FIN 509 Class Web Page, Fall 2 semester' 24

 

The Syllabus     Grade Calculator    Overall Grade Calculator  Risk Tolerance Test (FYI)

  

Weekly SCHEDULE, LINKS, FILES and Questions

Week

Coverage, HW, Supplements

-       Required

Equations and Assignments

 

·      Weekly Thursday class url on blackboard collaborate: On Blackboard under “Join Course Room”

Or from here  

https://us.bbcollab.com/guest/a070558d332041888dd5772fefccc290

 

 

·       Weekly Q&A Session on Blackboard URL (on Saturday from 7 – 8 PM): 

 https://us.bbcollab.com/guest/7ee6be25e06546949517ebf89ef980b5

 

 

 

 

 

Class Schedule:

 

 

 

Topic and Activities,

class video web links

Assignments and Key Due Dates

Week 1

10/8 at 6 pm #263 (or online)

Time value of money, chapter 5

Class video link

Discussion Board #1 on market watch game,   due by  Tuesday, week 5 (11/3)   

Week 2

10/15 at 6 pm #263 (or online)

 

Discounted Cash Flow Valuation, chapter 6

 

Class video link

 

 

Quiz 1, due by Monday (10/21)  11:59 pm,  

 

Homework of chapters 5, 6

due by  Thursady, week 5 (11/3)

Week 3

10/22 at 6 pm #263 (or online)

 

Interest Rates and Bond Valuation, chapter 7

 

Class video link

 

 

Quiz 2, due by  Monday (10/28)  11:59 pm

 

Homework of chapter 7

due by  Thursady, week 4 (10/29)

Week 4

10/29 at 6 pm #263 (or online)

 

Stock valuation, chapter 8

 

Class video link

 

 

 

Quiz 3, due by  Monday  11/4) 11:59 pm

 

Homework of chapter 8  due with final

 

Week 5

11/5 at 6 pm #263 (or online)

 

 

Capital Budgeting, WACC, chapters 9 &14

 

Class video link

 

Discussion Board # 2: Fed Monetary Policy,  due with final

 

 

 

Quiz 4 (only chapter 9), due by  Monday  (11/11) 11:59 pm.

 

 

Homework of chapter 9 due with Final

 

Week 6

11/12 at 6 pm #263 (or online)

 

Chapter 13, risk and return

 

Class video link

Discussion Board #3: The Impact of the Presidential Election on the Stock Market,  due with final

 

 

Quiz 5, due by  Monday  (11/18) 11:59 pm

 

Homework of chapter 13  due with Final

 

Week 7

 

Part I

11/19 Review and Final

Video

·       Final on   at 1 AM, on blackboard final folder, due by Sunday (11/24)11:59 pm

·      Final prep video (on youtube)

Week 7

 

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/fin509-24fall

 

2.     Password for this private game: havefun

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

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

5.     Follow the instructions and start trading!

 

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

 

 

·        A shorting strategy based on finviz.com (FYI)  

 https://www.jufinance.com/game/short_selling.html 

 

 

Pre-class assignment:

Set up marketwatch.com account and have fun

Week1,2

image002.jpg

 

 

 

 

Chapter 5 Time value of money – Part 1

 

 Chapter 5 In Class Exercise   (Solution Word File)

 

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

 

 

Present value – Future value – Demonstration Game

 

 

 

In class exercise (conceptual)

 

 

 

 

Chapter 6 Time Value of Money – Part 2

 

Chapter 6 PPT

 

Chapter 6 In Class Exercise               (Chapter 6 In Class Exercise Solution Word File)

 

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):

 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/fin509-24summer

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 7/11/2024  at 11:59 p.m. ET

 

 

 

HOMEWORK of Chapters 5 and 6 (due by 11/3 ) 

 

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: Bridget’s is an annuity due, so abs(fv(8%/12, 10*12, 150, 0, 1)) --- type =1; Jordan’s is an ordinary annuity, so abs(fv(8%/12, 10*12, 175, 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: Bridget’s is an annuity due, so abs(fv(8%/12, 10*12, 150, 0, 1)) --- type =1; Jordan’s is an ordinary annuity, so abs(fv(8%/12, 10*12, 175, 0) --- type =0, or omitted. There is a mistake in the help video for this question. Sorry for the mistake.)

 

Quiz 1- Help Videos   - Practice Quiz

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

 

Part I - Yield Curve     Quiz      Self-Produced Video

 

image161.jpg

https://www.ustreasuryyieldcurve.com/

 

US Treasuries Yield Curve - October 22, 2024

·        Inverted Yield Curve: The curve starts high at the short end, with a peak around 1-month maturity, and then declines, hitting a low point at around 3 years. This is indicative of an inverted yield curve, which often signals an impending economic recession.

·        Steepening Beyond 10 Years: After the 10-year mark, the curve starts to rise again, indicating investors expect higher returns for longer maturities, possibly due to anticipated future inflation or uncertainty.

  • Fed Funds Target Range: The checked Fed Funds Target Range highlights that short-term interest rates are influenced by the Federal Reserve's policy, which is likely elevated in this case to combat inflation.

 

 

image162.jpg

 

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

 

Current Treasury Yield Curve vs. prior years’

  • Flatter Yield Curve: This graph compares the yield curve for current, October 2023, and October 2022. All three curves are relatively flat, indicating limited difference in yields across maturities. This can signal economic stagnation or low growth expectations.
  • Declining Trend: Yields from 2022 to 2023 and now show a decline, reflecting that interest rates have decreased over time, largely due to The Federal Reserve’s policies.

Summary:

  ·  Inflation:

  • A flattening or inverted yield curve can indicate lower inflation expectations. If the yield curve is flat or inverted, it suggests that investors expect slower economic growth, which may dampen inflation in the future.
  • Long-term rates are low, reflecting that investors do not foresee a significant rise in inflation over time. The Federal Reserve’s efforts to control inflation through higher short-term rates appear to be having the desired effect.

·  Stock Market:

  • An inverted yield curve is often a predictor of economic recessions, which tend to negatively affect the stock market. Historically, such curves are followed by a period of reduced corporate profits and economic contraction, leading to lower stock prices.
  • The flattening curve signals caution among investors. The expectation of slower growth could lead to a more volatile or downward-trending stock market as investors become more risk-averse, favoring safer, interest-bearing assets like bonds over equities.

·  Economic Growth:

  • The inverted or flattening yield curve typically signals slowing economic growth or an impending recession. In this scenario, investors are betting that the Federal Reserve’s actions (e.g., raising short-term rates) to combat inflation will lead to reduced economic activity in the near term.
  • The low long-term yields reflect an outlook of subdued growth over the long term, meaning the economy could be entering a period of stagnation or slow recovery, rather than robust expansion.

 

 

Part II – Bond Definition

 

 

How Bonds Work (video)

 

 

For discussion:  https://jufinance.com/risk_tolerance.html

 

Bond Type         

 Characteristics                                  

 Suitability                                 

 Risk                                   

Short-Term Bonds  

Quick maturity, Low risk, Lower returns         

Conservative, Need liquidity               

Reinvestment Risk                      

Long-Term Bonds   

Higher returns, High risk                       

Long-term, High risk tolerance              

Default Risk; Market interest rate risk

 Corporate Bonds   

Higher yields, Higher risk, Company influence   

Seeking returns, Accepting higher risk     

Default Risk; Market interest rate risk (assuming long maturity)

 Treasury Securities

Low risk, Steady income, Different maturities   

Conservative, Stable income requirement    

Market interest rate risk (assuming long maturity) 

 Municipal Bonds   

Tax advantages, Credit risk                     

Tax-efficient income, Higher tax bracket   

Default Risk; Market interest rate risk (assuming long maturity)

 

 

·       Among the aforementioned bonds, do you have a preference? If so, what factors influence your choice?

 

 

 image141.jpg

Outlook for Investing in Bonds in 2024 (FYI only)

After starting the year recommending that investors focus on the middle of the yield curve, we began to advise investors to lengthen their duration in our midyear bond market update. According to our forecasts, we continue to think investors will be best served in longer-duration bonds and locking in the currently high interest rates. https://www.morningstar.com/markets/where-invest-bonds-2024

 

  

Where can you find bond information?

·       All types of bonds: https://www.finra.org/finra-data/fixed-income

·       Treasury Bond Auction and Market information

http://www.treasurydirect.gov/

 

Are bonds Risky?                   Self-produced video               Quiz 

 

Bond risk credit risk (video)

Bond risk interest rate risk (video)

 

 

 

Bond Type

Risk

Return

Potential Investors

Website for Info

Government Bonds

Low (for developed countries)

Low

Conservative, risk-averse investors

https://www.treasurydirect.gov

Corporate Bonds

Moderate to High

Moderate to High

Investors seeking higher returns

https://www.finra.org

Convertible Bonds

Moderate to High

Moderate with potential for high (if stock rises)

Investors willing to take risk for potential stock upside

https://www.investopedia.com

Zero-coupon Bonds

Moderate

Moderate

Investors seeking tax advantages or fixed returns

https://www.investor.gov

Floating-rate Bonds

Moderate

Variable (depends on rates)

Investors seeking protection against interest rate changes

https://www.investopedia.com

Callable Bonds

Moderate to High

Moderate (with potential for early redemption)

Investors betting on lower interest rates

https://www.finra.org

Puttable Bonds

Low to Moderate

Low

Conservative investors seeking flexibility

https://www.investopedia.com

Inflation-linked Bonds (TIPs)

Low

Moderate (inflation-adjusted)

Investors seeking protection against inflation

https://www.treasurydirect.gov

Foreign Bonds

Moderate (depends on issuer)

Moderate

Investors seeking international exposure

https://www.investopedia.com

Savings Bonds

Very Low

Low

Individual, conservative investors

https://www.treasurydirect.gov

 

 

 

 

   

 

 

image143.jpg       

The above graph shows the cash flow of a five year 5% coupon bond. The bond has a duration of 4.49 years.

 

What is Duration?

  • Duration is a measure of how long it takes, in years, for the price of a bond to be repaid by its internal cash flows (coupon payments and the principal).
  • It’s also used to assess how sensitive a bond is to changes in interest rates. A higher duration means the bond's price will drop more when interest rates rise.

 

In the image:

  • Each year there’s a cash flow of $50, and in the final year (Year 5), there's a final payment of $1050 (including $50 interest and $1000 principal).
  • Duration tells you how much time, on average, it takes to get those cash flows.

