FIN301 Class Web Page, Spring ' 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/earnings-calendar

IPO schedule:  http://www.marketwatch.com/tools/ipo-calendar

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.

Chapter 2 Introduction of Financial Market

# Introduction to Capital Markets - ION Open Courseware (Video)

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  (Due 2/2/2017)

1.        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.        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.        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.        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.        6. Ten years ago, you invested \$1,000. Today it is worth \$2,000. What rate of interest did you earn? (7.18%)

7.         7. At 5 percent interest, how long would it take to triple your money? (22.52)

8.        8. What is the effective annual rate if a bank charges you 12 percent compounded monthly? (12.68%)

9.        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.     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.     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 20-year 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 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)

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 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)
31. 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)

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)^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)

First Mid Term (2/2/2017) Study Guide

Multiple choices: 4*22=88

1. Given pmt, nper, rate, calculate PV.

2. Given pv, rate, nper, calculate pmt

3. Given pv, rate, pmt, calculate nper.

4. Given pv, rate, and how long to triple your investment?

5. Given pv, rate, and how long to double your investment?

6. Given pv, nper, rate, calculate FV (semiannual compounding)

7. Given pv, nper, rate, calculate FV (monthly compounding)

8. Given FV, nper, rate, calculate pv (monthly compounding)

9. Given APR, calculate EAR

10. Given APR, calculate EAR

11. Given PMT, rate, FV, calculate NPER

12. Given pmt, rate, pmt, calculate pv

13. Annuity due: given pmt, nper, rate, calculate pv

14. Annuity due: given pmt, nper, rate, calculate pv

15. Given pv, rate, nper, calculate pmt

16. Given APR, calculate EAR

17. Given pv, nper, rate, calculate fv

18. Given pv, rate, nper, calculate fv

20. Given fv, nper, rate, calculate pv

21.      Similar to Quiz 1, calculate interest and principal.

22.      Similar to Quiz 1, calculate interest and principal.

Short answer questions (8 points each. Total 16 points)

1.      What is the present value of the following cash flow stream at a rate of xxx%?

Years:                         0                      1                      2                      3                      4

|                       |                       |                       |                       |

CFs:                         \$xxx                \$xxx                \$xxx                \$xxx                \$xxx

2.       what is the future value?

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 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.

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?

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

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. 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.      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

Chapter 4: Ratio Analysis

Stock screening tools

FINVIZ.com

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. = (CA-Inventory)/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

HW

Calculate all ratios above of a stock in your portfolio except PEG, using the most recent annual financial statement

Second Mid Term Study Guide

Multiple Choices (30*3.3=100)

1)      What is income statement

2)      Concept of balance sheet

3)      Concept of balance sheet

4)      Concept of balance sheet

5)      Concept of balance sheet

6)      Concept of balance sheet

7)      Concept of income statement

8)      Calculate EBIT given sales, COG, depreciation and operating expenses.

9)      What are income statement, balance sheet and cash flow statement

10)  Calculate net income given sales, COG, depreciation and operating expenses, interest expenses and tax rate (similar to quiz)

11)  What are the two principal sources of financing for corporations

12)  Definition of net working capital

13)  Calculate net working capital (like HW)

14)  Examples of uses of cash

15)  Examples of sources of cash

16)   Given CA, CL, FA, and calculate TL+TE

17)  Given NI, TA, # of shares, PE ratio, calculate price

18)  Given debt ratio TA, LD, calculate CL.

19)  Given TA, LD, CL, FA, calculate NWC

20)  Use/Source given changes in items in balance sheet

21)  Use/Source given changes in items in balance sheet

22)  Use/Source given changes in items in balance sheet

23)  Use/Source given changes in items in balance sheet

24)  Misc

Similar to the sample exam, given balance sheet and income statement, calculate the following ratios.

25.  P/E ((Current stock price is \$131 /share) / EPS)

26.  Current Ratio (CA / CL)

27.  ROA (NI / TA)

28.  ROE (NI / TE)

29.  Operating margin (EBIT / SALES)

30.  Debt ratio (TL / TA)

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

 Month CSX return Apple Return Amazon Return Gold Return Sep-16 -0.39% 4.70% -1.76% -28.84% Aug-16 7.85% 6.60% 8.86% 6.41% Jul-16 0.47% 2.40% 1.36% -44.58% Jun-16 8.63% 9.00% 6.04% 27.27% May-16 -1.32% -4.30% -0.99% 72.60% Apr-16 -2.40% 7.20% 9.58% -38.63% Mar-16 5.90% -14.00% 11.11% 103.40% Feb-16 6.67% 12.70% 7.44% 0.86% Jan-16 5.64% -0.10% -5.87% 126.10% Dec-15 -11.29% -7.50% -13.15% 5.72% Nov-15 -8.72% -11.00% 1.67% -4.60% Oct-15 5.99% -0.60% 6.22% -26.64%

HW of chapter 6

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 risk-free 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 risk-free rate of return is 3.9 percent and the market risk premium (rm –rf) 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 Wal-Mart. 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 Wal-Mart. 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 risk-free 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)

stdevp(observation1, obv2, obv3,….)

