FIN301 Class Web Page, Spring ' 25

Instructor: Maggie Foley

Jacksonville University

The Syllabus PDF file Risk Tolerance Test (FYI) Term Project Guidelines Grade Calculator

Weekly SCHEDULE, LINKS, FILES and Questions

Chapter

Coverage, HW, Supplements

- Required

References

Marketwatch Stock Trading Game (Pass code: havefun)

1. Use the information and directions below to join the game.

1. URL for your game:
https://www.marketwatch.com/game/fin301-25spring

2. Password for this private game: havefun

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

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

· Follow the instructions and start trading!

3. Risk Tolerance Test (FYI)

4. Mutual Fund Selection Game (FYI)

5. Order Type Explained Game (FYI)

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.

Part 1 - Who Wants to Chair the Fed? Quiz 1

Game: https://lewis500.github.io/macro/

The Federal Reserve (Fed) often faces the challenging dilemma of balancing economic growth with price stability - commonly referred to as the trade-off between controlling inflation and minimizing unemployment.

1. Inflation vs. Unemployment

• Raising Interest Rates: Helps control inflation by slowing down spending and investment. However, this can increase unemployment as businesses cut back on hiring or production.
• Lowering Interest Rates: Boosts economic growth and reduces unemployment by encouraging spending and investment. However, it can lead to rising inflation if demand outpaces supply.

2. Long-term Stability vs. Short-term Relief

• The Fed must make decisions that sometimes prioritize long-term economic health (e.g., curbing inflation) over short-term relief for the economy (e.g., reducing unemployment), or vice versa.

3. Uncertainty and Lag Effects

• Monetary policy decisions take time to affect the economy, making it hard to predict their full impact.
• External factors, such as global economic conditions or supply shocks, add to the complexity.

In the game, you play as the Fed chair and must make interest rate decisions to strike this delicate balance while keeping inflation and unemployment within acceptable ranges. Success depends on how well you manage these competing goals over time.

Factors to Consider:

1. Current Inflation Rate:

• Is inflation above or below the Fed’s target (usually 2%)?
• Lowering interest rates could worsen inflation if it's already too high.

2. Unemployment Rate:

• Is unemployment high? If so, a rate cut might stimulate job creation and economic activity.

3. Economic Growth:

• Is the economy slowing down? If GDP growth is sluggish or negative, lowering interest rates can help boost investment and spending.

4. Consumer and Business Confidence:

• Are businesses and consumers optimistic about the future? A rate cut might encourage more borrowing and spending if confidence is low.

5. Financial Market Conditions:

• Are financial markets signaling distress? A lower interest rate could stabilize markets by making borrowing cheaper.

6. Global Economic Trends:

• Are there external pressures, such as a global slowdown or trade disruptions, that might justify lowering rates to cushion the economy?

7. Lag Effects of Monetary Policy:

• How quickly will the rate cut affect the economy? Policy changes take time, so we should consider the timing of their decision.

8. Federal Reserve’s Dual Mandate:

• The Fed is tasked with promoting maximum employment and stable prices. Which goal is more at risk currently?

In-Class Debate: Should the Fed Reduce Interest Rates Soon, or Is It Better to Wait?

• Support your decision with evidence based on the factors above.
• Play the game to help decide.

The next Federal Open Market Committee (FOMC) meeting is scheduled for January 28–29, 2025. Let’s wait and see what unfolds leading up to this critical decision.

Chapter 2 Introduction of Financial Market

ppt quiz 2

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

No homework for chapters 1, 2

The Implications of Trump's Return on U.S. Trade Policy: Will Tariffs and Trade Wars Resurface? (FYI)

Background

Trump's presidency (2017-2021) featured aggressive trade policies, including significant tariffs on China and other trading partners, renegotiations of trade agreements, and discussions about protecting American manufacturing through quotas and tariffs.

Industry	Impact of Tariff	Jobs	Cost of Living	Availability of Goods
Automotive	Tariffs on imported cars or car parts increase production costs.	o Potential job growth in U.S. car manufacturing.	o Cars become more expensive due to higher production and import costs.	o Fewer car options for consumers, especially for foreign brands.
		o - Job losses in assembly plants dependent on imports.
Technology	Tariffs on electronics (e.g., phones, laptops) increase prices for imported components and products.	· May encourage domestic tech manufacturing, creating new jobs.	· Higher prices for electronics like smartphones and laptops.	· Slower availability of new tech or limited models due to disrupted global supply chains.
		· Job losses in export-dependent sectors.
Agriculture	Tariffs on imports like fruits, vegetables, and grains benefit U.S. farmers but lead to retaliation abroad.	o Job growth in domestic farming.	o Food prices increase (e.g., fruits, vegetables, meat) due to higher import costs or reduced supply.	o Seasonal produce may become scarce without imported goods.
		o Job losses in export-heavy states if foreign markets retaliate.
Steel & Aluminum	Tariffs on steel and aluminum imports protect U.S. industries but increase input costs for manufacturers.	· Job creation in steel and aluminum production.	· Higher prices for goods like cars, appliances, and construction materials.	· Domestic materials may meet demand, but global quality or price competition decreases.
		· Job losses in industries that use steel (e.g., construction).
Textiles & Apparel	Tariffs on imported clothes and fabrics raise production costs for retailers.	o Some job growth in U.S. textile production.	o Clothes and shoes become more expensive, especially for foreign brands.	o Fewer affordable clothing options for budget-conscious consumers.
		o Retailers may downsize due to higher costs.
Pharmaceuticals	Tariffs on medicine ingredients from abroad increase drug manufacturing costs.	· Minimal direct impact on jobs; limited reshoring possible due to high costs.	· Higher prices for essential medicines, potentially unaffordable for low-income households.	· Slower production and potential shortages of life-saving drugs.
Energy (Oil & Gas)	Tariffs on imported crude oil or equipment for renewable energy increase domestic production costs.	o Job growth in U.S. oil and gas extraction.	o Higher energy costs (e.g., gas, electricity) due to increased input costs.	o Renewable energy projects may be delayed, reducing clean energy options.
		o Potential slowdown in renewable energy projects.
Consumer Goods	Tariffs on items like furniture, appliances, and toys raise retail prices.	· Few new jobs created, as these goods are often not manufactured domestically.	· Significant price hikes for everyday items, burdening consumers.	· Limited options for foreign brands; delays in availability of popular goods.
Luxury Goods	Tariffs on imported cars, wine, cheese, or designer goods impact high-end consumers and businesses.	o Minimal impact on jobs, as luxury production is already niche.	o Luxury items become much more expensive (e.g., European cars, wines, and fashion).	o Reduced availability of high-end imported goods.

Key Insights

1. Jobs:

• Tariffs generally boost domestic jobs in industries like steel, aluminum, and farming.
• Export-dependent industries (e.g., agriculture, tech) face potential job losses due to retaliation.

2. Cost of Living:

· Prices rise for everyday goods (e.g., food, clothes, electronics) when tariffs increase import costs.

· Higher energy costs can have widespread effects across industries.

3. Availability of Goods:

· Imported goods (e.g., seasonal produce, luxury cars, and tech gadgets) may become limited or delayed.

· Domestic alternatives might not match global competition in terms of quality, price, or innovation.

Now, let’s work on this survey about tariffs. Tariff Survey

Game: Tariff Trade Simulation A simple game

What Determines the Strength of the US Dollar? (self-produced video)

Swiss franc carry trade comes fraught with safe-haven rally risk (FYI)

By Harry Robertson

September 2, 20241:03 AM EDTUpdated 5 months ago

https://www.reuters.com/markets/currencies/swiss-franc-carry-trade-comes-fraught-with-safe-haven-rally-risk-2024-09-02/

LONDON, Sept 2 (Reuters) - As investors turn to the Swiss franc as an alternative to Japan's yen to fund carry trades, the risk of the currency staging one of its rapid rallies remains ever present.

The Swiss franc has long been used in the popular strategy where traders borrow currencies with low interest rates then swap them into others to buy higher-yielding assets.

Its appeal has brightened further as the yen's has dimmed. Yen carry trades imploded in August after the currency rallied hard on weak U.S. economic data and a surprise Bank of Japan rate hike, helping spark global market turmoil.

The Swiss National Bank (SNB) was the first major central bank to kick off an easing cycle earlier this year and its key interest rate stands at 1.25%, allowing investors to borrow francs cheaply to invest elsewhere.

By comparison, interest rates are in a 5.25%-5.50% range in the United States, 5% in Britain, and 3.75% in the euro zone.

"The Swiss franc is back as a funding currency," said Benjamin Dubois, global head of overlay management at Edmond de Rothschild

STABILITY

The franc is near its highest in eight months against the dollar and in nine years against the euro , reflecting its status as a safe-haven currency and expectations for European and U.S. rate cuts.

But investors hope for a gradual decline in the currency's value that could boost the returns on carry trades.

Speculators have held on to a $3.8 billion short position against the Swiss franc even as they have abruptly moved to a $2 billion long position on the yen , U.S. Commodity Futures Trading Commission data shows.