 

If the bond has a duration of 4.49 years, this means that the average time to receive the bond's payments (weighted by their value) is about 4.49 years. This also means that for every 1% increase in interest rates, the bond's price would drop by approximately 4.49%.

 

In Excel: to get duration, use duration function, such as “=DURATION(DATE(2024, 10, 17), DATE(2029, 10, 17), 5%, 5%, 2, 1)=4.49

Or visit https://www.jufinance.com/bond_chatgpt/ to get both duration and convexity (FYI only).

 

 

Relationship between bond prices and interest rates (Khan academy)

 

 

 

 Market data website:

FINRA:      https://www.finra.org/finra-data/fixed-income/corp-and-agency   (FINRA bond market data, 10/22/2024)

 image163.jpgimage164.jpg

 

For example:

image165.jpg

 

 

 

 

 

 

  Bond Calculation    Bond Calculator

 

Investing Basics: Bonds(video)

 

 

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

 

3.      2. 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?

 

3.      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?

 

4.      Current yield: For the above bond, calculate current yield. Note: current yield = coupon/bond price

5.      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?

 

6)   coupon: use pmt function in excel. 

·       =abs(pmt(yield to maturity, years left to maturity, -price, 10000) for annual coupon

·       =abs(pmt(yield to maturity/2, years left to maturity*2, -price, 10000)*2 for semi-annual coupon

 

 

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

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

b.      What is WMT’s rating?

c.       Is the rating for WMT the highest?

d.      Who earned the highest rating?

 

       8. FYI only

o   A quick quiz on the conceptual comprehension of the bond chapter (FYI only, not required):

www.jufinance.com/bond.html

 

o   An exercise on bond concepts with expiations (FYI only)

https://www.jufinance.com/game/bond/index.html

 

 

Supplement: Municipal Bond

image051.jpg

https://emma.msrb.org/

 

·       Corporate Bond Data is available at FINRA.ORG:  https://www.finra.org/finra-data/fixed-income/corp-and-agency

·       Muni Bond Data is available at EMMA https://emma.msrb.org/

·       Treasury Securities Data is available at Treasury Direct: https://www.treasurydirect.gov/

 

 

 

 

For class discussion:

·       Shall you invest in municipal bonds?

·       Are municipal bonds better than investment grade bonds?

 

 

 

Homework ( due by week 5, 11/3)

 

1.  Firm AAA’s 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 bond’s 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 bond’s YTM?  3.09%

6.  IBM 10 year 4% semi-annual coupon bond is selling for $950. How much is this IBM bond’s 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 week 5, 11/3)

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

 

 

Quiz 2- Help Video   Practice Quiz

 

 

 

 

 

 

 

 

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

 

 

 

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 firm’s intrinsic value?

·    Are future dividends predictable?

 

Refer to the following table for WMT’s dividend history

 

 

 

 

Wal-Mart Dividend History

 

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

image166.jpg

 

WMT Dividend History

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

Walmart Inc. Common Stock (WMT) Dividend History

 

·        Ex-Dividend Date08/16/2024

·        Dividend Yield1.01%

·        Annual Dividend$0.83

·        P/E Ratio13.72

 

 

Ex/EFF Date

Type

Cash

Declaration

Record Date

Declaration

12/13/2024

Cash

$0.21

2/20/2024

12/13/2024

10/6/2025

8/16/2024

Cash

$0.21

2/20/2024

8/16/2024

2/10/2025

5/9/2024

Cash

$0.21

2/20/2024

5/10/2024

7/29/2024

3/14/2024

Cash

$0.21

2/20/2024

3/15/2024

4/8/2024

12/7/2023

Cash

$0.57

2/21/2023

12/8/2023

9/23/2024

8/10/2023

Cash

$0.57

2/17/2023

8/11/2023

2/2/2024

5/4/2023

Cash

$0.57

2/21/2023

5/5/2023

7/17/2023

3/16/2023

Cash

$0.57

2/21/2023

3/17/2023

4/10/2023

12/8/2022

Cash

$0.56

2/17/2022

12/9/2022

9/30/2023

8/11/2022

Cash

$0.56

2/17/2022

8/12/2022

2/4/2023

5/5/2022

Cash

$0.56

2/17/2022

5/6/2022

7/23/2022

3/17/2022

Cash

$0.56

2/17/2022

3/18/2022

4/16/2022

12/9/2021

Cash

$0.55

2/18/2021

12/10/2021

10/1/2022

8/12/2021

Cash

$0.55

2/18/2021

8/13/2021

2/5/2022

5/6/2021

Cash

$0.55

2/18/2021

5/7/2021

7/24/2021

3/18/2021

Cash

$0.55

2/18/2021

3/19/2021

4/17/2021

12/10/2020

Cash

$0.54

2/18/2020

12/11/2020

10/4/2021

8/13/2020

Cash

$0.54

2/18/2020

8/14/2020

2/8/2021

5/7/2020

Cash

$0.54

2/18/2020

5/8/2020

7/27/2020

3/19/2020

Cash

$0.54

2/18/2020

3/20/2020

4/20/2020

12/5/2019

Cash

$0.53

2/19/2019

12/6/2019

9/21/2020

image167.jpg

 An Analysis based on Walmart's (WMT) Dividend Payout Record from 2020 to 2024:

·   Annual Payouts and Trends:

  • The data reflects a stable quarterly dividend payout, with four payments made each year. This regularity aligns with Walmart's predictable cash flow and solid financial footing, making it a reliable dividend-paying stock.
  • By aggregating the quarterly payments, we can see the annual dividend payout increased gradually, supporting a strategy of incrementally rewarding shareholders.

·  Recent Dividend Leveling:

  • The dividend payments reached a plateau in recent years, with the quarterly payout stabilizing at $0.57 in 2023 and dropping slightly to $0.21 in 2024. This change may reflect adjustments based on broader economic conditions or reinvestment strategies, as companies sometimes allocate funds differently during times of economic uncertainty or market shifts.

·  Prospects and Stability:

  • Walmart's consistent dividend payments indicate its financial stability and ability to maintain shareholder returns, even during fluctuating market conditions. The slight decrease in dividends per share in recent quarters could be a signal of Walmart's strategic adjustments, but the overall payout history is indicative of strong financial health and a shareholder-focused approach.

 

image167.jpg

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

 

image168.jpg

image169.jpg

 

P₀ = Σ [D / (1 + r)ᵗ] from t=1 to ∞

where:

  • P₀ is the Present Value or Market Price,
  • Σ represents the summation from t = 1 to infinity,
  • Dₜ is the dividend in year t,
  • r is the discount rate (required rate of return),
  • t is each time period (year).

 

Calculating the present value of dividends, especially when assuming they extend to infinity, can be challenging. To simplify, we can assume that dividends grow at a constant 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.

 

For dividends that grow at a constant rate, the Net Present Value (NPV) of dividends can be calculated as:

P₀ = D₁ / (r - g)

where:

  • P₀ = Present Value or Market Price,
  • D₁ = Dividend expected in the first year,
  • r = Discount rate (required rate of return),
  • g = Growth rate of dividends.

 

   

 

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

 

image170.jpg

 

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

 

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

 

image171.jpg

 

 

 

 

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

……

P₀ = D₁ / (r - g)

where:

  • P₀ = Present Value or Market Price,
  • D₁ = Dividend expected in the first year,
  • r = Discount rate (required rate of return),
  • g = Growth rate of dividends.

 

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/stock)

 

 

Equations

1. Present Value (P) Formulas:

P = D / (r - g) or P = D * (1 + g) / (r - g)

  • Where D is the dividend paid in the current period, and D is the dividend expected in the next period.

 

2. Required Rate of Return (r):

r = D / P + g = D * (1 + g) / P + g

  • Here, r represents the total return, which consists of:
    • Dividend Yield = D / P or D * (1 + g) / P
    • Capital Gain Yield = g

 

3. Growth Rate (g):

g = r - D / P = r - D * (1 + g) / P

  • This formula solves for the dividend growth rate g based on the required return and the dividend yield.

 

4. Dividend Formulas (D and D):

D = P * (r - g) and D = P * (r - g) / (1 + g)

 

5. Capital Gain Yield:

Capital Gain Yield = g = (P - P) / P

  • Where Pis the stock price one year later, calculated as:

P = D / (r - g)

 

6. Dividend Yield:

Dividend Yield = r - g = D / P = D * (1 + g) / P

 

7. Future Dividends (D, D, D, …):

D = D * (1 + g), D = D * (1 + g), D = D * (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

1. Market Price in Year nn (P):

When dividends start to grow at a constant rate from year nn:

P = Dₙ₊₁ / (r - g) = D * (1 + g) / (r - g)

where:

  • Dₙ₊₁ = Dividend in year n+1n+1
  • D = Dividend in year nn
  • r = Required rate of return (stock return)
  • g = Dividend growth rate
  • P = Market price of the stock in year nn

 

2. Present Value in Year 0 (P):

The present value P0PP0 of all future dividends up to year nn is:

P = NPV(r, D, D, …, D + P)

 

Or, equivalently:

P = D / (1 + r) + D / (1 + r)² + + (D + P) / (1 + r)

 

Calculator: Non-Constant Dividend Growth Calculator  https://www.jufinance.com/dcf/

 

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.

equity value = 1017.56 - 500 = 517.56 millions

stock price = 517.56 / 14

 

 

2. AAA pays no dividend currently. However, you expect it pay an annual dividend of $0.56/share 2 years from now with a growth rate of 4% per year thereafter. Its equity cost = 12%, then its stock price=?

 

Answer:

Do=0

D1=0

D2=0.56

g=4% after year 2 è P2 = D3/(r-g), D3=D2*(1+4%) è P2 = 0.56*(1+4%)/(12%-4%) = 7.28

r=12%

Po=?  Po = NPV(12%, D1, D2+P2), D2 = 0.56, P2=7.28. SO Po = NPV(12%, 0,0.56+7.28) = 6.25

 

(Note: for non-constant growth model, calculate price when dividends start to grow at the constant rate. Then use NPV function using dividends in previous years, last dividend plus price. Or use calculator at https://www.jufinance.com/dcf/ )

 

 

3. Required return =12%.  Do = $1.00, and the dividend will grow by 30% per year for the next 4 years.  After t = 4, the dividend is expected to grow at a constant rate of 6.34% per year forever.  What is the stock price ($40)?

