FIN 301 Class Web Page, Fall ' 15

Instructor: Maggie Foley

Jacksonville University

 

The Syllabus   (session 3 as an example)

Business Finance Online, an interactive learning tool for the Corporate Finance Student https://www.zenwealth.com/BusinessFinanceOnline/index.htm

 

 

Weekly SCHEDULE, LINKS, FILES and Questions

Week

Coverage, HW, Supplements

-        Required

WSJ Papers Reference only

 

Videos (optional)

Chapter 1, 2

Chapter  1: Introduction

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 Note:

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

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

 

Financial institutions facilitate exchanges of funds and financial products.

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

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

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

 

image009.jpg

 

 

Chapter 2 Introduction of Financial Market

ppt

Introduction to Capital Markets - ION Open Courseware (Video)

How the stock market works (video)

 

 Boom! What Next for This Yo-Yo of a Stock Market? (FYI only, for interested students)

Introduction to Capital Markets - ION Open Courseware

 

 

Chapter 5

Chapter 5 Time value of Money

ppt

Time value of money (Video)

The time value of money - German Nande (video)

Chapter 5 in class exercise

 

Chapter 5 in Class Exercise Part II Solution

 

Homework (Due on 9/18)

 

Chapter 5 hw word file

 

Chapter 5 supplement II–Introduction of Trading (give it a try and it is fun)

 

Stock screening tools

FINVIZ.com

http://finviz.com/screener.ashx

 

 

Zack Recommendation of stocks (Daily)

http://www.zacks.com/stocks/zacks-rank

 

 

Summary of stock screening rules from class discussion

PEG<1

PE<15  (? FB’s PE>100?)

 

First Mid Term on 9/22 covering chapter 1, 2, and 5

 

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Math Equations 

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))

 

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

     = pmt(rate, nper, pv, -fv)

 

To get Effective rate (EAR), use Effect function

 = effect(nominal_rate, npery)

 

To get annual percentage rate (APR), use nominal function

 = nominal(effective ratge,  npery)

 

Financial Analysis Using Excel, Part 1 (Time Value of Money)

Chapter 3

Chapter 3 Financial Statement Analysis

ppt

Experts Explain: Financial Statements (well explained, video)

 

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

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

Sales: $67,977

Cost of goods sold: $44,693

Marketing, general and administrative expenses: $15,885

Depreciation expenses: $1,616

Interest expense: $530

Tax rate: 36.70%

Number of shares outstanding: 1,623

Dividends paid to stockholders: $1,569.

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

 

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

Cash: $545

Accounts receivables: $1,085

Inventories: $10625

Other current assets: $1,224

Gross fixed assets: $38,471

Accumulated depreciation: $13,411

Other fixed assets: $1,586

Accounts payable: $9,080

Short term notes payable: $1,042

Long term debt: $11,114

Total common stock: $3,894

Retained earnings: $14,995

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

Income Statement Template

 

Balance Sheet Template

 

Cash flow template (new and simple, my contribution)

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

 

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

 

In Millions of USD (except for per share items)

52 weeks ending 2014-02-02

Net Income/Starting Line

5,385.00

Depreciation/Depletion

1,757.00

Amortization

-

Deferred Taxes

-31

Non-Cash Items

228

Changes in Working Capital

289

Cash from Operating Activities

7,628.00

Capital Expenditures

-1,389.00

Other Investing Cash Flow Items, Total

-118

Cash from Investing Activities

-1,507.00

Financing Cash Flow Items

-37

Total Cash Dividends Paid

-2,243.00

Issuance (Retirement) of Stock, Net

-8,305.00

Issuance (Retirement) of Debt, Net

3,933.00

Cash from Financing Activities

-6,652.00

Foreign Exchange Effects

-34

Net Change in Cash

-565

Cash Interest Paid, Supplemental

639

Cash Taxes Paid, Supplemental

2,839.00

 

Discussion:

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

2.      What does net change in cash mean?

image008.jpg

 

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

Source of cash

  • Decrease in an Asset
    • Example: Selling inventories or collecting receivables provides cash
  • Increase in Liability or Equity
    • Example: Borrowing funds or selling stocks provides cash

