FIN301 Class Web Page, Spring ' 23

Instructor: Maggie Foley

Jacksonville University

Weekly SCHEDULE, LINKS, FILES and Questions

Chapter

Coverage, HW, Supplements

- Required

References

Chapter 1, 2

Marketwatch Stock Trading Game (Pass code: havefun)

Use the information and directions below to join the game.

1. URL for your game:
https://www.marketwatch.com/game/fin301-23spring

2. Password for this private game: havefun

3. Click on the 'Join Now' button to get started.

4. If you are an existing MarketWatch member, login. If you are a new user, follow the link for a Free account - it's easy!

5. Follow the instructions and start trading!

How To Win The MarketWatch Stock Market Game (youtube, FYI) – finviz example

How Short Selling Works (Short Selling for Beginners) (youtube, FYI)

Chapter 1: Introduction

ppt

Note:

Flow of funds describes the financial assets flowing from various sectors through financial intermediaries for the purpose of buying physical or financial assets.

*** Household, non-financial business, and our government

Financial institutions facilitate exchanges of funds and financial products.

*** Building blocks of a financial system. Passing and transforming funds and risks during transactions.

*** Buy and sell, receive and deliver, and create and underwrite financial products.

*** The transferring of funds and risk is thus created. Capital utilization for individual and for the whole economy is thus enhanced.

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

· ?

There's a real probability of recession in 2023, says Thornburg's Jason Brady (youtube)

Chapter 2 Introduction of Financial Market

ppt

1. What are the six parts of the financial markets

Money:

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

Financial Instruments:

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

Financial Markets:

· Buy and sell financial instruments

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

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

Financial Institutions.

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

· Financial Intermediary: Helps get funds from savers to investors

Central Banks

· Monitor financial Institutions and stabilize the economy

Regulatory Agencies

· To provide oversight for financial system.

2. What are the five core principals of finance

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

Introduction to Capital Markets - ION Open Courseware (Video)

How the stock market works (video)

No homework for chapters 1, 2

Chapter 5 Time value of Money

ppt

The time value of money - German Nande (video)

Tutoring of Time Value of Money calculation in Excel （video）

Chapter 5 in class exercise

Chapter 5 Homework (due with the first mid term)

Homework video #1 on 1/20/2023 - in class

Homework Video #2 on 1/27/2023 - in class

Homework Video #3 on 2/3/2023 - in class

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))

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)

www.jufinance.com/nfv

Time Value of Money Calculator

https://www.jufinance.com/tvm/

Chapter 3 Financial Statement Analysis

Ppt

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

For discussion: Which company is better?

Let’s find it out by comparing stock performance between the two firms.

Nike Stock Performance (finance.yahoo.com)

What is your conclusion?

******* Part I: Balance Sheet and Income Statement **************

Home Depot (Ticker in the market: HD) reported the following information for the year ended January 30^th, 2011 (expressed in millions).

Sales: $67,977

Cost of goods sold: $44,693

Marketing, general and administrative expenses: $15,885

Depreciation expenses: $1,616

Interest expense: $530

Tax rate: 36.70%

Number of shares outstanding: 1,623

Dividends paid to stockholders: $1,569.

Use the above information to try to prepare the income statement of Home Depot for the year ended January 30^th, 2011

Home Depot (Ticker in the market: HD) reported the following information for the year ended January 30^th, 2011 (expressed in millions).

Cash: $545

Accounts receivables: $1,085

Inventories: $10625

Other current assets: $1,224

Gross fixed assets: $38,471

Accumulated depreciation: $13,411

Other fixed assets: $1,586

Accounts payable: $9,080

Short term notes payable: $1,042

Long term debt: $11,114

Total common stock: $3,894

Retained earnings: $14,995

Use the above information to try to prepare the balance sheet of Home Depot for the year ended January 30^th, 2011

https://www.nasdaq.com/market-activity/stocks/gpro/financials

GoPro

GoPro Stock performance ( finance.yahoo.com )

Balance Sheet Template

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

Income Statement Template

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

Cash flow template

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

Ratio Analysis (plus balance sheet, income statement)

https://www.jufinance.com/ratio

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

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

In Millions of USD (except for per share items)	52 weeks ending 2014-02-02
Net Income/Starting Line	5,385.00
Depreciation/Depletion	1,757.00
Amortization	-
Deferred Taxes	-31
Non-Cash Items	228
Changes in Working Capital	289
Cash from Operating Activities	7,628.00
Capital Expenditures	-1,389.00
Other Investing Cash Flow Items, Total	-118
Cash from Investing Activities	-1,507.00
Financing Cash Flow Items	-37
Total Cash Dividends Paid	-2,243.00
Issuance (Retirement) of Stock, Net	-8,305.00
Issuance (Retirement) of Debt, Net	3,933.00
Cash from Financing Activities	-6,652.00
Foreign Exchange Effects	-34
Net Change in Cash	-565
Cash Interest Paid, Supplemental	639
Cash Taxes Paid, Supplemental	2,839.00

Discussion:

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

2. What does net change in cash mean?

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

Source of cash

Decrease in an Asset

Example: Selling inventories or collecting receivables provides cash

Increase in Liability or Equity

Example: Borrowing funds or selling stocks provides cash

Use of Cash

Increase in an Asset

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

Cash Flow from Operations: Five Steps

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 SECOND midterm exam)

Video on 2/17/2023 (Friday) – in class

Video on 2/24/2023 (Friday) – 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 2018 balance sheet showed net fixed assets of $2.2 million, and the 2019 balance sheet showed net fixed assets of $2.6 million. The company's income statement showed a depreciation expense of $1,000,000. What was the amount of the net capital spending for 2019? （$1,400,000）

7. A firm has $500 in inventory, $1,860 in fixed assets, $190 in accounts receivables, $210 in accounts payable, and $70 in cash. What is the amount of the current assets? (760)