Answer:

Do=1

D1 = 1*(1+30%) = 1.3

D2= 1.3*(1+30%) = 1.69

D3 = 1.69*(1+30%) = 2.197

D4 = 2.197*(1+30%) = 2.8561

D5 = 2.8561*(1+6.34%), g=6.34%

P4 = D5/(r-g) = 2.8561*(1+6.34%) /(12% - 6.34%)

Po = NPV(12%, 1.3, 1.69, 2.197, 2.8561+2.8561*(1+6.34%)) /(12% - 6.34%)) = 40

 

Or use calculator at https://www.jufinance.com/dcf

 

 

 

Part IV: How to pick stocks? (FYI)

·       FINVIZ.com

http://finviz.com/screener.ashx

use screener on finviz.com to narrow down your choices of stocks, such as PE<15, PEG<1, ROE>30%

 

·       Mutual Fund Selection Game  https://www.jufinance.com/game/mutual_fund_selection.html

·        FYI  ~ Step-by-Step Guide for Screening Mutual Funds:

1. Open the Mutual Fund Screener:

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 youre 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:

Lets 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 funds name for more detailed information. Youll 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 funds historical performance isnt a guarantee of future returns, but its a useful indicator.

 

 

Part V: Behavior Finance (FYI)

Understanding behavioral finance is essential because it explains how psychological biases and emotions influence investors' decisions, often leading to irrational market behavior. By recognizing these tendencies, investors and analysts can make more informed choices, avoid common pitfalls, and better anticipate market trends driven by human behavior.

Anchoring   Game     Self-produced Video

•        Test yourself first:

               A stock price jumps to $40 from $20 but it suddenly dropped back to $20. Shall you buy the stock or not?

•        The concept of anchoring draws on the tendency to attach or "anchor" our thoughts to a reference point - even though it may have no logical relevance to the decision at hand.

•        Avoiding  Anchoring

–       Be especially careful about which figures you use to evaluate a stock's potential.

–       Don't base decisions on benchmarks

–       Evaluate each company from a variety of perspectives to derive the truest picture of the investment landscape.

 

Mental Accounting             Self-produced Video

•        Test yourself

–       Shall you payoff your credit card debt or start saving for a vocation?

–       How do you spend your tax refund?

•        Mental Accounting refers to the tendency for people to separate their money into separate accounts based on a variety of subjective criteria, like the source of the money and intent for each account. 

Example:  People have a special "money jar" set aside for a vacation while still carrying credit card debt.

 

Confirmation Bias       Self-produced video

•        Confirmation bias: First impression can be hard to shake

–       people selectively filter information that supports their opinion

–       People ignore the rest opinions.

–       In investing, people look for information that supports original idea

•        Generate faulty decision making because of the bias

Example: investor finds all sorts of green flags about the investment (such as growing cash flow or a low debt/equity ratio), while glossing over financially disastrous red flags, such as loss of critical customers or dwindling markets.

 

 

Herding     Game      Self-produced video

–       Example: Dotcom herd

–       The tendency for individuals to mimic the actions of a larger group.

•        Social pressure of conformity is one of the causes.

–       This is because most people are very sociable and have a natural desire to be accepted by a group

•        The second reason is the common rationale that a large group could not be wrong.          

–       This is especially prevalent when an individual has very little experience.

 

Overconfidence:

•        Confidence implies realistically trusting in one's abilities

•        Overconfidence implies an overly optimistic assessment of one's knowledge or control over a situation.

 

 Disposition effect          Game            Self-produced Video

–       which is the tendency for investors to hold on to losing stocks for too long and sell winning stocks too soon.

»       The most logical course of action would be to hold on to winning stocks to further gains and to sell losing stocks to prevent escalating losses.

»       investors are willing to assume a higher level of risk in order to avoid the negative utility of a prospective loss.

»       Unfortunately, many of the losing stocks never recover, and the losses incurred continued to mount .

Avoiding the Disposition Effect

        When you have a choice of thinking of one large gain or a number of smaller gains (such as finding $100 versus finding a $50 bill from two places), thinking of the latter can maximize the amount of positive utility.

        When you have a choice of thinking of one large loss or a number of smaller losses (losing $100 versus losing $50 twice), think of one large loss would create less negative utility.

        When you can think of one large gain with a smaller loss or a situation where you net the two to create a smaller gain ($100 and -$55, versus +$45), you would receive more positive utility from the smaller gain.

        When you can think of one large loss with a smaller gain or a smaller loss (-$100 and +$55, versus -$45), try to separate losses from gains.

 

Gambler’s fallacy       Game     Self-produced Video

–       An individual erroneously believes that the onset of a certain random event is less likely to happen following an event or a series of events.

Example:
Consider a series of 20 coin flips that have all landed with the "heads". A person might predict that the next coin flip is more likely to land with the "tails.
Slot machines:  Every losing pull will bring them that much closer to the jackpot. But that is wrong. All pulls are independent.

•        Example:

–       You liquidate a position after it has gone up in several days.

–       You hold on to a stock that has fallen in several days because you view further declines as "improbable".

•        Avoiding Gambler's Fallacy

–       Investors should base decisions on fundamental or technical analysis before determining what will happen.

It is irrational to buy a stock because you believe it is likely to reverse.

 

 

12 Cognitive Biases Explained - How to Think Better and More Logically Removing Bias (video, FYI)

0:18 Anchoring Bias 1:22 Availability Bias 2:22 Bandwagon Effect 3:09 Choice Supportive Bias 3:50 Confirmation Bias 4:30 Ostrich Bias 5:20 Outcome Bias 6:12 Overconfidence 6:52 Placebo Effect 7:44 Survivorship Bias 8:32 Selective Perception 9:08 Blindspot Bias

 

 

Part VI: Practice (FYI)

Play the stock market investment game. Make investment decision and balance risk with rewards in the stock market at  https://www.jufinance.com/game/investment/index.html

 

 

HOMEWORK (Due with final)

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? (14.60 percent)

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? ($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? ($3.3)

4.    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? (10%)

5.    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? ($70.67)

 

 

Homework Video of this week  

  

Homework help video (FYI)

 

Quiz 3- Help Video     Quiz 3 Practice

Part I          Part II      Part III     Part IV

 

 

 

 

 

 

 

 

 

 

 

 

 

P/E Ratio Summary by industry (FYI) --- Thanks to Dr Damodaran

 

Data Used: Multiple data services

Date of Analysis: Data used is as of January 2021

Download as an excel file insteadhttp://www.stern.nyu.edu/~adamodar/pc/datasets/pedata.xls

For global datasetshttp://www.stern.nyu.edu/~adamodar/New_Home_Page/data.html

 


Industry Name

Number of firms

Current PE

Expected growth - next 5 years

PEG Ratio

Advertising

61

20.95

83.44%

0.19

Aerospace/Defense

72

291.56

5.78%

3.55

Air Transport

17

8.14

-14.27%

NA

Apparel

51

22.38

13.60%

1.63

Auto & Truck

19

164.37

18.80%

8.87

Auto Parts

52

27.43

12.42%

2.92

Bank (Money Center)

7

8.46

5.27%

2.83

Banks (Regional)

598

13.5

5.74%

2.32

Beverage (Alcoholic)

23

45.64

17.53%

2.06

Beverage (Soft)

41

201.34

10.24%

2.93

Broadcasting

29

15.1

12.93%

0.96

Brokerage & Investment Banking

39

21.14

8.88%

1.81

Building Materials

42

28.19

15.28%

1.43

Business & Consumer Services

169

38.25

12.28%

3.28

Cable TV

13

68.46

29.41%

1.04

Chemical (Basic)

48

13.8

9.70%

1.79

Chemical (Diversified)

5

13.89

5.55%

2.35

Chemical (Specialty)

97

36.06

9.18%

3.4

Coal & Related Energy

29

2.85

-20.90%

NA

Computer Services

116

45.38

9.98%

1.86

Computers/Peripherals

52

40.61

12.30%

2.97

Construction Supplies

46

84.99

11.21%

2.27

Diversified

29

26.18

9.58%

1.86

Drugs (Biotechnology)

547

31

18.96%

1.14

Drugs (Pharmaceutical)

287

122.82

11.28%

2.09

Education

38

26.92

14.76%

1.75

Electrical Equipment

122

51.61

1.85%

15.93

Electronics (Consumer & Office)

22

57.06

20.95%

0.66

Electronics (General)

157

81.09

15.15%

2.72

Engineering/Construction

61

27.42

11.33%

2.38

Entertainment

118

908.12

17.03%

3.18

Environmental & Waste Services

86

538.13

11.58%

3.72

Farming/Agriculture

32

26.45

17.84%

1.38

Financial Svcs. (Non-bank & Insurance)

235

24.3

13.59%

1.08

Food Processing

101

268.11

13.87%

1.54

Food Wholesalers

18

320.61

11.97%

0.71

Furn/Home Furnishings

40

29.97

15.23%

1.25

Green & Renewable Energy

25

56

12.25%

5.25

Healthcare Products

265

330.73

16.92%

2.81

Healthcare Support Services

129

101.84

16.32%

1.03

Heathcare Information and Technology

139

189.47

21.56%

1.82

Homebuilding

30

19.46

16.91%

0.67

Hospitals/Healthcare Facilities

32

72.23

13.75%

1.33

Hotel/Gaming

66

51.99

-15.51%

NA

Household Products

140

592.23

9.46%

2.98

Information Services

77

102.24

11.15%

4.86

Insurance (General)

21

65.34

33.98%

0.63

Insurance (Life)

26

18.97

7.81%

1

Insurance (Prop/Cas.)

55

44.23

8.58%

1.55

Investments & Asset Management

348

480.92

10.73%

1.64

Machinery

125

59.51

12.27%

2.63

Metals & Mining

86

30.21

72.06%

0.51

Office Equipment & Services

22

16.09

8.16%

3.09

Oil/Gas (Integrated)

3

33.88

7.20%

7.29

Oil/Gas (Production and Exploration)

278

25.15

-25.81%

NA

Oil/Gas Distribution

57

10.84

6.69%

2.28

Oilfield Svcs/Equip.

135

40.3

7.98%

0.34

Packaging & Container

26

25.24

11.40%

2.37

Paper/Forest Products

15

20.06

7.00%

1.96

Power

55

21.48

7.02%

2.96

Precious Metals

93

19.65

12.85%

1.52

Publishing & Newspapers

29

48

9.21%

4.51

R.E.I.T.