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

beta = slope(stock return, sp500 return)

Chapter 7 Bond pricing

Simplified Balance Sheet of WalMart

 In Millions of USD As of 2014-01-31 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:

·         What is this “long term debt”?

·         Who is the lender of this “long term debt”?

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

Investing Basics: Bonds(video)

FINRA – Bond market information

Chapter 7 Study guide  (word file here)

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.orgč Investor center č market data č bond č corporate bond

Corporate Bond

 Issuer Name Callable Coupon Maturity Moody S&P Fitch Price Yield WMT No 7.55 2/15/2030 Aa2 AA AA 144.652 3.7 WMT No 6.75 10/15/2023 Aa2 AA AA 128.963 3.036

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

3.      3. Understand how to price bond

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

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

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

Again, when yield to maturity of this semi_annual coupon bond is 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 – 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?

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

6.      Zero coupon bond: coupon=0 and treat it as semi-annual coupon bond.

Example: A ten year zero coupon bond is selling for \$400. How much is its yield to maturity?

A ten year zero coupon bond’s 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 IBM’s 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 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? 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 (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)

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 Semi-annual, F=2 for semi-annual coupon

M: Par, \$1,000;  i: Yield to maturity; n: years left to maturity

### Third Mid-term study guide (4/13)

Multiple choices (25*4=100)

Issuer     Callable   Coupon _rate     Maturity       Moody Rating       Price       Yield

WMT          Yes            4 %                12/1/2013           A                 100.752      _____

Based on the above table, answer questions 1-8

1.      What is callable bond?

2.      What is coupon? How much is the coupon?

3.      What is bond rating?

4.      How much is the yield?

5.      What is current yield?

6.      What is yield to maturity – semi annual vs. annual coupon

7.      What is bond price. Calculate bond price with new yield

8.      What is bond price. Calculate bond price with new yield

9.      What is bond price. Calculate bond price with new yield

10.  Same as above but for semi annual coupon bond

11.  What is zero coupon bond

12.  Calculate zero coupon bond price given yield

13.  Calculate zero coupon bond yield given price

14.  What are junk bond, muni bond, Treasury bond?

15.  Give probability array and return array, calculate expected return

16.  Given dividend, old price, new price, calculate HPR

17.  What is systematic risk? Unsystematic risk?

18.  Same as above

19.  Use CAPM to figure out return (Beta is given)

20.  Same as above

21.  Same as above

22.  Portfolio questions. Calculate weight of each stock in the portfolio

23.  Same as above

24.  Calculate portfolio returns given each stock’s returns and weights

25.  Portfolio beta calculation

26.  Portfolio return calculation given based on CAPM

Chapter 10 Capital Budgeting

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?

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 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?

Chapter 10 In Class Exercise II

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?

 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?

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?
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?
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.

6. Consider the following two mutually exclusive projects:

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.

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

Final study guide

Multiple Choices (40*2.5=100)

1.      Calculate the NPV of project X.

2.      Calculate the NPV of project Y.

3.      Calculate IRR of project X.

4.      Calculate IRR of project Y.

5.      Calculate the payback period of project X

6.      Calculate the payback period of project Y

7.      Consider the two projects are mutually exclusive, which project shall you choose.

8.      Consider the two projects are independent, which project shall you choose.

9.      Calculate the crossover rate.

10.  Imagine that discount is 5%, and the two projects are mutually exclusive, which project shall you choose?

11.  Imagine that discount is 25%, and the two projects are mutually exclusive, which project shall you choose?

12.  Given cash flows of each year, calculate the payback period.

13.  Given cash flows of each year, calculate the IRR

14.  Given two projects’ cash flows, calculate crossover rate.

15.  True/false question about payback period.

18.  True/false question about NPV / IRR

20.  Given cash flows of each year, calculate the payback period.

21.  A hard question about NPV and IRR (Maybe, maybe not)

22.  Mutually exclusive projects’ NPV and IRR relationship

23.  Mutually exclusive projects’ NPV and IRR relationship

24.  Mutually exclusive projects’ NPV and IRR relationship

25.  Relationship between IRR and NPV

1.