ญญญ FIN301 Class Web Page, Fall ' 17
Instructor: Maggie Foley
Jacksonville University
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
Chapter 
Coverage, HW, Supplements 
Required 
References

Videos (optional) 

Chapter
1, 2 
Discussion: How to pick stocks (finviz.com) Daily earning announcement: http://www.zacks.com/earnings/earningscalendar IPO schedule: http://www.marketwatch.com/tools/ipocalendar Chapter 1: Introduction ..0.0000 Flow
of funds describes the financial assets flowing from various sectors through
financial intermediaries for the purpose of buying physical or financial
assets. *** Household, nonfinancial 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. Chapter 2 Introduction of
Financial Market How the stock market works (video) No homework for chapter 2 

Introduction to Capital Markets  ION Open
Courseware


Chapter 5 
Chapter 5 Time value of Money Time
value of money (Video) The
time value of money  German Nande (video)
Chapter 5 Homework 1.
You deposit $5,000 in a saving account at 10% compounded annually.
How much is your first year interest? How much is your second year interest?
(500, 550) 2.
What is the future value of $5,000 invested for 3 years at 10%
compounded annually? ( 6,655) 3.
You just bought a TV for $518.4 on credit card. You plan to pay back of
$50 a month for this credit card debt. The credit card charges you 12% of
interest rate on the monthly basis. So how long does it take to pay back your
credit card debt? (11 months) 4.
You are going to deposit certain amount in the next four years. Your
saving account offers 5% of annual interest rate. First year: $800 Second year: $900 Third year: $1000 Fourth year: $1200. How much you can withdraw four years later? (4168.35) 5.
You are going to deposit certain amount in the next four years. Your
saving account offers 5% of annual interest rate. First year: $800 Second year: $900 Third year: $1000 Fourth year: $1200. How much is the lump sum value as of today (NPV)? (3429.31) 6.
Ten years ago, you invested $1,000. Today it is worth $2,000. What rate
of interest did you earn? (7.18%) 7.
At 5 percent interest, how long would it take to triple your
money? (22.52) 8.
What is the effective annual rate if a bank charges you 12 percent
compounded monthly? (12.68%) 9.
Your father invested a lump sum 16 years ago at 8% interest for your
education. Today, that account worth $50,000.00. How much did your father
deposit 16 years ago? ($14594.50) 10. You are borrowing
$300,000 to buy a house. The terms of the mortgage call for monthly payments
for 30 years at 3% interest. What is the amount of each payment?
($1264.81) 11. You deposit $200 at
the beginning of each month into your saving account every month.
After two years (24 deposits total), your account value is $6,000. Assuming
monthly compounding, what is your monthly rate that the bank provides? (1.74%) 12. You want to buy a fancy car. For this goal,
you plan to save $5,500 per year, beginning immediately. You will make 4 deposits in an account that
pays 8% interest. Under these assumptions,
how much will you have 4 years from today? ($26,766) 13. Citi card is giving you a
good deal. You can transfer your balance from your current credit card to Citi new card with $50 balance transfer fee. The new card
charges at 5% a year. But your old card charges at 12% a year. Your balance
in your old card is $5,000. If you can afford to pay back to the credit card
of $250 a month. How much quicker does it take you to pay back your debt with
the new card? (Hint: for the new card, your debt = 5000+50=5050; Assume
monthly compounding by credit card companies). (1.28 months) 14.
Your girlfriend just won the Florida lottery. She has the choice of $40,000,000 today or
a 20year annuity of $2,850,000, with the first payment coming one year from
today. If the mutual fund of hers provides 4% of return each year for the
next 20 years, which payment option is more attractive to her? ($40million) 15.
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) 16.
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) 17.
Today,
you are purchasing a 15year, 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) 18.
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) 19.
Trevor's
Tires is offering a set of 4 premium tires on sale for $450. The credit terms
are 24 months at $20 per month. What is the interest rate on this
offer? (6.27 percent) 20.
Top
Quality Investments will pay you $2,000 a year for 25 years in exchange for
$19,000 today. What interest rate are you earning on this annuity? (9.42
percent) 21.
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 percent) 22.
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) 23.
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) 24.
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) 25.
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) 26.
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) 27.
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) 28.
What
is the future value of weekly payments of $25 for six years at 10
percent? ($10,673.90) 29.
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) 30.
Sky
Investments offers an annuity due with semiannual 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) 
Summary of math and excel equations 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)^m1 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) First
Mid Term FIN301 Study Guide Detailed Multiple Choice (20*4=80) Q1: Calculate
first year interest and principal Q2. Calculate
second year interest and principal Q3. Given PV
and calculate FV Q4. Calculate
interest rate, given nper, pv
and fv. Q5. Given
nominal rate and nper, calculate effective rate Q6. NPV
calculation, given CFs and rate Q7. How long
to double (triple or four times) of your money as discussed in class Q8. Given APR,
figure out effective rate Q9. Figure out
PMT given FV, PV, Rate and Nper. Q10.
Given PMT, FV, PV and rate, figure out nper. Q11.
NPV calculation question Q12. Given
effective rate, figure out APR. Q13. Mortgage
payment question (you can use amortization template in excel) Q1418. Time
value of money question (similar to in class exercises and homeworks) Q19 definition
of ordinary annuity Q20 stock vs.
bond. Vs. saving money in banks. The return vs. risk. Short
answer questions (10*2=20)
Two questions similar to HWs One
extra credit question (time value of money question hard) (5 points) 

