FIN435 Class Web
Page, Spring '21
Jacksonville
University, DCOB #263
Instructor:
Maggie Foley
Weekly SCHEDULE, LINKS, FILES and Questions
Week 
Coverage, HW, Supplements 
Required 

Videos (optional) 

Intro 
Discussion: How to pick stocks (finviz.com) Daily earning announcement: http://www.zacks.com/earnings/earningscalendar IPO schedule: http://www.marketwatch.com/tools/ipocalendar 



Chapters
3 and 4 
Chapter
3 Financial Statement Using a Balance
Sheet to Analyze a Company (VIDEO)
What
is an Income Statement? (Video)
How
Do You Read a Cash Flow Statement?  (VIDEO)
http://www.jufinance.com/10k/bs http://www.jufinance.com/10k/is http://www.jufinance.com/10k/cf FCF
calculator What is free cash flow (video) Capital expenditure = increases in NFA +
depreciation Or, capital expenditure = increases in GFA Note: All companies, foreign and domestic, are required
to file registration statements, periodic reports, and other forms
electronically through EDGAR. Case
study of chapter 3 – First case study ·
Excel File here (due with the first midterm exam,) ‘ 

*****
How much does Amazon worth?”
FYI: Amazon.com Inc. (AMZN) https://www.stockanalysison.net/NASDAQ/Company/AmazoncomInc/DCF/PresentValueofFCFF
Present Value of Free Cash Flow to the Firm (FCFF)In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to the firm (FCFF) is generally described as cash flows after direct costs and before any payments to capital suppliers.
Intrinsic
Stock Value (Valuation Summary)
Amazon.com Inc., free cash flow to the firm (FCFF) forecast
^{1} Weighted
Average Cost of Capital (WACC)
Amazon.com Inc., cost of capital
^{1} USD $ in millions ^{ } Equity
(fair value) = No. shares of common stock outstanding × Current share price ^{ } Debt (fair value). See Details » ^{2} Required rate of return on equity is estimated by using CAPM. See Details » ^{ } Required rate of return on debt. See Details » ^{ } Required rate of return on debt is after tax. ^{ } Estimated
(average) effective income tax rate WACC = 16.17% FCFF Growth
Rate (g)
FCFF growth rate (g) implied by PRAT model
Amazon.com Inc., PRAT model
^{1} See Details » 2017 Calculations ^{2} Interest
expense, after tax = Interest expense × (1 – EITR) ^{3} EBIT(1
– EITR) = Net income (loss) + Interest expense, after tax ^{4} RR
= [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 –
EITR) ^{5} ROIC
= 100 × EBIT(1 – EITR) ÷ Total capital ^{6} g = RR × ROIC FCFF growth rate (g) forecast
Amazon.com Inc., Hmodel
where: Calculations g_{2} = g_{1} +
(g_{5} – g_{1}) × (2
– 1) ÷ (5 – 1) g_{3} = g_{1} +
(g_{5} – g_{1}) × (3
– 1) ÷ (5 – 1) g_{4} = g_{1} +
(g_{5} – g_{1}) × (4
– 1) ÷ (5 – 1) 

Chapter 4 Ratio Analysis Reference: Commonly used ratio
explained Ratio Analysis template http://www.jufinance.com/ratio Finviz.com/screener for ratio analysis (https://finviz.com/screener.ashx Financial ratio analysis (VIDEO) ****** DuPont Identity ************* ROE = (net income / sales) * (sales / assets) * (assets /
shareholders' equity) This equation for ROE breaks it into three widely used and
studied components: ROE = (net profit margin) * (asset turnover) * (equity
multiplie) Chapter 4 case study
(Second Case Study, due with first midterm exam) 