Use of Cash

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

 Cash Flow from Operations: Five Steps

1.      Add back depreciation.

2.      Subtract (add) any increase (decrease) in accounts receivable.

3.      Subtract (add) any increase (decrease) in inventory.

4.      Subtract (add) any increase (decrease) in other current assets.

5.      Add (subtract) any increase (decrease) in accounts payable and other accrued expenses

 

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HW of chapter 3 

1.      For the above precision tool example, work out the cash flow statement

2.      Firm AAA just showed how it operated in the prior year.

Sales = $2,000; Cost of Goods Sold = $1,000; Depreciation Expense = $200; Administrative Expenses = $180; Interest Expense = $30; Marketing Expenses = $50; and Taxes = $200.  Prepare income statement

3.      A firm has $2000 in current assets, $3000 in fixed assets, $300 in accounts receivables, $300 accounts payable, and $800 in cash. What is the amount of the inventory? (hint: 900)

4.      A firm has net working capital of $1000. Long-term debt is $5000, total assets are $8000, and fixed assets are $5000. What is the amount of the total equity? (Hint: to find total equity, you need to calculate total debt, which is a sum of long term debt and short term debt. Short term can be found from new working capital.) (hint: 1000)

5.      Andre's Bakery has sales of $100,000 with costs of $50,000. Interest expense is $20,000 and depreciation is $10,000. The tax rate is 35 percent. What is the amount of tax paid? (hint: 7000)(hint: tax = taxable income * tax rate and taxable income = EBT)

6.      Andre's Bakery has sales of $100,000 with costs of $50,000. Interest expense is $20,000 and depreciation is $10,000. The tax rate is 35 percent. The company also paid $3,000 for dividend. What is the retained earning?  (hint: retained earning = net income - dividend)(hint: 10,000)

7. The Blue Bonnet's 2008 balance sheet showed net fixed assets of $2.2 million, and the 2009 balance sheet showed net fixed assets of $2.6 million. The company's income statement showed a depreciation expense of $1,000,000. What was the amount of the net capital spending for 2009? $1,400,000
8. A firm has $500 in inventory, $1,860 in fixed assets, $190 in accounts receivables, $210 in accounts payable, and $70 in cash. What is the amount of the current assets?  (760)
9. A firm has net working capital of $640. Total liability is $5,860. Total assets are $6,230, and fixed assets are $3,910. What is the amount of long term debt?  (4180)
10. The Purple Martin has annual sales of $687,400, total debt of $210,000, total equity of $365,000, and a profit margin of 5.00 percent. What is the return on assets? 
(5.98 percent)
11. A firm generated net income of $878. The depreciation expense was $40 and dividends were paid in the amount of $25. Accounts payables decreased by $13, accounts receivables increased by $20, inventory decreased by $14, and net fixed assets decreased by $8. There was no interest expense. What was the net cash flow from operating activity? (899)

12.   Your firm has net income of $198 on total sales of $1,200. Costs are $715 and depreciation is $145. The tax rate is 34%. The firm does not have interest expenses. What is the operating cash flow? (383)

 

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

 

14. The total assets are $900, the fixed assets are $600, long-term debt is $500, and short-term debt is $200. What is the amount of net working capital?    (100)

15.   At the beginning of the year, a firm has current assets of $380 and current liabilities of $210. At the end of the year, the current assets are $410 and the current liabilities are $250. What is the change in net working capital? 

 

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

 

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image011.jpg

 

Use the above information to prepare cash flow statement.

 

 

More in class exercises:

1.      What was change in cash flow in investment for 2009? (Hint: compare for net fixed asset and adjust for depreciation). 
A. $80
B. -$1,680
C. -$1,840
D. $1,700

 

2.       What is the net change in cash flow in operation in 2009? (hint: start with NI, depreciation and adjust for other current assets and liability) 
A.  3,822
B. 2,798
C. 3,575
D. 3,269

 

 

3.      What is the net change in cash flow in financing in 2009? (Hint: calculate cash flow changes in debt and equity and then add them up – calculate dividend first)

A. -$3,008
B. $1,720
C. -$2,175
D. -$1,668

 

 

4.      Inventory has increased from $18,776 to $21,908. This is  ____________ of cash;

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

5. Which one of the following is a source of cash? 
A. increase in accounts receivable
B. decrease in notes payable
C. decrease in common stock
D. increase in accounts payable
E. increase in inventory