8. A firm has net working capital of $640. Total liability is $5,860. Total assets are $6,230, and fixed assets are $3,910. What is the amount of long term debt? (4180)

9. Which one of the following is a use of cash? (answer: B)
A. decrease in accounts receivable
B. decrease in accounts payable
C. increase in common stock
D. decrease in inventory

10. A firm generated net income of $878. The depreciation expense was $40 and dividends were paid in the amount of $25. Accounts payables decreased by $13, accounts receivables increased by $20, inventory decreased by $14, and net fixed assets decreased by $8. There was no interest expense. What was the net cash flow from operating activity? (899)

11. Teddy’s Pillows has beginning net fixed assets of $480 and ending net fixed assets of $530. Assets valued at $300 were sold during the year. Depreciation was $40. What is the amount of capital spending? (90)

12. Art’s Boutique has sales of $640,000 and costs of $480,000. Interest expense is $40,000 and depreciation is $60,000. The tax rate is 34%. What is the net income? (39,600)

Cash Flow Statement Answer		calculation for changes
Cash at the beginning of the year	2060
*Cash from operation*
net income	3843
plus depreciation	1760
-/+ AR	-807	807
-/+ Inventory	-3132	3132
+/- AP	1134	1134
net change in cash from operation	2798

*Cash from investment*
-/+ (NFA+depreciation)	-1680	1680
net change in cash from investment	-1680

*Cash from finaning*
+/- long term debt	1700	1700
+/- common stock	2500	2500
- dividend	-6375	6375
net change in cash from investment	-2175

Total net change of cash	-1057
Cash at the end of the year	1003

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

More exercises of chapter 3 (word file here) (solution)

In class exercise

1. Refer to the above table. Inventory has increased from $18,776 to $21,908. This is ____________ of cash;

Long term debt has increased from $9,800 to $11,500. This is ____________ of cash.
A. use; use
B. use; source
C. source; source
D. source; use

2. Prepare cash flow statement based on information given

Increase in accounts receivable $20

Decrease in inventory 10

Operating income 120

Interest expense 20

Decrease in accounts payable 20

Dividend 10

Increase in common stock 30

Increase in net fixed asset 10

Depreciation 5

Income tax 10

Beginning cash 100

Why is Investment Cash flow -$15?

Assume that Net fixed assets =$10 in previous year.

Depreciation = $5 è Net fixed assets will drop by $5 due to depreciation, so net fixed assets should be $10-$5=$5, if the company has done nothing on fixed assets.

However, increase in Net Fixed Asset = $10 è net fixed assets = $10 + $10 = $20 this year.

How much has been spent on fixed assets?

$20-$5=$15 è It is a cash outflow, so -$15.

Solution: see above

Note: NI = EBIT – Interest – Tax = 120-20-10=90

Chapter 4: Ratio Analysis

Ppt

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

P/E Ratio (TTM) 35.96

Price to Sales Ratio 4.09

Price to Book Ratio 12.22

EPS (recurring) 3.74

EPS (basic) 3.83

Efficiency

Current Ratio 2.63

Quick Ratio 1.84

Cash Ratio 1.21

Profitability

Gross Margin +46.13

Operating Margin +14.49

Return on Assets 15.49

Return on Equity 43.11

Capital Structure

Total Debt to Total Assets 31.32

Long-Term Debt to Assets 0.29

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 SECOND 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?

2, The Co. has sales = $50 million, total assets = $30 million, and total debt = $15 million. The profit margin = 20%. What is the return on equity (ROE)?

GoPro --- Valuation P/E Ratio (TTM) 12.92 Price to Sales Ratio 1.45 Price to Book Ratio 2.62 Price to Cash Flow Ratio 7.34 Total Debt to EBITDA 1.79 EPS (recurring) 2.28 EPS (basic) 2.41 Efficiency Total Asset Turnover 1.13 Liquidity Current Ratio 1.65 Quick Ratio 1.46 Cash Ratio 1.13 Profitability Gross Margin +41.20 Operating Margin +9.96 Net Margin +31.97 Return on Assets 36.28 Return on Equity 89.23 Return on Total Capital 16.54 Capital Structure Total Debt to Total Assets 22.63 Long-Term Debt to Assets 0.12

https://www.wsj.com/market-data/quotes/GPRO/financials

www.marketwatch.com

First Mid Term Exam – 2/22/2023 (chapters 5, 3, 4)

First Mid Term Exam Study Guide

Multiple Choice Questions (25*4 = 100. There are 26 questions in total, with one 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

Chapter 6 Risk and Return

ppt

Risk and Return in class exercise

Excel file here will be provided soon

Steps: In class exercise

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

We chose Tesla, Amazon, and Walmart.

· Stock Prices Raw Data, Risk, Beta, CAPM (Duke energy, Disney, McDonald, S&P500 (Raw data), will be updated based on the new stocks chosen in class (template))

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 “2/1/2018” and “2/1/2023”, 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.

R_i = R_f + β_i * (R_m - R_f) ------ CAPM model

R_i = Expected return of investment

R_f = Risk-free rate

β_i = Beta of the investment

R_m = Expected return of market

(R_m - R_f) = Market risk premium

CAPM calculator

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 1(Questions 1-4) – 3/3/2023 – in class

Homework help video 2 (the remaining homework) – 3/10/2023 – in class

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

State of

the Economy Probability Stock A's Return

Recession 10% -30%

Below Average 20% -2%

Average 40% 10%

Above Average 20% 18%

Boom 10% 40%

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

2) Joe purchased 800 shares of Robotics Stock at $3 per share on 1/1/19. Bill sold the shares on 12/31/19 for $3.45. Robotics stock has a beta of 1.9, the risk-free rate of return is 4%, and the market risk premium is 9%. Joe's holding period return is? (ANSWER: 15%)