"There is more two-way risk now in the yen than there has been for quite some time," said Bank of America senior G10 FX strategist Kamal Sharma. "The Swiss franc looks the more logical funding currency of choice."

BofA recommends investors buy sterling against the franc , arguing the pound can rally due to the large interest rate gap between Switzerland and Britain, in a call echoed by Goldman Sachs.

The SNB appears set to cut rates further in the coming months as inflation dwindles. That would lower franc borrowing costs and could weigh on the currency, making it cheaper to pay back for those already borrowing it.

Central bankers also appear reluctant to see the currency strengthen further, partly because of the pain it can cause exporters. BofA and Goldman Sachs say they believe the SNB stepped in to weaken the currency in August.

"The SNB will likely guard against currency appreciation through intervention or rate cuts as required," said Goldman's G10 currency strategist Michael Cahill.

'INHERENTLY RISKY'

Yet the Swissie, as it is known in currency markets, can be an unreliable friend.

Investors are prone to pile into the currency when they get nervous, thanks to its long-standing safe-haven reputation.

Cahill said the franc is best used as a funding currency at moments when investors are feeling optimistic.

A quick rally in the currency used to fund carry trades can wipe out gains and cause investors to rapidly unwind their positions, as the yen drama showed. High levels of volatility or a drop in the higher-yielding currency can have the same effect.

The SNB and Swiss regulator Finma declined to comment when asked by Reuters about the impact of carry trades on the Swiss currency.

As stock markets tumbled in early August, the Swiss franc jumped as much as 3.5% over two days. The franc-dollar pair has proven sensitive to the U.S. economy, often rallying hard on weak data that causes U.S. Treasury yields to fall.

"Any carry trade is inherently risky and this is particularly true for those funded with safe-haven currencies," said Michael Puempel, FX strategist at Deutsche Bank.

"The main risk is that when yields move lower in a risk-off environment, yield differentials compress and the Swiss franc can rally," Puempel added.

A gauge of how much investors expect the Swiss currency to move , derived from options prices, is currently at around its highest since March 2023.

"Considering the central banks, you can see how there may be more sentiment for some carry players to prefer the franc over the yen," said Nathan Vurgest, head of trading at Record Currency Management.

"The ultimate success of this carry trade might still be dependent on how quickly it can be closed in a risk-off scenario," Vurgest said, referring to a moment where investors cut their riskier trades to focus on protecting their cash.

Get the latest news and expert analysis about the state of the global economy with the Reuters Econ World newsletter. Sign up here.

Reporting by Harry Robertson; Editing by Dhara Ranasinghe and Alexander Smith

Key Insights from the Article:

1. Swiss Franc as a Funding Currency:

• The Swiss franc has gained popularity as a funding currency for carry trades due to its low-interest rate (1.25%), particularly as the yen has become less favorable after recent volatility and a surprise rate hike by the Bank of Japan.

2. Carry Trade Dynamics:

• Investors borrow currencies with low interest rates (e.g., the Swiss franc) and invest in higher-yielding currencies like the British pound or U.S. dollar.
• The attractiveness of the Swiss franc is tied to its low borrowing costs and the potential for a gradual decline in its value.

3. Safe-Haven Risks:

• The Swiss franc's safe-haven status introduces risk for carry trades. In times of market stress, investors flock to the franc, causing it to rally and potentially wiping out carry trade gains.
• This was evident when the franc jumped 3.5% over two days in early August during stock market turmoil.

4. Central Bank Influence:

• The Swiss National Bank (SNB) is expected to cut rates further, which could lower borrowing costs for the franc and make it cheaper for carry trades.
• The SNB appears to actively intervene in the currency market to prevent excessive appreciation, supporting exporters and stabilizing the economy.

5. Strategist Views:

• Bank of America and Goldman Sachs favor the Swiss franc as a funding currency over the yen due to reduced volatility and predictability.
• BofA and Goldman Sachs recommend buying higher-yielding currencies like sterling against the franc to benefit from interest rate differentials.

6. Risks of Swiss Franc Carry Trades:

• Sudden rallies in the franc (often triggered by safe-haven demand or weak U.S. data) pose significant risks to carry trades.
• Yield compression in risk-off scenarios can amplify losses for traders.

7. Investor Sentiment:

• The success of Swiss franc carry trades depends on investor optimism and the ability to close trades quickly during market stress.
• Volatility expectations for the franc are currently elevated, reflecting concerns about market risks.

This analysis highlights the opportunities

Chapter 5 Time value of Money

ppt Quiz 3 Quiz 4

Key Topics Covered:

1. Future Value (FV):

· Definition: The amount of money an investment will grow to after earning interest over a specific period.

· Formula: See the column to the right for details.

· Application: Learn how to calculate the future value of savings or investments.

2. Present Value (PV):

· Definition: The current worth of a future sum of money or cash flow, discounted at a specific rate.

· Formula: See the column to the right for details.

· Application: Understand how to assess the value of future payments or investments today.

3. Payment (PMT):

· Definition: The fixed payment required to repay a loan over time, including interest.

· Formula: See the column to the right for details.

· Application: Learn how to calculate payments for loans, such as car loans or mortgages.

4. Interest Rate (Rate):

· Definition: The rate of return or cost of borrowing, expressed as a percentage.

· Formula: See the column to the right for details.

· Application: Learn how to determine the interest rate needed to achieve a financial goal.

5. Number of Periods (NPER):

· Definition: The number of time periods required for an investment to reach a specific future value or for a loan to be paid off.

· Formula: See the column to the right for details.

· Application: Determine how long it will take to save or grow your money.

6. Net Present Value (NPV), Net Future Value (NFV)

· Net Present Value (NPV): The difference between the present value of cash inflows and outflows over a period of time. It is used to assess the profitability of an investment or project.

· Net Future Value (NFV): The future value of all cash inflows and outflows accumulated at a specific interest rate. It provides a measure of the total future worth of an investment.

7. Effective Annual Rate (EAR) and Annual Percentage Rate (APR)

· Effective Annual Rate (EAR):
The actual annual interest rate, accounting for compounding periods. It represents the true cost of borrowing or return on investment.

· Annual Percentage Rate (APR):
The nominal annual interest rate that does not account for compounding within the year. It is commonly used for loans and credit products to standardize interest rate disclosures.

8. Ordinary Annuity (PMT) and Annuity Due (PMT, type=1)

• Ordinary Annuity (PMT):
Payments are made at the end of each period. Used for loans, retirement savings, and mortgages.

• Annuity Due (PMT, type=1):
Payments are made at the beginning of each period. Common in lease agreements and insurance premiums.

Real-World Applications:

1. Planning for the Future:

o Use TVM concepts to plan for retirement, save for large purchases, or achieve financial goals.

2. Loan Management:

o Calculate loan payments for car loans, mortgages, or student loans.

o Compare loans and understand the cost of borrowing.

3. Credit Card Decisions:

o Evaluate interest rates and payment terms to choose the best credit card.

4. Investment Opportunities:

o Compare investment options by calculating present and future values.

Key Takeaways:

• Money has a time value, meaning it grows with interest or decreases in purchasing power due to inflation.
• Understanding TVM concepts helps in making informed financial decisions, like choosing investments or managing debt.
• Practical applications include savings growth, loan payments, and credit card evaluation.

The time value of money - German Nande (video)

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

Chapter 5 – Escape Room – To Earn Fake Etherum and Meme Coins

Questions in the escape room exercises:

1. You are investing $5,000 (Present Value) in an account that earns 4% annual interest (Rate) for 8 years (Number of Periods). What is the Future Value of your investment? (fv=abs(fv(4%, 8, 0, 5000)), or fv =5000*(1+4%)^8)

2. You are investing $3,000 (Present Value) in an account that earns 3% annual interest (Rate) for 12 years (Number of Periods). What is the Future Value of your investment? (fv=abs(fv(3%, 12, 0, 3000)), or fv =3000*(1+3%)^12)

3. You need $20,000 in 10 years (Future Value) and can earn 3% annual interest (Rate). What is the Present Value of your investment? (pv=abs(pv(3%, 10, 0, 20000)), or pv =20000/(1+3%)^10)

4. You need $15,000 in 5 years (Future Value) and can earn 2% annual interest (Rate). What is the Present Value of your investment? (pv=abs(pv(2%, 5, 0, 15000)), or pv =15000/(1+2%)^5)

5. You invested $5,000 (Present Value) and it grew to $6,500 (Future Value) in 5 years. What was the annual interest rate? (rate=rate(5, 0, 5000, -6500)), or rate = ln(6500/5000)^(1/5)-1)

6. You invested $8,000 (Present Value) and it grew to $10,000 (Future Value) in 6 years. What was the annual interest rate? (rate=rate(6, 0, 8000, -10000)), or rate = ln(10000/5=6000)^(1/6)-1)

7. You invested $5,000 (Present Value) at an annual interest rate of 4% and it grew to $6,000 (Future Value). How many years did it take? (nper = nper(4%, 0, 5000, -6000), nper = ln(6000/5000)/(ln(1+4%))

8. You invested $10,000 (Present Value) at an annual interest rate of 5% and it grew to $15,000 (Future Value). How many years did it take? (nper = nper(5%, 0,10000, -15000), nper = ln(15000/10000)/(ln(1+5%))

9. You take a $30,000 loan (Present Value) at 4% annual interest (Rate) for 5 years (Number of Periods). What is your monthly payment? (pmt=pmt(4%/12, 5*12, 30000, 0))

10. You take a $20,000 loan (Present Value) at 3% annual interest (Rate) for 10 years (Number of Periods). What is your monthly payment? (pmt=pmt(3%/12, 10*12, 20000, 0))

Chapter 5 Homework (due with the first mid term)

1. You deposit $5,000 in a saving account at 10% compounded annually. How much is your first year interest? How much is your second year interest? (500, 550)

2. What is the future value of $5,000 invested for 3 years at 10% compounded annually? ( 6,655)

3. You just bought a TV for $518.4 on credit card. You plan to pay back of $50 a month for this credit card debt. The credit card charges you 12% of interest rate on the monthly basis. So how long does it take to pay back your credit card debt? (11 months)

4. You are going to deposit certain amount in the next four years. Your saving account offers 5% of annual interest rate.