Chapter 3 Financial Statement Analysis 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 30^{th},
2011 (expressed in millions). Sales: $67,977 Cost of goods sold: $44,693 Marketing, general and
administrative expenses: $15,885 Depreciation expenses:
$1,616 Interest expense: $530 Tax rate: 36.70% Number of shares
outstanding: 1,623 Dividends paid to stockholders:
$1,569. Use the above information
to try to prepare the income statement of Home Depot
for the year ended January 30^{th}, 2011 Home Depot (Ticker in the
market: HD) reported the following information for the year ended January 30^{th},
2011 (expressed in millions). Cash: $545 Accounts receivables:
$1,085 Inventories: $10625 Other current assets:
$1,224 Gross fixed assets: $38,471 Accumulated depreciation:
$13,411 Other fixed assets: $1,586 Accounts payable: $9,080 Short term notes payable:
$1,042 Long term debt: $11,114 Total common stock: $3,894 Retained earnings: $14,995 Use the above information
to try to prepare the balance sheet of Home Depot for
the year ended January 30^{th}, 2011. 
Cash
flow template (new and simple, my contribution) 

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

In Millions of USD (except for per share items) 
52 weeks ending 20140202 
Net Income/Starting Line 
5,385.00 
Depreciation/Depletion 
1,757.00 
Amortization 
 
Deferred Taxes 
31 
NonCash 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:
2. What does net change in cash mean?
Now
lets learn how to calculate cash changes in each session
Source
of cash
Use
of Cash
Cash
Flow from Operations: Five Steps
1. Add back depreciation.
2. Subtract (add) any increase (decrease) in accounts receivable.
3. Subtract (add) any increase (decrease) in inventory.
4. Subtract (add) any increase (decrease) in other current
assets.
5. Add (subtract) any increase (decrease) in accounts payable
and other accrued expenses
Chapter 3 HW
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. Longterm 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. Pull out the balance sheet and the income statement of a company in your portfolio and do a simple study. Write down your analysis.
Cash
Flow Statement Answer 
calculation for changes 