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

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

Boom 27% 14%

Normal 70% 8%

Recession 3% -11%

4) The prices for the Electric Circuit Corporation for the first quarter of 2019 are given below. The price of the stock on January 1, 2019 was $130. Find the holding period return for an investor who purchased the stock onJanuary 1, 2009 and sold it the last day of March 2019. (ANSWER: 2.12%)

Month End Price

January $125.00

February 138.50

March 132.75

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

6) An investor currently holds the following portfolio:

Amount

Invested

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

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

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

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

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

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

Investment Value Beta

Stock A $8,000 1.5

Stock B $10,000 1.0

Stock C $2,000 .5

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

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

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

Stock Percentage of portfolio Beta

1. 20% 1

2. 30% 0.5

3. 50% 1.6

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

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

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

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

Period Jazman Solomon

1 $10 $20

2 $12 $25

3 $15 $15

12. Calculate expected return (ANSWER: 12%)

State of the economy	Probability of the states	% Return (Cash Flow/Inv. Cost)
Economic Recession	30%	5%
Strong and moderate Economic Growth	70%	15%

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

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

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

3) Investment $10,000 in 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

Expected return calculator

www.jufinance.com/return

Holding Period Return Calculator

www.jufinance.com/hpr

CAPM Model Calculator

www.jufinance.com/capm

Two Stock Portfolio Return and Standard Deviation

www.jufinance.com/portfolio

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,
p_i = the probability of state i,
R_1i = the return on stock 1 in state i,
E[R₁] = the expected return on stock 1,
R_2i = the return on stock 2 in state i, and
E[R₂] = the expected return on stock 2.

2022 High Beta Stocks List | The 100 Highest Beta S&P 500 Stocks (FYI)

Updated on September 15th, 2022 by Bob Ciura

https://www.suredividend.com/high-beta-stocks/

#5: Fortinet, Inc. (FTNT)

Fortinet, Inc. provides broad, integrated, and automated cybersecurity solutions around the world. It offers FortiGate hardware and software licenses that provide various security and networking functions. Fortinet is a large-cap stock with a market cap above $40 billion.

In the 2022 second quarter, Fortinet generated revenue of $1.03 billion, up 29% from the same quarter last year. Product and service revenue grew 34% and 25%, respectively. Adjusted earnings-per-share increased 26% year-over-year.

For 2022, Fortinet expects revenue of $4.25 billion to $4.40 billion, consisting of $2.62 billion to $2.67 billion in service revenue. Billings are expected between $5.56 billion and $5.64 billion. Adjusted earnings-per-share are expected in a range of $1.01 to $1.06 for the full year.

FTNT has a Beta value of 1.71.

#4: Paycom Software Inc. (PAYC)

Paycom is a technology stock that produces cloud-based human capital management (HCM) as-a-service software. Services help employers manage a variety of HCM tasks such as talent acquisition, and time and labor management.

In the most recent quarter, Paycom generated $317 million in revenue, up 31% year-over-year. Recurring revenue grew 31%, and represented 98% of total revenue. Earnings-per-share of $1.26 increased 30% compared with $0.97 in the year-ago quarter.

PAYC has a Beta value of 1.71.

#3: ServiceNow (NOW)

ServiceNow is a high-quality technology company, which transforms old, manual ways of working into modern digital workflows. It reduces the complexity of jobs and makes work more pleasant to employees, thus resulting in increased productivity.

ServiceNow currently has more than 7,400 enterprise customers, which include about 80% of the Fortune 500. All these customers use the Now Platform, which is an intelligent cloud platform that carries out their digital transformation.

ServiceNow is a leader in the digital transformation of companies towards making work better for their employees. According to a research of IDC, more than $3 trillion has been invested in digital transformation initiatives but only 26% of the investments have delivered acceptable returns.

NOW has a Beta value of 1.77.

#2: Advanced Micro Devices (AMD)

Advanced Micro Devices was founded in 1959 and in the decades since it has become a sizable player in the chip market. AMD is heavy in gaming chips, competing with others like NVIDIA for the lucrative, but competitive market.

In the 2022 second quarter, AMD reported revenue of $6.6 billion. This was a 70% year-over-year increase, driven by organic growth as well as the contribution from Xilinx. Gross margin contracted two percentage points to 46% for the quarter. Operating income rose 22% to $526 million. Adjusted earnings-per-share of $1.05 increased 67%.

AMD has a Beta value of 2.09.

#1: NVIDIA Corporation (NVDA)

NVIDIA Corporation is a specialized semiconductor company that designs and manufactures graphics processors, chipsets and related software products.

Its products include processors that are specialized for gaming, design, artificial intelligence, data science and big data research, as well as chips designed for autonomous vehicles and robots.

Over the last five years, NVIDIA’s growth exploded. This growth was partially driven by cryptocurrency mining, although that has mostly ceased to be a tailwind, and future growth will be centered on other growth drivers. NVIDIA’s GPUs are very versatile in AI applications, which was an unintended benefit of the company’s research and development efforts.

The company has immediately started to capitalize on this trend by offering GPUs that are optimized for deep learning and other specialized applications. These GPUs act as the brains of computers, robots, and self-driving cars. Those GPUs are, among others, utilized in professional visualization and data centers. The markets NVIDIA supplies GPUs for have strong growth tailwinds, which bodes well for NVIDIA’s long-term revenue outlook.

NVDA has a Beta value of 2.31.

Negative Beta Stocks | The 1 Negative Beta S&P 500 Stock In 2022 (FYI)

Updated on January 19th, 2022 by Bob Ciura

https://www.suredividend.com/negative-beta-stocks/

Negative Beta Stock: Clorox Company (CLX)

With over 40 years of dividend increases, Clorox is on the exclusive Dividend Aristocrats list.

Clorox is a manufacturer and marketer of consumer and professional products, spanning a wide array of categories from charcoal to cleaning supplies to salad dressing.

More than 80% of its revenue comes from products that are #1 or #2 in their categories across the globe, helping Clorox produce more than $7 billion in annual revenue.

Clorox reported first quarter earnings on November 1st, 2021, and results were better than expected, although expectations were low.