First year: $800

Second year: $900

Third year: $1000

Fourth year: $1200.

How much you can withdraw four years later? (4168.35) (hint: refer to https://www.jufinance.com/nfv/ )

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) (Hint: use npv function in excel)

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%) (hint: use effect function in excel)

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)

www.jufinance.com/nfv

Time Value of Money Calculator

http://www.jufinance.com/tvm/

Chapter 3 Financial Statement Analysis

Ppt Quiz on BS and IS Quiz on Cash Flow Statement

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

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

Nike’s Income Statement

Period Ending:	5/31/2024	5/31/2023	5/31/2022	5/31/2021
Total Revenue	$51,362,000	$51,217,000	$46,710,000	$44,538,000
Cost of Revenue	$28,475,000	$28,925,000	$25,231,000	$24,576,000
Gross Profit	$22,887,000	$22,292,000	$21,479,000	$19,962,000
Operating Expenses
Research and Development	--	--	--	--
Sales, General and Admin.	$16,576,000	$16,377,000	$14,804,000	$13,025,000
Non-Recurring Items	--	--	--	--
Other Operating Items	--	--	--	--
Operating Income	$6,311,000	$5,915,000	$6,675,000	$6,937,000
Add'l income/expense items	$228,000	$280,000	$181,000	($14,000)
Earnings Before Interest and Tax	$6,700,000	$6,201,000	$6,651,000	$6,661,000
Interest Expense	--	--	--	--
Earnings Before Tax	$6,700,000	$6,201,000	$6,651,000	$6,661,000
Income Tax	$1,000,000	$1,131,000	$605,000	$934,000
Minority Interest	--	--	--	--
Equity Earnings/Loss Unconsolidated Subsidiary	--	--	--	--
Net Income-Cont. Operations	$5,700,000	$5,070,000	$6,046,000	$5,727,000
Net Income	$5,700,000	$5,070,000	$6,046,000	$5,727,000
Net Income Applicable to Common Shareholders	$5,700,000	$5,070,000	$6,046,000	$5,727,000

Nike’s Balance Sheet

Period Ending:	5/31/2024	5/31/2023	5/31/2022	5/31/2021
Current Assets
Cash and Cash Equivalents	$9,860,000	$7,441,000	$8,574,000	$9,889,000
Short-Term Investments	$1,722,000	$3,234,000	$4,423,000	$3,587,000
Net Receivables	$4,427,000	$4,131,000	$4,667,000	$4,463,000
Inventory	$7,519,000	$8,454,000	$8,420,000	$6,854,000
Other Current Assets	$1,854,000	$1,942,000	$2,129,000	$1,498,000
Total Current Assets	$25,382,000	$25,202,000	$28,213,000	$26,291,000
Long-Term Assets
Long-Term Investments	--	--	--	--
Fixed Assets	$7,718,000	$8,004,000	$7,717,000	$8,017,000
Goodwill	$240,000	$281,000	$284,000	$242,000
Intangible Assets	$259,000	$274,000	$286,000	$269,000
Other Assets	--	--	--	--
Deferred Asset Charges	$4,511,000	$3,770,000	$3,821,000	$2,921,000
Total Assets	$38,110,000	$37,531,000	$40,321,000	$37,740,000
Current Liabilities
Accounts Payable	$9,110,000	$8,825,000	$9,800,000	$9,205,000
Short-Term Debt / Current Portion of Long-Term Debt	$1,006,000	$6,000	$510,000	$2,000
Other Current Liabilities	$477,000	$425,000	$420,000	$467,000
Total Current Liabilities	$10,593,000	$9,256,000	$10,730,000	$9,674,000
Long-Term Debt	$7,903,000	$8,927,000	$8,920,000	$9,413,000
Other Liabilities	$2,566,000	$2,786,000	$2,777,000	$2,931,000
Deferred Liability Charges	$2,618,000	$2,558,000	$2,613,000	$2,955,000
Misc. Stocks	--	--	--	--
Minority Interest	--	--	--	--
Total Liabilities	$23,680,000	$23,527,000	$25,040,000	$24,973,000
Stock Holders Equity
Common Stocks	$3,000	$3,000	$3,000	$3,000
Capital Surplus	$965,000	$1,358,000	$3,476,000	$3,179,000
Retained Earnings	--	--	--	--
Treasury Stock	$13,409,000	$12,412,000	$11,484,000	$9,965,000
Other Equity	$53,000	$231,000	$318,000	($380,000)
Total Equity	$14,430,000	$14,004,000	$15,281,000	$12,767,000
Total Liabilities & Equity	$38,110,000	$37,531,000	$40,321,000	$37,740,000

Nike’s Cash Flow Statement

Period Ending:	5/31/2024	5/31/2023	5/31/2022	5/31/2021
Net Income	$5,700,000	$5,070,000	$6,046,000	$5,727,000
Cash Flows-Operating Activities
Depreciation	$844,000	$859,000	$840,000	$797,000
Net Income Adjustments	$169,000	$425,000	($38,000)	$88,000
Changes in Operating Activities
Accounts Receivable	($329,000)	$489,000	($504,000)	($1,606,000)
Changes in Inventories	$908,000	($133,000)	($1,676,000)	$507,000
Other Operating Activities	($260,000)	($644,000)	($845,000)	($182,000)
Liabilities	$397,000	($225,000)	$1,365,000	$1,326,000
Net Cash Flow-Operating	$7,429,000	$5,841,000	$5,188,000	$6,657,000
Cash Flows-Investing Activities
Capital Expenditures	($812,000)	($969,000)	($758,000)	($695,000)
Investments	$1,721,000	$1,481,000	($747,000)	($3,276,000)
Other Investing Activities	($15,000)	$52,000	($19,000)	$171,000
Net Cash Flows-Investing	$894,000	$564,000	($1,524,000)	($3,800,000)
Cash Flows-Financing Activities
Sale and Purchase of Stock	($3,583,000)	($4,829,000)	($2,863,000)	$564,000
Net Borrowings	--	($500,000)	--	($197,000)
Other Financing Activities	($136,000)	($102,000)	($151,000)	($136,000)
Net Cash Flows-Financing	($5,888,000)	($7,447,000)	($4,836,000)	($1,459,000)
Effect of Exchange Rate	($16,000)	($91,000)	($143,000)	$143,000
Net Cash Flow	$2,419,000	($1,133,000)	($1,315,000)	$1,541,000

Nike’s Financial Ratios

Period Ending:	5/31/2024	5/31/2023	5/31/2022	5/31/2021
Liquidity Ratios
Current Ratio	239.61%	272.28%	262.94%	271.77%
Quick Ratio	168.63%	180.94%	184.46%	200.92%
Cash Ratio	109.34%	115.33%	121.13%	139.30%
Profitability Ratios
Gross Margin	44.56%	43.52%	45.98%	44.82%
Operating Margin	12.29%	11.55%	14.29%	15.58%
Pre-Tax Margin	13.04%	12.11%	14.24%	14.96%
Profit Margin	11.10%	9.90%	12.94%	12.86%
Pre-Tax ROE	46.43%	44.28%	43.52%	52.17%
After Tax ROE	39.50%	36.20%	39.57%	44.86%

Nike vs GoPro Financial Summary

Category	Nike (FY 2024)	GoPro (FY 2023)
Revenue Performance	Stable, slight increase in revenue ($51.36B)	Declining for three consecutive years ($1.01B)
Profitability	Strong, with improved profit margin (11.10%)	Negative profitability, with a net loss of $53.18M
Operating Income	Positive at $6.31B, indicating strong operations	Negative at -$75.46M, signaling inefficiency
Net Income	Increased to $5.70B, reflecting efficiency	Net loss of $53.18M, reversing 2022 gains
Profit Margin	Improved to 11.10%, showing better cost control	Negative (-5.29%), meaning GoPro is losing money
Liquidity (Current Ratio)	Strong (239.61%), ensuring financial flexibility	Declining (172.91%), reducing financial flexibility
Cash Flow from Operations	Strong positive at $7.43B	Negative (-$32.86M), showing cash burn
Financial Stability	Financially stable with strong cash flow and profit growth	Struggling with declining revenue and operational inefficiencies
Key Concerns	Slow revenue growth but strong liquidity and profitability	Revenue decline, weak profitability, and cash flow struggles
Overall Conclusion	Nike remains in a strong financial position with steady profitability and strong liquidity.	GoPro is in financial distress, with losses, declining revenue, and weakening financial stability.