Below are Benjamin Graham’s seven timetested
criteria to identify strong value stocks.
https://cabotwealth.com/daily/valueinvesting/benjamingrahamsvaluestockcriteria/
Value Stock Criteria List:
VALUE CRITERIA #1:
Look for a
quality rating that is average or better. You don’t need to
find the best quality companies–average or better is
fine. Benjamin Graham recommended using Standard & Poor’s
rating system and required companies to have an S&P Earnings and Dividend
Rating of B or better. The S&P rating system ranges from D to A+. Stick
to stocks with ratings of B+ or better, just to be on the safe side. VALUE CRITERIA #2:
Graham
advised buying companies with Total Debt to Current Asset ratios of less than
1.10. In value investing it is important at all times to invest in companies
with a low debt load. Total Debt to Current Asset ratios can be found in data
supplied by Standard & Poor’s, Value Line, and
many other services. VALUE CRITERIA #3:
Check the
Current Ratio (current assets divided by current liabilities) to find
companies with ratios over 1.50. This is a common ratio provided by many
investment services. VALUE CRITERIA #4:
Criteria
four is simple: Find companies with positive earnings per share growth during
the past five years with no earnings deficits. Earnings need to be higher in
the most recent year than five years ago. Avoiding companies with earnings
deficits during the past five years will help you stay clear of highrisk
companies. VALUE CRITERIA
#5:
Invest in companies with
price to earnings per share (P/E) ratios of 9.0 or less. Look for
companies that are selling at bargain prices. Finding companies with low P/Es
usually eliminates high growth companies, which should be evaluated
using growth investing techniques. VALUE CRITERIA #6:Find
companies with price to book value (P/BV) ratios less than 1.20. P/E ratios,
mentioned in rule 5, can sometimes be misleading. P/BV ratios are calculated
by dividing the current price by the most recent book value per share for a
company. Book value provides a good indication of the underlying value of a
company. Investing in stocks selling near or below their book value makes
sense. VALUE CRITERIA #7:Invest in
companies that are currently paying dividends. Investing in undervalued
companies requires waiting for other investors to discover the bargains you
have already found. Sometimes your wait period will be long and tedious, but
if the company pays a decent dividend, you can sit back and collect dividends
while you wait patiently for your stock to go from undervalued to overvalued. One last
thought. We like to find out why a stock is selling at a bargain price.
Is the company competing in an industry that is dying? Is the company
suffering from a setback caused by an unforeseen problem? The most important
question, though, is whether the company’s problem is shortterm or longterm and whether
management is aware of the problem and taking action to correct it. You can
put your business acumen to work to determine if management has an adequate
plan to solve the company’s current problems. For class discussion: Times have changed. Mr.
Granham’s book about value investing
was published sixty years ago. Do you think the criteria in his book are
still working in today’s
environment? 