Total revenue declined nearly –6% year–over–year to $1.8 billion, as organic sales fell –5% during the quarter. The decline was due to unfavorable pricing and mix, a decline in volume, and forex translation.

Cleaning and professional products were higher, but consumer products like vitamins and supplements posted strong declines.

Clorox stock has a Beta value of -0.24.

https://ycharts.com/companies/CLX/performance/price

Chapter 7 Bond pricing

Ppt

Yield Curve http://finra-markets.morningstar.com/BondCenter/Default.jsp 3/19/2023

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

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

Chapter 7 Study guide

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

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

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://finra-markets.morningstar.com/BondCenter/

Refer to the following bond at http://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C104227&symbol=WMT.GP

3. 3. Understand how to price bond

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

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

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

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

4. Understand how to calculate bond returns

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

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

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

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

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

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

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

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

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

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

b. What is IBM’s rating?

c. Is the rating for IBM the highest?

d. Who earned the highest rating?

8. Understand the cash flows from a bond as a bond investor

For example, a five year, annual coupon bond, with 5% coupon rate. Its cash flows are as follows.

Chapter 7 Home Work (due with the second mid-term)

Homework video 3/24/2023 (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%

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)

www.jufinance.com/bond

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>

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>

<label for="couponRate">Coupon Rate (%):</label>

<label for="yearsToMaturity">Years to Maturity:</label>

<label for="yieldToMaturity">Yield to Maturity (%):</label>

</form>

</body>

</html>

Chapter 8 Stock Valuation

ppt

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?

Ex/EFF DATE	TYPE	CASH AMOUNT	DECLARATION DATE	RECORD DATE	PAYMENT DATE
04/23/2019	CASH	$0.15	04/09/2019	04/24/2019	06/03/2019
01/30/2019	CASH	$0.15	01/17/2019	01/31/2019	03/01/2019
10/22/2018	CASH	$0.15	10/11/2018	10/23/2018	12/03/2018
07/20/2018	CASH	$0.15	07/13/2018	07/23/2018	09/04/2018
04/19/2018	CASH	$0.15	04/10/2018	04/20/2018	06/01/2018
01/29/2018	CASH	$0.13	01/16/2018	01/30/2018	03/01/2018

https://www.nasdaq.com/market-activity/stocks/f/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