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

Nike Stock Performance (finance.yahoo.com)

https://finance.yahoo.com/quote/NKE/

Metric	Nike	GoPro
1-Year Performance	-	-68.44%
Previous Close Price	$74.39	$1.00
Opening Price	$74.45	$1.01
Current Price	$76.66	$1.01
Market Cap	$113.38B	$156.31M
Beta (5Y Monthly)	1.03 (Stable volatility)	1.56 (Higher volatility)
P/E Ratio (TTM)	23.66	N/A
EPS (TTM)	$3.24	-$2.61
52-Week Range	$70.32 - $107.43	$1.00 - $3.15
Forward Dividend	$1.60 (2.08%)	None
1-Year Target Estimate	$86.78	$1.35

Observations:

• Performance: Nike's stock is stable compared to GoPro's sharp decline of over 68% in one year.
• Market Size: Nike is significantly larger with a market cap of $113.38B compared to GoPro's $156.31M.
• Profitability: Nike's positive P/E ratio and EPS indicate profitability, while GoPro's negative EPS highlights ongoing losses.
• Volatility: GoPro's higher beta reflects greater risk and price fluctuations compared to Nike's stable beta.
• Dividends: Nike pays a consistent dividend, while GoPro does not.

******* 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’s Income Statement

Period Ending:	12/31/2023	12/31/2022	12/31/2021	12/31/2020
Total Revenue	$1,005,459	$1,093,541	$1,161,084	$891,925
Cost of Revenue	$681,886	$686,713	$683,979	$577,411
Gross Profit	$323,573	$406,828	$477,105	$314,514
Operating Expenses
Research and Development	$165,688	$139,885	$141,494	$131,589
Sales, General and Admin.	$233,348	$227,988	$222,395	$219,744
Non-Recurring Items	--	--	--	--
Other Operating Items	--	--	--	--
Operating Income	($75,463)	$38,955	$113,216	($36,819)
Add'l income/expense items	$12,429	$1,740	($176)	($4,881)
Earnings Before Interest and Tax	($63,034)	$40,695	$113,040	($41,700)
Interest Expense	$4,699	$6,242	$22,940	$20,257
Earnings Before Tax	($67,733)	$34,453	$90,100	($61,957)
Income Tax	($14,550)	$5,606	($281,071)	$4,826
Minority Interest	--	--	--	--
Equity Earnings/Loss Unconsolidated Subsidiary	--	--	--	--
Net Income-Cont. Operations	($53,183)	$28,847	$371,171	($66,783)
Net Income	($53,183)	$28,847	$371,171	($66,783)
Net Income Applicable to Common Shareholders	($53,183)	$28,847	$371,171	($66,783)

GoPro’s Balance Sheet

Period Ending:	12/31/2023	12/31/2022	12/31/2021	12/31/2020
Current Assets
Cash and Cash Equivalents	$222,708	$223,735	$401,087	$327,654
Short-Term Investments	$23,867	$143,602	$137,830	--
Net Receivables	$91,452	$77,008	$114,221	$107,244
Inventory	$106,266	$127,131	$86,409	$97,914
Other Current Assets	$38,298	$34,551	$42,311	$23,872
Total Current Assets	$482,591	$606,027	$781,858	$556,684
Long-Term Assets
Long-Term Investments	--	--	--	--
Fixed Assets	$27,415	$35,146	$46,323	$55,271
Goodwill	$146,459	$146,459	$146,459	$146,459
Intangible Assets	--	--	--	$1,214
Other Assets	$311,486	$289,293	$285,239	$11,771
Deferred Asset Charges	--	--	--	--
Total Assets	$967,951	$1,076,925	$1,259,879	$771,399
Current Liabilities
Accounts Payable	$212,661	$210,525	$300,117	$225,175
Short-Term Debt / Current Portion of Long-Term Debt	--	--	$122,391	--
Other Current Liabilities	$66,433	$65,403	$52,324	$37,518
Total Current Liabilities	$279,094	$275,928	$474,832	$262,693
Long-Term Debt	$92,615	$141,017	$111,289	$218,172
Other Liabilities	$40,396	$48,421	$57,844	$74,516
Deferred Liability Charges	--	--	--	--
Misc. Stocks	--	--	--	--
Minority Interest	--	--	--	--
Total Liabilities	$412,105	$465,366	$643,965	$555,381
Stock Holders Equity
Common Stocks	$998,373	$960,903	$1,008,872	$980,147
Capital Surplus	($249,296)	($196,113)	($279,345)	($650,516)
Retained Earnings	($193,231)	($153,231)	($113,613)	($113,613)
Treasury Stock	--	--	--	--
Other Equity	--	--	--	--
Total Equity	$555,846	$611,559	$615,914	$216,018
Total Liabilities & Equity	$967,951	$1,076,925	$1,259,879	$771,399

GoPro’s Cash Flow Statement

Period Ending:	12/31/2023	12/31/2022	12/31/2021	12/31/2020
Net Income	($53,183)	$28,847	$371,171	($66,783)
Cash Flows-Operating Activities
Depreciation	$6,160	$8,570	$10,962	$19,065
Net Income Adjustments	$20,986	$48,452	($214,299)	$71,007
Changes in Operating Activities
Accounts Receivable	($14,478)	$37,829	($8,142)	$93,084
Changes in Inventories	$20,865	($40,722)	$11,505	$46,322
Other Operating Activities	($7,649)	$7,922	($17,513)	$6,392
Liabilities	($5,564)	($85,151)	$75,469	($75,305)
Net Cash Flow-Operating	($32,863)	$5,747	$229,153	$93,782
Cash Flows-Investing Activities
Capital Expenditures	($1,520)	($3,447)	($5,545)	($4,881)
Investments	$123,422	($4,941)	($138,174)	$14,830
Other Investing Activities	--	--	--	($438)
Net Cash Flows-Investing	$121,902	($8,388)	($143,719)	$9,511
Cash Flows-Financing Activities
Sale and Purchase of Stock	($36,124)	($34,859)	$7,490	$5,435
Net Borrowings	($46,250)	($125,000)	--	$77,501
Other Financing Activities	($8,008)	($13,410)	($17,379)	($6,207)
Net Cash Flows-Financing	($90,382)	($173,269)	($9,889)	$71,977
Effect of Exchange Rate	$316	($1,442)	($2,112)	$2,083
Net Cash Flow	($1,027)	($177,352)	$73,433	$177,353

GoPro’s Financial Ratios

Period Ending:	12/31/2023	12/31/2022	12/31/2021	12/31/2020
Liquidity Ratios
Current Ratio	172.91%	219.63%	164.66%	211.91%
Quick Ratio	134.84%	173.56%	146.46%	174.64%
Cash Ratio	88.35%	133.13%	113.50%	124.73%
Profitability Ratios
Gross Margin	32.18%	37.20%	41.09%	35.26%
Operating Margin	-7.51%	3.56%	9.75%	-4.13%
Pre-Tax Margin	-6.74%	3.15%	7.76%	-6.95%
Profit Margin	-5.29%	2.64%	31.97%	-7.49%
Pre-Tax ROE	-12.19%	5.63%	14.63%	-28.68%
After Tax ROE	-9.57%	4.72%	60.26%	-30.92%

*

GoPro Stock performance ( finance.yahoo.com )

https://finance.yahoo.com/quote/GPRO/

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)

http://www.jufinance.com/ratio

*

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

· Self produced video On Cash Flow Statement

· Cash Flows Explained (youtbe)

· Quiz – Cash In or Cash Out?