6.  one of the following is a use of cash? 
A. increase in notes payable
B. decrease in inventory
C. increase in long-term debt
D. decrease in accounts receivables
E. decrease in common stock

 7. Which one of the following is a source of cash? 
A. repurchase of common stock
B. acquisition of debt
C. purchase of inventory
D. payment to a supplier
E. granting credit to a customer

 

8. Which one of the following is a source of cash? 
A. increase in accounts receivable
B. decrease in common stock
C. decrease in long-term debt
D. decrease in accounts payable
E. decrease in inventory

9. During the year, Kitchen Supply increased its accounts receivable by $130, decreased its inventory by $75, and decreased its accounts payable by $40. How did these three accounts affect the firm's cash flows for the year? 

10. A firm generated net income of $878. The depreciation expense was $47 and dividends were paid in the amount of $25. Accounts payables decreased by $13, accounts receivables increased by $22, inventory decreased by $14, and net fixed assets decreased by $8. There was no interest expense. What was the net cash flow from operating activity? What was the net cash flow from investment?

 

Chapter 4

Chapter 4: Ratio Analysis

Ppt

 

Chapter 4 how to master analyzing financial statement (FYI only)

 

Stock screening tools

FINVIZ.com

http://finviz.com/screener.ashx

We will focus on several ratios:

P/E (price per share/earning per share)

P/B (market price per share / book value per share)

PEG (PE ratio / growth rate. PEG<1, undervalued stock)

EPS (earning per share)

EPS growth (EPS growth rate)

ROA (Return on Asset = NI/TA)

ROE (return on equity = NI/TE)

Current ratio (liquidity measure. = CA/CL)

Quick ratio (liquidity measure. = (CA-Inventory)/CL)

Debt/Equity (Leverage measure. = TD/TE)

Gross margin (profit measure. = EBITDA/sales, or = Gross margin/sales)

Operating margin (profit measure. = EBIT/sales, or = operating income/sales)

Net profit margin (profit measure. = NI/sales)

Payout ratio (= dividend / NI, measures distribution to shareholders).

 

HW:

Calculate all ratios above of WalMart except PEG, EPS growth rate, using the most recent financial statement of WMT (due on 10/13).

 

 

 

 

ex Goldman Sachs Trader Tells Truth about Trading - Part 1

 

ex Goldman Sachs Trader Tells Truth about Trading - Part 2

 

ex Goldman Sachs Trader Tells Truth about Trading - Part 3

 

ex Goldman Sachs Trader Tells Truth about Trading - Part 4

 

ex Goldman Sachs Trader Tells Truth about Trading - Part 5

 

ex Goldman Sachs Trader Tells Truth about Trading - Part 6

 

Second Mid Term on 10/15, covering chapter 3 and 4.

 

10/27 from 1:30-2:30, Visit

Jacksonville Branch - Federal Reserve Bank of Atlanta

Dress Code: Business Casual

Address: 800 Walter Street

(904) 632-1000

 

 

Chapter 6

Chapter 6 Risk and Return

ppt

Chapter 6 In Class Exercise (word file here)

Chapter 6 In class exercise class demonstration (Excel): prices of Stock 1, 2, and 3 are randomly generated using randbetween (bottom, top) in Excel.  In class, we did WMT, YAHOO, and GOOG. 

HW of chapter 6  

Chapter 6 Homework (Due on 11/10/2015, updated)

1) The prices for the Electric Circuit Corporation for the first quarter of 2009 are given below. The price of the stock on January 1, 2009 was $130. Find the holding period return for an investor who purchased the stock on January 1, 2009 and sold it the last day of March 2009. (6.2%)

 

      Month End   Price

      January     $125.00

      February     138.50

      March         132.75

 

2) Stock prices of company A are as follows: 15, 20, 21, 26, 24 (from Sept, 2015 to May 2015)

Stock prices of company B are as follows: 34, 28, 25, 22, 26 (from Sept, 2015 to May 2015)

 

Calculate four stock returns (Should have four returns) of both companies.

Calculate four stock risk (standard deviation)

Calculate correlation

Calculate portfolio returns assuming 50% invested in company A and 50% invested in company B. 