Chapter 6 Interest rate Market data website: http://finramarkets.morningstar.com/BondCenter/Default.jsp (FINRA
bond market data) Market watch on Wall Street Journal has daily yield curve and
interest rate information. http://www.marketwatch.com/tools/pftools/ http://www.youtube.com/watch?v=yph8TRldW6k
(yield curve 20022012) The yield curve (Video, Khan academy)
Treasury Yields
https://www.bloomberg.com/markets/ratesbonds/governmentbonds/us In
Class Exercise: ·
Please draw the yield curve based on the
above information; ·
What can be predicted from the current
yield curve? For
Daily Treasury rates such as the following, please visit https://www.treasury.gov/resourcecenter/datachartcenter/interestrates/pages/textview.aspx?data=yield
For class
discussion: Why do interest rates change daily? Who determines interest rate? “ interest
rates are determined by
the Federal Open Market Committee (FOMC), which consists of seven governors
of the Federal Reserve Board and five Federal Reserve Bank presidents. The
FOMC meets eight times a year to determine the nearterm direction of
monetary policy and interest rates.” Who Determines Interest Rates?
https://www.investopedia.com/ask/answers/whodeterminesinterestrates/
By NICK K. LIOUDIS Updated Aug 15, 2019 Interest rates are the cost
of borrowing money. They
represent what creditors earn for lending you money. These rates are
constantly changing, and differ based on the lender, as well as your
creditworthiness. Interest rates not only keep the economy functioning, but
they also keep people borrowing, spending, and lending. But most of us don't
really stop to think about how they are implemented or who determines them.
This article summarizes the three main forces that control and determine
interest rates. KEY TAKEAWAYS
ShortTerm Interest Rates: Central BanksIn countries using a
centralized banking model, shortterm interest rates are determined by
central banks. A government's economic observers create a policy that helps
ensure stable prices and liquidity. This
policy is routinely checked so the supply of money within the economy is
neither too large, which causes prices to increase,
nor too small, which can lead to a drop in prices. In the U.S., interest rates
are determined by the Federal Open Market Committee (FOMC), which consists of seven governors of the Federal
Reserve Board and five Federal Reserve Bank presidents. The FOMC meets eight
times a year to determine the nearterm direction of monetary policy and
interest rates. The actions of central banks like the Fed affect shortterm
and variable interest rates. If the monetary policymakers
wish to decrease the money supply, they will raise the interest rate, making
it more attractive to deposit funds and reduce borrowing from the central
bank. Conversely, if the central bank wishes to increase the money supply,
they will decrease the interest rate, which makes it more attractive to
borrow and spend money. The Fed funds rate affects
the prime rate—the rate banks charge their best
customers, many of whom have the highest credit rating possible. It's also
the rate banks charge each other for overnight loans. The U.S.
prime rate remained at 3.25% between Dec. 16, 2008 and Dec. 17, 2015, when it
was raised to 3.5%. LongTerm
Interest Rates: Demand for Treasury Notes
Many of these rates are
independent of the Fed funds rate, and, instead, follow 10 or 30year
Treasury note yields. These yields depend on demand after the U.S. Treasury
Department auctions them off on the market. Lower demand tends to result in
high interest rates. But when there is a high demand for these notes, it can
push rates down lower. If you have a longterm
fixedrate mortgage, car loan, student loan, or any similar nonrevolving
consumer credit product, this is where it falls. Some credit card annual
percentage rates are also affected by these notes. These rates are generally
lower than most revolving credit products but are higher than the prime rate. Many savings account rates are also determined by longterm
Treasury notes. Other
Rates: Retail Banks
Retail banks are
also partly responsible for controlling interest rates. Loans and mortgages
they offer may have rates that change based on several factors including
their needs, the market, and the individual consumer. For example, someone with a
lower credit score may be at a higher risk of default, so they pay a higher
interest rate. The same applies to credit cards. Banks will offer different
rates to different customers, and will also increase the rate if there is a
missed payment, bounced payment, or for other services like balance transfers
and foreign exchange. Monday 1/15/2020 For
daily yield curve, please visit http://finramarkets.morningstar.com/BondCenter/Default.jsp
Normal Yield Curve Steep Curve –
Economy is improving Inverted Curve –
Recession is coming
To become inverted, the yield curve
must pass through a period where longterm yields are the same as shortterm
rates. When that happens the shape will appear to be flat or, more commonly,
a little raised in the middle. Unfortunately, not all flat or humped curves
turn into fully inverted curves. Otherwise we'd all get rich plunking our
savings down on 30year bonds the second we saw their yields start falling
toward shortterm levels. On the other hand, you shouldn't discount a
flat or humped curve just because it doesn't guarantee a coming recession.
The odds are still pretty good that economic slowdown and lower interest
rates will follow a period of flattening yields. Formula  Break down of interest rate r = r* + IP + DRP + LP + MRP r = required return on a debt security r* = real riskfree rate of interest IP = inflation premium DRP = default risk premium LP = liquidity premium MRP = maturity risk premium MRP_{t} = 0.1% (t – 1) DRP_{t} + LP_{t} = Corporate spread * (1.02)^{(t−1)} 