WMT Dividend History

· EX-DIVIDEND DATE 12/08/2022

· DIVIDEND YIELD N/A

· ANNUAL DIVIDEND $2.24

· P/E RATIO 33.29

Ex/EFF DATE	TYPE	CASH AMOUNT	DECLARATION DATE	RECORD DATE	PAYMENT DATE
12/07/2023	CASH	$0.57	02/21/2023	12/08/2023	01/02/2024
08/10/2023	CASH	$0.57	02/17/2023	08/11/2023	09/05/2023
05/04/2023	CASH	$0.57	02/21/2023	05/05/2023	05/30/2023
03/16/2023	CASH	$0.57	02/21/2023	03/17/2023	04/03/2023
12/08/2022	CASH	$0.56	02/17/2022	12/09/2022	01/03/2023
08/11/2022	CASH	$0.56	02/17/2022	08/12/2022	09/06/2022
05/05/2022	CASH	$0.56	02/17/2022	05/06/2022	05/31/2022
03/17/2022	CASH	$0.56	02/17/2022	03/18/2022	04/04/2022
12/09/2021	CASH	$0.55	02/18/2021	12/10/2021	01/03/2022
08/12/2021	CASH	$0.55	02/18/2021	08/13/2021	09/07/2021
05/06/2021	CASH	$0.55	02/18/2021	05/07/2021	06/01/2021
03/18/2021	CASH	$0.55	02/18/2021	03/19/2021	04/05/2021
12/10/2020	CASH	$0.54	02/18/2020	12/11/2020	01/04/2021
08/13/2020	CASH	$0.54	02/18/2020	08/14/2020	09/08/2020
05/07/2020	CASH	$0.54	02/18/2020	05/08/2020	06/01/2020
03/19/2020	CASH	$0.54	02/18/2020	03/20/2020	04/06/2020
12/05/2019	CASH	$0.53	02/19/2019	12/06/2019	01/02/2020
08/08/2019	CASH	$0.53	02/19/2019	08/09/2019	09/03/2019
05/09/2019	CASH	$0.53	02/19/2019	05/10/2019	06/03/2019
03/14/2019	CASH	$0.53	02/19/2019	03/15/2019	04/01/2019
12/06/2018	CASH	$0.52	02/21/2018	12/07/2018	01/02/2019
08/09/2018	CASH	$0.52	02/21/2018	08/10/2018	09/04/2018
05/10/2018	CASH	$0.52	02/20/2018	05/11/2018	06/04/2018
03/08/2018	CASH	$0.52	02/20/2018	03/09/2018	04/02/2018
12/07/2017	CASH	$0.51	02/21/2017	12/08/2017	01/02/2018
08/09/2017	CASH	$0.51	02/21/2017	08/11/2017	09/05/2017
05/10/2017	CASH	$0.51	02/21/2017	05/12/2017	06/05/2017
03/08/2017	CASH	$0.51	02/21/2017	03/10/2017	04/03/2017
12/07/2016	CASH	$0.50	02/18/2016	12/09/2016	01/03/2017
08/10/2016	CASH	$0.50	02/18/2016	08/12/2016	09/06/2016
05/11/2016	CASH	$0.50	02/18/2016	05/13/2016	06/06/2016
03/09/2016	CASH	$0.50	02/18/2016	03/11/2016	04/04/2016
12/02/2015	CASH	$0.49	02/19/2015	12/04/2015	01/04/2016
08/05/2015	CASH	$0.49	02/19/2015	08/07/2015	09/08/2015
05/06/2015	CASH	$0.49	02/19/2015	05/08/2015	06/01/2015
03/11/2015	CASH	$0.49	02/19/2015	03/13/2015	04/06/2015
12/03/2014	CASH	$0.48	02/20/2014	12/05/2014	01/05/2015
08/06/2014	CASH	$0.48	02/20/2014	08/08/2014	09/03/2014
05/07/2014	CASH	$0.48	02/20/2014	05/09/2014	06/02/2014
03/07/2014	CASH	$0.48	02/20/2014	03/11/2014	04/01/2014
12/04/2013	CASH	$0.47	02/21/2013	12/06/2013	01/02/2014
08/07/2013	CASH	$0.47	02/21/2013	08/09/2013	09/03/2013
05/08/2013	CASH	$0.47	02/21/2013	05/10/2013	06/03/2013
03/08/2013	CASH	$0.47	02/21/2013	03/12/2013	04/01/2013
12/05/2012	CASH	$0.3975	03/01/2012	12/07/2012	12/27/2012
08/08/2012	CASH	$0.3975	03/01/2012	08/10/2012	09/04/2012
05/09/2012	CASH	$0.3975	03/01/2012	05/11/2012	06/04/2012
03/08/2012	CASH	$0.3975	03/01/2012	03/12/2012	04/04/2012
12/07/2011	CASH	$0.365	03/03/2011	12/09/2011	01/03/2012
08/10/2011	CASH	$0.365	03/03/2011	08/12/2011	09/06/2011
05/11/2011	CASH	$0.365	03/03/2011	05/13/2011	06/06/2011
03/09/2011	CASH	$0.365	03/03/2011	03/11/2011	04/04/2011
12/08/2010	CASH	$0.3025	03/04/2010	12/10/2010	01/03/2011
08/11/2010	CASH	$0.3025	03/04/2010	08/13/2010	09/07/2010
05/12/2010	CASH	$0.3025	03/04/2010	05/14/2010	06/01/2010
03/10/2010	CASH	$0.3025	03/04/2010	03/11/2010
12/09/2009	CASH	$0.2725	03/05/2009	12/10/2009
08/12/2009	CASH	$0.2725	03/05/2009	08/14/2009	09/08/2009
05/13/2009	CASH	$0.2725	03/05/2009	05/15/2009	06/01/2009
03/11/2009	CASH	$0.2725	03/05/2009	03/13/2009	04/06/2009
12/11/2008	CASH	$0.2375	03/06/2008	12/15/2008	01/02/2009
08/13/2008	CASH	$0.2375	03/06/2008	08/15/2008	09/02/2008
05/14/2008	CASH	$0.2375	03/06/2008	05/16/2008	06/02/2008
03/12/2008	CASH	$0.2375	03/06/2008	03/14/2008	04/07/2008
12/12/2007	CASH	$0.22	03/08/2007	12/14/2007	01/02/2008
08/15/2007	CASH	$0.22	03/08/2007	08/17/2007	09/04/2007
05/16/2007	CASH	$0.22	03/08/2007	05/18/2007	06/04/2007
03/14/2007	CASH	$0.22	03/08/2007	03/16/2007	04/02/2007
12/13/2006	CASH	$0.1675	03/02/2006	12/15/2006	01/02/2007
08/16/2006	CASH	$0.1675	03/02/2006	08/18/2006	09/05/2006
05/17/2006	CASH	$0.1675	03/02/2006	05/19/2006	06/05/2006
03/15/2006	CASH	$0.1675	03/02/2006	03/17/2006	04/03/2006
12/14/2005	CASH	$0.15
08/17/2005	CASH	$0.15	03/03/2005	08/19/2005	09/06/2005
05/18/2005	CASH	$0.15	03/03/2005	05/20/2005	06/06/2005
03/16/2005	CASH	$0.15	03/03/2005	03/18/2005	04/04/2005
12/15/2004	CASH	$0.13	03/02/2004	12/17/2004	01/03/2005
08/18/2004	CASH	$0.13	03/02/2004	08/20/2004	09/07/2004
05/19/2004	CASH	$0.13	03/02/2004	05/21/2004	06/07/2004
03/17/2004	CASH	$0.13	03/02/2004	03/19/2004	04/05/2004

Can you estimate the expected dividend in 2023? And in 2024? 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?

Stock Splits

Wal-Mart Stores, Inc. was incorporated on Oct. 31, 1969. On Oct. 1, 1970, Walmart offered 300,000 shares of its common stock to the public at a price of $16.50 per share. Since that time, we have had 11 two-for-one (2:1) stock splits. On a purchase of 100 shares at $16.50 per share on our first offering, the number of shares has grown as follows:

2:1 Stock Splits	Shares	Cost per Share	Market Price on Split Date	Record Date	Distributed
On the Offering	100	$16.50
May 1971	200	$8.25	$47.00	5/19/71	6/11/71
March 1972	400	$4.125	$47.50	3/22/72	4/5/72
August 1975	800	$2.0625	$23.00	8/19/75	8/22/75
Nov. 1980	1,600	$1.03125	$50.00	11/25/80	12/16/80
June 1982	3,200	$0.515625	$49.875	6/21/82	7/9/82
June 1983	6,400	$0.257813	$81.625	6/20/83	7/8/83
Sept. 1985	12,800	$0.128906	$49.75	9/3/85	10/4/85
June 1987	25,600	$0.064453	$66.625	6/19/87	7/10/87
June 1990	51,200	$0.032227	$62.50	6/15/90	7/6/90
Feb. 1993	102,400	$0.016113	$63.625	2/2/93	2/25/93
March 1999	204,800	$0.008057	$89.75	3/19/99	4/19/99

Can you estimate the expected dividend in 2023? And in 2024? And on and on…

Can you write down the math equation now?

WMT stock price = ?

WMT stock price = npv(return, D1, D2, …D∞)

WMT stock price = D1/(1+r) + D2/(1+r)² + D3/(1+r)³ + D4/(1+r)⁴ + …

Can you calculate now? It is hard right because we assume dividend payment goes to infinity. How can we simplify the calculation?