238

49.79

2.10%

17.69

Real Estate (Development)

25

31.02

14.50%

1.1

Real Estate (General/Diversified)

11

40.16

-3.24%

NA

Real Estate (Operations & Services)

61

1199.26

21.97%

1.01

Recreation

69

39.3

22.98%

3.22

Reinsurance

2

9.56

30.10%

0.51

Restaurant/Dining

79

70.43

12.54%

3.93

Retail (Automotive)

30

30.46

13.29%

1.27

Retail (Building Supply)

15

152.69

18.72%

1.23

Retail (Distributors)

85

41.38

9.94%

2.59

Retail (General)

17

23.23

2.14%

10.77

Retail (Grocery and Food)

14

40.6

12.26%

0.78

Retail (Online)

75

133.68

20.17%

3.51

Retail (Special Lines)

85

30.51

9.91%

4.19

Rubber& Tires

3

39.19

7.45%

1.76

Semiconductor

70

1291.42

13.63%

2.3

Semiconductor Equip

40

108.68

24.68%

1.14

Shipbuilding & Marine

11

23.47

11.30%

2.19

Shoe

11

31.53

15.84%

4.45

Software (Entertainment)

101

100.59

19.72%

1.67

Software (Internet)

36

92.26

23.68%

1.36

Software (System & Application)

388

193.65

22.61%

1.73

Steel

32

76.29

1.93%

8.99

Telecom (Wireless)

16

29.65

10.30%

4.67

Telecom. Equipment

96

69.36

14.07%

1.57

Telecom. Services

58

158.41

6.90%

2.17

Tobacco

15

28.53

9.83%

2.48

Transportation

21

27.84

11.20%

2.77

Transportation (Railroads)

6

25.54

9.37%

2.87

Trucking

35

30.51

4.76%

5.53

Utility (General)

16

20.24

4.95%

3.21

Utility (Water)

17

54.77

8.56%

4.83

Total Market

7582

109.79

11.64%

2.35

Total Market (without financials)

6253

103.33

12.17%

2.5

 

 

 

 

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:

image086.jpg

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:

image081.jpg

Multiplying both sides of the previous equation by (1+g)/(1+r) gives:

image082.jpg

We can then subtract the second equation from the first equation to get:

image083.jpg

Rearranging and simplifying:

image084.jpg

image085.jpg

Finally, we can simplify further to get the Gordon growth model equation

 

 

 

 

Chapter 9 Capital Budgeting

 

ppt  

 

Self-produced video explaining approaches for capital budgeting

 

image093.jpg

 

 

1.      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.

 

2.      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.

 image040.jpg

 

image100.jpg 

 

image099.jpg

 

image047.jpg

 

Or, PI = NPV / CFo +1

Profitable index (PI) =1 + NPV / absolute value of CFo

 

3.     MIRR( valuesfinance_ratereinvest_rate )

Where the function arguments are as follows:

Values

-

An array of values (or a reference to a range of cells containing values) representing the series of cash flows (investment and net income values) that occur at regular periods.

These must contain at least one negative value (representing payment) and at least one positive value (representing income).

finance_rate

-

The interest rate paid on the money used in the cash flows.

reinvest_rate

-

The interest rate paid on the reinvested cash flows.

 

image036.jpg

 

 

Modified Rate of Return: Definition & Example (video)

https://study.com/academy/lesson/modified-rate-of-return-definition-example.html 

 

 

NPV, IRR, Payback Period calculator I

(www.jufinance.com/npv)

 

NPV, IRR, Payback Period calculator II

(www.jufinance.com/capital)


image046.jpg

 

 

image147.jpg

 

Excel Template - NPV, IRR, MIRR, PI, Payback, Discounted payback

 

 

NPV Profile in Excel Demonstration (Video, FYI)

 

In class exercise 

 

Part I: Single project

 

1.     How much is MIRR? IRR? Payback period? Discounted payback period? NPV?

WACC:  11.00%

Year                0          1          2          3         

Cash flows      -$800   $350    $350    $350

 

Answer:

 

1)     NPV:

 

 image148.jpg

 

NPV = -800 + 350/(1+11%) + 350/(1+11%)2 + 350/(1+11%)3  = 55.30

Or in excel:  = npv(11%, 350, 350, 350)-800 = 55.30

 

2)     IRR:

 

image099.jpg

So NPV = 0 = -800 + 350/(1+IRR) + 350/(1+IRR)2 + 350/(1+IRR)3 , use Solver, can get IRR = 14.93%

Or in excel:

image067.jpg

 

3)     PI: profitable index

image047.jpg

 

SO, PI= (350/(1+11%) + 350/(1+11%)2 + 350/(1+11%)3 ) / 800 = 1.069

Or PI = NPV/800 + 1 = 55.30/800 + 1 = 1.069

 

4)     Payback period:

 

image149.jpg

 

 

A portion of the third year = (800-350-350)/350 = 100/350 = 0.2857

So it takes 2 + 0.2857 = 2.2857 years to pay off the debt of $800.

 

5)     Discounted payback period:

 

image149.jpg

 

Note: All the cash flows in the above equation should be the present values.

 

 

 

A portion of the third year = (800-318.18-289.26)/262.96 = 0.72

So it takes 2 + 0.72 = 2.72 years to pay off the debt of $800.

 

image174.jpg

 

A portion of the third year = (800-315.32-289.26)/262.96 = 0.72

So it takes 2 + 0.72 = 2.72 years to pay off the debt of $800.

 

Or use the calculator at https://www.jufinance.com/capital/

 

 

Part II: Multi-Projects

 

1.     Projects S and L, whose cash flows are shown below.  These projects are mutually exclusive, equally risky, and not repeatable.  The CEO believes the IRR is the best selection criterion, while the CFO advocates the NPV.  If the decision is made by choosing the project with the higher IRR rather than the one with the higher NPV, how much, if any, value will be forgone, i.e., what's the chosen NPV versus the maximum possible NPV?  Note that (1) true value is measured by NPV, and (2) under some conditions the choice of IRR vs. NPV will have no effect on the value gained or lost.

 

WACC:  7.50%

Year    0                          1                2            3          4         

CFS     -$1,100               $550          $600       $100    $100

CFL     -$2,700               $650           $725      $800    $1,400

 

Answer:

 

image073.jpg

 

 

 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:

https://www.jufinance.com/fin509_22f/index_files/image065.jpg 

 

 

Part III More on IRR – (non-conventional cash flow) 

 

Suppose an investment will cost $90,000 initially and will generate the following cash flows:

–    Year 1: 132,000

–    Year 2: 100,000

–    Year 3: -150,000

The required return is 15%. Should we accept or reject the project?

1)      How  does the NPV profile look like? (Answer: Inverted NPV profile)

2)      IRR1= 10.11% -- answer

3)      IRR2= 42.66% -- answer

 

 

Solution:

https://www.jufinance.com/fin509_22f/index_files/image067.jpg

 

 

Summary

Approach

Description

Pros

Cons

Suitable Cases

Industry Popularity

Net Present Value (NPV)

Calculates the present value of cash flows, subtracting initial investment

Accounts for time value of money, provides direct measure of profitability

Requires accurate cash flow estimation, sensitive to discount rate assumptions

Long-term projects, capital budgeting

Popular in most industries, especially capital-intensive sectors like manufacturing, energy, and real estate

Internal Rate of Return (IRR)

Finds the discount rate that makes NPV zero

Easy to understand, considers time value of money

Can be misleading with non-conventional cash flows or mutually exclusive projects, assumes reinvestment at IRR

Projects with conventional cash flows, early cash inflows

Used across industries, especially finance, healthcare, and tech

Modified Internal Rate of Return (MIRR)

Similar to IRR, but assumes reinvestment at a specified rate

Corrects IRR’s reinvestment assumption, suitable for comparing different projects

More complex calculation than IRR, still less informative than NPV for absolute profitability

Projects where reinvestment rate is known

Less common, used in finance and advanced corporate finance projects

Payback Period

Time required to recoup initial investment

Simple, emphasizes liquidity, useful for quick screening

Ignores time value of money, cash flows beyond payback period, and profitability

Short-term projects, high liquidity needs

Common in small businesses and start-ups, used in risk-averse sectors like retail

Discounted Payback Period

Time to recoup investment considering time value of money

Considers time value of money, provides a more accurate payback measure than traditional Payback Period

Ignores cash flows after payback, profitability, and project lifetime

High-liquidity projects with cash flow risks

Used in industries with uncertain cash flows like tech and energy

Profitability Index (PI)

Ratio of PV of future cash flows to initial investment

Useful for ranking projects, particularly with capital constraints

Similar drawbacks as NPV for cash flow estimation, not suitable for mutually exclusive projects

Capital rationing scenarios, comparing projects with limited capital

Used in finance, utilities, and large capital-intensive industries

 

 

HOMEWORK(Due with final)


 
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)?   ---- 4 years

2)      If the firm has a 10% required rate of return. How much is NPV (approach 2)?-- $2456.74

3)      If the firm has a 10% required rate of return. How much is IRR (approach 3)? ---- 14.55%

4)      If the firm has a 10% required rate of return. How much is PI (approach 4)? ---- 1.12

 

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 and PI. Analyze your results. (2.85, $764.27, 15.64%, 1.013, accept the project)

 

 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? (As NPV = 72.73, Bs NPV=227.27, so choose B)

§  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?

(mutually exclusive: As NPV=758.83 > Bs NPV = 616.45, so choose A; Independent, choose all positive NPV, so choose both;

Crossover rate = 21.01%. The calculator does not work. Use IRR in Excel)

 

Quiz 4- chapter 9 (no video prepared; Could use the calculator)

 

Quiz 4 Practice

 

 

 

 

Homework help videos (chapter 9)

Q1    Q2-Q3     Excel Template Help

 

 

 

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, tooanalyzing 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 algorithmsone 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 resourceseither people or money or attentioncan benefit from simple rules.

WSJ: Can you give an example of how that simplification works in a company?

Sull: Theres 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 didnt 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 projectsthat 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 Frontierstuff 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 factorsis 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, youll 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. Theyre easy to remember, they dont confuse or stress you, they save time.

They should be tailored to your specific goals, so you choose the rules based on what exactly youre 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: Lets look at when Alex Behring took over America Latina Logistica SARUMO3.BR +1.59%, 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 insteadhe decided what the most important goals were. You cant 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 thats where the money will stretch farther.