What is interest rates https://www.youtube.com/watch?v=Pod73wrvdSQ How interest rates are set https://www.youtube.com/watch?v=Oz5hNemSdWc What happens if Fed raise interest rates https://www.youtube.com/watch?v=4OP3Ui6K1s The Fed won’t keep interest rates near
zero forever — here’s what to do now PUBLISHED WED,
JAN 27 20212:01 PM EST SHAREShare Article via FacebookShare Article via TwitterShare Article
via LinkedIn The Federal Reserve said Wednesday it would keep
its benchmark interest rate near zero until the economic recovery
gains ground. As the federal government rolls out a mass vaccination
plan and weighs additional stimulus in the midst of the corona virus,
the central bank is keeping its commitment to help everyday Americans through
the pandemic. That means rockbottom rates will stick around, for now. “Even if everyone gets the vaccine, it will take a while
for the economy to get rolling again,” said Yiming Ma, an assistant finance
professor at Columbia University Business School. “That will happen, but the time horizon is not likely to
be this year,” she added. “Take this time to look for opportunities.” With millions of people out of work and a
growing number of Americans feeling severely cashstrapped, the Fed’s
policies can help, even without another Covid relief package. Although the federal funds rate, which is what
banks charge one another for shortterm borrowing, is not the rate that
consumers pay, the Fed’s moves still affect the borrowing and saving rates
they see every day. For example, the economy, the Fed and inflation
all have some influence over longterm fixed mortgage rates, which
generally are pegged to yields on U.S. Treasury notes. Currently, the average 30year fixed rate home mortgage is
near a record low at 3%, down from 3.77% a year ago, according to
Bankrate. Homeowners can shave a few hundred dollars off their
monthly payment by refinancing at a lower rate, if they haven’t already. “That is the most impactful on the household budget,” said
Greg McBride, chief financial analyst at Bankrate. “The drop from last year
to this year is so substantial that the refinancing savings is pretty
compelling.” The same goes for other types of debt, particularly credit
cards. Most credit cards have a variable rate, which
means there’s a direct connection to the Fed’s benchmark rate. Since the central bank started cutting rates a year
ago, credit card rates have fallen to 16.03%, down from a high of
17.85%, according to Bankrate. “It’s a great time to try to refinance your highinterest
debt,” said Matt Schulz, chief credit analyst at LendingTree,
an online loan marketplace. “Zeropercent balance transfer credit cards are available,
especially if you have good credit,” he said. “We’ve also seen a decrease
recently in APRs with personal loans, which can be a great tool for
refinancing and consolidating debts.” The average interest rate on personal loans is now down
to 11.84%, according to Bankrate. Other borrowing costs are even lower. A home equity
line of credit is as low as 4.73% and anyone shopping for
a car will find the average fiveyear new car loan rate down to 4.20%. “The key to fully benefiting from the Fed’s actions is to
compare rates from different lenders across all financial products in order
to find your best deal,” said Tendayi Kapfidze, chief
economist at LendingTree. “Doing so could save you thousands in interest costs — and
better help you ride the waves of this economic storm.” Even college students can pay less on their student
loan debt. Based on an earlier auction of 10year Treasury
notes, the interest rates on federal student loans taken out during the
202021 academic year are at an alltime low. For those struggling with outstanding balances, the new
administration offered some relief by pausing payments on federal
student loans through at least September 2021. If possible, McBride advises borrowers to keep up payments
anyway to knock down that balance while there’s a
reprieve in interest charges. “Make hay while the sun shines,” he said. Private loans may have a variable rate tied to Libor,
prime or Tbill rates, which means that when the Fed holds rates down, those
borrowers can benefit as well, depending on the benchmark and the terms
of the loan. That also makes it a good time to refinance private
student loans or ask your lender what options are available. As the economy recovers, paying down highcost debt and
building up emergency savings are the biggest moves consumers can make,
McBride said. Currently, fewer than 4 in 10 people have enough savings
to pay for an unexpected $1,000 expense in cash, according to
a recent survey from Bankrate. “There’s a lot of work to be done and between stimulus
checks and tax refunds, this is a good time of year to do it,” McBride said.
“That can go a long way toward establishing your savings cushion.” Just don’t expect to earn anything from a standard savings
account. Although the Fed has no direct influence on
deposit rates, those tend to be correlated to changes in the target federal
funds rate. As a result, the average savings account rate is down to a
mere 0.05%, or even less, at some of the largest retail banks, according to
the Federal Deposit Insurance Corp. The potential for another round of stimulus checks
could drive these rates even lower, according to Ken Tumin, founder
of DepositAccounts.com. “The 2020 stimulus checks contributed to record levels of
deposits at banks,” he said. “If new stimulus checks add to deposit levels at
banks, the demand for deposits will further fall which will put more downward
pressure on deposit rates.” When the inflation rate is higher than savings account
rates, the money in savings loses purchasing power over time. 