We can assume that dividend grows at certain rate, just as the table on the right shows.

Discount rate is r (based on Beta and CAPM that we will learn in chapter 6)

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 expected to be sold for

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; So r = total return = dividend yield + capital gain yield

· g= r-D₁/Po = r- Do*(1+g)/Po

· D1 = Po *(r-g); D0 = Po*(r-g)/(1+g)

· Capital Gain yield = g = (P₁-Po)/Po; P₁: Stock price one year later (P₁=D₂/(r-g))

· Dividend Yield = r – g = D₁ / Po = Do*(1+g) / Po

· D₁=Do*(1+g); D₂= D₁*(1+g); D₃=D₂*(1+g)…

For discussion:

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

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

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

§ More exercise about the dividend growth model.

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

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

HW of chapter 8 (due with final)

Video on 3/31/2023

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

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

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

Dividend growth model Calculator

(very useful)

www.jufinance.com/stock

Excel Template (FYI)

Useful website

www.finance.yahoo.com

www.finviz.com

www.getaom.com

money.msn.com/investing

zacks.com

minyanville.com

moneychimp.com

navellier.investor.com/portfolio-grader/

nasdaq.com

marketwatch.com

superstockscreener.com

gurufocus.com

portfoliomoney.com

stockconsultant.com

marketgrader.com

moderngraham.com

stockpickr.com

stockta.com

thestreet.com

askstockguru.com

quotes.wsj.com

oldschoolvalue.com

fool.com

analystratings.com

barchart.com

stock2own.com

theonlineinvestor.com

seekingalpha.com

Details about how to derive the model mathematically (FYI)

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

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

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

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)

10/25/2022

https://www.nasdaq.com/market-activity/stock-splits

SYMBOL	COMPANY	RATIO	PAYABLE ON	EX-DATE	ANNOUNCED
YAGZZ	Yageo Corporation GDR - 144A	39 : 49	11/08/2022	11/08/2022	11/08/2022
TWO	Two Harbors Investments Corp	1 : 4	11/02/2022	11/02/2022	11/02/2022
UXIN	Uxin Limited	1 : 10	10/28/2022	10/28/2022	10/28/2022
VAGNF	Vegano Foods	1 : 10	10/25/2022	10/25/2022	10/25/2022
CMHHY	China Merchants Port Holdings Company Ltd ADR	5.420%	07/29/2022	07/06/2202	N/A

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
AM	Antero Midstream Corporation	10/25/2022	11/09/2022	10/26/2022	0.225	0.9	10/12/2022
ATR	AptarGroup, Inc.	10/25/2022	11/16/2022	10/26/2022	0.38	1.52	10/13/2022
CALM	Cal-Maine Foods, Inc.	10/25/2022	11/10/2022	10/26/2022	0.853	3.412	09/27/2022
CLX	Clorox Company (The)	10/25/2022	11/10/2022	10/26/2022	1.18	4.72	09/20/2022
DNUT	Krispy Kreme, Inc.	10/25/2022	11/09/2022	10/26/2022	0.035	0.14	09/15/2022
RY	Royal Bank Of Canada	10/25/2022	11/24/2022	10/26/2022	0.925	3.701	08/24/2022
THO	Thor Industries, Inc.	10/25/2022	11/09/2022	10/26/2022	0.45	1.8	10/12/2022

Before Collapse of Silicon Valley Bank, the Fed Spotted Big Problems (FYI)

The bank was using an incorrect model as it assessed its own risks amid rising interest rates, and spent much of 2022 under a supervisory review.

Jeanna Smialek March 19, 2023

https://www.nytimes.com/2023/03/19/business/economy/fed-silicon-valley-bank.html

WASHINGTON — Silicon Valley Bank’s risky practices were on the Federal Reserve’s radar for more than a year — an awareness that proved insufficient to stop the bank’s demise.

The Fed repeatedly warned the bank that it had problems, according to a person familiar with the matter.

In 2021, a Fed review of the growing bank found serious weaknesses in how it was handling key risks. Supervisors at the Federal Reserve Bank of San Francisco, which oversaw Silicon Valley Bank, issued six citations. Those warnings, known as “matters requiring attention” and “matters requiring immediate attention,” flagged that the firm was doing a bad job of ensuring that it would have enough easy-to-tap cash on hand in the event of trouble.

But the bank did not fix its vulnerabilities. By July 2022, Silicon Valley Bank was in a full supervisory review — getting a more careful look — and was ultimately rated deficient for governance and controls. It was placed under a set of restrictions that prevented it from growing through acquisitions. Last autumn, staff members from the San Francisco Fed met with senior leaders at the firm to talk about their ability to gain access to enough cash in a crisis and possible exposure to losses as interest rates rose.

It became clear to the Fed that the firm was using bad models to determine how its business would fare as the central bank raised rates: Its leaders were assuming that higher interest revenue would substantially help their financial situation as rates went up, but that was out of step with reality.

By early 2023, Silicon Valley Bank was in what the Fed calls a “horizontal review,” an assessment meant to gauge the strength of risk management. That checkup identified additional deficiencies — but at that point, the bank’s days were numbered. In early March, it faced a run and failed, sending shock-waves across the broader American banking system that ultimately led to a sweeping government intervention meant to prevent panic from spreading. On Sunday, Credit Suisse, which was caught up in the panic that followed Silicon Valley Bank’s demise, was taken over by UBS in a hastily arranged deal put together by the Swiss government.

Major questions have been raised about why regulators failed to spot problems and take action early enough to prevent Silicon Valley Bank’s March 10 downfall. Many of the issues that contributed to its collapse seem obvious in hindsight: Measuring by value, about 97 percent of its deposits were uninsured by the federal government, which made customers more likely to run at the first sign of trouble. Many of the bank’s depositors were in the technology sector, which has recently hit tough times as higher interest rates have weighed on business.