 

 

3) 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? (11%)

 

4) An investor currently holds the following portfolio:

                                       Amount

                                      Invested

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

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

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

 

The beta for the portfolio is? (1.99)

 

5) 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? (12.87%)

 

 

6) 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? (1.2)

 

 

7. The risk-free rate of return is 3.9 percent and the market risk premium (rmrf) is 6.2 percent. What is the expected rate of return on a stock with a beta of 1.21? 
( 11.4%)

 

8.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. (1.15)

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

 

 

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

Period             Jazman           Solomon

1                      $10                  $20

2                      $12                  $25

3                      $15                  $15

 

 

10.  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. (1.1)

 

 

11.  Joe purchased 800 shares of Robotics Stock at $5 per share on 1/1/13. Bill sold the shares on 4/18/13 for $6. Robotics stock has a beta of 1.2, the risk-free rate of return is 1%, and the market risk premium is 10%. Joe's holding period return is how much? (20%)

 

image012.jpg

 

 

image013.jpg

 

Excel Command:

sumproduct(array1, array2)

stdevp(observation1, obv2, obv3,….)

correl(stock 1’s return, stock 2’s return)

beta = slope(stock return, sp500 return)

The Importance of Diversification

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

 

 

 Understanding Diversification in Stock Trading to Avoid Losses

https://www.youtube.com/watch?v=FrmoXog9zig

 

 

 

How to Build a Portfolio | by Wall Street Survivor

https://www.youtube.com/watch?v=V48NECmT3Ns

Chapter 7

  Chapter 7 Bond Market

ppt

 

Website:  

FINRA.org (www.findra.org, è Investor center è market data è bond è corporate bond)

 

image014.jpg

 

WAL-MART STORES INC

Coupon Rate 3.300%         Maturity Date  04/22/2024

Symbol

 

CUSIP

 

Next Call Date

01/22/2024

Callable

Yes

Last Trade Price

$106.18

Last Trade Yield

2.512%

Last Trade Date

04/09/2015

US Treasury Yield

 

Credit and Rating Elements

Moody's Rating

Aa2 (04/21/2014)

Standard & Poor's Rating

AA (04/16/2014)

Fitch Rating

AA (09/30/2014)

Coupon Payment Frequency

Semi-Annual

 

 

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

 

2.      3. Understand how to price bond

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

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

 

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

 

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

 

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

 

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

 

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

 

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

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 bonds yield to maturity is 10%. How much is its price?

 

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

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

b.   What is WMTs rating?

 

Homework

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

2.              IBM 10 year 4% semi_annual coupon bond is selling for $950. How much is this IBM bond’s YTM?  4.63%

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

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

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

6.              Collingwood Homes has a bond issue outstanding that pays an 8.5 percent coupon and matures in 18.5 years. The bonds have a par value of $1,000 and a market price of $964.20. Interest is paid semiannually. What is the yield to maturity? (8.90%)

7.              Grand Adventure Properties offers a 9.5 percent coupon bond with annual payments. The yield to maturity is 11.2 percent and the maturity date is 11 years from today. What is the market price of this bond if the face value is $1,000?($895.43)

8.              The zero coupon bonds of D&L Movers have a market price of $319.24, a face value of $1,000, and a yield to maturity of 9.17 percent. How many years is it until these bonds mature? (12.73 years)

9.              A zero coupon bond with a face value of $1,000 is issued with an initial price of $212.56. The bond matures in 25 years. What is the implicit interest, in dollars, for the first year of the bond's life? (6.29%)

10.        The bonds issued by Stainless Tubs bear a 6 percent coupon, payable semiannually. The bonds mature in 11 years and have a $1,000 face value. Currently, the bonds sell for $989. What is the yield to maturity? (6.14%)

Summary of bond pricing excel functions

To calculate bond price (annual coupon bond):

Price=abs(pv(yield to maturity, years left to maturity, coupon rate*1000, 1000)

 

To calculate yield to maturity (annual coupon bond)::

Yield to maturity = rate(years left to maturity, coupon rate *1000, -price, 1000)

 

To calculate bond price (semi-annual coupon bond):

Price=abs(pv(yield to maturity/2, years left to maturity*2, coupon rate*1000/2, 1000)

 

