FIN 301, 509, & FIN510 Class Web Page, Summer'23

 

The Syllabus

  

Weekly SCHEDULE, LINKS, FILES and Questions

Week

Coverage, HW, Supplements

-       Required

Equations and Assignments

 

Weekly Thursday class url on blackboard collaborate:

https://us.bbcollab.com/guest/976baa0d6b064640a15dc718ab5da585 updated, 6/22/2023

 

 

 

Class Schedule:

 

 

 

Topic and Activities,

class video web links

Assignments and Key Due Dates

Week 1

6/15 at 6 pm #117

Time value of money, chapter 5

Class video link

Discussion Board #1 on market watch game, due by Sunday 8/5

Week 2

6/22 at 6 pm #117

 

Discounted Cash Flow Valuation, chapter 6

 

Class video link

 

 

Quiz 1, due by Wednesday (6/28) 11:59 pm, start from Friday at 1 AM (on blackboard in week2 folder)

 

Homework of chapters 5, 6

due by Sunday 7/9

Week 3

6/29 at 6 pm #117

 

Interest Rates and Bond Valuation, chapter 7

 

Class video link

 

 

Quiz 2, due by Wednesday (7/5) 11:59 pm, start from Friday at 1 AM (on blackboard in week3 folder)

 

Homework of chapter 7 due by Sunday 7/9

 

Week 4

7/6 at 6 pm #117

 

Stock valuation, chapter 8

 

Class video link

 

 

Quiz 3, due by Wednesday (7/12) 11:59 pm, start from Friday at 1 AM (on blackboard in week4 folder)

 

Homework of chapter 8 due by 8/5

 

Week 5

7/14 at 6 pm #117

 

Capital Budgeting, WACC, chapters 9 &14

 

Class video link

 

Discussion Board # 2 on How can we bring down inflation, due by 8/5

 

Quiz 4 (only chapter 9), due by Wednesday (7/19) 11:59 pm, start from Friday at 1 AM (on blackboard in week5 folder)

 

 

Homework of chapter 9 due by 8/5

 

Week 6

7/21 at 6 pm #117

 

Chapter 13, risk and return

 

Class video link

Discussion Board # 3 on recession prediction due by 8/5

 

 

Quiz 5, due by Wednesday (7/26) 11:59 pm, start from Friday at 1 AM (on blackboard in week6 folder)

 

 

Homework of chapter 13 due by 8/5

 

Week 7

And Week 8

Part I

Review and Final

Video

       Final on 7/29 at 1 AM, on blackboard final folder, due by Sunday (8/6)11:59 pm

      Final prep video (on youtube)

Week 7

And Week 8

Part II

Chapter 2, chapter 3, not required

 

Class video link

 

 

 

 

Week 0

Market Watch Game 

  Use the information and directions below to join the game.

1.      URL for your game: 
https://www.marketwatch.com/game/fin509-23summer

 

2.     Password for this private game: havefun.

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

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

5.     Follow the instructions and start trading!

 

FYI How To Win The MarketWatch Stock Market Game (youtube) based on https://www.finviz.com

 

 

 

 

Pre-class assignment:

Set up marketwatch.com account and have fun

Week1,2

image002.jpg

 

 

 

 

Chapter 5 Time value of money 1

 

Week 1 in class exercise (word file)   Solution

 

Chapter 5 ppt 

 

The time value of money - German Nande (youtube)

 

Concept of FV, PV, Rate, Nper

Calculation of FV, PV, Rate, Nper

Concept of interest rate, compounding rate, discount rate

 

image001.jpg

 

 

Chapter 6 Time Value of Money 2

 

Chapter 6 PPT

 

Concept of PMT, NPV

Calculation of FV, PV, Rate, Nper, PMT, NPV, NFV

Concept of EAR, APR

Calculation of EAR, APR

 

 

First Discussion Board Assignment (post your writing on blackboard under discussion folder):

(due by 7/9 at 11:59 pm)

 Market Watch Game

Let's start trading in the stock market! Please join a game and report back on your experience.