Cash
at the beginning of the year 
2060 

Cash from operation 

net
income 
3843 

plus
depreciation 
1760 

/+ AR

807 
807 

/+ Inventory 
3132 
3132 

+/ AP 
1134 
1134 

net change in cash from operation 
2798 

Cash from investment 

/+ (NFA+depreciation) 
1680 
1680 

net change in cash from investment 
1680 

Cash from finaning 

+/ long term debt 
1700 
1700 

+/ common stock 
2500 
2500 

 dividend 
6375 
6375 

net change in cash from investment 
2175 

Total net change of cash 
1057 

Cash at the end of the year 
1003 
(The excel file of the above cash flow statement is here)
Chapter 4: Ratio Analysis
Chapter 4 how to
master analyzing financial statement (FYI only)
Stock
screening tools
FINVIZ.com
http://finviz.com/screener.ashx
We
will focus on the following several ratios:
P/E (price per share/earning per
share, P/E < 15, a bargain)
PEG (PE ratio / growth rate. PEG<1, undervalued
stock)
EPS (earning per share)
ROA (Return on Asset = NI/TA, ROA>10% should be a
nice benchmark)
ROE (return on equity = NI/TE, ROE>15% should be
good)
Current
ratio (liquidity measure. = CA/CL,
has to be greater than one)
Quick
ratio (liquidity measure. =
(CAInventory)/CL, has to be greater than one)
Debt
Ratio (Leverage measure. = TD/TA,
need to be optimal, usually between 30% and 40%)
Gross
margin (profit measure. =
EBITDA/sales, or = Gross margin/sales, has to be positive)
Operating
margin (profit measure. = EBIT/sales, or
= operating income/sales, has to be positive)
Net
profit margin (profit measure. = NI/sales,
has to be positive)
Payout
ratio (= dividend / NI, measures
distribution to shareholders. No preferences. Usually value stocks have high
payout ratio; Growth stocks have low payout ratio).
Chapter
4 IN Class Exercise (excel file here) 

Assignment:
Calculate ratios of AAPL 

Steps 
Inputs
/ Answers 

1 
P/E = price per share
/ earning per share 

EPS  earning per share =
NI / Shares outstanding 
9.64 

NI 
53,394,000,000.00 

Shares outstanding 
5,540,000,000.00 

Price per share 
98.98 

P/E 
10.27 

2 
PEG =PE / Growth 

Assume growth rate of apple
is 15% every year, so growth = 15 

PEG =PE / Growth 
0.68 

3 
ROA = NI/TA 
18.38% 
NI 
53,394,000,000.00 

TA 
290,479,000,000.00 

4 
ROE = NI/TE 
0.45 
NI 
53,394,000,000.00 

TE 
119,355,000,000.00 

5 
Current Ratio = CA/CL 
1.109 
6 
Quick ratio = (CA 
inventory)/CL 
1.142 
Total Current Assets 
89,378.00 

Total Current Liabilities 
80,610.00 

Total Inventory 
2,349.00 

7 
Debt ratio = TD/TA 
22.19% 
TA 
290,479,000,000.00 

Total Debt 
64,462,000,000.00 

8 
Gross margin = EBITDA/sales 
40.06% 

Gross Profit (= EBITDA) 
93,626.00 
Revenue 
233,715.00 

9 
Operating
margin = EBIT / sales 
30.48% 
Operating Income 
71,230.00 

10 
Profit margin = NI/Sales 
22.85% 
Net Income 
53,394.00 

11 
Payout ratio = Total dividend
/ NI 
20.54% 
Dividend per share 
1.98 

Total dividend = dividend
per share * total shares 
