FIN301 Class Web Page, Summer ' 17

Instructor: Maggie Foley

Jacksonville University

 

The Syllabus    

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

Marketwatch Stock Trading Game (Pass code: havefun)

Use the information and directions below to join the game.

1.     URL for your game: 
http://www.marketwatch.com/game/jufin301-17

2.     Password for this private game: havefun.

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

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

5.     Follow the instructions and start trading!

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

..0.0000image001.jpg

 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

Capital flow chart

ppt

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

ppt

Time value of money (Video)

The time value of money - German Nande (video)

Chapter 5 in class exercise

image002.jpg

 

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 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

 

image005.jpg

 

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)

 

 

 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?

image003.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

 

image004.jpg

 

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.

 

image005.jpg

 

image006.jpg

 

 

 

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)

 

More exercises of chapter 3 (word file here)

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 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

 

Chapter 6

Chapter 6 Risk and Return

ppt

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  (word file here)

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?

 

 

image009.jpg

image010.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)

Week 3, 4

Mid Term for chapters 1, 2, 3, 4, 5, 6)

 

Week 4

Chapter 7 Bond pricing

Ppt

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

http://finra-markets.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.orgè Investor center è market data è bond è 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)

 

image020.jpg

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

 

 

image021.jpg

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

 

 

image022.jpg

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

 

image023.jpg

Week 5

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   

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 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?

 

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: 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? 

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

Week 6

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?

 

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?
  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? 


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.
  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.

 

 

image019.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

 

 

Week 7

1.     Chapter 9

2.      ppt

 

Chapter 9 Review

Discount rate to figure out the value of projects is called WACC (weighted average cost of capital)

WACC = weight of debt * cost of debt *(1-tax rate) + weight of equity *( cost of equity)

 

Cost of debt = rate(nper, coupon, price – flotation costs, 1000)

Cost of Equity = D1/(Po – Flotation Cost)  + g   

D1: Next period dividend; Po: Current stock price; g: dividend growth rate

 

 

Discussion:

·         Cheaper to raise capital from debt market. Why? Why not 100% financing via borrowing?

·         Why tax rate cannot reduce firms’ cost of equity?

·         Hertz’s WACC = 7.9%. Too low or too high? How to get this WACC?

Issuer Name

Symbol

Callable

Sub-Product Type

Coupon

Maturity

Moody

S&P

Price

Yield

HERTZ CORP

HTZ.AS

Yes

Corporate Bond

6.75

4/15/2019

B2

B

98.542

7.551

HERTZ CORP

HTZ.AR

Yes

Corporate Bond

7.375

1/15/2021

B2

B

95.386

8.843

HERTZ CORP

HTZ3975862

Yes

Corporate Bond

5.875

10/15/2020

B2

B

91.563

8.728

HERTZ CORP

HTZ3975861

Yes

Corporate Bond

6.25

10/15/2022

B2

B

89.719

8.64

HERTZ CORP

  HTZ.AI

Yes

Corporate Bond

7

1/15/2028

B3

99.637

7.047

HERTZ CORP

HTZ3982321

Corporate Bond

4.25

4/1/2018

101.44

HERTZ CORP

HTZ4402231

Corporate Bond

10/15/2024

85.625

HERTZ CORP

HTZ.AH

Corporate Bond

7.5

10/15/2018

98.5

HERTZ CORP

HTZ.AP

Corporate Bond

4/15/2019

99

 

 

 

Corporate Bond

 

 

 

 

 

 

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

 

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, 950-950*7%, 1000)*(1-40%)

Ke = 5/(50 – 0) + 5%

WACC = Wd*Kd +We*Ke =

 

 

HOMEWORK of Chapter 10  (FYI)

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 AAA’s equity condition is as follows. D1 = $1.25; P0 = $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

 

 

Simple Rules for Running a Business (fyi)

From the 20-page cellphone contract to the five-pound employee handbook, even the simple things seem to be getting more complicated.