Directions

1.      URL for your game: 
https://www.marketwatch.com/game/fin509-23summer

2.      Password for this private game: havefun.

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

4.      Register for a new account with your email address or sign in if you already have an account.


Discussion Board Prompts

1.      Why did you choose the stock? How much money did you think you would make? Please explain.

2.      Did you make money or lose money off of your chosen stock? Which factors contributed to that? 

3.      What did you learn from this experience and how will it affect your choices in real life when choosing stocks?

Instructions

        Responses should be 100 to 250 words in length and should answer all three prompts

        Optional: reply to one of your peers with meaningful, thought-provoking responses

        Due by 7/9/2023 at 11:59 p.m. ET

 

 

 

HOMEWORK of Chapters 5 and 6 (due on week 4, 7/9) 

1. 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)

 

2. The condominium at the beach that you want to buy costs $249,500. You plan to make a cash down payment of 20 percent and finance the balance over 10 years at 6.75 percent. What will be the amount of your monthly mortgage payment? ($2,291.89)

3. 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)

 

4. 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)

5. 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%)

6. 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%)

7. You have just won the lottery! You can receive $10,000 a year for 8 years or $57,000 as a lump sum payment today. What is the interest rate on the annuity? (8.22%)

8. 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)


9.  Expansion, Inc. acquired an additional business unit for $310,000. The seller agreed to accept annual payments of $67,000 at an interest rate of 6.5 percent. How many years will it take Expansion, Inc. to pay for this purchase? (5.68 years)

10. You want to retire early so you know you must start saving money. Thus, you have decided to save $4,500 a year, starting at age 25. You plan to retire as soon as you can accumulate $500,000. If you can earn an average of 11 percent on your savings, how old will you be when you retire? (49.74 years)

11. 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)

12. Fred was persuaded to open a credit card account and now owes $5,150 on this card. Fred is not charging any additional purchases because he wants to get this debt paid in full. The card has an APR of 15.1 percent. How much longer will it take Fred to pay off this balance if he makes monthly payments of $70 rather than $85? (93.04 months)

13. Bridget plans to save $150 a month, starting today, for ten years. Jordan plans to save $175 a month for ten years, starting one month from today. Both Bridget and Jordan expect to earn an average return of 8 percent on their savings. At the end of the ten years, Jordan will have approximately _____ more than Bridget. ($4,391)

(Hint: Bridgets is an annuity due, so abs(fv(8%/12, 10*12, 150, 0, 1)) --- type =1; Jordans is an ordinary annuity, so abs(fv(8%/12, 10*12, 150, 0) --- type =0, or omitted. There is a mistake in the help video for this question. Sorry for the mistake.)

 

 

14. What is the future value of weekly payments of $25 for six years at 10 percent? ($10,673.90)


15. At the end of this month, Bryan will start saving $80 a month for retirement through his company's retirement plan. His employer will contribute an additional $.25 for every $1.00 that Bryan saves. If he is employed by this firm for 25 more years and earns an average of 11 percent on his retirement savings, how much will Bryan have in his retirement account 25 years from now? ($157,613.33)

 

16. Sky Investments offers an annuity due with semi-annual payments for 10 years at 7 percent interest. The annuity costs $90,000 today. What is the amount of each annuity payment? ($6,118.35)


17. Mr. Jones just won a lottery prize that will pay him $5,000 a year for thirty years. He will receive the first payment today. If Mr. Jones can earn 5.5 percent on his money, what are his winnings worth to him today? ($76,665.51)

 

18. You want to save $75 a month for the next 15 years and hope to earn an average rate of return of 14 percent. How much more will you have at the end of the 15 years if you invest your money at the beginning of each month rather than the end of each month? ($530.06)

 

19. What is the effective annual rate of 10.5 percent compounded semi-annually? (10.78%) 

20. What is the effective annual rate of 9 percent compounded quarterly? (9.31%)

21. Fancy Interiors offers credit to customers at a rate of 1.65 percent per month. What is the effective annual rate of this credit offer? (21.70%)

 

22. What is the effective annual rate of 12.75 percent compounded daily? (13.60 percent)

 

23. Your grandparents loaned you money at 0.5 percent interest per month. The APR on this loan is _____ percent and the EAR is _____ percent. (6.00; 6.17)

24. Three years ago, you took out a loan for $9,000. Over those three years, you paid equal monthly payments totaling $11,826. What was the APR on your loan? (18.69%)

 

 

FYI only: help for homework

Part 1(Qs 1-2) Part 2(Qs 4-8) Part 3(Qs 9-12)

Part 4(Qs 13-16) Part 5(Qs 17-20) Part 6(Qs 21-24)

(Q13: Bridgets is an annuity due, so abs(fv(8%/12, 10*12, 150, 0, 1)) --- type =1; Jordans is an ordinary annuity, so abs(fv(8%/12, 10*12, 150, 0) --- type =0, or omitted. There is a mistake in the help video for this question. Sorry for the mistake.)