10,969,200,000.00 
Second Mid term
(10/19) Study Guide
Second
Mid Term Study Guide
(3.85 points each)
1.
Concept of balance sheet, income statement and
cash flow statement.
2.
Which one of the
following is a source of cash?
3.
Which one of the
following is a use of cash?
4. On the Statement of Cash Flows, which of the following are considered financing activities?
5.
a source or use of cash question.
6.
Balance sheet
concept question
7.
Balance sheet
concept question
8.
Balance sheet
concept question
9.
Comparison
of liquidity of assets in balance sheet
10.
Depreciation
definition
11.
Given net income, depreciation,
dividends, accounts payables increases, accounts receivables decreases,
inventory decreases net fixed assets increases, calculate the net cash flow
from operating activity?
12.
Given net income,
depreciation, dividends, accounts payables increases, accounts receivables
decreases, inventory decreases net fixed assets increases, calculate the net
cash flow from investment activity?
13.
Given inventory, net
fixed assets, accounts receivables, accounts payable, cash. What is the
amount of the total assets?
14.
Given net working
capital, total liability, total assets, fixed assets, calculate current
assets
15.
Given net working
capital, total liability, total assets, fixed assets, calculate long term
debt
16.
Given
total assets, fixed assets, LD, SD, calculate TD.
17.
Given
total assets, fixed assets, LD, SD, calculate TE.
18.
Given
sales, COG, interest, depreciation, tax rate, calculate NI.
19.
Given
sales, COG, interest, depreciation, tax rate, calculate operating income.
20.
Use/
Source?
21.
Use/
Source?
22.
Use/
Source?
23.
Use/
Source?
24.
Given
balance sheet and income statement information and calculate cash flow from
investment
25.
Given
balance sheet and income statement information and calculate cash flow from
operating
26.
Given
balance sheet and income statement information and calculate cash flow from
financing.
Chapter
6
Chapter 6 Risk and Return
Chapter
6 In Class Exercise(Word file here updated)
Use
the following information in the in class exercise
Date 
WMT price 
Paypal price 
Apple priece 
WMT return 
Paypal return 
Apple return 
Portfolio 
11/1/2016 
68.53 
39.28 
108.60 
1.86% 
0.48% 
5.33% 
1.32% 
12/1/2016 
67.25 
39.47 
114.40 
2.75% 
0.79% 
4.77% 
0.94% 
1/1/2017 
65.40 
39.78 
119.86 
6.28% 
5.58% 
12.89% 
8.25% 
2/1/2017 
69.51 
42.00 
135.31 
1.62% 
2.43% 
5.32% 
3.12% 
3/1/2017 
70.63 
43.02 
142.51 
5.07% 
10.93% 
0.01% 
5.33% 
4/1/2017 
74.21 
47.72 
142.50 
4.55% 
9.41% 
6.34% 
6.77% 
5/1/2017 
77.59 
52.21 
151.54 
3.07% 
2.80% 
5.33% 
1.87% 
6/1/2017 
75.21 
53.67 
143.46 
5.70% 
9.09% 
3.27% 
6.02% 
7/1/2017 
79.49 
58.55 
148.15 
2.40% 
5.35% 
10.27% 
4.40% 
8/1/2017 
77.58 
61.68 
163.36 
0.72% 
3.81% 
5.66% 
0.38% 
9/1/2017 
78.14 
64.03 
154.12 
13.45% 
9.01% 
1.33% 
7.93% 
10/1/2017 
88.65 
69.80 
156.17 