Chapter 6 Interest rate Part II: Term Structure of Interest rate Calculator – Term Structure
Question for discussion: If
a% and b% are both known to investors, such as the bank rates, how much is
the future interest rate, such as c%? (1+a)^N
= (1+b)^m *(1+c)^(NM) Either
earning a% of interest rate for N years, or
b% of interest rate for M years, and then c% of interest rate for (NM)
years, investors
should be indifferent. Right? Then,
(1+a)^N = (1+b)^m *(1+c)^(NM)è c = ((1+a)^N / (1+b)^m)^(1/(NM))1 Or
approximately, N*a
= M*b +(NM)*(c)è c = (N*a – M*b) /(NM) What Is Expectations Theory (video)
Expectations theory attempts to predict what
shortterm interest rates will be in the future based on current
longterm interest rates. The theory suggests that an investor earns the same
amount of interest by investing in two consecutive oneyear bond
investments versus investing in one twoyear bond today. The theory is also
known as the "unbiased expectations theory.” Understanding Expectations TheoryThe expectations theory aims to help investors make decisions based upon a forecast of future interest rates. The theory uses longterm rates, typically from government bonds, to forecast the rate for shortterm bonds. In theory, longterm rates can be used to indicate where rates of shortterm bonds will trade in the future (https://www.investopedia.com/terms/e/expectationstheory.asp) 

Expectations Theory
By CHRIS B. MURPHY Updated Apr 21, 2019 Example of Calculating Expectations TheoryLet's say that the
present bond market provides investors with a twoyear bond that
pays an interest rate of 20% while a oneyear bond pays an interest rate of
18%. The expectations theory can be used to forecast the interest rate of a
future oneyear bond.
In this example, the investor is earning an equivalent return
to the present interest rate of a twoyear bond. If the investor chooses to
invest in a oneyear bond at 18% the bond yield for the following year’s bond would need to increase to 22% for this investment
to be advantageous.
Expectations theory aims to help investors make decisions by
using longterm rates, typically from government bonds, to forecast the rate
for shortterm bonds. Disadvantages of Expectations Theory
Investors should be aware that
the expectations theory is not always a reliable tool. A common problem with
using the expectations theory is that it sometimes overestimates future
shortterm rates, making it easy for investors to end up with an inaccurate
prediction of a bond’s yield curve. Another limitation of the
theory is that many factors impact shortterm and longterm bond yields. The
Federal Reserve adjusts interest rates up or down, which impacts bond yields
including shortterm bonds. However, longterm yields might not be as
impacted because many other factors impact longterm yields including
inflation and economic growth expectations. As a result, the expectations
theory doesn't take into account the outside forces and fundamental
macroeconomic factors that drive interest rates and ultimately bond yields. 

Chapter 6 In class exercise Solution 1 You read
in The Wall Street Journal that 30day Tbills are currently
yielding 5.5%. Your brotherinlaw, a broker at Safe and Sound Securities,
has given you the following estimates of current interest rate premiums:
On the basis of these data, what is the real riskfree rate of
return? (answer: 2.25%) 2 The real riskfree
rate is 3%. Inflation is expected to be 2% this year and 4% during the next 2
years. Assume that the maturity risk premium is zero. What is the yield on
2year Treasury securities? What is the yield on 3year Treasury securities?(answer: 6%, 6.33%) 3 A Treasury bond that matures in 10 years has a yield of 6%. A
10year corporate bond has a yield of 8%. Assume that the liquidity premium
on the corporate bond is 0.5%. What is the default risk premium on the
corporate bond? (answer: 1.5%) 4 The real
riskfree rate is 3%, and inflation is expected to
be 3% for the next 2 years. A 2year Treasury security yields 6.2%. What is
the maturity risk premium for the 2year security? (answer: 0.2%) 5 Oneyear
Treasury securities yield 5%. The market anticipates that 1 year from now,
1year Treasury securities will yield 6%. If the pure expectations theory is
correct, what is the yield today for 2year Treasury securities? (answer:
5.5%) Chapter
six case study (due with first mid term exam) 