 

Quiz 1- Help Videos

Part I Part II Part III

 

Calculators


NPV calculator
 

 

NFV calculator

 

Time Value of Money Calculator 

 

2002 - 2019 by Mark A. Lane, Ph.D.

 

 

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))

 

image001.jpg

 

 

EAR = (1+APR/m)^m-1

APR = (1+EAR)^(1/m)*m

 

 

 

Excel Formulas 

To get FV, use FV function.    

 =abs(fv(rate, nper, pmt, pv))

 

To get PV, use PV function         

 = abs(pv(rate, nper, pmt, fv))

 

To get r, use rate function             

= rate(nper,  pmt, pv, -fv)

 

To get number of years, use nper function                                

 = nper(rate,  pmt, pv, -fv)

 

To get annuity payment, use PMT function                                          

 = abs(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      

APR = nominal(effective rate,  npery)

 

To get NPV, use NPV function

NPV = npv(rate, cf1, cf2,) + cf0

 

 

Week3

Chapter 7 Bond Pricing

 

Ppt

 

 

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

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

 

 

Balance Sheet of WalMart https://www.nasdaq.com/market-activity/stocks/wmt/financials

 

 

 

For discussion:

         What is this long term debt?

         Who is the lender of this long term debt?

So this long term debt is called bond in the financial market. Where can you find the pricing information and other specifications of the bond issued by WMT?

 

 

FINRA Bond market information

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

 

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

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

 

Corporate Bond https://www.finra.org/finra-data/fixed-income/corp-and-agency/trade

 

 

 

1.     Understand what is coupon, coupon rate, yield, yield to maturity, market price, par value, maturity, annual bond, semi-annual bond, current yield.

 

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

 

 

https://www.finra.org/finra-data/fixed-income/bond?symbol=WMT5571287&bondType=CORP

 

 

The above graph shows the cash flows of a five year 5% coupon bond.

 

  

How Bonds Work (video)

Investing Basics: Bonds(video)

 

In class exercise:      

 

1.     Find bonds sponsored by WMT

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

       Search for Walmart bonds

 

For discussion:

       What are the ratings of the WMT bonds? How does the rating agency rate a bond? Altman Z Score video

       Why some WMT bonds are priced higher than the par value, while others are priced at a discount?

       Why some WMT bonds have higher coupon rates than other bonds? How does WMT determine the coupon rates?

       Why some WMT bonds have higher yields than other bonds? Does a bonds yield change daily?

       Which of the WMT bonds are the most attractive one to you? Why?

 

http://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C610043&symbol=WMT4117477

 

 

2.      2. Understand what is coupon, coupon rate, yield, yield to maturity, market price, par value, maturity, annual bond, semi-annual bond, current yield.

 

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 4%, 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

 

Bond Calculator (www.jufinance.com/bond)

 

For example, when the annual coupon bond is selling for $1,100, what is its return to investors?

 

For example, when the semi-annual coupon bond is selling for $1,100, what is its return to investors?

 

5.      Current yield: For the above bond, calculate current yield. Note: current yield = 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 bonds yield to maturity is 10%. How much is its price?

 

7.      Understand what is bond rating and how to read those ratings.

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

b.      What is WMTs rating?

c.       Is the rating for WMT the highest?

d.      Who earned the highest rating?

 

 

Supplement: Municipal Bond

image051.jpg

https://emma.msrb.org/

 

For class discussion:

       Shall you invest in municipal bonds?

       Are municipal bonds better than investment grade bonds?

 

 

The risks investing in a bond

       Bond investing: credit Risk (video)

       Bond investing: Interest rate risk (video)

       Bond investing: increased risk (video)

 

 

 

Market data website:

1.   FINRA

      http://finra-markets.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/

 

 

 

Homework ( due on_7/9/2023)

 

1.  Firm AAAs bonds price = $850.  Coupon rate is 5% and par is $1,000. The bond has six years to maturity. Calculate for current yield? (5.88%)

2. For a zero coupon bond, use the following information to calculate its yield to maturity. (14.35%) Years left to maturity = 10 years. Price = $250. 

3.  For a zero coupon bond, use the following information to calculate its price. ($456.39) Years left to maturity = 10 years. Yield = 8%.

4.  Imagine that an annual coupon bonds coupon rate = 5%, 15 years left. Draw price-yield profile. (hint: Change interest rate, calculate new price and draw the graph). 