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 First midterm exam)

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 Quiz on Financial Ratios

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

Ratios & Margins Nike Inc. Cl B

All values updated annually at fiscal year end

Valuation

Category	Metric
P/E Ratio (TTM)	23.14
P/E Ratio (including extraordinary items)	23.05
Price to Sales Ratio	2.83
Price to Book Ratio	9.9
Price to Cash Flow Ratio	19.57
Enterprise Value to EBITDA	16.4
Enterprise Value to Sales	2.29
Total Debt to Enterprise Value	0.08
Total Debt to EBITDA	1.3
EPS (recurring)	3.72
EPS (basic)	3.76
EPS (diluted)	3.73
Revenue/Employee	647,179
Income Per Employee	71,788
Receivables Turnover	12.01
Total Asset Turnover	1.36
Current Ratio	2.4
Quick Ratio	1.69
Cash Ratio	1.09
Gross Margin	44.01%
Operating Margin	11.76%
Pretax Margin	13.04%
Net Margin	11.09%
Return on Assets	15.07%
Return on Equity	40.09%
Return on Total Capital	23.01%
Return on Invested Capital	22.52%
Total Debt to Total Equity	82.83%
Total Debt to Total Capital	45.30%
Total Debt to Total Assets	31.36%
Interest Coverage	23.15
Long-Term Debt to Equity	72.55%
Long-Term Debt to Total Capital	39.68%
Long-Term Debt to Assets	27.00%

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 $2,000 and a debt-equity ratio of 2. What is the value of the total assets?  (answer: $6,000)

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: 66.67%. Hint: TE= 15 million; NI =10 million)

Firm Midterm Exam

Solutions T/F Calculations

Study Guide

2.25. - In Class Exam - Closed Book Closed Notes

• 30 True/False Questions covering Chapters 3, 4, and 5, similar to the quizzes completed in class.
• 20 Calculation Questions similar to the homework and in-class exercises.
• Sample Questions

Time Value of Money (TVM) - You Should Know:

• Future Value (FV) – How much money will be worth in the future if it earns interest.
• Present Value (PV) – How much a future amount of money is worth today.
• Payment (PMT) – The fixed amount you pay or receive regularly (e.g., loan or savings).
• Interest Rate (Rate, r) – The percentage of money earned or charged over time.
• Number of Periods (NPER) – How long an investment or loan lasts (e.g., years, months).
• Net Present Value (NPV) – If an investment is worth it today after considering future cash flows.
• Net Future Value (NFV) – The total future value of all cash flows combined.
• Effective Annual Rate (EAR) – The true interest rate after considering compounding.
• Annual Percentage Rate (APR) – The yearly interest rate without compounding.
• Ordinary Annuity – Regular payments made at the end of each period (e.g., loans, savings).
• Annuity Due – Regular payments made at the beginning of each period (e.g., rent, leases).

Financial Statements - You Should Know:

• Income Statement – Shows how much money a company made and spent (Revenue – Expenses = Profit).
• Balance Sheet – A snapshot of what a company owns (assets) and owes (liabilities) at a moment in time.
• Cash Flow Statement – Shows where a company’s cash comes from and where it goes (Operating, Investing, Financing).
• Revenue – The money a company makes from sales.
• Expenses – The costs of running a business (e.g., rent, wages, materials).
• Net Income (Profit) – Money left after paying all expenses.

Cash Flow - You Should Know:

Understanding cash flow is important because it shows how money moves in and out of a business. Even if a company is profitable, it can still run out of cash if it doesn’t manage its finances well.

1. What is Cash Flow?

• Cash Flow = The amount of cash coming in and going out of a business.
• If a company has positive cash flow, it has more money coming in than going out.
• If a company has negative cash flow, it is spending more than it is earning.

2. Three Sections of the Cash Flow Statement

Operating Activities (Day-to-Day Business Cash Flow)

• Shows cash from the company's main business activities.
• Examples of cash inflows (money coming in):
• Revenue from selling goods or services.
• Cash received from customers.
• Examples of cash outflows (money going out):
• Paying employees' salaries.
• Paying rent, utilities, and other business expenses.
• Paying suppliers for materials.

Investing Activities (Buying & Selling Assets)

• Shows cash spent on investments and long-term assets.
• Examples of cash inflows:
• Selling equipment or buildings.
• Selling stocks or other investments.
• Examples of cash outflows:
• Buying new machinery, land, or buildings.
• Investing in other companies.
• Key Concept: If a company spends a lot on investments, it may show negative cash flow, but that doesn’t mean it's bad—it might be growing!

Financing Activities (Raising Money & Paying Debt)

• Shows how a company raises cash (borrowing money, selling stock) and spends cash (paying dividends, repaying debt).
• Examples of cash inflows:
• Taking out a loan.
• Selling company stock.
• Examples of cash outflows:
• Paying back loans.
• Paying dividends to shareholders.
• Buying back company shares.
• Key Concept: A company that borrows too much might struggle later when repaying loans!

3. Cash Flow vs. Profit – What’s the Difference?

• Profit (Net Income) – Shows how much money a company makes after expenses, but it doesn't mean the company actually has cash on hand.
• Cash Flow – Shows actual cash movement. A company can be profitable but still run out of money if it doesn’t collect cash quickly.

Example: A company sells $10,000 worth of products but only collects $2,000 in cash now. Profit looks good on paper, but cash flow is low, which could cause trouble paying bills!

4. Why is Cash Flow Important?

· Tells if a company can survive – A company needs enough cash to pay expenses.

· Shows real financial health – Net income (profit) can be misleading, but cash flow is real.

· Helps in decision-making – Investors look at cash flow to see if a company is a good investment.

5. Key Cash Flow Red Flags

· Negative Operating Cash Flow – The company isn't making enough money from its business.

· High Debt Payments – If too much cash is going toward debt, the company may struggle.

· Declining Free Cash Flow – Less money available for growth or returning money to investors.

Final Takeaways

• Cash Flow Statement = Cash in vs. Cash out in three sections (Operating, Investing, Financing).
• Positive cash flow = good, but negative cash flow in some areas (like investing) isn’t always bad.
• Net profit <> cash flow è A company can be profitable but still run out of cash.
• Investors focus on Free Cash Flow (FCF) to see if a company is strong.

Financial Ratios - You Should Know:

Liquidity Ratios (Can a company pay its short-term bills?)

• Current Ratio – Can the company cover short-term debts? (Higher is better, >1 is ideal).
• Quick Ratio – Can the company pay short-term debts without selling inventory?

Profitability Ratios (Is the company making money?)

• Gross Margin – Profit after deducting production costs.
• Operating Margin – Profit after deducting operating expenses.
• Net Profit Margin – How much of each dollar in sales is actual profit.
• Return on Assets (ROA) – How well the company uses assets to make profit.
• Return on Equity (ROE) – How well the company uses investor money to make profit.

Efficiency Ratios (How well does the company use its assets?)

• Total Asset Turnover – How efficiently the company generates sales from its assets.
• Inventory Turnover – How often inventory is sold and replaced.

Leverage Ratios (How much debt does the company have?)

• Debt Ratio – The percentage of assets financed by debt.
• Debt-to-Equity Ratio – How much debt the company has compared to its equity.

Market Ratios (How valuable is the company’s stock?)

• Price-to-Earnings (P/E) Ratio – How much investors are willing to pay per $1 of earnings.
• Earnings Per Share (EPS) – Profit per share of stock.

Final Reminders:

• Time Value of Money means money today is worth more than money in the future.
• Financial Statements tell us if a company is doing well or struggling.
• Ratios help compare companies and understand their strengths and weaknesses.

Chapter 6 Risk and Return

ppt Quiz on Diversification Quiz on CAPM ICE Data and Results

Topic 1: Single Stock - Risk and Return Tradeoff

Calculator

Given a probability distribution of returns, the expected return can be calculated using the following equation:

where

• E[R] = the expected return on the stock,
• N = the number of states,
• p_i = the probability of state i, and
• R_i = the return on the stock in state i.

https://www.zenwealth.com/businessfinanceonline/RR/ExpectedReturn.html

Given an asset's expected return, its variance can be calculated using the following equation:

where

• N = the number of states,
• p_i = the probability of state i,
• R_i = the return on the stock in state i, and
• E[R] = the expected return on the stock.

The standard deviation is calculated as the positive square root of the variance.

https://www.zenwealth.com/businessfinanceonline/RR/MeasuresOfRisk.html

Exercise:

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? Standard deviation?

Solution: 

· Expected return = 10%*(-30%)) + 20%*(-2%) + 40% *10% + 20%*18% + 10%*40% = 8.2%

· Standard deviation (not required)

= sqrt(10%*(-30%-8.2%)² + 20%*(-2%-8.2%)² +40%*(10%-8.2%)² + 20%*(18%-8.2%)² +10%*(40%-8.2%)²) = 16.98%

Or,  https://www.jufinance.com/return/

Drawbacks of Holding One Stock:

· Holding only one stock is risky due to lack of diversification.

· All your “eggs” are in one basket, so company-specific bad news can severely hurt your portfolio.

· This concentration leads to high volatility and uncompensated risk – risk that could be diversified away but isn’t.

Topic 2: A Portfolio with Two Stocks - Risk and Return Tradeoff Quiz

Key Insights on Two-Stock Portfolio and Diversification

1. Diversification Lowers Risk: Adding a second stock reduces overall portfolio risk, as long as the stocks are not perfectly correlated.
2. Risk Reduction Without Sacrificing Return: Diversification lowers volatility while keeping expected returns stable.
3. Correlation Matters:

1) If two stocks have high correlation (+1), they move together, offering little risk reduction.

2) If they have low correlation (~0), they move independently, reducing overall volatility.

3) If they have negative correlation (-1), one stock rises while the other falls, potentially eliminating risk.

4. Example: Pairing an airline stock with a social media stock (low correlation) smooths out portfolio swings. If airline profits fall due to rising fuel costs, the social media stock might not be affected, helping stabilize returns.
5. Bottom Line: The lower the correlation between stocks, the better the risk reduction, making a diversified portfolio more stable than holding a single stock.

For example: By thoughtfully selecting stocks with varying correlations to NVIDIA, investors can construct a portfolio that balances potential returns with reduced risk.