average 
2.48% 
5.42% 
3.50% 
3.80% 

risk (standard
deviation) 
5.11% 
3.70% 
5.74% 
3.43% 

Probability of
return to fall below 0 
31.35% 
7.13% 
27.07% 
13.38% 

Correlation 
0.7426 
0.0814 
0.0089 

wmt & Paypal 
WMT & APPl 
Paypal & APPL 
HW
of chapter 6 (Due on 11/7/2017) (Solution FYI
per request)
Chapter
6 Homework
1)
Stock A has the following returns for various states of the economy:
State
of
the
Economy Probability Stock
A's Return
Recession 10% 30%
Below
Average 20% 2%
Average 40% 10%
Above
Average 20% 18%
Boom 10% 40%
Stock
A's expected return is?
2)
Joe purchased 800 shares of Robotics Stock at $3 per share on 1/1/09. Bill
sold the shares on 12/31/09 for $3.45. Robotics stock has a beta of 1.9, the
riskfree rate of return is 4%, and the market risk premium is 9%. Joe's
holding period return is?
3. You
own a portfolio with the following expected returns given the various states
of the economy. What is the overall portfolio expected return?
State
of
economy probability
of state of
economy rate
of return if state occurs
Boom 27% 14%
Normal 70% 8%
Recession 3% 11%
4)
The prices for the Electric Circuit Corporation for the first quarter of 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 onJanuary 1, 2009 and sold it the last day of March
2009.
Month
End Price
January $125.00
February 138.50
March 132.75
5)
Collectibles Corp. has a beta of 2.5 and a standard deviation of returns of 20%.
The return on the market portfolio is 15% and the risk free rate is 4%. What
is the risk premium on the market?
6)
An investor currently holds the following portfolio:
Amount
Invested
8,000
shares of
Stock A $16,000 Beta = 1.3
15,000
shares of Stock B $48,000 Beta = 1.8
25,000
shares of Stock C $96,000 Beta = 2.2
The
beta for the portfolio is?
7)
Assume that you have $165,000 invested in a stock that is returning 11.50%,
$85,000 invested in a stock that is returning 22.75%, and $235,000 invested
in a stock that is returning 10.25%. What is the expected return of your
portfolio?
8)
If you hold a portfolio made up of the following stocks:
Investment
Value Beta
Stock
A $8,000 1.5
Stock
B $10,000 1.0
Stock
C $2,000 .5
What
is the beta of the portfolio?
9. The riskfree rate of
return is 3.9 percent and the market risk premium (r_{m} r_{f}) is 6.2 percent. What is the expected rate
of return on a stock with a beta of 1.21?
10. You own a portfolio consisting of the stocks below.
Stock Percentage
of
portfolio Beta
1. 20% 1
2. 30% 0.5
3. 50% 1.6
The risk free rate is 3% and
market return is 10%.
a. Calculate
the portfolio beta.
b. Calculate
the expected return of your portfolio.
11. Computing holding period return for Jazman and Solomon for period 1 through 3 (bought in
period 1 and sold in period 3). Show the holding period returns for each
company.
Period Jazman Solomon
1 $10 $20
2 $12 $25
3 $15 $15
12. Calculate expected return
State of the economy 
Probability of the states 
% Return (Cash Flow/Inv. Cost) 
Economic Recession 
30% 
5% 
Strong and moderate Economic Growth 
70% 
15% 
13. Calculate the expected returns of the
following cases, respectively
1) Invest
$10,000 in Treasury bill with guaranteed return of 4%.
2) Investment
$10,000 in Apple. 50% possibility to earn 20% return and 50% possibility to lose
10% of investment.
3) Investment
$10,000 in WalMart. 50% possibility to earn 5% return and 50% possibility to
earn 0% of investment.
14. Rank the risk of the following cases, from
the least risky one the most risky one
1) Invest
$10,000 in Treasury bill with guaranteed return of 4%.
2) Investment
$10,000 in Apple. 50% possibility to earn 20% return and 50% possibility to
lose 10% of investment.
3) Investment
$10,000 in WalMart. 50% possibility to earn 5% return and 50% possibility to
earn 0% of investment.
15. An
investor currently holds the following portfolio:
Amount
Invested
8,000
shares of
Stock A $10,000 Beta = 1.5
15,000
shares of Stock B $20,000 Beta = 0.8
25,000
shares of Stock C $20,000 Beta = 1.2
Calculate
the beta for the portfolio.
16. 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 riskfree
rate of return is 1%, and the market risk premium is 10%. Joe's holding
period return is how much?
Excel
Command:
sumproduct(array1,
array2)
stdev(observation1, obv2, obv3,
.)
correl(stock
1s return, stock 2s return)
beta
= slope(stock return, sp500 return)
Chapter 7 Bond pricing
Simplified Balance Sheet of WalMart
In Millions of USD 
As
of 20140131 
Total Assets 
204,751.00 
Total Current Liabilities 
69,345.00 
Long Term Debt 
41,771.00 
Other liabilities 
17,380.00 
Total Liabilities 
128,496.00 
Total Equity 
76,255.00 
Total Liabilities & Shareholders' Equity 
204,751.00 
For discussion:
ท What is this long term debt?
ท Who is the lender of this long term debt?
So this long term debt is called bond in the financial
market. Where can you find the pricing information and other specifications
of the bond issued by WMT?
Investing Basics: Bonds(video)
FINRA
Bond market information
http://finramarkets.morningstar.com/BondCenter/Default.jsp
Chapter 7 Study guide
1. Go to http://cxa.gtm.idmanagedsolutions.com/finra/BondCenter/Default.aspx , the bond market data website of FINRA to find bond
information. For example, find bond sponsored by IBM
Or, just go to www.finra.org, ่ Investor center ่ market data ่ bond ่ corporate bond
Corporate
Bond