5. IBM 5 year 2% annual coupon bond is selling for $950. How much this IBM bonds YTM?  3.09%

6.  IBM 10 year 4% semi-annual coupon bond is selling for $950. How much is this IBM bonds YTM?  4.63%

7. IBM 10 year 5% annual coupon bond offers 8% of return. How much is the price of this bond?   798.7

8. IBM 5 year 5% semi-annual coupon bond offers 8% of return. How much is the price of this bond?  $878.34

9.  IBM 20 year zero coupon bond offers 8% return. How much is the price of this bond? 208.29

10.   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? (8.90%)

11.  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?

($895.43)

12.  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)

13.  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 yield to maturity?  (6.29%)

14.   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%)

 

Videos --- homework help (due by 7/9/2023)

Part I Q1-Q2 Q3-Q4 Q5-Q8 Q9-Q14

 

 

Quiz 2- Help Video (Quiz 2 Due by the end of week 3 Wednesday on 7/12/2023)

 

 

 

Bond Calculator

www.jufinance.com/bond

 

 

 

Bond Pricing Formula (FYI)

 

image033.jpg

 

 

 

image035.jpg

 

 

image036.jpg

 

 

image037.jpg

 

image038.jpg

 

 

 

 

Bond Pricing Excel Formula

 

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

 

 

Second Discussion Board Reading Assignments (suggested)

 

Treasury yields invert as investors weigh risk of recession

June 6, 2023

https://www.usbank.com/investing/financial-perspectives/market-news/treasury-yields-invert-as-investors-weigh-risk-of-recession.html

 

 

 

Third Discussion Board Reading Assignments

 

ChatGPT probably wont help you beat the stock marketbut it can assist investors in other ways, says CFP

Published Fri, Jun 23 20233:01 PM EDT Cheyenne DeVon

https://www.cnbc.com/2023/06/23/cfp-chatgpt-wont-help-you-beat-the-stock-market-but-has-other-uses.html

 

Around 50% of Gen Zers and a little over half of millennials have used ChatGPT, OpenAIs viral AI chatbot, for investing advice, according to a recent survey of over 2,000 Americans by The Motley Fool, a financial and investing advice company.

 

Thats despite the fact that OpenAI prompts ChatGPT users with a warning that it sometimes writes plausible-sounding but incorrect or nonsensical answers and that the tool is not intended to give advice.

 

But letting AI build your portfolio probably isnt the best investment strategy anyway.

 

It is by no means going to provide you with a way to beat the market, Douglas Boneparth, a certified financial planner and the president and founder of Bone Fide Wealth, tells CNBC Make It.

 

Boneparth himself put ChatGPTs financial acumen to the test and says the results werent great. He asked the tool to build him a hypothetical diversified portfolio with 80% equity and 20% fixed income and gave it a few parameters, risk characteristics and guidance as to what kind of exchange-traded funds (ETFs) he wanted to use.

 

I was presented with a table that added up to more than 100%, he says. After informing ChatGPT of this, it tried to correct the error but didnt necessarily pull the right information, he says. However, Boneparth says he was impressed by how close ChatGPT came to achieving what he asked.

 

People who use AI tools like ChatGPT for financial advice may misunderstand the current capabilities and limitations of these tools. Since theyre able to process large amounts of data, some may assume that AI chatbots are all knowing or can predict the future performance of a company, Boneparth says.

 

While this technology may make a few lucky stock picks, it hasnt been around long enough for us to see whether it can replicate those results over the long term, he says. Additionally, the free version of ChatGPT has limited knowledge of world events after 2021, which means its responses arent based on real-time data.

 

Theres just fundamental components of the technology that are not there to do the things that you hope it would do, Boneparth says. Theres a difference between potential and reality. And the reality is were certainly not in a place where we should be relying on a ChatGPT bot or AI in general to be making investment decisions for ourselves.

 

How ChatGPT can actually help investors

While ChatGPT and other AI chatbots may not be the best tools for building a portfolio, they can be useful to investors in other ways.

 

The technology can be a helpful tool when looking up definitions of financial terms you may be unfamiliar with or for gathering data when researching a company that youre considering investing in, Boneparth says.

 

But dont expect AI to fully replace human financial advisors any time soon.

 

While well probably continue to see these tools do very well when it comes to analytical number crunching, a human financial advisor is better suited to help you with financial decisions that involve feelings and behaviors, such as deciding to move across the country or choosing where to retire, Boneparth says.

 

AI isnt really capable of understanding the specific preferences of an individual, and therefore youre not necessarily going to get tailored financial advice, he says.