1. NVIDIA and Intel Corporation (INTC):

• Correlation: Approximately 0.29 over the past 90 days, indicating a modest positive relationship. Macroaxis+1Macroaxis+1
• Implication: While both are in the semiconductor industry, their stock movements aren't perfectly aligned. Adding Intel to a portfolio with NVIDIA can slightly reduce risk due to their modest correlation.

2. NVIDIA and Amazon.com Inc. (AMZN):

• Correlation: Around -0.08 over the past 90 days, suggesting a slight negative relationship. Macroaxis+1Macroaxis+1
• Implication: Amazon operates in e-commerce and cloud computing, sectors different from NVIDIA's primary focus. This negative correlation means that when NVIDIA's stock decreases, Amazon's might increase, offering potential risk mitigation.

3. NVIDIA and Advanced Micro Devices, Inc. (AMD):

• Correlation: Approximately 0.747, indicating a strong positive relationship. Wire
• Implication: Both companies are key players in the GPU market, leading to similar stock performance. Pairing them offers limited diversification benefits due to their high correlation.

Key Takeaways:

• Diversification Benefits: Combining NVIDIA with stocks from different sectors (e.g., Amazon) can reduce portfolio volatility.
• Correlation Consideration: Selecting stocks with low or negative correlation to NVIDIA enhances risk reduction.
• Industry Exposure: Pairing NVIDIA with companies in the same industry (e.g., AMD) may not provide significant diversification benefits due to similar market influences.

Game

Calculator

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.

Exercise:

Stocks A and B have the following returns for various states of the economy:

State of the Economy	Probability	Stock A's Return	Stock B's Return
Recession	10%	-30%	-10%
Below Average	20%	-2%	2%
Average	40%	10%	1%
Above Average	20%	18%	2%
Boom	10%	40%	-5%

Solution: (or use calculator at https://www.jufinance.com/return/)

Stock 1:

· Expected return = 10%*(-30%)) + 20%*(-2%) + 40% *10% + 20%*18% + 10%*40% = 8.2%

· Standard deviation (not required)

= sqrt(10%*(-30%-8.2%)² + 20%*(-2%-8.2%)² +40%*(10%-8.2%)² + 20%*(18%-8.2%)² +10%*(40%-8.2%)²) = 16.98%

Stock 2:

· Expected return = 10%*(10%)) + 20%*(2%) + 40% *1% + 20%*2% + 10%*(-5)% = 1.7%

· Standard deviation (not required) = sqrt(10%*(10%-1.7%)² + 20%*(2%-1.7%)² +40%*(1%-1.7%)² + 20%*(2%-1.7%)² +10%*((-5)%-1.7%)²) = 3.41%

Covariance (not required):

· Covariance = 10%*(-30%-8.2%)*(10%-1.7%)+20%*(-2%-8.2%)*(2%-1.7%)+40%*(10%-8.2%)*(1%-1.7%)+20%*(18%-8.2%)*(2%-1.7%)+10%*(40%-8.2%)*((-5%)-1.7%) = -0.54%

Correlation (not required):

· Correlation = -0.54%/(16.98%* 3.41%) = -0.93

Topic 3: A Portfolio with Three Stocks - Risk and Return Tradeoff Quiz

Key Insights:

1. More Stocks = Lower Risk: Adding a third stock further reduces portfolio volatility, especially if it’s from a different sector or has low correlation with the first two.
2. Diversification Effect: Three stocks create three correlation pairs, spreading out unsystematic (company-specific) risk even more than a two-stock portfolio.
3. Risk Reduction Potential: While three stocks won’t eliminate all diversifiable risk, research shows that holding around 20 stocks captures most of the benefits of diversification.
4. Portfolio Return Calculation: The expected return of a three-stock portfolio is a weighted average of each stock’s return. Allocating higher weights to strong-performing stocks balances risk and return.
5. Choosing Low-Correlation Stocks:

1) Tech stock (growth potential)

2) Consumer staples stock (stable in recessions)

3) Utility stock (defensive, steady returns)
These sectors don’t move in sync, helping smooth out portfolio fluctuations.

6. Bottom Line: The third stock acts as a buffer, making the portfolio more resilient and reducing reliance on any single stock or sector.

Game

In class Exercise

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

We chose Stock 1, Stock 2, Stock 3 (Use following app to get monthly stock returns in the past five years) https://script.google.com/macros/s/AKfycbxao_yHFToaMAs2fuEiYMfHapioFAjIukvBAFyJIOS6ccYL2WAepMMyrO8afpRjsVBA/exec)

· Stock Prices Raw Data, Risk, Beta, CAPM (stock 1, Stock 2, Stock 3, 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 “1/31/2020” and “1/31/2025”, 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?

Conclusion: More than 25 stocks should do the trick for diversification. Quiz

Please refer to template

Topic 4 - What Is the Capital Asset Pricing Model? Quiz

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 5 – 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)

Topic 6: Step-by-Step Guide for Screening Mutual Funds (FYI)

Game

1. Open the Mutual Fund Screener:

• Go to FINRA Mutual Fund Screener: https://finra-markets.morningstar.com/MutualFund/AdvScreener/Screen.jsp
• This tool allows you to screen (search) for mutual funds based on specific characteristics that fit your investment goals.

2. Choose Basic Search Criteria:

• Start by simplifying the search. 

Key Criteria to Focus On:

• Fund Family: This is the company managing the mutual fund (e.g., Vanguard, Fidelity).
• Morningstar Rating: This is a star-based rating (from 1 to 5 stars). The more stars, the better the fund has performed relative to its risk level.
• Category: You can select a category of funds, such as "Large Growth", "Bond Funds", or "Balanced Funds" to meet specific needs.

3. Set Up a Simple Screen:

Step-by-Step Filters for the screener:

1. Fund Family:
• You can select well-known fund families like Vanguard or Fidelity to screen for trusted, low-cost funds.
2. Category:
• Pick a category based on what you’re looking for, such as:
• Large Growth: Focuses on big companies expected to grow fast.
• Bond Funds: Safer investments for income.
• Balanced Funds: Mix of stocks and bonds for moderate risk.
3. Morningstar Rating:
• Choose a Morningstar Rating of 4 or 5 stars to focus on higher-rated funds.
4. Expense Ratio:
• The expense ratio is the annual fee mutual funds charge. Select Low to filter funds with low fees (less than 1%).

4. Run the Search:

• After selecting your criteria, click Search.
• The screener will provide a list of mutual funds that match your search filters.

5. Analyze the Results:

After you run the screen, a list of funds will appear. Here's how to interpret the most important columns:

• Fund Name: This is the name of the mutual fund.
• Morningstar Rating: The star rating (1 to 5 stars).
• Expense Ratio: The annual fee expressed as a percentage (the lower, the better).
• 1 Year Return / 5 Year Return: The performance of the fund over the past 1 or 5 years.

6. Key Points:

• Morningstar Rating: Aim for 4-5 stars.
• Expense Ratio: Look for expense ratios below 1% for cost efficiency.
• Fund Returns: Compare the 1-year and 5-year returns to see how well the fund has performed.

Example:

Let’s say you want to find a low-cost, well-rated balanced fund:

• Fund Family: Select Vanguard or Fidelity.
• Category: Choose Balanced Funds.
• Morningstar Rating: Select 4 or 5 stars.
• Expense Ratio: Select Low (below 1%).

Now, click Search, and the results will show a list of funds that match this criteria.

7. Choosing a Fund:

After the search, click on a fund’s name for more detailed information. You’ll see details like:

• Top Holdings: What the fund is invested in.
• Risk: How risky the fund is compared to others in its category.
• Fees: A breakdown of the total fees and expenses.

Additional Tips:

·        Start Simple: Focus on categories and ratings to avoid getting overwhelmed by too many options.

·        Expense Ratio: Always look at the fees! They can significantly impact long-term returns.

·        Performance: A fund’s historical performance isn’t a guarantee of future returns, but it’s a useful indicator.

Advice on Multi-Stock Portfolios (FYI) Diversification Game-1 Game-2

Advice Category	Key Insights
Reducing Unsystematic vs. Systematic Risk	Adding more stocks reduces company-specific risk (unsystematic risk), but market-wide risk (systematic risk) remains. Diversification helps prevent the collapse of an entire portfolio due to one company's failure.
Diminishing Marginal Benefits of Diversification	The first few added stocks provide the greatest risk reduction. Research shows about 20 well-chosen stocks across industries eliminate most diversifiable risk. Beyond that, the additional benefit diminishes.
Sector & Asset Allocation Diversification	True diversification isn’t just about quantity but variety. Stocks should be spread across different sectors (tech, healthcare, energy, etc.) and asset classes (stocks, bonds, real estate) to improve stability.
Balancing Risk and Return	The risk-return tradeoff remains: higher returns require higher risk. However, diversification allows investors to lower risk without significantly reducing returns. A well-balanced portfolio smooths out volatility while capturing market gains.