2. 2.
Understand what is coupon, coupon rate, yield, yield to maturity, market
price, par value, maturity, annual bond, semiannual bond, current yield.
3. 3.
Understand how to price bond
Bond price = abs(pv(yield, maturity, coupon, 1000))  annual coupon
Bond price = abs(pv(yield/2, maturity*2, coupon/2, 1000)) 
semiannual coupon
Also change the yield and
observe the price changes. Summarize the price change pattern and draw a
graph to demonstrate your findings.
Again, when yield to
maturity of this semi_annual coupon
bond is 3%, how should this WMT bond sell for?
4. Understand
how to calculate bond returns
Yield to maturity =
rate(maturity, coupon, market price, 1000) annual coupon
Yield to maturity =
rate(maturity*2, coupon/2, market price, 1000)*2 semiannual
coupon
For example, when the annual
coupon bond is selling for $1,200, what is its return to investors?
For example, when the semiannual
coupon bond is selling for $1,200, what is its return to investors?
5. Current
yield: For the above bond, calculate current yield.
6. Zero
coupon bond: coupon=0 and treat it as semiannual coupon bond.
Example: A ten year zero coupon bond
is selling for $400. How much is its yield to maturity?
A ten year zero coupon
bonds yield to maturity is 10%. How much is its price?
7. Understand
what is bond rating and how to read those
ratings.
a. Who
are Moody, S&P and Fitch?
b. What
is IBMs rating?
c. Is
the rating for IBM the highest?
d. Who
earned the highest rating?
Chapter 7 Home Work
1. IBM
5 year 2% annual coupon bond is selling for $950. How much
this IBM bonds YTM? 3.09%
2. IBM
10 year 4% semi_annual coupon bond
is selling for $950. How much is this IBM bonds 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% semiannual coupon bond offers 8% of return. How
much is the price of this bond? $878.34
5. IBM
20 year zero coupon bond offers 8% return. How much is the price of this
bond? 208.29
6. Collingwood
Homes has a bond issue outstanding that pays an 8.5 percent coupon and
matures in 18.5 years. The bonds have a par value of $1,000 and a market
price of $964.20. Interest is paid semiannually. What is the yield to
maturity? 8.9%
7. Grand
Adventure Properties offers a 9.5 percent coupon bond with annual payments.
The yield to maturity is 11.2 percent and the maturity date is 11 years from
today. What is the market price of this bond if the face value is
$1,000? 895
8. The
zero coupon bonds of D&L Movers have a market price of $319.24, a face
value of $1,000, and a yield to maturity of 9.17 percent. How many years is
it until these bonds mature? 12.73 years
9. A
zero coupon bond with a face value of $1,000 is issued with an initial price
of $212.56. The bond matures in 25 years. What is the implicit interest, in
dollars, for the first year of the bond's life? 6.29%
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 (semiannual coupon bond):
Price=abs(pv(yield to maturity/2,
years left to maturity*2, coupon rate*1000/2, 1000)
To calculate yield to maturity (semiannual coupon
bond):
Yield to maturity = rate(years left to maturity*2,
coupon rate *1000/2, price, 1000)*2
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(semiannual 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 (semiannual coupon bond)
Coupon = pmt(yield to maturity/2, number of years left*2,
price, 1000)*2
Coupon rate = coupon / 1000
Math Formula (FYI)
C:
Coupon, M: Par, $1,000; i: Yield to maturity; n:
years left to maturity
For
Semiannual, F=2 for semiannual coupon
M:
Par, $1,000; i: Yield to
maturity; n: years left to maturity
Third
Mid Term Exam Study Guide
Multiple choices (4*19=76)
1. What is premium bond and what is discount bond?
2. Conceptual question about YTM, Years left to maturity, coupon, coupon rate, par value, face value
3. Conceptual question about YTM, Years left to maturity, coupon, coupon rate, par value, face value
4. Conceptual question about YTM, Years left to maturity, coupon, coupon rate, par value, face value
5. Bond rating: AAA, AA, AA, A, BBB meaning in terms of default, risk and return?
6. Given coupon rate, price, years left to maturity, calculate YTM annual coupon
7. Given coupon rate, price, years left to maturity, calculate YTM semiannual coupon
8. Given coupon rate, YTM, years left to maturity, calculate price annual coupon
9. Given coupon rate, YTM, years left to maturity, calculate price semiannual coupon
10. Zero coupon bond, given YTM, years left to maturity, calculate price
11. Relation between bond price and YTM
12. What is Beta in CAPM? Beta =0? Beta=1?
13. Given beta, standard deviation, market return, risk free rate, calculate market risk premium.
14. Concept about security market line
15. Concept about systematic risk and unsystematic risk (examples)
16. Rank risks among several securities.