 

Anytime feelings and behaviors get involved, the financial planner or financial professional is likely going to be able to use their own ability to relate or commiserate and help process those feelings a lot better than what AI can do at this point.

 

 

Big banks are talking up generative A.I. but the risks mean theyre not diving in headfirst

PUBLISHED MON, JUN 12 20237:48 PM EDT Ryan Browne MacKenzie Sigalos

https://www.cnbc.com/2023/06/13/banks-are-talking-up-ai-amid-chatgpt-buzz-but-keeping-its-use-limited.html

 

 

KEY POINTS

       Many terms and phrases were used by top banking and fintech executives to describe generative AI at Money 20/20 in Amsterdam this week, from mind boggling to an explosion of innovation.

       Generative AI, which generates content in response to user prompts, can be used to automate complex processes in banking.

       However, the technology is still in its early days, and many banks cautioned that it may be too risky to implement it in areas that touch consumers.

AMSTERDAM, Netherlands Major banks and fintech companies claim to be piling into generative artificial intelligence as the hype surrounding the buzzy technology shows no signs of fizzling out but there are lingering fears about potential pitfalls and risks.

 

At the Money 20/20 fintech conference in Amsterdam, Netherlands, executives at large lenders and online finance firms sang the praises of generative AI, calling it an explosion of innovation, and saying it will unleash innovation in areas that we cant even think about.

 

Chalapathy Neti, head of AI at global bank messaging network Swift, described the progress made with ChatGPT and GPT-4 as mind-boggling. He added, This is truly a transformative moment.

 

But in the short term, banks are scrambling to figure out the use cases.

 

The Netherlands ABN Amro is one banking giant thats piloting the use of generative AI in its processes.

 

Annerie Vreugdenhil, chief commercial officer of ABN Amros personal and business banking division, revealed on a panel that it is using the technology to automatically summarize conversations between bank staff and customers. Its also using it to help its employees gather data on customers to assist with answering queries and avoid repetitive questions.

 

The bank is now in the process of scaling these pilots to 200 employees and is exploring a number of new pilots to start this summer.

 

In a closed-door session on the application of AI in financial services, meanwhile, two banking executives explained how theyre using the technology to improve their internal code and analyze how their clients are behaving.

 

We are experimenting at this stage and we dont have necessarily anything client facing but we are using the [tech the] same as other companies, for example, code refactoring, comms calls, the other way around, said Mariana Gomez de la Villa, an executive at ING Bank specializing in strategy and innovation.

 

Indeed, the banks appeared unanimous in their hesitation to roll out ChatGPT-like tools to customer-facing scenarios.

Jon Ander Beracoechea Alava, advanced analytics discipline head at Spanish bank BBVA, said that the lender had taken a conservative approach to AI, adding that, at this stage, generative AI is still early and immature.

 

A crucial issue is that advanced AI systems require the processing of huge volumes of data a sensitive commodity wrapped up in all kinds of rules and regulations. As such, Alava said that at this stage it was too risky to involve sensitive information from customers.

 

Generative A.I., explained

Generative AI is a specific form of AI that is able to produce content from scratch. The systems take inputs from the user and feed them into powerful algorithms fueled by large datasets to generate new text, images and video in a way thats more humanlike than most AI tools already on the market.

 

The technology was thrust into the spotlight following the success of OpenAIs GPT language processing technology. ChatGPT, which uses massive language models to create human-sounding responses to questions, has ignited an arms race among some companies over what is seen as the next paradigm shift in tech.

 

In March, Goldman Sachs chief information officer, Marco Argenti, told CNBC the bank is experimenting with generative AI tools internally to help its developers automatically generate and test code.

 

More recently, in May, Goldman spun off the first startup from the banks internal incubator an AI-powered social media company for corporate use called Louisa. The push into AI is part of a larger effort by CEO David Solomon to expedite the banks digital makeover.

 

Morgan Stanley, meanwhile, is using it to inform its financial advisors on queries they may have. The bank has been testing an OpenAI-powered chatbot with 300 advisors so far, with a view to ultimately aid its roughly 16,000 advisors in making use of Morgan Stanleys repository of research and data, according to Jeff McMillan, head of analytics and data at the firms wealth management division.

 

A.I. co-pilot

These are just some examples of how financial firms are using AI, but more as a digital helper than as a core part of their services.