Chapter 7 Market data website: 1. FINRA http://finramarkets.morningstar.com/BondCenter/Default.jsp (FINRA bond market
data) 2. WSJ Market watch on Wall
Street Journal has daily yield curve and bond yield information. http://www.marketwatch.com/tools/pftools/ http://www.youtube.com/watch?v=yph8TRldW6k 3. Bond Online http://www.bondsonline.com/Todays_Market/ Simplified Balance Sheet of WalMart
https://www.wsj.com/marketdata/quotes/WMT/financials/annual/balancesheet For discussion: · What is this “long term debt”? · Who is the lender of this “long term
debt”? So
this long term debt is called bond in the financial market. Where can you
find the pricing information and other specifications of the bond issued by
WMT? How Bonds Work (video) Investing Basics: Bonds(video) FINRA – Bond market information http://finramarkets.morningstar.com/BondCenter/Default.jsp WALMART STORES INC
http://finramarkets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C104227&symbol=WMT.GP Coupon Rate
7.550 % Maturity Date
02/15/2030
Credit
and Rating Elements
Classification Elements
Special
Characteristics
Issue Elements
Bond Elements
For class discussion: Fed
has hiked interest rates. So, shall you invest in short term bond or long
term bond? Study guide 1. Find bond sponsored by WMT just go to www.finra.org, è Investor center è market data è bond è corporate bond Corporate Bond
For class discussion: · Fed has kept interest rates low. So,
shall you invest in short term bond or long term bond? · Which of the three WMT bonds are the
most attractive one to you? Why? · Referring to the price chart of the
above bond, the price was reaching peak in the middle of 2015. Why? The price
was really low in the middle of 2014. Why? Interest rate is not the
reason. http://finramarkets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C610043&symbol=WMT4117477 In class exercises 1. AAA firm’ bonds
will mature in eight years, and coupon is $65. YTM is 8.2%. Bond’s market
value? ($903.04, abs(pv(8.2%, 8, 65, 1000)) 2. AAA firm’s bonds’ market value is $1,120, with 15 years
maturity and coupon of $85. What is YTM? (7.17%, rate(15, 85, 1120,
1000)) 3. Sadik
Inc.'s bonds currently sell for $1,180 and have a par value of
$1,000. They pay a $105 annual coupon
and have a 15year maturity, but they can be called in 5 years at
$1,100. What is their yield to call (YTC)? (7.74%, rate(15, 105, 1180, 1100)) 4. Malko
Enterprises’ bonds currently sell for $1,050. They have a 6year
maturity, an annual coupon of $75, and a par value of $1,000. What
is their current yield? (7.14%,
75/1050) 5. Assume
that you are considering the purchase of a 20year, noncallable bond with an
annual coupon rate of 9.5%. The bond has a face value of $1,000,
and it makes semiannual interest payments. If you require an 8.4%
nominal yield to maturity on this investment, what is the maximum price you
should be willing to pay for the bond? ($1,105.69, abs(pv(8.4%/2, 20*2, 9.%*1000/2, 1000)) ) 6. Grossnickle
Corporation issued 20year, noncallable, 7.5% annual coupon bonds at their
par value of $1,000 one year ago. Today, the market interest rate
on these bonds is 5.5%. What is the current price of the bonds,
given that they now have 19 years to maturity? ($1,232.15, abs(pv(5.5%, 19, 75, 1000))) 7. McCue
Inc.'s bonds currently sell for $1,250. They pay a $90 annual coupon, have a
25year maturity, and a $1,000 par value, but they can be called in 5 years
at $1,050. Assume that no costs other than the call premium would
be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with
rates expected to remain at current levels on into the
future. What is the difference between this bond's YTM and its
YTC? (Subtract the YTC from the YTM; it is possible to get a
negative answer.) (2.62%, YTM = rate(25, 90,
1250, 1000), YTC = rate(5, 90, 1250, 1050)) 8. Taussig
Corp.'s bonds currently sell for $1,150. They have a 6.35% annual
coupon rate and a 20year maturity, but they can be called in 5 years at
$1,067.50. Assume that no costs other than the call premium would
be incurred to call and refund the bonds, and also assume that the yield
curve is horizontal, with rates expected to remain at current levels on into
the future. Under these conditions, what rate of return should an
investor expect to earn if he or she purchases these bonds? (4.2%, rate(5, 63.5, 1150, 1067.5)) 9. A
25year, $1,000 par value bond has an 8.5% annual payment
coupon. The bond currently sells for $925. If the yield
to maturity remains at its current rate, what will the price be 5 years from
now? ($930.11, rate(25, 85, 925, 1000),
abs(pv( rate(25, 85, 925, 1000), 20, 85, 1000)) 10. Read
the attached prospects and answer the following questions: “We are offering
$500,000,000 of our 1.000% notes due 2017 (symbol WMT4117476), $1,000,000,000 of our 3.300% notes due 2024
(symbol WMT4117477) and $1,000,000,000 of our 4.300% notes due 2044
(symbol WMT4117478) 1)
What is the purpose for the money raised? 2) Which
of the two outstanding WMT bonds are more attractive
one to you? Why? 3) Who are the underwriters for the WMT bonds? Case study of chapter 7 (Due with first mid term) · Case study of chapter 7 (excel) 

