­­ FIN301 Class Web Page, Spring ' 18

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/jufin301-18s

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

ppt

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, nperpv, -fv)

 

To get Effective rate (EAR), use Effect function

 = effect(nominal_ratenpery)

 

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

 = nominal(effective ratge,  npery)

 

 

 

First Mid Exam Study Guide

Multiple Choices (23*4.3)

1. Concept question of time value of money

 2. Concept of present value, future, annuity

3. Concept question of time value of money

4. Calculate FV given PV and rate and nper

5. Calculate FV given PV and rate and nper

 6. Calculate FV given PV and rate and nper

 7. Calculate PV given FV and rate and nper

8. Calculate rate, given pv, fv, nper

9. Calculate nper, given pv, fv, rate

10. Calculate nper, given pv, fv, rate

11.  Calculate rate, given pv, fv, nper

12. At certain rate, calculate the number of years to triple your money

13. Calculate pmt, given pv, fv, rate, nper
14. Calculate pv, given fv, rate, nper, ptm

15. Calculate pv, given fv, rate, nper, ptm (annuity due)

16. Calculate fv, given pv, nper, rate

17. Calculate pmt, given pv, fv, rate, nper
18. Calculate nper, given pv, fv, pmt, rate

 19. Conversion between ear and apr

20. Conversion between ear and apr

21. Conversion between ear and apr

22. Conversion between ear and apr

23. calculate pv, given fv, rate, nper

 

 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 (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 financing

-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

 

The ratio analysis for AAPL and WMT using 2017’s financial statement (excel file. Thanks, Ian and Igor)

AAPL         WMT

 

 

Second Mid term (2/15/2018)  

Second Mid Term Study Guide

 Multiple Choice Questions (23*3.5 = 80.5)
 

  1. Net working capital is defined as: 
  2. Definition of income statement, cash flow statement, and balance sheet. 

3.                    Cash flow statement structure

4.                    Examples in current asset

5.                    Definition of net working capital

6.                    Examples of net working capital

7.                    Examples of net working capital

8.                    Definition of income statement, cash flow statement, and balance sheet. 

9-14Balance sheet questions

Review of the balance sheet structures

15-17 Income statement questions: review of income statement structure. 

 18-23: based on the following tables

The following information should be used for problems  :

 

2015

2016

Sales

 

 

COGS

 

 

Interest

 

 

Dividends

 

 

Depreciation

 

 

Cash

 

 

Accounts receivables

 

 

Current liabilities

 

 

Inventory

 

 

Long-term debt

 

 

Net fixed assets

 

 

Common stock

 

 

Tax rate

 

 

        17.   What is the net working capital for 2016?

        18.   What is the change in net working capital from 2015 to 2016?

19-23.  Choose source / use

 

Source / use

Accounts receivables

 

 

 

 

Source / use

Current liabilities

 

 

 

 

Source / use

Inventory

 

 

 

 

 

Source / use

Long-term debt

 

 

 

 

 

Source / use

Common stock

 

 

 

 

Short Answer Question (20 points)

 

Prepare the cash flow statement of the company (template will be given).

In class exercise (for second mid term)

Use the following information to work out the cash flow statement of 2008

 

 

Chapter 6

Chapter 6 Risk and Return

ppt

 

Excel Exercise Steps:

1.      Visit finance.yahoo.com

2.      Search for WalMart

3.      Click on historical data

4.      Time period: Feb 22 2017 – Feb 22 2018

Show: Historical price

Frequency: Monthly

5.      Click on Apply and then click on download data

6.      Open in Excel the downloaded file

7.      Delete all columns except “date” and “adj close”

8.      Repeat the above for APPLE and AMAZON (File is here for reference)

9.      Combine the three companies into one excel file.

10.  Calculate average return and risk (standard deviation) (File is here for reference)

 