17. Definition about Beta
18. What is risk free rate? Market portfolio? Diversification?
19. Misc
Short
Answer Questions (24 points):
1.
Given everything. Use CAPM model to calculate
stock returns.
2.
Based on the prior question, draw SML
Chapter 8 Stock Valuation
Dividend Growth Model
Po= D1/(rg) or Po= Do*(1+g)/(rg)
R = D1/Po+g = Do*(1+g)/Po+g
D1=Do*(1+g); D2= D1*(1+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 WalMart (Ticker: WMT) a
year ago.
1. How is your holding period return in the prior year?
Price in Dec 3^{rd} of 2014 was $84.94 and price
of Dec 3^{rd} 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 WalMart. 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
1. Northern Gas
recently paid a $2.80 annual dividend on its common stock. This dividend increases
at an average rate of 3.8 percent per year. The stock is currently selling
for $26.91 a share. What is the market rate of return? (answer: 14.6%)
2. Douglass Gardens
pays an annual dividend that is expected to increase by 4.1 percent per year.
The stock commands a market rate of return of 12.6 percent and sells for
$24.90 a share. What is the expected amount of the next dividend? (answer: 2.12)
3.
IBM just paid $3.00 dividend per share to investors. The dividend growth rate
is 10%. What is the expected dividend of the next year? (answer: 3.3)
4.
You bought 1 share of HPD for $20 in May 2008 and sold it for $30 in May
2009. How much is the holding period return? (answer: 50%)
5. The current market
price of stock is $50 and the stock is expected to pay dividend of $2 with a
growth rate of 6%. How much is the expected return to stockholders? (answer: 10%)
6. The stockholders expected return is 8% and the stock is expected to pay
dividend of $2 with a growth rate of 4%. How much should
the stock be traded for? (answer:
50)
7. The stockholders 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: D_{3
}= D_{2}*(1+g) = D_{1}*(1+g)^{2} )(answer: 2.16)
8. Kilsheimer Company just paid a dividend of $5 per share.
Future dividends are expected to grow at a constant rate of 7% per year. The
value of the stock is $42.80. What is the required return of this stock?(answer: 19.5%)
9. Investors of
Creamy Custard common stock earns 15% of return. It
just paid a dividend of $6.00 and dividends are expected to grow at a rate of
6% indefinitely. What is expected price of Creamy Custard's stock?(answer: 70.67)
10.
Douglass Gardens pays an annual dividend that is expected to increase
by 6 percent per year. The stock commands a market rate of return of 12.6
percent and sells for $24.90 a share. What is the dividend yield of this
stock? (answer:
6.6%)
Useful website
money.msn.com/investing
zacks.com
minyanville.com
moneychimp.com
navellier.investor.com/portfoliograder/
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
Chapter 10 Capital
Budgeting
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)?
ท Does
this method consider time value of money?
ท Easy
to explain to outsiders?
2) If
the firm has a 10% required rate of return. How much is NPV (approach
2)?
ท What
does NPV means? NPV>0 indicates what? Otherwise?
ท Does
this method consider time value of money?
ท Easy
to explain to outsiders?
3) If
the firm has a 10% required rate of return. How much is IRR (approach
3)?
ท What
does IRR mean? IRR > 10% indicates what? Otherwise?
ท Does
this method consider time value of money?
ท Easy
to explain to outsiders?
Question 2: Project
with an initial cash outlay of $60,000 with following free cash flows for 5
years.
Year FCF
Initial
outlay 60,000
1 25,000
2 24,000
3 13,000
4 12,000
5 11,000
The firm has a 15% required rate of return.
Calculate payback period, NPV, IRR. Analyze your results.
Question 3: Mutually Exclusive Projects
1) Consider
the following cash flows for oneyear 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?
ง Initial
Outlay: A = $200; B = $1,500
ง 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?
Chapter 10 Homework (due on 12/7)
1. Consider the following two projects, calculate the NPVs of the two projects. If the two
projects are mutually exclusive, which one should you choose? What about they
are independent projects?(answer: NPVa: 8.67; NPVb: 12.65;
Mutually exclusive: B; Independent:B)
Project 
Year 0 Cash Flow 
Year 1 Cash Flow 
Year 2 Cash Flow 
Year 3 Cash Flow 
Year 4 Cash Flow 
Discount Rate 
A 
100 
40 
40 
40 
N/A 
.15 
B 
73 
30 
30 
30 
30 
.15 
2. You
are considering an investment with the following cash flows. If the required rate
of return for this investment is 15.5 percent, should you accept the
investment based solely on the internal rate of return rule? Why? (answer: 17.53%; Yes, rate<IRR, accept)
3. It will cost $6,000 to acquire an ice cream cart. Cart