 

Gudmundur Kristjansson, CEO and co-founder of Icelandic regulatory technology firm Lucinity, showed CNBC how artificial intelligence can be used to assist with a key area in finance: fighting crime.

 

An AI tool the company created, called Luci, aims to help compliance professionals with their investigations. In a live demonstration, Kristjansson showed himself looking into a money laundering case. The AI tool analyzed the case and described what it saw and then completed an independent review.

 

In this use case, the AI acts as more of a resource or copilot to help an employee find data and flesh out a case rather than replace the role of a person looking into reports of suspicious activity.

 

Where you find money laundering is through ... interconnected networks of people who are basically employed to do it. Thats why its so hard to find it. Banks spent this year $274 billion on prevention, Kristjansson told CNBC in an interview.

 

He said where Luci helps is by vastly reducing the amount of time spent trying to work out whether something is fraud or money laundering.

 

The whole appeal of AI to the big banks and fintechs, Money 20/20 attendees said, is the potential reduction in the time and money it takes to complete tasks that can take human employees days.

 

Niklas Guske, chief operating officer at Taktile, a startup that helps fintechs automate decision-making, acknowledged that the use of AI is challenging in the financial sector, given the lack of publicly available data.

 

But he stressed that it could be a crucial tool to reduce the companies operational expenses and improve efficiency.

 

In many fintech applications, this is done through an increase in automation and reducing manual processes, especially in onboarding and underwriting, he told CNBC.

 

This automation is truly enabled through access to more data sources, which empower lenders to gain new insights and identify the right customers without having to parse through dozens of PDFs for the right piece of information.

 

CNBCs Hugh Son contributed reporting

Week 4

Chapter 8 Stock Valuation

 

ppt

 

Part I Dividend payout and Stock Valuation

 

For class discussion:

        Why can we use dividend to estimate a firms intrinsic value?

    Are future dividends predictable?

 

 