To calculate yield to maturity (semi-annual coupon bond):

Yield to maturity = rate(years left to maturity*2, coupon rate *1000/2, -price, 1000)*2

 

To calculate number of years left(annual coupon bond)

Number of years =nper(yield to maturity,  coupon rate*1000, -price, 1000)

 

To calculate number of years left(semi-annual coupon bond)

Number of years =nper(yield to maturity/2,  coupon rate*1000/2, -price, 1000)/2

 

To calculate coupon (annual coupon bond)

Coupon = pmt(yield to maturity, number of years left, -price, 1000)

Coupon rate = coupon / 1000

 

To calculate number of years left(semi-annual coupon bond)

Number of years = pmt(yield to maturity/2, number of years left*2, -price, 1000)

Coupon rate = coupon / 1000

 

 

 

Chapter 10

Chapter 10 Capital Budgeting

Ppt

NPV, IRR, and Payback period template in Excel

 

Chapter 10 In Class Exercise

Question 1: Project with an initial cash outlay of $20,000 with following free cash flows for 5 years.

Year   Cash flows

1                    $8,000

2                    4,000

3                    3,000

4                    5,000

5                    10,000

 

1)      How much is the payback period (approach one)?

·         Does this method consider time value of money?

·         Easy to explain to outsiders?

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

·         What does NPV means? NPV>0 indicates what? Otherwise?

·         Does this method consider time value of money?

·         Easy to explain to outsiders?

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

·         What does IRR mean? IRR > 10% indicates what? Otherwise?

·         Does this method consider time value of money?

·         Easy to explain to outsiders?

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

·         What does |PI mean? PI > 1 indicates what? Otherwise?

·         Does this method consider time value of money?

·         Easy to explain to outsiders?

 

Question 2: Project with an initial cash outlay of $60,000 with following free cash flows for 5 years.

      Year    FCF               

      Initial outlay    –60,000          

      1          –25,000          

      2          –24,000          

      3          13,000

      4          12,000

      5          11,000 

The firm has a 15% required rate of return.

Calculate payback period, NPV, IRR and PI. Analyze your results.

 

Question 3: Mutually Exclusive Projects

1)      Consider the following cash flows for one-year Project A and B, with required rates of return of 10%. You have limited capital and can invest in one but one project. Which one?

§  Initial Outlay: A = $200; B = $1,500

§  Inflow:            A = $300; B = $1,900

 

2)      Example: Consider two projects, A and B, with initial outlay of $1,000, cost of capital of 10%, and following cash flows in years 1, 2, and 3:

A: $100                       $200                $2,000

B: $650                       $650                $650

 

Which project should you choose if they are mutually exclusive? Independent? Crossover rate?

 

Homework (answers will be provided soon, due on 12/5/2015)

1.       Consider the following two projects, calculate the NPVs of the two projects. If the two projects are mutually exclusive, which one should you choose? What about they are independent projects? (Answer:  NPV of A= -8.67; NPV of B = 12.65. Choose A, if mutually exclusive; Choose A if independent)

Project

Year 0

Cash Flow

Year 1

Cash Flow

Year 2

Cash Flow

Year 3

Cash Flow

Year 4

Cash Flow

Discount Rate

A

-100

40

40

40

N/A

.15

B

-73

30

30

30

30

.15

2. You are considering an investment with the following cash flows. If the required rate of return for this investment is 15.5 percent, should you accept the investment based solely on the internal rate of return rule? Why or why not? (Answer: NPV=96078, >0, Accept)
  https://www.jufinance.com/fin301_14f/index_files/image026.gif  

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

4.  An investment project provides cash flows of $1,190 per year for 10 years. If the initial cost is $8,000, what is the payback period? (Answer: 6.72 years)


5. A firm evaluates all of its projects by using the NPV decision rule. At a required return of 14 percent, the NPV for the following project is _____ and the firm should _____ the project.
  https://www.jufinance.com/fin301_14f/index_files/image028.gif  
  6. Consider the following two mutually exclusive projects:
  https://www.jufinance.com/fin301_14f/index_files/image030.gif 
What is the NPV of each project? What is the IRR of each project?
What is the crossover rate for these two projects?  