sales are expected to be $3,600 a year for three years. After the three
years, the cart is expected to be worthless as the expected life of the
refrigeration unit is only three years. What is the payback period? (answer: 2.67)
4. An
investment project provides cash flows of $1,190 per year for 10 years. If
the initial cost is $8,000, what is the payback period? (answer: 6.72)
5. A
firm evaluates all of its projects by using the NPV decision rule. At a
required return of 14 percent, the NPV for the following project is _____ and
the firm should _____ the project.
(answer: 7264.95, accept)
6. Consider the following two mutually exclusive
projects. Use 10% for required rate of return.
What is the NPV of each project? What is the IRR of each project? (answer: A
922.78; 15.33%; B 871.47; 14.68%)
What is the crossover rate for these two projects? (answer: 6.29%)
7. Cash Flow in Period
Initial
Outlay 1 2 3 4
$4,000,000 $1,546,170 $1,546,170 $1,546,170 $1,546,170
The
Internal Rate of Return (to nearest whole percent) i?
(answer: 20.03%)
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%. (Answer:
$447,291.91. Hint: year 5s cash flow is 650k+120k = 770k)
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.
ท 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.
https://www.youtube.com/watch?v=7FsGpi_W9XI
https://www.youtube.com/watch?v=YgVQvn51noc
Chapter 9
Discount rate to figure out the
value of projects is called WACC (weighted average cost of capital)
WACC = weight of debt * cost
of debt + weight of equity *( cost of
equity)
Wd= total debt / Total capital
= total borrowed / total capital
We= total equity/ Total capital
Cost of debt = rate(nper, coupon, (price flotation costs), 1000)*(1tax
rate)
Cost of Equity = D1/(Po
Flotation Cost) + g
D1: Next period dividend;
Po: Current stock price; g: dividend growth rate
Note: flotation costs = flotation percentage * price
Or if beta is given, use CAPM model
(refer to chapter 6)
Cost of equity = risk free rate +
beta *(market return risk free rate)
Cost
of equity = risk free rate + beta * market risk premium
Discussion:
ท
Cheaper to raise capital from debt market.
Why? Why not 100% financing via borrowing?
ท
Why tax rate cannot reduce firms cost of
equity?
In Class
Exercise
IBM
financed 10m via debt coupon 5%, 10 year, price is $950 and flotation is 7%
of the price, tax 40%.
IBM
financed 20m via equity. D1=$5. Po=50, g is 5%. Flotation cost =0. So WACC?
Wd=1/3.
We=2/3.
Kd =
rate(10, 5%*1000, (950950*7%), 1000)*(140%) = 3.98%
Ke =
5/(50 0) + 5% =15%
WACC
= Wd*Kd +We*Ke = 11 %
HOMEWORK of Chapter 9 (Will
not be graded)
1.
Firm AAA sold a noncallable bond now has 20 years
to maturity. 9.25% annual coupon rate,
paid semiannually, sells at a price = $1,075, par = $1,000. Tax rate = 40%, calculate after tax cost of
debt (5.48%)
2. Firm AAAs equity condition is as follows.
D_{1} = $1.25; P_{0} = $27.50; g = 5.00%; and Flotation =
6.00% of price. Calculate cost of
equity (9.84%)
3.
Firm AAA raised 10m from the capital market. In it, 3m is from the debt
market and the rest from the equity market. Calculate WACC.
Weighted Average Cost of Capital (WACC) Calculator (FYI)
http://www.ultimatecalculators.com/weighted_average_cost_of_capital_WACC_calculator.html
From the 20page cellphone contract to the fivepound 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 50item 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 lowlevel 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 websitehelped 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 businessschool answer to
this is that you run the NPV (net present value) test on each project and
rankorder them by NPV. Alex Behring knows this. He was at the top of the
class at Harvard Business School.
But instead, he decided what
the most important goals were. You 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 globalhealth 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 16
Final
Exam (12/7 In class) (comprehensive) Study Guide
Multiple choices (30*3.3)
The two projects are as follows. Discount rate is given and cash flows are given.
111. Calculate the NPV, IRR, payback periods, crossover rate. Your decision if the two projects are independent? What about they are mutually exclusive?
1213 Concept of NPV and IRR and choices of projects based on NPV and IRR
14. What is dividend?
1520, use dividend growth model calculate price, or return, or future dividend.
2125 Like chapter 10s in class exercise question, calculate weight of debt, weight of equity, cost of debt, cost of equity, WACC.
26. Concept of financing via debt, and equity markets
27 30 conceptual questions from prior chapters
Items should be included in income statement?
Bond concepts: coupon, par, face value, yield to maturity.
What
is beta? What does Beta do?