Chapter 6 Homework (due with the second midterm exam)

Need help? Watch this guide video: Chapter 6 Homework Help

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

· Bond Interactive Game

· Bond Quiz 1

· Bond Quiz2

· Bond Quiz3

Yield Curve http://finra-markets.morningstar.com/BondCenter/Default.jsp 3/24/2025

https://www.gurufocus.com/yield_curve.php

Investing Basics: Bonds(video)

FINRA – Bond market information

https://www.finra.org/finra-data/fixed-income

Chapter 7 Study guide

1. Go to https://www.finra.org/finra-data/fixed-income, the bond market data website of FINRA to find bond information. For example, find bonds sponsored by Wal-mart

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/

For WALMART bond Symbol: WMT5571329CUSIP: 931142FE8 Bond Type: CORP

https://www.finra.org/finra-data/fixed-income/bond?symbol=WMT5571329&bondType=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

(hint: current yield = annual coupon / bond price)

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)

Instructor Walkthrough for Chapter 7 Homework: Click to watch

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

Current Yield = annual coupon / bond market price

· Current yield is the return you earn just from the bond’s coupon payments, not including any price gain or loss (this is capital gain yield).

· Yield to maturity = total return = current yield + capital gain yield

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

www.jufinance.com/bond

Second Midterm Exam (chapters 6 and 7 only)

· Date: 4/3

· T/F Solution (33 questions, 33*1.5=49 points, closed book close notes)

· Multiple Choice Solution (17 questions, 17*3=51 points)

Chapter 6 Study Guide

1. Single Stock – Risk & Return Tradeoff

• Expected Return (E[R]): Weighted average of returns using probabilities.

v Formula: E[R] = Σ (pi * Ri)

• Variance & Standard Deviation: Measures of total risk (volatility).

v Std Dev = √Variance

• Higher standard deviation = more risk
• Holding one stock = High risk (lack of diversification)

• Risk cannot be eliminated with one stock.

2. Two-Stock Portfolio

• Diversification: Reduces risk if stocks are not perfectly correlated.
• Correlation (ρ):

v +1 = perfect positive (no diversification benefit)

v 0 = no relationship (moderate benefit)

v -1 = perfect negative (best risk reduction)

• Portfolio Variance depends on weights, std dev, and correlation.

• Correlation example: -0.93 between Stock A and B (strong diversification)
• You can lower risk without lowering return via diversification.

3. Three-Stock Portfolio

Key Concepts:

• More stocks = more diversification
• Correlation is key: Low/negative correlation helps most.
• Portfolio Expected Return = Weighted average of individual expected returns.

• Combining 3 stocks reduces risk more than 2, especially from different sectors.
• After ~20 well-chosen stocks, diversification benefit flattens.

4. Capital Asset Pricing Model (CAPM)

Key Formula:

• Ri = Rf + βi * (Rm - Rf)

Key Concepts:

• Beta (β): Measures stock’s volatility relative to the market.

1. β = 1 → same risk as market

2. β > 1 → more volatile

3. β < 1 → less volatile

• Market Risk Premium (Rm - Rf): Additional return for market risk.

• High beta = higher expected return under CAPM
• Risk-free rate = return with no risk (e.g., T-bills)
• Only systematic risk is priced in CAPM, not company-specific risk.

5. Portfolio Concepts

Key Concepts:

• Expected Portfolio Return = Weighted average of individual returns
• Portfolio Beta = Weighted average of each stock's beta
• Unsystematic Risk (company-specific): Can be diversified away
• Systematic Risk (market risk): Cannot be diversified away
• Diversification reduces unsystematic risk only

Chapter 7 Study Guide

1. Bond Basics

Understand these key terms:

Term	Meaning
Par Value	The face value of the bond, usually $1,000.
Coupon Rate	The % of par paid annually/semi-annually as interest.
Coupon Payment	Actual dollar payment (e.g., 5% of $1,000 = $50 annually).
Market Price	Current price the bond is trading at (may be above/below par).
Maturity	The time when bond repays principal ($1,000).
Yield to Maturity (YTM)	Investor’s total return if held to maturity.
Current Yield	= Annual Coupon ÷ Current Market Price.
Zero Coupon Bond	Pays no coupon. Only pays $1,000 at maturity.
Annual vs. Semiannual	Semiannual bonds pay 2x per year, so divide rate and double periods in formulas.

2. Bond Price-Yield Relationship

• Inverse Relationship:
• When YTM ↑, Bond Price ↓
• When YTM ↓, Bond Price ↑

Key takeaway: Rising interest rates cause bond prices to fall and vice versa.

3. Bond Pricing Formulas

• Annual Coupon Bond:
  Price = abs(pv(YTM, N, Coupon, 1000))
• Semi-Annual Coupon Bond:
  Price = abs(pv(YTM/2, N*2, Coupon/2, 1000))

4. Calculating Yield to Maturity (YTM)

• YTM is the interest rate that sets present value of cash flows = current price.

Excel/Calculator formulas:

• Annual:
  =rate(n, coupon, -price, 1000)
• Semi-Annual:
  =rate(n*2, coupon/2, -price, 1000)*2

5. Current Yield

Formula:
Current Yield = Annual Coupon ÷ Market Price

Example:

• $50 coupon bond trading at $950 →
  50 ÷ 950 = 5.26%

6. Zero-Coupon Bonds

• Coupon = 0, trades at deep discount.
• Treated as semi-annual for formulas.
• Only pays $1,000 at maturity.

Chapter 8 Stock Valuation

· ppt

· Quiz

Part I Dividend payout and Stock Valuation

Companies that have consistently increased their dividends over the past 30 years

Company	Ticker	Sector	Beta	Current Quarterly Dividend	Annual Dividend	Years of Consecutive Increases	Recent Increase (%)
Johnson & Johnson	JNJ	Health Care	0.56	$1.24	$4.96	62	4.2% (2024)
Coca-Cola	KO	Consumer Staples	0.59	$0.51	$2.04	63	5.2% (2025)
Procter & Gamble	PG	Consumer Staples	0.42	$1.01	$4.03	68	7% (2024)
PepsiCo	PEP	Consumer Staples	0.55	$1.36	$5.42	51	7% (2025)
3M	MMM	Industrials	0.95	$1.51	$6.04	65	0.7% (2024)
Lowe’s	LOW	Consumer Discretionary	1.09	$1.15	$4.60	60	5% (2024)
Colgate-Palmolive	CL	Consumer Staples	0.6	$0.50	$2.00	62	4.2% (2024)
Hormel Foods	HRL	Consumer Staples	0.41	$0.29	$1.16	59	2.7% (2025)
Illinois Tool Works	ITW	Industrials	1.12	$1.50	$6.00	50+	7% (2024)
AbbVie	ABBV	Health Care	0.56	$1.64	$6.56	10 (post spin-off)	5.8% (2025)

Companies with Near-Fixed Dividend Growth

Company	Ticker	Sector	Quarterly Dividend (USD)	Annual Dividend (USD)	Recent Increase (%)	Dividend Yield (%)	Dividend History Link
Microsoft	MSFT	Technology	0.83	3.32	10	0.92	https://www.microsoft.com/en-us/Investor/dividendhistory.aspx
Visa	V	Financial Services	0.59	2.36	13	0.76	https://investor.visa.com/financial-information/stock-info/default.aspx
McDonald's	MCD	Consumer Discretionary	1.77	7.08	6	2.31	https://corporate.mcdonalds.com/corpmcd/investors/stock-information/dividends.html
PepsiCo	PEP	Consumer Staples	1.355	5.42	5	3.93	https://www.pepsico.com/investors/stock-information/dividends
Waste Management	WM	Industrials	0.825	3.3	10	1.56	https://investors.wm.com/stock/dividends/default.aspx

Large-cap and well-known smaller companies that haven't paid dividends in the past decade:

Company	Ticker	Sector	Stock Price (USD)	Beta	Dividend Paid (Past 10 Years)	Reason for Not Paying Dividends	Buy Recommendation
Amazon	AMZN	Consumer Discretionary	175.26	1.39	No	Reinvests in logistics, AWS, and growth initiatives	Buy for long-term growth
Alphabet (Google)	GOOGL	Communication Services	155.2	1.06	No	Reinvests in AI, cloud, YouTube, and search technologies	Buy for AI/cloud exposure
Meta Platforms (Facebook)	META	Communication Services	488.1	1.21	No	Focus on innovation and acquisitions; reinvests in VR, AI	Buy cautiously; growth with volatility
Tesla	TSLA	Consumer Discretionary	168.38	2.19	No	Capital goes into production, R&D, and expansion	Buy only if comfortable with risk
Berkshire Hathaway	BRK.A / BRK.B	Financials	626185	0.92	No	Prefers reinvestment; Buffett's philosophy is against dividends	Hold; slow but safe compounder
Netflix	NFLX	Communication Services	595.98	1.26	No	Spends on original content and global expansion	Buy for content/streaming growth
Shopify	SHOP	Technology	77.65	1.87	No	Focus on reinvestment and expansion of e-commerce tools	Buy for aggressive tech exposure
Uber Technologies	UBER	Technology	75.1	1.58	No	Reinvests heavily in rideshare, freight, and autonomous tech	Buy if bullish on mobility and AI
Roku	ROKU	Communication Services	63.43	1.83	No	Spends on content deals, platform development, and growth	Speculative buy; high risk/high reward
Palantir Technologies	PLTR	Technology	22.75	2.05	No	Invests in AI, government contracts, and data platforms	Buy for long-term AI and defense exposure
Snowflake	SNOW	Technology	188.9	0.9	No	Focus on cloud data growth and scalability	Buy cautiously; strong revenue, no profits
Twilio	TWLO	Technology	61.3	1.41	No	Reinvests in developer tools and enterprise solutions	Hold; uncertain path to profitability