And Silicon Valley Bank also held a lot of long-term debt that had declined in market value as the Fed raised interest rates to fight inflation. As a result, it faced huge losses when it had to sell those securities to raise cash to meet a wave of withdrawals from customers.

The Fed has initiated an investigation into what went wrong with the bank’s oversight, headed by Michael S. Barr, the Fed’s vice chair for supervision. The inquiry’s results are expected to be publicly released by May 1. Lawmakers are also digging into what went awry. The House Financial Services Committee has scheduled a hearing on recent bank collapses for March 29.

The picture that is emerging is one of a bank whose leaders failed to plan for a realistic future and neglected looming financial and operational problems, even as they were raised by Fed supervisors. For instance, according to a person familiar with the matter, executives at the firm were told of cybersecurity problems both by internal employees and by the Fed — but ignored the concerns.

The Federal Deposit Insurance Corporation, which has taken control of the firm, did not comment on its behalf.

Still, the extent of known issues at the bank raises questions about whether Fed bank examiners or the Fed’s Board of Governors in Washington could have done more to force the institution to address weaknesses. Whatever intervention was staged was too little to save the bank, but why remains to be seen.

“It’s a failure of supervision,” said Peter Conti-Brown, an expert in financial regulation and a Fed historian at the University of Pennsylvania. “The thing we don’t know is if it was a failure of supervisors.”

Mr. Barr’s review of the Silicon Valley Bank collapse will focus on a few key questions, including why the problems identified by the Fed did not stop after the central bank issued its first set of matters requiring attention. The existence of those initial warnings was reported earlier by Bloomberg. It will also look at whether supervisors believed they had authority to escalate the issue, and if they raised the problems to the level of the Federal Reserve Board.

The Fed’s report is expected to disclose information about Silicon Valley Bank that is usually kept private as part of the confidential bank oversight process. It will also include any recommendations for regulatory and supervisory fixes.

The bank’s downfall and the chain reaction it set off is also likely to result in a broader push for stricter bank oversight. Mr. Barr was already performing a “holistic review” of Fed regulation, and the fact that a bank that was large but not enormous could create so many problems in the financial system is likely to inform the results.

Typically, banks with fewer than $250 billion in assets are excluded from the most onerous parts of bank oversight — and that has been even more true since a “tailoring” law that passed in 2018 during the Trump administration and was put in place by the Fed in 2019. Those changes left smaller banks with less stringent rules.

Silicon Valley Bank was still below that threshold, and its collapse underlined that even banks that are not large enough to be deemed globally systemic can cause sweeping problems in the American banking system.

As a result, Fed officials could consider tighter rules for those big, but not huge, banks. Among them: Officials could ask whether banks with $100 billion to $250 billion in assets should have to hold more capital when the market price of their bond holdings drops — an “unrealized loss.” Such a tweak would most likely require a phase-in period, since it would be a substantial change.

But as the Fed works to complete its review of what went wrong at Silicon Valley Bank and come up with next steps, it is facing intense political blowback for failing to arrest the problems.

Some of the concerns center on the fact that the bank’s chief executive, Greg Becker, sat on the Federal Reserve Bank of San Francisco’s board of directors until March 10. While board members do not play a role in bank supervision, the optics of the situation are bad.

“One of the most absurd aspects of the Silicon Valley bank failure is that its CEO was a director of the same body in charge of regulating it,” Senator Bernie Sanders, a Vermont independent, wrote on Twitter on Saturday, announcing that he would be “introducing a bill to end this conflict of interest by banning big bank CEOs from serving on Fed boards.”

Other worries center on whether Jerome H. Powell, the Fed chair, allowed too much deregulation during the Trump administration. Randal K. Quarles, who was the Fed’s vice chair for supervision from 2017 to 2021, carried out a 2018 regulatory rollback law in an expansive way that some onlookers at the time warned would weaken the banking system.

Mr. Powell typically defers to the Fed’s supervisory vice chair on regulatory matters, and he did not vote against those changes. Lael Brainard, then a Fed governor and now a top White House economic adviser, did vote against some of the tweaks — and flagged them as potentially dangerous in dissenting statements.

“The crisis demonstrated clearly that the distress of even noncomplex large banking organizations generally manifests first in liquidity stress and quickly transmits contagion through the financial system,” she warned.

Senator Elizabeth Warren, Democrat of Massachusetts, has asked for an independent review of what happened at Silicon Valley Bank and has urged that Mr. Powell not be involved in that effort. He “bears direct responsibility for — and has a long record of failure involving” bank regulation, she wrote in a letter on Sunday.

Maureen Farrell contributed reporting.

Second Midterm Exam (4/5/2023)

Second Mid Term Exam Study Guide

Chapters 6, 7, 8

Review video in class (Must watch) (4/3/2023 in class)

Chapter 6

1. Given D1, r, g, Po=?

2. Given D1, r, g, Po=?

3. Given D1, g, Po, dividend yield?

4. Given D1, r, Po, r=?

5. Given D1, Po, r, g=?

6. Given r, Po, g, D1=?

7. Given r, Po, g, Do=?

Chapter 7

1. Issuer Symbol Callable Coupon _rate Maturity Moody Rating Price Yield

GM CRK3680632 Yes 9% 07/15/2031 aa 97 _____

This bond is callable. This means that?

· Coupon? Price?

· Moody?

· What is the rating by Moody?

· How much YTM?

· How much current yield?

· Recalculate price if YTM is given.

· A Zero coupon bond, given years, YTM, price?

· A semi-annual coupon bond, given ytm, nper, coupon, calculate price.

· A semi-annual coupon bond, given price, nper, coupon, calculate YTM.

Chapter 8

Given total fund, fund invested in each stock, the probability of each stock’s return.

1. The percentage of investment of each security is how much ?

2. Calculate the return of each stock in the portfolio.

3. Given probability of each economic condition, and its return. Calculate expected return.

4. Given beta of each stock in the portfolio, and weight of each stock. Calculate the beta of the portfolio. And given risk free rate, and market return, calculate portfolio’s return.