7
 Cash Flow in Period

Initial Outlay         1                 2                   3                          4

$4,000,000      $1,546,170    $1,546,170       $1,546,170         $1,546,170

The Internal Rate of Return (to nearest whole percent) i?

8.  Welltran Corp. can purchase a new machine for $1,875,000 that will provide an annual net cash flow of $650,000 per year for five years. The machine will be sold for $120,000 after taxes at the end of year five. What is the net present value of the machine if the required rate of return is 13.5%.

9.  Compute the discounted payback period for a project with the following cash flows received uniformly within each year and with a required return of 8%:

Initial Outlay = $100

Cash Flows:  Year 1 = $40

                      Year 2 = $50

                      Year 3 = $60

10. A project requires an initial investment of $389,600. The project generates free cash flow of $540,000 at the end of year 4. What is the internal rate of return for the project?

 

 

NPV Excel syntax

Syntax

  NPV(rate,value1,value2, ...)

  Rate     is the rate of discount over the length of one period.

  Value1, value2, ...     are 1 to 29 arguments representing the payments and income.

·         Value1, value2, ... must be equally spaced in time and occur at the end of each    period. NPV uses the order of value1, value2, ... to interpret the order of cash flows. Be sure to enter your payment and income values in the correct sequence.

 

 

 

IRR Excel syntax

Syntax

   IRR(values, guess)

   Values  is an array or a reference to cells that contain numbers for which you want to calculate the internal rate of return.

  Guess     is a number that you guess is close to the result of IRR.

 

image018.jpg

 

Net Present Value NPV Explained with

NPV Example for NPV Calculation (Cartoon, video)

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

 

 

 

 

 

 

 

 

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

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

 

Chapter 8 Stock Valuation

ppt

Dividend Growth Model

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

      R = D1/Po+g = Do*(1+g)/Po+g

Dividend Growth model template excel simple version  - my contribution

Dividend growth model template excel (more complicated than the above one, for reference)

 

Chapter 8 Study Guide

Imagine you bought 100 shares of Wal-Mart (Ticker: WMT) a year ago.

 

1.      How is your holding period return in the prior year?

Price in Dec 3rd of 2014 was $84.94 and price of Dec 3rd of 2015 is $58.78.

 

2.      The followings are from google/finance about WMT.

Range

58.60 - 59.09

52 week

56.30 - 90.97

Open

58.69

Vol / Avg.

1.16M/11.77M

Mkt cap

188.43B

P/E

12.61

 

Div/yield

0.49/3.33

EPS

4.66

Shares

3.22B

Beta

0.27

Inst. own

31%

 

What does each item indicate?

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

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

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

6.      More exercise about the dividend growth model.

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

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

 

 

 

HW of chapter 8   (answer HW will not be collected)

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? 

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? 

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?

 

4. You bought 1 share of HPD for $20 in May 2008 and sold it for $30 in May 2009. How much is the holding period?

 

5. The current market price of stock is $50 and the stock is expected to pay dividend of $2 with a growth rate of 6%. How much is the expected return to stockholders?

 

6. The stockholder’s expected return is 8% and the stock is expected to pay dividend of $2 with a growth rate of 4%. How much should the stock be traded for?

 

7. The stockholder’s expected return is 8% and the stock is expected to pay dividend of $2 with a growth rate of 4%.  How much is the dividend expected to be three years from now? (Hint: D3 = D2*(1+g) = D1*(1+g)2 )

 

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

 

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

 

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

 

 

 

 

Final Exam (Comprehensive exam)

11:00-12:15 class: Tuesday, 12/8, 12-3pm

1:30-2:45 class: 12/10, 12-3pm

 

Final Exam Final Grade Calculation template FYI

Useful website 

 

www.finance.yahoo.com

www.finviz.com

www.getaom.com

money.msn.com/investing

zacks.com

minyanville.com

moneychimp.com

navellier.investor.com/portfolio-grader/

nasdaq.com

marketwatch.com

superstockscreener.com

gurufocus.com

portfoliomoney.com

stockconsultant.com

marketgrader.com

moderngraham.com

stockpickr.com

stockta.com

thestreet.com

askstockguru.com

quotes.wsj.com

oldschoolvalue.com

fool.com

analystratings.com

barchart.com

stock2own.com

theonlineinvestor.com

seekingalpha.com