Key Insight: Dividend Growth Model (DGM), Or Gordon’s Growth Model

Section	Details
What Is It?	A valuation tool that estimates a stock’s true worth based on the idea that dividends will grow at a constant rate forever.
Where Does It Come From?	Created by Myron Gordon (1960s). Based on the Discounted Cash Flow (DCF) concept — except it focuses only on dividends as future cash flows.
Formula (Equation)	P0o=D1/(r−g) (Refer to https://www.jufinance.com/dividend/, Dividend growth model calculator)
	Where:
	• Po: today's stock price
	• D1=D0×(1+g) D1 is next year’s dividend
	• r: required return
	• g: growth rate
Used For?	• Pricing dividend stocks
	• Checking if a stock is over- or under-valued
	• Estimating expected return if you know current price
Works Best For...	• Mature companies
	• Steady profits and consistent dividend growth
	• Big names like Coca-Cola, P&G, J&J, Pepsi
Real-World Examples	Coca-Cola (KO): pays rising dividend yearly since 1963
	Microsoft (MSFT): 10% dividend increase in 2024
	PepsiCo (PEP): 51+ years of dividend increases
Limitations / Weaknesses	Needs constant growth g - not realistic for every firm
	Very sensitive to inputs - small error in r or g gives wild valuation
	Doesn’t work for growth companies (e.g., Amazon, Tesla)
	Assumes company lives forever paying dividends
Common Misunderstandings	• You can’t use it if the company doesn’t pay dividends
	• Don’t assume growth rate = GDP or inflation — use actual dividend history
Extensions & Variations	• Two-stage model: fast growth now, slower growth later
	• Multi-stage DDM: for complex growth paths
	• Compare to Discounted Cash Flow (DCF) for companies without dividends

If the company doesn’t pay dividends, use other valuation methods:

Model	Good For
Discounted Cash Flow (DCF)	Growth companies with reinvested profits
Price/Earnings Ratio (P/E)	Companies with positive earnings, no dividends
EV/EBITDA	For comparing firms in the same industry
Price/Sales	For early-stage or fast-growing tech companies

Class Exercise: Estimate JNJ’s Stock Price Using the Dividend Growth Model

Objective:

Use the Dividend Growth Model (DGM) to estimate the intrinsic value of Johnson & Johnson (JNJ) stock, then compare it to the actual market price.

Step-by-Step Instructions:

1. Gather These Inputs

From Public Sources (Yahoo Finance, etc.):

• Current Dividend per Share (D₀) = $4.76 (2023 full-year dividend)
• Dividend Growth Rate (g) = 4.2% (recent annual increase)
• Beta (β) = 0.56

Use These Fixed Assumptions:

• Risk-Free Rate (Rf) = 4.2% (10-year Treasury yield, as of 2025)
• Market Return (Rm) = 10.0% (long-run market average)

2. Calculate the Required Rate of Return (r)

Use the CAPM formula:

Expected Return of stock i = Rf + Beta * (Rm – Rf)

Where:

• Rf: Risk free rate

• Rm: Market return proxied by S&P500 index returns

$${\mathrm{3.\; Project\; Next\; Year\text{'}s\; Dividend,\; D1<o:p></o:p>}}_{}$$

$${\mathrm{4.\; Use\; the\; Dividend\; Growth\; Model\; (DGM)<span\; style="font-size:\; 12.0pt;font-family:"Times\; New\; Roman","serif";mso-ascii-theme-font:minor-fareast;\; mso-hansi-theme-font:minor-fareast;mso-bidi-theme-font:minor-fareast;\; color:windowtext"><o:p></o:p></span>}}_{}$$

$${\mathrm{5.\; Check\; Your\; Answer<span\; style="font-size:12.0pt;font-family:\; "Times\; New\; Roman","serif";mso-ascii-theme-font:minor-fareast;mso-hansi-theme-font:\; minor-fareast;mso-bidi-theme-font:minor-fareast;color:windowtext"><o:p></o:p></span>}}_{}$$

• Look up the real stock price of JNJ (e.g., on Yahoo Finance or Google).
• Compare your DGM estimate with the market price.
• The student with the closest estimate can win a prize or bonus point!

Optional Challenge Questions:

• What would happen if the dividend growth rate increased?
• What if the beta were higher - would the stock seem more or less expensive?
• Why might your estimate differ from the market?

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)…

HW of chapter 8    (due with final)

Video for chapter 8 homework

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.

Chapter 10 Capital Budgeting

§ Ppt

§ Self-produced video: Exploring Capital Budgeting Key Concepts and Strategies

§ Interactive Game: https://www.jufinance.com/game/capital_budgeting_simple_game.html

§ Quiz on NPV, IRR, and Payback Period

§ NPV, IRR, Payback Calculator

§ http://www.jufinance.com/capital/

§ NPV, IRR, Payback Excel Template

§ http://www.jufinance.com/npv_1/

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
A	-100	40	40	40	N/A	.15
B	-73	30	30	30	30	.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)

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)

http://www.youtube.com/watch?v=7FsGpi_W9XI

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

https://www.youtube.com/watch?v=YgVQvn51noc

‘Simple Rules’ for Running a Business (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.

Chapter 9 – WACC (Weighted Average Cost of Capital)

Self produced video on WACC:

WACC Explained: How Companies Balance Cost, Risk & Growth

WACC Learning Game:

§ https://www.jufinance.com/game/wacc_explanation.html

WACC Calculator:

§ Annual Coupon Bond:

https://www.jufinance.com/wacc/

§ Semi-annual coupon bond:

https://www.jufinance.com/wacc_1/

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

In Class Exercise

IBM financed 10m via debt coupon 5%, 10 year, price is $950 and flotation is 7% of the price, tax 40%.

IBM financed 20m via equity. D1=$5. Po=50, g is 5%. Flotation cost =0. So WACC?

Solution:

· 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 %

Wal-Mart Inc  (NYSE:WMT) WACC %: 8.08%  As of 4/14/2025

As of today (2025-4-14), Walmart's weighted average cost of capital is 8.08%. Walmart's ROIC % is 12.04% (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 4/14/2025

As of today (2025-4-14), Amazon.com's weighted average cost of capital is 12.51%. Amazon.com's ROIC % is 14.82% (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 4/14/2025

As of today (2025-4-14), Apple's weighted average cost of capital is 11.09%. Apple's ROIC % is 33.16% (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

Final Exam (5/1, 11:30-2PM, #288) & Term Project Due

· True/False Solutions

Study Guide

Part I: True/False Concepts (1 point each — 50 total, closed book closed notes)

Core Topics Covered:

• Time Value of Money (chapter 5)
• Financial Statement Analysis (chapters 3 and 4)
• Risk and Return (chapter 6)
• Bonds & Valuation (chapter 7)
• Stock Valuation (chapter 8)
• Capital Budgeting (NPV, IRR, Payback) (chapter 10)
• Cost of Capital (chapter 9)

Sample T/F Conceptual Prep Questions (similar to the questions on the first and the second midterm exam)

1. A bond's price and interest rates are inversely related. ✅
2. A stock with a beta of 1.5 is less risky than the market portfolio. ❌
3. The internal rate of return (IRR) is the discount rate that sets NPV = 0. ✅
4. When calculating WACC, the cost of equity is irrelevant. ❌
5. NPV always gives the correct decision when choosing among mutually exclusive projects. ✅
6. According to the CAPM, only systematic risk is priced. ✅
7. If IRP holds, there is no arbitrage opportunity in currency forward markets. ✅
8. The payback rule considers the time value of money. ❌
9. Preferred stock dividends are tax-deductible to corporations. ❌
10. The dividend payout ratio equals dividends divided by earnings. ✅
    …

Part II: Calculation-Based Questions (2 points each — 25 total, similar to questions on the first and the second midterm exam)

Topics & Examples

1. Bond Valuation (chapter 7)
   Calculate the price of a 10-year bond with 6% coupon (semiannual), face value $1,000, market rate 8%. 
2. Stock Valuation (Gordon Growth Model) (chapter 8)
   Find the price of a stock with D₁ = $2.00, g = 4%, and required return = 10%. 
3. NPV / IRR / Payback period (chapter 10)
   Evaluate a project with cash flows and initial investment. Discount at 9%. 
4. CAPM (chapter 6)
   Find expected return: R_f = 3%, Market = 9%, Beta = 1.2 
5. Beta from Portfolio Data (chapter 6)
   Given returns, risk-free rate, and market return, back-solve beta. 
6. Cash flow statement, balance sheet and income statement (chapters 3 an 4)

Happy Summer!