F Dividend History

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

         EX-DIVIDEND DATE 04/25/2023

         DIVIDEND YIELD 3.94%

         ANNUAL DIVIDEND $0.60

         P/E RATIO 21.62

Ex/EFF DATE

TYPE

CASH AMOUNT

DECLARATION DATE

RECORD DATE

PAYMENT DATE

04/25/2023

CASH

$0.15

04/06/2023

04/26/2023

06/01/2023

02/10/2023

CASH

$0.65

02/13/2023

03/01/2023

02/10/2023

CASH

$0.15

02/02/2023

02/13/2023

03/01/2023

11/14/2022

CASH

$0.15

10/26/2022

11/15/2022

12/01/2022

08/10/2022

CASH

$0.15

07/27/2022

08/11/2022

09/01/2022

04/25/2022

CASH

$0.10

04/07/2022

04/26/2022

06/01/2022

01/28/2022

CASH

$0.10

01/10/2022

01/31/2022

03/01/2022

11/18/2021

CASH

$0.10

10/27/2021

11/19/2021

12/01/2021

01/29/2020

CASH

$0.15

01/08/2020

01/30/2020

03/02/2020

10/21/2019

CASH

$0.15

10/11/2019

10/22/2019

12/02/2019

07/22/2019

CASH

$0.15

07/12/2019

07/23/2019

09/03/2019

04/23/2019

CASH

$0.15

04/09/2019

04/24/2019

06/03/2019

01/30/2019

CASH

$0.15

01/17/2019

01/31/2019

03/01/2019

10/22/2018

CASH

$0.15

10/11/2018

10/23/2018

12/03/2018

07/20/2018

CASH

$0.15

07/13/2018

07/23/2018

09/04/2018

04/19/2018

CASH

$0.15

04/10/2018

04/20/2018

06/01/2018

01/29/2018

CASH

$0.13

01/16/2018

01/30/2018

03/01/2018

01/29/2018

CASH

$0.15

01/16/2018

01/30/2018

03/01/2018

10/20/2017

CASH

$0.15

10/12/2017

10/23/2017

12/01/2017

07/20/2017

CASH

$0.15

07/13/2017

07/24/2017

09/01/2017

04/18/2017

CASH

$0.15

04/10/2017

04/20/2017

06/01/2017

01/18/2017

CASH

$0.05

01/10/2017

01/20/2017

03/01/2017

01/18/2017

CASH

$0.15

01/10/2017

01/20/2017

03/01/2017

10/25/2016

CASH

$0.15

10/13/2016

10/27/2016

12/01/2016

07/26/2016

CASH

$0.15

07/14/2016

07/28/2016

09/01/2016

04/27/2016

CASH

$0.15

04/08/2016

04/29/2016

06/01/2016

01/27/2016

CASH

$0.25

01/12/2016

01/29/2016

03/01/2016

01/27/2016

CASH

$0.15

01/12/2016

01/29/2016

03/01/2016

10/28/2015

CASH

$0.15

10/08/2015

10/30/2015

12/01/2015

07/29/2015

CASH

$0.15

07/09/2015

07/31/2015

09/01/2015

04/29/2015

CASH

$0.15

04/10/2015

05/01/2015

06/01/2015

01/28/2015

CASH

$0.15

01/08/2015

01/30/2015

03/02/2015

10/29/2014

CASH

$0.125

10/08/2014

10/31/2014

12/01/2014

07/30/2014

CASH

$0.125

07/10/2014

08/01/2014

09/02/2014

 

Wal-Mart Dividend History

https://www.macrotrends.net/stocks/charts/WMT/walmart/dividend-yield-history

 

WMT Dividend History

https://www.nasdaq.com/market-activity/stocks/wmt/dividend-history

 EX-DIVIDEND DATE 05/04/2023

         DIVIDEND YIELD 1.44%

         ANNUAL DIVIDEND $2.28

         P/E RATIO 38.01

Ex/EFF DATE

TYPE

CASH AMOUNT

DECLARATION DATE

RECORD DATE

PAYMENT DATE

12/07/2023

CASH

$0.57

02/21/2023

12/08/2023

01/02/2024

08/10/2023

CASH

$0.57

02/17/2023

08/11/2023

09/05/2023

05/04/2023

CASH

$0.57

02/21/2023

05/05/2023

05/30/2023

03/16/2023

CASH

$0.57

02/21/2023

03/17/2023

04/03/2023

12/08/2022

CASH

$0.56

02/17/2022

12/09/2022

01/03/2023

08/11/2022

CASH

$0.56

02/17/2022

08/12/2022

09/06/2022

05/05/2022

CASH

$0.56

02/17/2022

05/06/2022

05/31/2022

03/17/2022

CASH

$0.56

02/17/2022

03/18/2022

04/04/2022

12/09/2021

CASH

$0.55

02/18/2021

12/10/2021

01/03/2022

08/12/2021

CASH

$0.55

02/18/2021

08/13/2021

09/07/2021

05/06/2021

CASH

$0.55

02/18/2021

05/07/2021

06/01/2021

03/18/2021

CASH

$0.55

02/18/2021

03/19/2021

04/05/2021

12/10/2020

CASH

$0.54

02/18/2020

12/11/2020

01/04/2021

08/13/2020

CASH

$0.54

02/18/2020

08/14/2020

09/08/2020

05/07/2020

CASH

$0.54

02/18/2020

05/08/2020

06/01/2020

03/19/2020

CASH

$0.54

02/18/2020

03/20/2020

04/06/2020

12/05/2019

CASH

$0.53

02/19/2019

12/06/2019

01/02/2020

08/08/2019

CASH

$0.53

02/19/2019

08/09/2019

09/03/2019

05/09/2019

CASH

$0.53

02/19/2019

05/10/2019

06/03/2019

03/14/2019

CASH

$0.53

02/19/2019

03/15/2019

04/01/2019

12/06/2018

CASH

$0.52

02/21/2018

12/07/2018

01/02/2019

08/09/2018

CASH

$0.52

02/21/2018

08/10/2018

09/04/2018

05/10/2018

CASH

$0.52

02/20/2018

05/11/2018

06/04/2018

03/08/2018

CASH

$0.52

02/20/2018

03/09/2018

04/02/2018

 

For class discussion:

What conclusions can be drawn from the above information?

Can we figure out the stock price of Wal-Mart based on dividend, with reasonable assumptions?

 

Can you estimate the expected dividend in 2024? And in 2025? And on and on

 

 

Can you write down the math equation now?

 

WMT stock price = ?

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

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

 

 

Calculating the present value of dividends when assuming dividends go to infinity can indeed be challenging. To simplify the calculation, we can make the assumption that dividends grow at a certain rate.

 

Additionally, we can use the discount rate 'r,' which is based on the Beta and Capital Asset Pricing Model (CAPM) discussed in Chapter 13. By incorporating these assumptions, we can streamline the calculation process for determining the present value of dividends.

   

 

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

 

 

 

What information does each item in the table convey or represent?