  Week 4 - Chapter 14 Cost of Capital 

 

 ppt   

 

Self-Produced Video Explaining WACC and WACC Strategies for Different Industries

 

WACC Game      Conceptual Quiz

 

Company Type

Debt Level

WACC Level

Reasoning

Example

Startup

Low

High

Limited cash flows and high risk make heavy reliance on equity preferable.

Early-stage tech startup

High-Tech

Low to Moderate

High

High risk and growth potential lead to high WACC; typically funded through equity to avoid debt burden.

Biotech firm

Retail

Moderate to High

Moderate

Moderate, consistent cash flows allow for higher debt but limited by competitive pressures.

Supermarket chain

Utility

High

Low to Moderate

Stable cash flows and assets allow for high debt levels, which lowers WACC.

Electric company

Manufacturing

Moderate

Moderate

Moderate risk; often uses a balanced approach to debt and equity.

Automobile manufacturer

Matured Firm

High

Low

Stable with predictable cash flows, allowing for high debt and lower WACC due to reduced risk.

Coca-Cola

 

 

 

One option (if beta is given, refer to chapter 13)

 image087.jpg

 

Another option (if dividend is given):

 

 image088.jpg

 

WACC Formula

 

 image150.jpg

 

 

WACC calculator (annual coupon bond)

(www.jufinance.com/wacc)

 

 image090.jpg

 

WACC calculator  (semi-annual coupon bond)

 (www.jufinance.com/wacc_1)

 

WACC Excel Template

 

WACC Calculator help videos FYI

 

Weighted Average Cost of Capital (WACC)

WACC is the discount rate used to evaluate project values.

Formula: WACC = (Wd * Cost of Debt) + (We * Cost of Equity)

Where:

  • Wd = Weight of Debt = Total Debt / Total Capital = Total Borrowed / Total Capital
  • We = Weight of Equity = Total Equity / Total Capital

Cost of Debt

Formula:
Cost of Debt = RATE(nper, coupon, -(price – flotation cost), 1000) * (1 - tax rate)

Definitions:

  • nper = number of periods
  • coupon = periodic interest payment
  • price = current bond price
  • flotation cost = flotation percentage * price
  • tax rate = corporate tax rate

Cost of Equity

Two methods are available depending on the information provided:

  1. Dividend Growth Model
    Cost of Equity = D1 / (Po - Flotation Cost) + g

Definitions:

    • D1 = Next period dividend
    • Po = Current stock price
    • Flotation Cost = flotation percentage * Po
    • g = Dividend growth rate
  1. Capital Asset Pricing Model (CAPM) (if beta is given)
    Cost of Equity = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate)
    Alternative form:
    Cost of Equity = Risk-Free Rate + Beta * Market Risk Premium

Definitions:

  • Risk-Free Rate = Return on a risk-free asset (e.g., government bond)
  • Beta = Measure of the stock's risk relative to the market
  • Market Return = Expected return of the market
  • Market Risk Premium = Market Return - Risk-Free Rate

 

 

In Class Exercise:

 A firm borrows money from bond market. The price they paid is $950 for the bond with 5% coupon rate and 10 years to mature. Flotation cost is $40.  For the new stocks, the expected dividend is $2 with a growth rate of 10% and price of $40. The flotation cost is $4. The company raises capital in equal proportions i.e. 50% debt and 50% equity (such as total $1m raised and half million is from debt market and the other half million is from stock market). Tax rate 34%. What is WACC (weighted average cost of capital, cost of capital)?  (Answer: 9.84%)

1)      Why does the firm raise capital from the financial market? Is there of any costs of doing so? What do you think?

2)      What is cost of debt?

          (Kd = rate(nper, coupon, -(price – flotation costs $)), 1000)*(1-tax rate))

3)      Cost of equity? (Ke = (D1/(Price – flotation costs $)) +g, or Ke = Rrf + Beta*MRP))

         Why no tax adjustment like cost of debt?

4)      WACC=Cost of capital = Percentage of Debt * cost of debt + percentage of stock * cost of stock = Wd*Kd + We* Ke

        Meaning: For a dollar raised in the capital market from debt holders and stockholders, the cost is WACC.

Solution:

Cost of debt = rate(10, 50, -(950-40), 1000)*(1-34%)

Cost of/equity = 2/(40-4)+10%

WACC = 0.5*cost of debt + 0.5*cost of equity

https://www.jufinance.com/fin509_22f/index_files/image074.jpghttps://www.jufinance.com/fin509_22f/index_files/image076.jpg

 

 

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

 

 

No homework for chapter 14

 

WACC Excel Template

(both annual and semi-annual)

 

WACC calculator (annual coupon bond)

(www.jufinance.com/wacc)

 

  

WACC calculator (semi-annual coupon bond)

(www.jufinance.com/wacc_1)

 

  

Wal-Mart Inc  (NYSE:WMT) WACC %: 7.62%  As of 11/4/2024 

 

As of today (2024-11-4), Walmart's weighted average cost of capital is 7.62%. Walmart's ROIC % is 11.51% (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

 

image172.jpg

 

 

Amazon.com Inc  (NAS:AMZN) WACC %:11.77% As of 11/4/2024 

As of today (2024-11/4) Amazon.com's weighted average cost of capital is 11.77%. Amazon.com's ROIC % is 13.05% (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 %:11.17%  As of 11/4/2024 

 

As of today (2024-11/4), Apple's weighted average cost of capital is 11.17%. Apple's ROIC % is 31.92% (calculated using TTM income statement data). Apple generates higher returns on investment than it costs the company to raise the capital needed for that investment. It is earning excess returns. A firm that expects to continue generating positive excess returns on new investments in the future will see its value increase as growth increases..https://www.gurufocus.com/term/wacc/AAPL/WACC/Apple%2Binc

 

Tesla WACC %: 15.32%  As of 11/4/2024 

As of today (2024-11-4), Tesla's weighted average cost of capital is 15.32%. Tesla's ROIC % is 18.67% (calculated using TTM income statement data). Tesla earns returns that do not match up to its cost of capital. It will destroy value as it grows.

https://www.gurufocus.com/term/wacc/NAS:TSLA/WACC-/Tesla

 

 

 

NVIDIA (NAS:NVDA) WACC %: 18.89%  As of 11/4/2024 

As of today (2024-11/4), NVDIA's weighted average cost of capital is 18.89%. NVDIA's ROIC % is 162.59%. (calculated using TTM income statement data). Tesla earns returns that do not match up to its cost of capital. It will destroy value as it grows.

https://www.gurufocus.com/term/wacc/NVDA/WACC-Percentage/NVDA

 

 

image160.jpg

 

 

Cost of Capital by Sector (US)

 

Date of Analysis: Data used is as of January 2024

Download as an excel file insteadhttps://www.stern.nyu.edu/~adamodar/pc/datasets/wacc.xls

For global datasetshttps://www.stern.nyu.edu/~adamodar/New_Home_Page/data.html

 

 

image173.jpg

 

Industry Name

Beta

Cost of Equity

E/(D+E)

Cost of Debt

Tax Rate

After-tax Cost of Debt

WACC

Advertising

1.37

10.19%

74.76%

5.35%

5.44%

4.01%

8.63%

Aerospace/Defense

1.08

8.83%

79.71%

5.09%

7.28%

3.81%

7.81%

Air Transport

1.27

9.71%

38.15%

5.09%

8.62%

3.81%

6.06%

Apparel

1.19

9.38%

67.22%

5.09%

10.19%

3.81%

7.55%

Auto & Truck

1.52

10.88%

76.32%

5.35%

3.12%

4.01%

9.26%

Auto Parts

1.34

10.06%

72.23%

5.09%

14.62%

3.81%

8.33%

Bank (Money Center)

1.06

8.76%

31.63%

4.50%

17.69%

3.38%

5.08%

Banks (Regional)

0.46

6.00%

49.52%

4.50%

17.69%

3.38%

4.68%

Beverage (Alcoholic)

1.13

9.09%

80.34%

5.09%

10.42%

3.81%

8.05%

Beverage (Soft)

0.76

7.40%

85.38%

5.09%

6.68%

3.81%

6.87%

Broadcasting

1.06

8.76%

36.18%

5.09%

7.85%

3.81%

5.60%

Brokerage & Investment Banking

1.12

9.03%

30.67%

5.09%

16.84%

3.81%

5.41%

Building Materials

1.32

9.94%

84.64%

5.09%

19.94%

3.81%

9.00%

Business & Consumer Services

1.02

8.58%

84.79%

5.09%

10.84%

3.81%

7.86%

Cable TV

1.28

9.75%

49.57%

5.09%

23.72%

3.81%

6.76%

Chemical (Basic)

1.10

8.92%

68.65%

5.09%

8.93%

3.81%

7.32%

Chemical (Diversified)

1.13

9.09%

58.99%

5.09%

14.89%

3.81%

6.93%

Chemical (Specialty)

1.09

8.88%

78.85%

5.09%

10.40%

3.81%

7.81%

Coal & Related Energy

1.27

9.73%

81.60%

5.35%

2.62%

4.01%

8.67%

Computer Services

1.00

8.47%

77.43%

5.09%

7.78%

3.81%

7.42%

Computers/Peripherals

1.13

9.09%

94.26%

5.09%

8.67%

3.81%

8.79%

Construction Supplies

1.13

9.07%

80.19%

5.09%

14.91%

3.81%

8.03%

Diversified

1.19

9.38%

83.93%

5.35%

5.25%

4.01%

8.51%

Drugs (Biotechnology)

1.12

9.05%

85.92%

5.35%

0.81%

4.01%

8.34%

Drugs (Pharmaceutical)

1.03

8.60%

86.17%

6.09%

2.89%

4.57%

8.05%

Education

1.23

9.52%

83.62%

5.09%

11.15%

3.81%

8.58%

Electrical Equipment

1.24

9.59%

82.38%

5.35%

5.66%

4.01%

8.61%

Electronics (Consumer & Office)

1.30

9.84%

84.51%

5.09%

7.31%

3.81%

8.90%

Electronics (General)

0.93

8.18%

85.33%

5.09%

8.17%

3.81%

7.54%

Engineering/Construction

0.96

8.30%

79.24%

5.09%

14.27%

3.81%

7.37%

Entertainment

0.99

8.45%

77.67%

5.35%

3.25%

4.01%

7.46%

Environmental & Waste Services

0.91

8.05%

82.00%

5.09%

5.42%

3.81%

7.29%

Farming/Agriculture

0.99

8.44%

68.82%

5.35%

6.68%

4.01%

7.06%

Financial Svcs. (Non-bank & Insurance)