Use the following information in the in class exercise

Price collected from Finance.Yahoo.com

Monthly Stock Return

Date

WMT price

Apple price

amazon price

WMT ret

Apple ret

amazon ret

3/1/2017

70.26

141.42

886.54

5.07%

-0.01%

4.34%

4/1/2017

73.82

141.41

924.99

4.55%

6.34%

7.53%

5/1/2017

77.18

150.38

994.62

-3.07%

-5.33%

-2.68%

6/1/2017

74.81

142.36

968.00

5.70%

3.27%

2.04%

7/1/2017

79.07

147.02

987.78

-2.40%

10.27%

-0.73%

8/1/2017

77.18

162.11

980.60

0.72%

-5.66%

-1.96%

9/1/2017

77.73

152.94

961.35

11.74%

9.68%

14.97%

10/1/2017

86.85

167.75

1105.28

11.36%

1.66%

6.47%

11/1/2017

96.72

170.54

1176.75

1.56%

-1.17%

-0.62%

12/1/2017

98.23

168.54

1169.47

8.52%

-1.06%

24.06%

1/1/2018

106.60

166.75

1450.89

-14.15%

2.17%

2.21%

2/1/2018

91.52

170.38

1482.92

 

 

 

Summary and Comparison

WMT

APPLE

Amazon

Average monthly stock return

2.69%

1.83%

5.06%

Standard Deviation of monthly stock return

7.46%

5.32%

8.12%

Summary: AMAZON has the highest average return in the prior year. Its risk is also the highest.

It is the best investment among the three. Apple's performance is the worst. Its return is the lowest.

Its risk is not low enough to compensate for the low return among the three stocks.

 

WMT

APPLE

Amazon

Portfolio

Average monthly stock return

2.69%

1.83%

5.06%

3.19%

Standard Deviation of monthly stock return

7.46%

5.32%

8.12%

5.33%

Beta

2.20

        (0.39)

          1.81

          1.20

 

Excel file here:   

 

image025.jpg

Regression line of AMAZON

Results:

Amazon return

 = 1.8* S&P500 return + 0.03

So Beta of AMAZON=1.8

Or use slope function

beta of amazon

                1.81

HW of chapter 6   (due before the 3rd mid term)

Chapter 6 Homework  (some of the questions are used as in class exercise questions)

1) Stock A has the following returns for various states of the economy: (FYI: calculator here)

 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)

stdev(observation1, obv2, obv3,….)

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

beta = slope(stock return, sp500 return)

 

 

 

 

 

CAPM Calculator (Thanks TO Dr. Lane)

CAPM Calculator: Introduction (www.zenwealth.com)

image028.jpg

The CAPM Calculator can be used to solve problems based upon the Security Market Line (SML) from the Capital Asset Pricing Model. The calculator is able to solve for any of the four possible variables given the value of the other three variables.

1.     Expected Return on Stock i Field - The Expected Return on Stock i is displayed or entered in this field.

2.     Risk Free Rate Field - The Risk Free Rate is displayed or entered in this field.

3.     Expected Return on the Market Field - The Expected Return on the Market Portfolio is displayed or entered in this field.

4.     Beta for Stock i Field - The Beta for Stock i is displayed or entered in this field.

5.     Buttons - Press these buttons to calculate the corresponding value.

o    E[Ri] Button - Press to calculate the Expected Return on Asset i.

o    Rf Button - Press to calculate the Risk Free Rate.

o    E[Rm] Button - Press to calculate the Expected Return on the Market Portfolio.

o    Beta Button - Press to calculate the Beta for Asset i.

(from zenwealth.com)

 

Expected return Calculator

Thanks to Dr. Lane

https://www.zenwealth.com/BusinessFinanceOnline/RR/images/ExpectedReturnCalculator.gif

The Expected Return Calculator calculates the Expected Return, Variance, Standard Deviation, Covariance, and Correlation Coefficient for a probability distribution of asset returns.

1.     Input Fields - Enter the Probability, Return on Stock 1, and Return on Stock2 for each state in these fields. The sum of the probabilities must equal 100%.