 

From finviz.com   https://finviz.com/quote.ashx?t=WMT

 

 

 

 

 

 

 

Part II: Constant Dividend Growth-Dividend growth model

Calculate stock prices

1)      Given next dividends and price expected to be sold for

Po= https://www.jufinance.com/fin509_19s/index_files/image013.gif 

Po= https://www.jufinance.com/fin509_19s/index_files/image015.gif +https://www.jufinance.com/fin509_19s/index_files/image017.gif

Po= https://www.jufinance.com/fin509_19s/index_files/image015.gif +https://www.jufinance.com/fin509_19s/index_files/image019.gif +https://www.jufinance.com/fin509_19s/index_files/image021.gif

Po= https://www.jufinance.com/fin509_19s/index_files/image015.gif +https://www.jufinance.com/fin509_19s/index_files/image019.gif +https://www.jufinance.com/fin509_19s/index_files/image023.gif+https://www.jufinance.com/fin509_19s/index_files/image025.gif

image086.jpg

Refer to http://www.calculatinginvestor.com/2011/05/18/gordon-growth-model/

 

        Now lets apply this Dividend growth model in problem solving.

 

 

Constant dividend growth model calculator  (www.jufinance.com/stock)

 

 

Equations

       Po= D1/(r-g) or Po= Do*(1+g)/(r-g)

 

       r = D1/Po+g = Do*(1+g)/Po+g; 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)

 

Exercise:

1.      Consider the valuation of a common stock that paid $1.00 dividend at the end of the last year and is expected to pay a cash dividend in the future. Dividends are expected to grow at 10% and the investors required rate of return is 17%. How much is the price? How much is the dividend yield? Capital gain yield? (answer: 15.71, 7%, 10%)

2.     The current market price of stock is $90 and the stock pays dividend of $3 (D1) with a growth rate of 5%. What is the return of this stock? How much is the dividend yield? Capital gain yield? (answer: 8.33%, 3.33%, 5%)

 

 

Part III: Non-Constant Dividend Growth

Calculate stock prices

1)      Given next dividends and price expected to be sold for

Po= https://www.jufinance.com/fin509_19s/index_files/image013.gif 

Po= https://www.jufinance.com/fin509_19s/index_files/image015.gif +https://www.jufinance.com/fin509_19s/index_files/image017.gif

Po= https://www.jufinance.com/fin509_19s/index_files/image015.gif +https://www.jufinance.com/fin509_19s/index_files/image019.gif +https://www.jufinance.com/fin509_19s/index_files/image021.gif

Po= https://www.jufinance.com/fin509_19s/index_files/image015.gif +https://www.jufinance.com/fin509_19s/index_files/image019.gif +https://www.jufinance.com/fin509_19s/index_files/image023.gif+https://www.jufinance.com/fin509_19s/index_files/image025.gif

 

Non-constant dividend growth model

 

Equations

Pn = Dn+1/(r-g) = Dn*(1+g)/(r-g), since year n, dividends start to grow at a constant rate.

Where Dn+1= next dividend in year n+1;

Do = just paid dividend in year n;

r=stock return; g= dividend growth rate;

Pn= current market price in year n;

 

Po = npv(r, D1, D2, , Dn+Pn)

Or,

Po = D1/(1+r) + D2/(1+r)2 + + (Dn+Pn)/(1+r)n

 

Calculator: Non-Constant Dividend Growth Calculator

 

 

In class exercise for non-constant dividend growth model

 

 

 

 

 

1.     You expect AAA Corporation to generate the following free cash flows over the next five years:

 

Year

1

2

3

4

5

FCF ($ millions)

75

84

96

111

120

 

Since year 6, you estimate that AAA's free cash flows will grow at 6% per year. WACC of AAA = 15%

       Calculate the enterprise value for DM Corporation.

       Assume that AAA has $500 million debt and 14 million shares outstanding, calculate its stock price.

 

Answer:

FCF grows at 6% ==> could use dividend constant growth model to get the value at year 5

Value in year five = FCF in year 6 /(WACC - g)

FCF in year 6 = FCF in year 5 *(1+g%), g=6%

FCF in year 6 = 120 *(1+6%)

value in year five = 120*(1+6%)/(15%-6%) = 1413.13

value in year 0 (current value) =1017.56 = npv(15%, 75, 84, 96, 111, 120+1413.13)

Note: Po = D1/(r-g) ==> Firm value = FCF1/(WACC-g) = FCFo *(1+g)/(WACC-g)

Assume that AAA has $500 million debt and 14 million shares outstanding, calculate its stock price.