1.14

9.14%

22.02%

5.09%

11.07%

3.81%

4.99%

Food Processing

0.61

6.67%

74.79%

5.09%

8.29%

3.81%

5.95%

Food Wholesalers

0.97

8.32%

69.14%

5.09%

15.90%

3.81%

6.93%

Furn/Home Furnishings

1.11

8.97%

67.77%

5.09%

13.94%

3.81%

7.31%

Green & Renewable Energy

1.11

8.97%

41.42%

5.35%

4.39%

4.01%

6.07%

Healthcare Products

1.06

8.77%

88.76%

5.35%

4.81%

4.01%

8.23%

Healthcare Support Services

1.03

8.63%

78.82%

5.09%

8.08%

3.81%

7.61%

Heathcare Information and Technology

1.27

9.74%

86.15%

5.35%

3.11%

4.01%

8.95%

Homebuilding

1.37

10.18%

85.90%

5.09%

17.22%

3.81%

9.28%

Hospitals/Healthcare Facilities

0.88

7.93%

55.63%

5.09%

6.86%

3.81%

6.10%

Hotel/Gaming

1.34

10.06%

67.26%

5.09%

8.63%

3.81%

8.02%

Household Products

0.84

7.76%

85.80%

5.35%

8.21%

4.01%

7.23%

Information Services

0.93

8.16%

73.71%

5.09%

15.79%

3.81%

7.02%

Insurance (General)

1.03

8.63%

79.41%

5.09%

13.69%

3.81%

7.64%

Insurance (Life)

0.77

7.40%

52.02%

5.09%

10.18%

3.81%

5.68%

Insurance (Prop/Cas.)

0.74

7.28%

83.76%

5.09%

12.42%

3.81%

6.72%

Investments & Asset Management

0.46

5.98%

71.26%

4.50%

11.33%

3.38%

5.23%

Machinery

1.03

8.60%

85.57%

5.09%

11.73%

3.81%

7.91%

Metals & Mining

0.96

8.31%

86.34%

5.35%

2.00%

4.01%

7.72%

Office Equipment & Services

1.14

9.12%

65.54%

5.09%

17.12%

3.81%

7.29%

Oil/Gas (Integrated)

0.67

6.96%

88.89%

5.09%

21.18%

3.81%

6.61%

Oil/Gas (Production and Exploration)

0.93

8.16%

81.12%

5.09%

5.61%

3.81%

7.34%

Oil/Gas Distribution

0.79

7.52%

58.75%

5.09%

9.25%

3.81%

5.99%

Oilfield Svcs/Equip.

0.98

8.39%

75.68%

5.09%

10.88%

3.81%

7.27%

Packaging & Container

1.13

9.09%

62.01%

5.09%

18.12%

3.81%

7.09%

Paper/Forest Products

1.94

12.80%

72.80%

5.09%

12.91%

3.81%

10.35%

Power

0.65

6.87%

51.83%

4.50%

13.69%

3.38%

5.19%

Precious Metals

0.87

7.88%

86.80%

5.35%

1.98%

4.01%

7.37%

Publishing & Newspapers

0.96

8.30%

75.49%

5.09%

10.01%

3.81%

7.20%

R.E.I.T.

1.03

8.63%

55.85%

4.50%

1.95%

3.38%

6.31%

Real Estate (Development)

0.67

6.96%

51.52%

5.09%

1.45%

3.81%

5.43%

Real Estate (General/Diversified)

0.56

6.47%

75.83%

5.09%

13.21%

3.81%

5.83%

Real Estate (Operations & Services)

1.08

8.85%

69.17%

5.09%

4.29%

3.81%

7.30%

Recreation

1.17

9.27%

63.06%

5.09%

8.26%

3.81%

7.25%

Reinsurance

0.66

6.89%

70.16%

4.50%

22.95%

3.38%

5.84%

Restaurant/Dining

1.19

9.38%

79.54%

5.09%

11.41%

3.81%

8.24%

Retail (Automotive)

1.49

10.75%

63.49%

5.09%

13.50%

3.81%

8.22%

Retail (Building Supply)

1.94

12.80%

83.39%

5.09%

12.59%

3.81%

11.30%

Retail (Distributors)

1.11

8.97%

75.59%

5.09%

15.76%

3.81%

7.71%

Retail (General)

1.25

9.61%

88.16%

5.09%

14.58%

3.81%

8.93%

Retail (Grocery and Food)

0.49

6.15%

64.17%

5.09%

16.88%

3.81%

5.31%

Retail (REITs)

1.12

9.04%

62.96%

4.50%

2.53%

3.38%

6.94%

Retail (Special Lines)

1.18

9.31%

73.45%

5.09%

9.53%

3.81%

7.85%

Rubber& Tires

0.67

6.98%

29.83%

5.09%

0.00%

3.81%

4.76%

Semiconductor

1.50

10.76%

94.30%

5.09%

4.89%

3.81%

10.36%

Semiconductor Equip

1.53

10.91%

92.78%

5.09%

12.14%

3.81%

10.40%

Shipbuilding & Marine

0.81

7.61%

77.06%

5.09%

6.74%

3.81%

6.74%

Shoe

1.29

9.82%

91.99%

5.09%

11.31%

3.81%

9.34%

Software (Entertainment)

1.11

8.98%

96.94%

5.35%

5.11%

4.01%

8.83%

Software (Internet)

1.62

11.31%

89.30%

6.09%

2.61%

4.57%

10.59%

Software (System & Application)

1.29

9.83%

94.16%

5.35%

4.19%

4.01%

9.49%

Steel

1.13

9.06%

83.21%

5.09%

15.72%

3.81%

8.18%

Telecom (Wireless)

1.09

8.88%

60.92%

5.35%

9.56%

4.01%

6.98%

Telecom. Equipment

1.08

8.85%

89.75%

5.09%

6.20%

3.81%

8.33%

Telecom. Services

0.78

7.49%

44.46%

5.35%

6.62%

4.01%

5.56%

Tobacco

1.22

9.51%

74.13%

5.09%

9.95%

3.81%

8.03%

Transportation

1.26

9.67%

74.86%

5.35%

6.53%

4.01%

8.25%

Transportation (Railroads)

1.02

8.56%

78.86%

4.50%

17.28%

3.38%

7.46%

Trucking

1.15

9.16%

83.37%

5.09%

20.21%

3.81%

8.27%

Utility (General)

0.58

6.55%

54.10%

4.50%

14.05%

3.38%

5.09%

Utility (Water)

0.71

7.16%

66.27%

5.09%

11.09%

3.81%

6.03%

Total Market

1.00

8.48%

68.30%

5.09%

8.35%

3.81%

7.00%

Total Market (without financials)

1.10

8.93%

81.57%

5.09%

6.80%

3.81%

7.99%

 

http://people.stern.nyu.edu/adamodar/New_Home_Page/datafile/wacc.htm

 

Week 6 - Chapter 13 Risk and Return

 

ppt

 

 

 

 

Equations (FYI):

1.    Expected return and standard deviation – Single Stock

Calculator

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

https://www.zenwealth.com/businessfinanceonline/RR/images/ER.gif

where

  • E[R] = the expected return on the stock,
  • N = the number of states,
  • pi = the probability of state i, and
  • Ri = 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:

https://www.zenwealth.com/businessfinanceonline/RR/images/Var.gif

where

  • N = the number of states,
  • pi = the probability of state i,
  • Ri = 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/images/SD.gif

 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

= 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/

https://www.jufinance.com/fin509_22f/index_files/image087.jpg

 

 

2.     Two stock portfolio equations:

Calculator

image026.jpg

W1 and W2 are the percentage of each stock in the portfolio.

image028.jpg

 

image031.gif

 

  • 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.

image076.jpg

 

image022.jpg

  • s12 = the covariance between the returns on stocks 1 and 2,
  • N = the number of states,
  • pi = the probability of state i,
  • R1i = the return on stock 1 in state i,
  • E[R1] = the expected return on stock 1,
  • R2i = the return on stock 2 in state i, and
  • E[R2] = the expected return on stock 2.

 

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

= 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

= 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:

·       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:

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

 

 

https://www.jufinance.com/fin509_22f/index_files/image094.jpg

 

]3.. Historical returns

Holding period return (HPR) = (Selling price – Purchasing price + dividend)/ Purchasing price

HPR calculator

 

 

4.    CAPM (Capital Asset Pricing Model) model 

 CAPM calculator

·        What is Beta? Where to find Beta?

image018.gifimage018.gif

Beta is a measurement of a stock's price fluctuations, which is often called volatility, and is used by investors to gauge how quickly a stock's price will rise or fall. Because beta is calculated from past returns, it's not considered as reliable a tool to forecast rises in stock prices, and it is more commonly used by options traders. Beta compares the changes in a company's stock returns against the returns of the market as a whole. Online brokerages give investors extensive data on a stock's beta value, and some free financial news websites also show current beta measurements.

 

 

·         What Is the Capital Asset Pricing Model?

The Capital Asset Pricing Model (CAPM) describes the relationship between systematic risk and expected return for assets, particularly stocks. CAPM is widely used throughout finance for pricing risky securities and generating expected returns for assets given the risk of those assets and cost of capital.

 Ri = Rf + βi  *( Rm - Rf) ------ CAPM model

·       Ri = Expected return of investment

·       Rf = Risk-free rate

·       βi = Beta of the investment

·       Rm = Expected return of market

·       (Rm - Rf) = Market risk premium

Investors expect to be compensated for risk and the time value of money. The risk-free rate in the CAPM formula accounts for the time value of money. The other components of the CAPM formula account for the investor taking on additional risk.

 The beta of a potential investment is a measure of how much risk the investment will add to a portfolio that looks like the market. If a stock is riskier than the market, it will have a beta greater than one. If a stock has a beta of less than one, the formula assumes it will reduce the risk of a portfolio.

A stocks beta is then multiplied by the market risk premium, which is the return expected from the market above the risk-free rate. The risk-free rate is then added to the product of the stocks beta and the market risk premium. The result should give an investor the required return or discount rate they can use to find the value of an asset.

The goal of the CAPM formula is to evaluate whether a stock is fairly valued when its risk and the time value of money are compared to its expected return.