Companies have been complicating things for themselves, tooanalyzing hundreds of factors when making decisions, or consulting reams of data to resolve every budget dilemma. But those requirements might be wasting time and muddling priorities.

So argues Donald Sull, a lecturer at the Sloan School of Management at the Massachusetts Institute of Technology who has also worked for McKinsey & Co. and Clayton, Dubilier & Rice LLC. In the book Simple Rules: How to Thrive in a Complex World, out this week from Houghton Mifflin Harcourt HMHC -1.36%, he and Kathleen Eisenhardt of Stanford University claim that straightforward guidelines lead to better results than complex formulas.

Mr. Sull recently spoke with At Work about what companies can do to simplify, and why five basic rules can beat a 50-item checklist. Edited excerpts:

WSJ: Where, in the business context, might simple rules help more than a complicated approach?

Donald Sull: Well, a common decision that people face in organizations is capital allocation. In many organizations, there will be thick procedure books or algorithmsone company I worked with had an algorithm that had almost 100 variables for every project. These are very cumbersome approaches to making decisions and can waste time. Basically, any decision about how to focus resourceseither people or money or attentioncan benefit from simple rules.

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

Sull: Theres a German company called Weima GmBH that makes shredders. At one point, they were getting about 10,000 requests and could only fill about a thousand because of technical capabilities, so they had this massive problem of sorting out which of these proposals to pursue.

They had a very detailed checklist with 40 or 50 items. People had to gather data and if there were gray areas the proposal would go to management. But because the data was hard to obtain and there were so many different pieces, people didnt always fill out the checklists completely. Then management had to discuss a lot of these proposals personally because there was incomplete data. So top management is spending a disproportionate amount of time discussing this low-level stuff.

Then Weima came up with guidelines that the frontline sales force and engineers could use to quickly decide whether a request fell in the yes,” “no or maybe category. They did it with five rules only, stuff like Weima had to collect at least 70% of the price before the unit leaves the factory.

After that, only the maybes were sent to management. This dramatically decreased the amount of time management spend evaluating these projectsthat time was decreased by almost a factor of 10.

Or, take Frontier Dental Laboratories in Canada. They were working with a sales force of two covering the entire North American market. Limiting their sales guidelines to a few factors that made someone likely to be receptive to Frontierstuff like dentists who have their own practice and dentists with a website”—helped focus their efforts and increase sales 42% in a declining market.

WSJ: Weima used five factorsis that the optimal number? And how do you choose which rules to follow?

Sull: You should have four to six rules. Any more than that, youll spend too much time trying to follow everything perfectly. The entire reason simple rules help is because they force you to prioritize the goals that matter. Theyre easy to remember, they dont confuse or stress you, they save time.

They should be tailored to your specific goals, so you choose the rules based on what exactly youre trying to achieve. And you should of course talk to others. Get information from different sources, and ask them for the top things that worked for them. But focus on whether what will work for you and your circumstances.

WSJ: Is there a business leader you can point to who has embraced the simple rules guideline?

Donald Sull: Lets look at when Alex Behring took over America Latina Logistica SARUMO3.BR +1.59%, the Brazilian railway and logistics company. With a budget of $15 million, how do you choose among $200 million of investment requests, all of which are valid?

The textbook business-school answer to this is that you run the NPV (net present value) test on each project and rank-order them by NPV. Alex Behring knows this. He was at the top of the class at Harvard Business School.

But insteadhe decided what the most important goals were. You cant achieve everything at once. In their case, their priorities were removing bottlenecks on growing revenues and minimizing upfront expenditure. So when allocating money, they had a bias for projects that both addressed the bottleneck problem and, for example, used existing tracks and trains.

Similarly, the global-health arm of the Gates Foundation gets many, many funding requests. But since they know that their goal is to have the most impact worldwide, they focus on projects in developing countries because thats where the money will stretch farther.

Week 8

3.  Final (Chapter 7, 8, 9, 10)

4.      Final will be available on 6/15. Due on 6/26. No class on 6/21.