://www.jufinance.com/quiz/wacc_quiz.html Here's the plan for the upcoming final exam:
Best
of luck with your final exam preparations! |
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Wishing you a joyful Holiday break and looking forward to seeing you in the sPRING!
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