For example, imagine an investor is contemplating a stock worth $100 per share today that pays a 3% annual dividend. The stock has a beta compared to the market of 1.3, which means it is riskier than a market portfolio. Also, assume that the risk-free rate is 3% and this investor expects the market to rise in value by 8% per year.

The expected return of the stock based on the CAPM formula is 9.5%.

The expected return of the CAPM formula is used to discount the expected dividends and capital appreciation of the stock over the expected holding period. If the discounted value of those future cash flows is equal to $100 then the CAPM formula indicates the stock is fairly valued relative to risk.

(https://www.investopedia.com/terms/c/capm.asp)

 

 

·       SML – Security Market Line

image043.jpg

 

 

In Class Exercise (NVIDIA, WalMart, JP Morgan -  Monthly Stock prices – prior 5 years)  

 

Here's how to pull monthly stock data in Google Sheets for free using the GOOGLEFINANCE function:

Step 1: Use GOOGLEFINANCE to Get Daily Data

o   =GOOGLEFINANCE("NVDA", "close", DATE(2019,11,29), DATE(2024,11,3))
  • Replace "NVDA" with your desired stock symbol.
  • Adjust the date range to your preference.

Step 2: Extract Month-Year from Dates

  1. In a new column, use the TEXT function to convert dates to a "YYYY-MM" format. This will help you group the data by month:
·       =TEXT(A2, "YYYY-MM")
    • Assuming your dates are in Column A, start this formula in Cell B2.

Step 3: Identify the Last Trading Day of Each Month

  1. In another column, use a formula to determine if the current date is the last trading day of the month:
·       =IF(AND(C2<>C3, NOT(ISBLANK(A2))), TRUE, FALSE)
    • This checks if the Month-Year in Cell C2 is different from the one in the next row (C3), indicating it’s the last day of that month.

Step 4: Filter the Last Trading Day Data

  1. Use the FILTER function to extract the dates and closing prices corresponding to the last trading day of each month:
·       =FILTER(A2:C, D2:D=TRUE)
    • This will pull only the dates and closing prices marked as TRUE in the column where you checked for the last trading day.

Step 5: Repeat for Other Stocks

  • If you have multiple stocks (e.g., NVDA, WMT, JPM), repeat the steps for each stock's data.

By following this process, you can organize and extract monthly stock data in Google Sheets using GOOGLEFINANCE effectively. 

Step 6: S&P500 Index as a Proxy for the Market

1.     Use GOOGLEFINANCE to Get Daily Data for S&P 500:

=GOOGLEFINANCE("INDEXSP:.INX", "close", DATE(2019,11,29), DATE(2024,11,3))
    • "INDEXSP:.INX": This is the ticker symbol for the S&P 500 Index.
    • "close": Retrieves the closing prices.
    • Adjust the date range to match your other stocks' date range.

2.     Follow the Same Steps for S&P 500 Data:

    • Extract Month-Year from Dates: Use =TEXT(A2, "YYYY-MM") to format the dates as "YYYY-MM".
    • Identify the Last Trading Day of Each Month: Use =IF(AND(C2<>C3, NOT(ISBLANK(A2))), TRUE, FALSE) to determine if it's the last trading day of the month.
    • Filter the Last Trading Day Data: Use =FILTER(A2:C, D2:D=TRUE) to extract the dates and closing prices for the last trading day of each month.

Example for All Stocks:

  • NVIDIA (NVDA): Follow steps 1 to 5 for NVIDIA.
  • Walmart (WMT): Repeat steps 1 to 5 for Walmart.
  • JP Morgan (JPM): Repeat steps 1 to 5 for JP Morgan.
  • S&P 500 Index (Market Proxy): Follow steps 1 to 6 for the S&P 500 Index.

 

 

 

Steps:(Yahoo Does not provide free stock price data anymore)

 

1.      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 “8/1/2018” and “7/1/2023”, respectively.

·  Download it to Excel

·  Delete all inputs, except “adj close” – this is the closing price adjusted for dividend.

·  Merge the three sets of data just downloaded

 

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

·       For example: chose WalMart, Nvidia, JP Morgan, and S&P500 index.

·       Stock Prices Raw Data File (updated, fall 2024)       

 

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

·       Stock Price In Class exercise all included (Beta, CAPM, excel file here) (fall 2024, updated, equations presented clearly)

 

·       Stock Price Normal Distribution (FYI)  ( https://homepage.divms.uiowa.edu/~mbognar/applets/normal.html)

 

      

 

 

 

HOMEWORK (Due with final)

 

1.            AAA firm’s stock has a 0.25 possibility to make 30.00% return, a 0.50 chance to make 12% return, and a 0.25 possibility to make -18% return.  Calculate expected rate of return (Answer: 9%)   

2.            If investors anticipate a 7.0% risk-free rate, the market risk premium = 5.0%, beta = 1, Find the return. (answer:12%)

3.            AAA firm has a portfolio with a value of $200,000 with the following four stocks. Calculate the beta of this portfolio ( answer: 0.988)

                                 Stock                                               value                                         β

                                     A                                              $ 50,000.00                              0.9500

                                     B                                                  50,000.00                              0.8000

                                     C                                                  50,000.00                              1.0000

                                     D                                                 50,000.00                              1.2000

                                 Total                                         $200,000.00

4.            A portfolio with a value of $40,000,000 has a beta = 1. Risk free rate = 4.25%, market risk premium = 6.00%. An additional $60,000,000 will be included in the portfolio. After that, the expected return should be 13%. Find the average beta of the new stocks to achieve the goal  ( answer: 1.76)

5. 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?

 

(answer: expected return = 8.2%, variance=0.02884, standard deviation=16.98%, visit  https://www.jufinance.com/return/)

 

6.       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%)

 

7.       An investor currently holds the following portfolio: (answer: 1.99)

                                       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?

 

8. Deleted

 

9. 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: 12.87%)

 

10.  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)

 

 11.              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%)

 

12.  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)

 

 

Homework Help videos

 Q1 Q5       Q2 Q3       Q4 Q6 Q7       Q9 TO THE END

 

Quiz 5 prep video

Part I (has three questions from chapter 8)       Part II

 

 

 

How much does Amazon worth?” --- FYI only: Amazon.com Inc. (AMZN) https://www.stock-analysis-on.net/NASDAQ/Company/Amazoncom-Inc/DCF/Present-Value-of-FCFF

 

 

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

 

Year

Value

FCFFt or Terminal value (TVt)

Calculation

Present value at 16.17%

01

FCFF0

(4,286)

1

FCFF1

(4,286) × (1 + 0.00%)

2

FCFF2

 × (1 + 0.00%)

3

FCFF3

 × (1 + 0.00%)

4

FCFF4

 × (1 + 0.00%)

5

FCFF5

 × (1 + 0.00%)

5

Terminal value (TV5)

 × (1 + 0.00%) ÷ (16.17% – 0.00%)

Intrinsic value of Amazon.com's capital

Less: Debt (fair value)

45,696 

Intrinsic value of Amazon.com's common stock

Intrinsic value of Amazon.com's common stock (per share)

$–

Current share price

$1,642.81

1 


Weighted Average Cost of Capital (WACC)

Amazon.com Inc., cost of capital

 

Value1

Weight

Required rate of return2

Calculation

Equity (fair value)

803,283 

0.95

16.97%

Debt (fair value)

45,696 

0.05

2.10%

2.99% × (1 – 29.84%)

1 USD $ in millions

   Equity (fair value) = No. shares of common stock outstanding × Current share price
488,968,628 × $1,642.81 = $803,282,551,764.68

   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
= (20.20% + 36.61% + 60.59% + 0.00% + 31.80%) ÷ 5 = 29.84%

WACC = 16.17%


FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

Amazon.com Inc., PRAT model

 

Average

Dec 31, 2017

Dec 31, 2016

Dec 31, 2015

Dec 31, 2014

Dec 31, 2013

Selected Financial Data (USD $ in millions)

Interest expense

848 

484 

459 

210 

141 

Net income (loss)

3,033 

2,371 

596 

(241)

274 

Effective income tax rate (EITR)1

20.20%

36.61%

60.59%

0.00%

31.80%

Interest expense, after tax2

677 

307 

181 

210 

96 

Interest expense (after tax) and dividends

677 

307 

181 

210 

96 

EBIT(1 – EITR)3

3,710 

2,678 

777 

(31)

370 

Current portion of long-term debt

100 

1,056 

238 

1,520 

753 

Current portion of capital lease obligation

5,839 

3,997 

3,027 

2,013 

955 

Current portion of finance lease obligations

282 

144 

99 

67 

28 

Long-term debt, excluding current portion

24,743 

7,694 

8,235 

8,265 

3,191 

Long-term capital lease obligations, excluding current portion

8,438 

5,080 

4,212 

3,026 

1,435 

Long-term finance lease obligations, excluding current portion

4,745 

2,439 

1,736 

1,198 

555 

Total stockholders' equity

27,709 

19,285 

13,384 

10,741 

9,746 

Total capital

71,856 

39,695 

30,931 

26,830 

16,663 

Ratios

Retention rate (RR)4

0.82

0.89

0.77

0.74

Return on invested capital (ROIC)5

5.16%

6.75%

2.51%

-0.12%

2.22%

Averages

RR

0.80

ROIC

3.31%

Growth rate of FCFF (g)6

0.00%

1 See Details »

2017 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
848 × (1 – 20.20%) = 677

3 EBIT(1 – EITR) = Net income (loss) + Interest expense, after tax
3,033 + 677 = 3,710

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [3,710 – 677] ÷ 3,710 = 0.82

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 3,710 ÷ 71,856 = 5.16%

6 g = RR × ROIC
0.80 × 3.31% = 0.00%


FCFF growth rate (g) forecast

Amazon.com Inc., H-model

 

Year

Value

gt

1

g1

0.00%

2

g2

0.00%

3

g3

0.00%

4

g4

0.00%

5 and thereafter

g5

0.00%

where:
g
1 is implied by PRAT model
g
5 is implied by single-stage model
g
2g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5 – g1) × (2 – 1) ÷ (5 – 1)
0.00% + (0.00% – 0.00%) × (2 – 1) ÷ (5 – 1) = 0.00%

g3 = g1 + (g5 – g1) × (3 – 1) ÷ (5 – 1)
0.00% + (0.00% – 0.00%) × (3 – 1) ÷ (5 – 1) = 0.00%

g4 = g1 + (g5 – g1) × (4 – 1) ÷ (5 – 1)
0.00% + (0.00% – 0.00%) × (4 – 1) ÷ (5 – 1) = 0.00%

Week7  part I

 

 

Final Exam (will be posted on blackboard)

Final prep video (on youtube)

 

Week 7 Part II

 

image175.jpg

FYI – Develop a Stock Data Fetcher in Google Sheets 

https://script.google.com/macros/s/AKfycby5vZhxEOed7AcET57IfRwkanirTqOszZ8Wtfs9OEM42vFb6As_cQaJL9wOWPF170xn/exec (example)

Step 1: Create a New Google Sheet

  1. Open Your Web Browser: Go to Google Sheets.
  2. Sign In: If you aren’t signed in already, use your Google account to sign in.
  3. Create a New Sheet: Click on the Blank option to create a new, empty Google Sheet.