Bond Pricing Formula (FYI) Bond Pricing Excel Formula To calculate bond price in EXCEL (annual
coupon bond): Price=abs(pv(yield to maturity, years left to maturity,
coupon rate*1000, 1000) To calculate yield to maturity (annual coupon bond):: Yield to maturity = rate(years left to maturity, coupon
rate *1000, price, 1000) To calculate bond price (semiannual coupon bond): Price=abs(pv(yield to maturity/2, years left to
maturity*2, coupon rate*1000/2, 1000) To calculate yield to maturity (semiannual coupon
bond): Yield to maturity = rate(years left to maturity*2,
coupon rate *1000/2, price, 1000)*2 Redemption Features (FYI)
While the maturity date
indicates how long a bond will be outstanding, many bonds are
structured in such a way so that an issuer or investor can substantially
change that maturity date. Call Provision
Bonds may have a
redemption – or call – provision that allows or requires
the issuer to redeem the bonds at a specified price and date before
maturity. For example, bonds are often called when interest rates have
dropped significantly from the time the bond was issued. Before you
buy a bond, always ask if there is a call provision and, if there is, be sure
to consider the yield
to call as well as the yield to maturity . Since a call provision
offers protection to the issuer, callable bonds usually offer a higher annual
return than comparable noncallable
bonds to compensate the
investor for the risk that the investor might have to reinvest the
proceeds of a called bond at a lower interest rate. Put Provision
A bond may have a put provision, which gives
an investor the option to sell the bond to an issuer at a specified
price and date prior to maturity. Typically, investors exercise a put
provision when they need cash or when interest rates have risen
so that they may then reinvest the proceeds at a higher interest rate.
Since a put provision offers protection to the investor, bonds with such
features usually offer a lower annual return than comparable bonds without a
put to compensate the issuer. Conversion
Some corporate bonds, known as convertible
bonds, contain an option to convert the bond into common stock
instead of receiving a cash payment. Convertible bonds contain provisions on
how and when the option to convert can be exercised. Convertibles offer a
lower coupon rate because they have the stability of a bond while offering
the potential upside of a stock. 

First Mid Term exam (chapters 3, 4,
6, 7) 