2.     Expected Return Fields - The Expected Returns on Stocks 1 and 2 are displayed here.

3.     Variance Fields - The Variance of the returns on Stocks 1 and 2 are displayed here.

4.     Standard Deviation Fields - The Standard Deviation of the returns on Stocks 1 and 2 are displayed here.

5.     Covariance Field - The Covariance between the returns on Stocks 1 and 2 is displayed here.

6.     Correlation Coefficient Field - The Correlation Coefficient between the returns on Stocks 1 and 2 is displayed here.

7.     Buttons - Press the Calculate Button to calculate the Expected Return, Variance, etc. for Assets 1 and 2. Press the Clear Button to reset the calculator.

 

 

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?

 

Investopedia Video: Introduction To Bond Investing

 

FINRA – Bond market information

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

 

Chapter 7 Study guide  

Bond Cash Flow:

 

image004.jpg

 

1.      Go to http://finra-markets.morningstar.com/BondCenter/Default.jsp

 , 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  (due before the 3rd mid term)

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 YTM? 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? What is the current yield?  6.14%  6.67%

 

Third mid term (3/29/2018)   Study Guide 

Multiple Choices (30*3.33=100, 1-20 from chapter 6 and 21-30 from chapter 7)

company 1

company 2

market

1/1/2018

1%

3%

10%

12/1/2017

2%

4%

20%

11/1/2017

3%

3%

30%

10/1/2017

4%

5%

40%

Refer to the above table to answer questions 1-12.

1.      company 1’s average return?

2.      company 1’s standard deviation)?

3.      Company 1’s beta? 

4.      correlation between company 1 and company 2?

5.      Company 1 and 2 seems to be good choice when thinking about setting up a portfolio?

 

6.      Compare risk between firm 1 and 2.  

7.      What is correlation? The range of correlation?

8.      Using CAPM to calculate firm’s return, all else given.

9.      Questions based on SML: slope, intercept, equation

10.      

Economy         Probability       Stock A's Return

Recession              10%                 -3%

Average                 50%                 1%

Boom                    40%                 20%

Stock A's expected return is?

 

11.   holding period return =?, given a series of stock prices.

12.    Given fund composition and beta of each stock and calculate portfolio beta 

13.  What is systematic risk.

 

 

WAL-MART STORES INC

Coupon Rate 7%         Maturity Date  04/22/2050

Symbol

 

CUSIP

 

Next Call Date

01/22/2019

Callable

Yes

Last Trade Price

$145.21

Last Trade Yield

3%

Last Trade Date

3//26/2018

US Treasury Yield

 

Credit and Rating Elements

Moody's Rating

Aa2 (3//26/2018)

Standard & Poor's Rating

AA (3//26/2018)

Coupon Payment Frequency

Semi-Annual

 

Refer to the above table and answer questions 21-28.

14.  coupon?

15.  What does the rating indicate?

16.  What does callable mean?

17.  Calculate the current yield based on the above table.

18.  Imagine that the interest rate has increased to 10%. Calculate the new bond price. Semiannual coupon

19.  Imagine that the interest rate has increased to 10%. Calculate the new bond price. annual, coupon

20.  Imagine that the price is $700. Calculate the new yield to maturity.  Semiannual coupon

 

21.  Imagine that the price is $850. Calculate the new yield to maturity. Semiannual coupon

22.  For a zero coupon bond, calculate price, all else given

 

23.  For a zero coupon bond, calculate YTM, all else given

 

 

Summary of bond pricing excel functions

To calculate bond price (annual coupon bond):

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

 

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

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

 

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

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

 

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

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

 

To calculate number of years left(annual coupon bond)

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

 

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

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

 

To calculate coupon (annual coupon bond)

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

Coupon rate = coupon / 1000

 

To calculate coupon (semi-annual coupon bond)

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

Coupon rate = coupon / 1000

 

 

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

 

 

Bond calculation  (Thanks to Dr. Lane)

Bond Calculator: Introduction (www.zenwealth.com)

image027.jpg


The Bond Calculator can be used to Price Bonds and to determine the Yield-to-Maturity and Yield-to-Call on Bonds. It works similarly to the Time Value Of Money functions of the Texas Instruments BA II Plus calculator.