Step 2: Set Up the Google Apps Script

  1. Open the Script Editor:
    • In your new Google Sheet, click on Extensions in the top menu.
    • Select Apps Script from the dropdown menu. This will open the Apps Script editor in a new tab.
  2. Clear Any Default Code:
    • If there is any default code in the editor, delete it to start with a blank script.
  3. Paste the Script:
    • Copy the following script and paste it into the editor:

 

// Function to serve the HTML file

function doGet() {

  return HtmlService.createHtmlOutputFromFile('index');

}

 

function fetchStockData(ticker, startDateStr) {

  var sheet = SpreadsheetApp.getActiveSpreadsheet().getActiveSheet();

 

  // Clear previous data

  sheet.getRange("A1:F1000").clearContent();

 

  // Set the header row for daily data

  sheet.getRange("A1").setValue("Date");

  sheet.getRange("B1").setValue("Closing Price");

  sheet.getRange("C1").setValue("Stock Name");

 

  // Fetch and display the stock name using GOOGLEFINANCE

  var stockNameFormula = `=GOOGLEFINANCE("${ticker}", "name")`;

  sheet.getRange("C2").setFormula(stockNameFormula);

 

  // Set up the formula to fetch daily data using GOOGLEFINANCE

  var formula = `=GOOGLEFINANCE("${ticker}", "close", "${startDateStr}", TODAY(), "daily")`;

  sheet.getRange("A2").setFormula(formula);

 

  // Wait for the data to populate

  SpreadsheetApp.flush();

 

  // Copy the daily data into an array

  var dataRange = sheet.getRange("A2:B1000").getValues();

  var validData = dataRange.filter(row => row[0] && row[1]); // Remove empty rows and invalid data

 

  if (validData.length === 0) {

    return "No data available. Please check the stock ticker and date range.";

  }

 

  // Set the header row for monthly data in columns D, E, and F

  sheet.getRange("D1").setValue("Month");

  sheet.getRange("E1").setValue("Closing Price");

  sheet.getRange("F1").setValue("Monthly Return");

 

  // Process data to calculate the last trading day of each month

  var monthlyData = {};

  validData.forEach(row => {

    var date = new Date(row[0]);

    var price = row[1];

    var monthKey = `${date.getFullYear()}-${(date.getMonth() + 1).toString().padStart(2, '0')}`;

 

    // Keep updating to get the last price of the month

    monthlyData[monthKey] = price;

  });

 

  // Write the monthly data and calculate returns

  var previousPrice = null;

  var rowIndex = 2;

  for (var month in monthlyData) {

    var price = monthlyData[month];

    sheet.getRange(rowIndex, 4).setValue(month); // Write month in column D

    sheet.getRange(rowIndex, 5).setValue(price); // Write price in column E

 

    if (previousPrice !== null) {

      var monthlyReturn = ((price - previousPrice) / previousPrice) * 100;

      sheet.getRange(rowIndex, 6).setValue(monthlyReturn.toFixed(2) + "%"); // Write return in column F

    }

 

    previousPrice = price;

    rowIndex++;

  }

 

  return "Data fetched and returns calculated successfully!";

}

  1. Save the Script:
    • Click on the Save icon (or press Ctrl + S).
    • Name Your Project: Give it a simple name like "Stock Data Fetcher."

Step 3: Authorize and Run the Script

  1. Authorize the Script:
    • Click on the Run button (the icon).
    • A dialog box will appear asking for permission. Click Review Permissions.
    • Choose your Google account and click Allow to grant the necessary permissions.
  2. Run the Script:
    • After authorizing, click Run again to execute the script.

 

Step 4: Create the HTML File

1.     In the Apps Script editor, click on the + button next to "Files" and select HTML.

2.     Name the new file Index.html.

3.     Paste the following HTML code into the Index.html file:

<!DOCTYPE html>

<html>

<head>

  <base target="_top">

  <title>Stock Data Fetcher</title>

  <style>

    body {

      font-family: Arial, sans-serif;

      margin: 20px;

    }

    h2 {

      color: #333;

    }

    label {

      display: block;

      margin-top: 10px;

    }

    input, button {

      margin-top: 5px;

    }

    .footer {

      margin-top: 20px;

      font-size: 12px;

      color: #666;

      text-align: center;

    }

  </style>

</head>

<body>

  <h2>Stock Data Fetcher</h2>

  <label for="ticker">Stock Ticker:</label>

  <input type="text" id="ticker" placeholder="e.g., AAPL, WMT" /><br>

 

  <label for="startDate">Start Date:</label>

  <input type="date" id="startDate" /><br>

 

  <button onclick="fetchData()">Fetch Data</button>

  <p id="status"></p>

 

  <!-- Button to open the Google Sheet -->

  <button onclick="openGoogleSheet()">Open Google Sheet</button>

 

  <script>

    function fetchData() {

      var ticker = document.getElementById('ticker').value;

      var startDate = document.getElementById('startDate').value;

 

      // Call the Apps Script function

      google.script.run.withSuccessHandler(function(response) {

        document.getElementById('status').innerText = response;

      }).fetchStockData(ticker, startDate);

    }

 

    function openGoogleSheet() {

      // Replace with the URL of your Google Sheet

     var sheetUrl = "YOUR_GOOGLE_SHEET_URL"; // Replace with your actual Google Sheet URL

      window.open(sheetUrl, "_blank");

    }

  </script>

</body>

</html>

Step 5: Deploy Your Web App

  1. In the Apps Script editor, click on Deploy > New deployment.
  2. Choose Web app.
  3. Set the following options:
    • Description: Enter a name like "Stock Data Fetcher Deployment."
    • Execute as: Select Me.
    • Who has access: Choose Anyone (if you want others to use it) or Only myself for private use.
  4. Click Deploy and follow the instructions to authorize the app.
  5. Copy the web app URL provided after deployment.

Step 6: Access and Use the Web App

  1. Open the web app using the URL you copied.
  2. Enter the stock ticker and start date.
  3. Click Fetch Data to retrieve and display the data in your Google Sheet.
  4. Share the URL so that others can use your app to fetch stock data.

 

Chapters 2, 3 - Financial Statements (not required)

 

Ppt chapter 2

 

Ppt chapter 3

 


Using a Balance Sheet to Analyze a Company (VIDEO)
   (FYI)

What is an Income Statement? (Video) (FYI)

How Do You Read a Cash Flow Statement? | (VIDEO) (FYI)

 

Based on the following information, prepare the income statement and the cash flow statement

 

                                                2017          2018

Sales                                                          36,408

Depreciation                                             1,760

Tax paid                                                    2,070

Accounts receivable                3,411         4,218

Inventory                                18,776       21,908

Accounts payable                    7,250         8,384

Common stock                        15,000       17,500

Retained earning                     6,357         3,825

COG                                                         28,225

Cash                                        2,060         1,003

Interest paid                                              510

NFA                                        14,160       14,080

Long term debt                       9,800         11,500

 

Solution:  (excel solution fyi)

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 financing

-2175

Total net change of cash

-1057

Cash at the end of the year

1003

 

 

 

************ What is Free Cash Flow **************

 

What is free cash flow (video)

 

What is free cash flow (FCF)? Why is it important?

 

        FCF is the amount of cash available from operations for distribution to all investors (including stockholders and debtholders) after making the necessary investments to support operations.

        A company’s value depends on the amount of FCF it can generate.

 

What are the five uses of FCF?

1. Pay interest on debt.

2. Pay back principal on debt.

3. Pay dividends.

4. Buy back stock.

5. Buy nonoperating assets (e.g., marketable securities, investments in other companies, etc.)

 

https://www.jufinance.com/fin509_22sum/index_files/image099.gif

 

 

 

What are operating current assets?

        Operating current assets are the CA needed to support operations.

        Op CA include: cash, inventory, receivables.

        Op CA exclude: short-term investments, because these are not a part of operations.

 

What are operating current liabilities?

        Operating current liabilities are the CL resulting as a normal part of operations.

        Op CL include: accounts payable and accruals.

        Op CL exclude: notes payable, because this is a source of financing, not a part of operations.

 

 

image003.jpg

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.  https://www.sec.gov/edgar/searchedgar/companysearch.html

 

FCF calculator    

https://www.jufinance.com/fcf

 

In class exercise

1. Firm AAA has EBIT (operating income) of $3 million, depreciation of $1 million. Firm AAA’s expenditures on fixed assets = $1 million. Its net operating working capital = $0.6 million.  Calculate for free cash flow. Imagine that the tax rate =40%.

a.                $1.2

b.                $1.3

c.                $1.4

d.         $1.5

FCF = EBIT(1 – T) + Deprec. – (Capex + NOWC)

 

answer:

EBIT                        $3

Tax rate    40%

Depreciation               $1

Capex + NOWC          $1.60

So, FCF =   $1.2

 

2. The following information should be used for the following problems:

                                            2014    2015

Sales                                   $ 740   $ 785

COGS                                               430            460

Interest                                     33  35

Dividends               16  17

Depreciation                            250                  210

Cash                                           70  75

Accounts receivables                   563            502

Current liabilities        390            405

Inventory               662                   640

Long term debt                             340            410

Net fixed assets                            1,680         1,413

Common stock                              700            235

Tax rate                       35%           35%

 

                 What is the net income for 2015? ($52)

 

 


Ratio Analysis 
 template

https://www.jufinance.com/ratio

 

 

Finviz.com/screener for ratio analysis (https://finviz.com/screener.ashx)

 

Financial ratio analysis  (VIDEO)

 

Ratio formulas