Chapter 8 Risk
and Return Part I: Expected Return
and Standard Deviation Calculator: https://www.jufinance.com/return/ Given
a probability distribution of returns, the expected return can be calculated
using the following equation: where
Given
an asset's expected return, its variance can be calculated using the
following equation: where
The
standard deviation is calculated as the positive square root of the variance. http://www.zenwealth.com/businessfinanceonline/RR/MeasuresOfRisk.html Part II: Two stock
portfolio Calculator https://www.jufinance.com/portfolio/ W1 and W2 are the
percentage of each stock in the portfolio.
Historical
returns Calculator https://www.jufinance.com/hpr/ Holding
period return (HPR) = (Selling price – Purchasing price + dividend)/
Purchasing price Part III: CAPM model Calculator: https://www.jufinance.com/capm/ The Capital Asset Pricing Model (CAPM)
describes the relationship between systematic risk and expected
return for assets, particularly stocks. CAPM is widely used throughout
finance for pricing risky securities and generating expected returns
for assets given the risk of those assets and cost of capital. R_{i} = R_{f} + β_{i}
*( R_{m}  R_{f})  CAPM model R_{i} = Expected return
of investment R_{f} =
Riskfree rate β_{i} =
Beta of the investment R_{m} =
Expected return of market (R_{m} 
R_{f}) = Market risk premium · What is Beta? Where to find Beta? How do you compute the Beta of a company
First, we need to have two samples of the same size: The
returns for a company, and the returns of the market
for the same period of time. Note: You need to provide
the returns and NOT the actual stock values in order for the calculations to
be correct. Then, a linear regression is conducted and the estimated slope
of the regression model using the returns of the company as the dependent
variable and the returns of the market as the independent variable will be
the beta we are looking for. Alternative formulas to compute the beta https://mathcracker.com/betacalculator
The actual definition of beta is : This formula is less clear for many people because the covariance is a less
understood measure and some people do not know how to compute it. Ultimately, the calculation of the beta as a
slope coefficient of the regression between company and market returns has a
stronger intuitive appeal. Beta Calculator Excel
Calculation
beta in Excel is easy. You need to go to a provider of historical prices,
such as Yahoo finance. Then you clean all
you need to clean and leave only adjusted prices. Your market data could be the S&P 500 or
any other market proxy. Then, by subtracting and dividing by the base value,
you will get the returns, for both your company and the market. Then, you will run a regression with the company
returns as the dependent variable, and the market returns as the independent
variable. Finally, you will examine your regression
output, and select the estimated slope coefficient. That will be the beta you
are looking for. Beta calculator and the CAPM
Why is it
useful to compute the beta of a firm? Because it gives a measure of how risky
the firm's stock is with respect to the market, and it tells us how much
should be our expected return based ion that level of risk, via de CAPM model. · SML – Security Market Line RISK
and Return General Template (standard deviation, correlation, beta) In Class
Exercise 1. An investor currently holds
the following portfolio: He invested 30% of the fund in Apple with Beta equal
1.1. He also invested 40% in GE with Beta equal 1.6. The rest of his fund
goes to Ford, with Beta equal 2.2. Use the above information to answer the following
questions. 1) The beta for the portfolio
is? (1.63) 2) The three month Treasury
bill rate (this is risk free rate) is 2%. S&P500 index return is 10%
(this is market return). Now calculate the portfolio’s
return. (15.04%) Refer to the following
graph. The three month Treasury bill rate (this is risk free rate) is 2%.
S&P500 index return is 10% (this is market return). 2. What is the value of A? (2%) 3. What is the value of B? (10%) 4. How much is the slope of the above security
market line? (8%) 5. Your uncle bought Apple in January, year
2000 for $30. The current price of Apple is $480 per share. Assume there are
no dividend ever paid. Calculate your uncle’s holding period return. (15
times) 6. Your current portfolio’s BETA is about 1.2.
Your total investment is worth around $200,000. You uncle just gave you
$100,000 to invest for him. With this $100,000 extra funds in hand, you plan
to invest the whole $100,000 in additional stocks to increase your whole
portfolio’s BETA to 1.5 (Your portfolio now worth $200,000 plus $100,000).
What is the average BETA of the new stocks to achieve your goal? (hint: write
down the equation of the portfolio’s Beta first) (2.1) 7. Years Market
r Stock
A Stock
B 1 3% 16% 5% 2 5% 20% 5% 3 1% 18% 5% 4 10% 25% 5% 5 6% 14% 5% · Calculate the average
returns of the market r and stock A and stock B. (answer: 1%, 18.6%, 5%) · Calculate the standard deviations
of the market, stock A, & stock B (answer: 6.44%, 4.21%, 0) · Calculate the correlation
of stock market r and stock a. (answer: 0.98) · Assume you invest 50% in stock
A and 50% in stock B. Calculate the average return and the standard deviation
of the portfolio. (answer: 11.8%, 2.11%) ·
Calculate
beta of stock A and beta of stock B, respectively (answer: 0.64, 0) ·
The Solution in Excel and in
Math equations (FYI) 8. A $40 million portfolio with a beta of 1.00. Riskfree rate= 4.25%, and the market risk premium= 6.00%. With an additional $60 million invested,
the fund’s required return = 13.00%.
The beta of stock that the $60 million dollars invested
in? ANSWER: Old funds (millions) $40.00 40.00% New funds (millions) $60.00 60.00%
Total new funds $100.00 100.00% Beta on existing portfolio 1.00 Riskfree rate 4.25% Market risk premium 6.00% Desired required return 13.00% 13% =
r_{RF} + b(RP_{M}); b = (13% − r_{RF})/RP_{M} Required new portfolio beta 1.4583 beta
= (return − riskfree)/RP_{M} Required beta on new
stocks 1.76 Req b =
(old$/total$) × old b + (new$/total$) × new b Beta on new stocks = (Req b −
(old$/total$) × old b)/(new$/total$) 9. What is the coefficient of variation on the
company's stock? Probability Stock's State
of of
State the
Economy Return Boom 0.45 25% Normal 0.50 15% 