Refer to the graph

· What does A represent?

· What does B represent?

· How much is the slope of the above security market line?

5. What is systematic risk? Unsystematic risk?

6. Given purchasing price, selling price, calculate HPR.

7. How to diversify?

8. Given probability, return, under each economic condition, and calculate expected return and standard deviation.

Chapter 10 Capital Budgeting

Ppt

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:

Question 2:

Period	Project A	Project B
0	-500	-400
1	325	325
2	325	200
IRR
NPV

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:

Chapter 10 Homework (due with final)

Video for homework in class (4/14/2023)

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)

Project

Year 0

Cash Flow

Year 1

Cash Flow

Year 2

Cash Flow

Year 3

Cash Flow

Year 4

Cash Flow

Discount Rate

-100

N/A

.15

-73

.15

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)

3. It will cost $6,000 to acquire an ice cream cart. Cart sales are expected to be $3,600 a year for three years. After the three years, the cart is expected to be worthless as the expected life of the refrigeration unit is only three years. What is the payback period? (answer: 1.67)

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)

  6. Consider the following two mutually exclusive projects. Use 10% for required rate of return.

Year	Cash flow (A)	Cash Flow (B)
0	(10,110)	(10,110)
1	5,373	4,443
2	3,373	3,543
3	4,473	5,343

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%)
What is the crossover rate for these two projects? (answer: 6.29%)

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:

Ct = net cash inflow for the period
CO = initial investment
r = discount rate
t = number of periods

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 (fyi)

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.”

After that, only the “maybes” were sent to management. This dramatically decreased the amount of time management spend evaluating these projects–that time was decreased by almost a factor of 10.

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, he decided what the most important goals were. You can’t achieve everything at once. In their case, their priorities were removing bottlenecks on growing revenues and minimizing upfront expenditure. So when allocating money, they had a bias for projects that both addressed the bottleneck problem and, for example, used existing tracks and trains.

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.

Wal-Mart Inc (NYSE:WMT) WACC %: 6.83% As of 4/7/2023

As of today (2023-4-7), Walmart's weighted average cost of capital is 6.83%. Walmart's ROIC % is 7.67% (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 %:10.98% As of 4/7/2023

As of today (2023-4-7), Amazon.com's weighted average cost of capital is 10.98%. Amazon.com's ROIC % is 1.87% (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 %:11.03% As of 4/7/2023

As of today (2023-4-7), Apple's weighted average cost of capital is 11.42%. Apple's ROIC % is 31.47% (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 %: 20.31% As of 4/7/2023

As of today (2023-4-7), Tesla's weighted average cost of capital is 19.82%. Tesla's ROIC % is 29.39% (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

Final Exam (4/28 In class, 11:30-2PM)

Or by appointment to take final on Monday, Tuesday, or Wednesday from 11:30-5PM

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 chapter 10)

Review Video (In class)

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

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 PV, r, nper, calculate FV (hint: no pmt)

15. Given FV, r, nper, pmt, calculate PV

16. Given PV, FV, nper, no pmt, calculate for rate

17. Given PV, rate (hint: if monthly, dividend by 12), pmt, calculate for nper (hint: FV=0)

Chapter 6

18-19: What is systematic risk? Unsystematic risk?

20. How to diversify to achieve the goal for diversification?

21. Given beta, r of stock A, beta and r of stock B, calculate market return

22. Given beta, r of stock A, beta and r of stock B, calculate risk free rate

23. Given beta, r of stock A, beta and r of stock B, and given stock C’s beta, calculate its return

24-25. Definition of beta, standard deviation

26, Calculate return given probability of each state of economy, and return under each state of economy.

Chapter 7

27-28. Bond conceptual questions

29. Bond: given nper, bond price, yield to maturity, calculate for coupon rate (hint: use pmt function)

30-31. Given nper, bond price, coupon rate, calculate for yield to maturity, for semi-annual coupon bond and annual coupon bond .

32. Zero coupon bond: given nper, price, calculate for yield to maturity.

33. Calculate current yield

34. Calculate coupon rate

Will use a table similar to the following to ask the above questions

Chapter 8

35. Given dividend yield, Po, calculate for D1.

36. Given r, D0, g, calculate for dividend yield

37. Given D0, g, calculate for D5

38. Given Do, g, and r calculate for Po

39: given Do, g, r, calculate for Po

40. Given D1, g, r, calculate for Po

41. Definitions: dividend yield, capital gain yield

Chapter 10

42-48. Calculate for payback period, NPV, IRR, given CF0 – CF5 and r, calculate crossover rate.

49-50. How to make a capital budgeting decision based on NPV and IRR?

Wishing you a joyful summer break and looking forward to seeing you in the fall!

How To Win The MarketWatch Stock Market Game (youtube, FYI) – finviz example

How Short Selling Works (Short Selling for Beginners) (youtube, FYI)

There's a real probability of recession in 2023, says Thornburg's Jason Brady (youtube)

1. What are the six parts of the financial markets

The time value of money - German Nande (video)

Explaining 4 Financial Statements (youtube)

https://www.nasdaq.com/market-activity/stocks/gpro/financials

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

3 Minutes! Financial Ratios & Financial Ratio Analysis Explained & Financial Statement Analysis

Topic 2 - What Is the Capital Asset Pricing Model?

Topic 3 – “Normal Distribution” – Predict Stock Returns (FYI only)

WMT Dividend History

Stock Splits

Deriving the Gordon Growth Model Equation

Stock Splits Calendar (FYI)

Dividend Calendar (FYI)

Net Present Value NPV Explained with

NPV Example for NPV Calculation (Cartoon, video)

Using Excel for Net Present Values, IRR's and MIRR's

‘Simple Rules’ for Running a Business (fyi)

Tesla WACC %: 20.31% As of 4/7/2023

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