  1. Bond Price Field - The Price of the bond is displayed or entered in this field.
  2. Coupon Field - The Coupon Payment is displayed or entered in this field. For a Semiannual Coupon Bond the amount displayed or entered is the semiannual Coupon Payment.
  3. Face Value Field - The Face Value or Principal of the bond is displayed or entered in this field.
  4. Yield Field - The Bond Yield is displayed or entered in this field.
  5. Periods Field - The number of Periods remaining until maturity is displayed or entered in this field. For a Semiannual Coupon Bond, this represents the number of six month periods remaining until maturity, i.e., the number of years remaining times two.
  6. Compounding Field - The value selected in this pop-up represents the compounding frequency for the Bond Yield and the frequency of the Coupon Payments, i.e., whether the bond is a Semiannual or Annual Coupon Bond.
  7. Buttons - Press these buttons to calculate the corresponding value.
    • Price Button - Press to calculate the Bond Price.
    • Coupon Button - Press to calculate the Coupon Payment.
    • Face Value Button - Press to calculate the Face Value.
    • Yield Button - Press to calculate the Bond Yield.
    • Periods Button - Press to calculate the Number of Periods remaining until Maturity.

FYI:http://finra-markets.morningstar.com/BondCenter/TRACEMarketAggregateStats.jsp

Most Active Investment Grade Bonds

Issuer Name

Symbol

Coupon

Maturity

Moody’s®/S&P

High

Low

Last

Change

Yield%

AT&T INC

T4525196

2.850%

02/14/2023

Baa1/BBB+

100.09900

99.64600

100.04500

0.295000

2.839707

AT&T INC

T4525198

3.900%

08/14/2027

Baa1/BBB+

100.29600

99.64537

100.25000

-0.029000

3.867290

AT&T INC

T4525199

4.900%

08/14/2037

Baa1/BBB+

100.58400

98.86400

100.25000

-1.150000

4.879186

CVS HEALTH CORP

CVS4607884

4.780%

03/25/2038

Baa1/BBB

101.11900

98.90300

99.37100

0.329000

4.829014

AT&T INC

T4525197

3.400%

08/14/2024

Baa1/BBB+

100.30000

100.03600

100.23200

-0.017000

3.358417

CVS HEALTH CORP

CVS4608029

3.700%

03/09/2023

Baa1/BBB

100.79570

98.37800

99.40800

-0.004000

3.832083

WELLS FARGO & CO NEW MEDIUM TERM SR NTS

WFC4160708

3.300%

09/09/2024

A2/A-

98.45200

96.18500

96.91300

-0.183000

3.843921

CVS HEALTH CORP

CVS4607885

5.050%

03/25/2048

Baa1/BBB

102.45221

101.82400

102.43300

0.110000

4.892994

CVS HEALTH CORP

CVS4608028

4.300%

03/25/2028

Baa1/BBB

100.87800

98.09300

100.00000

1.093000

4.299527

VERIZON COMMUNICATIONS INC

VZ4388862

4.125%

08/15/2046

Baa1/BBB+

88.60800

87.23900

88.60800

0.442000

4.869433

Most Active High Yield Bonds

Issuer Name

Symbol

Coupon

Maturity

Moody’s®/S&P

High

Low

Last

Change

Yield%

ANHEUSER-BUSCH INBEV WORLDWIDE INC

BUD4612344

4.600%

04/15/2048

/

101.01800

99.43400

100.45000

0.355000

ANHEUSER-BUSCH INBEV WORLDWIDE INC

BUD4612348

4.000%

04/13/2028

/

100.77100

99.21600

99.76200

0.318000

ANHEUSER-BUSCH INBEV WORLDWIDE INC

BUD4612345

4.375%

04/15/2038

/

99.90600

98.55500

99.90600

0.816000

ANHEUSER-BUSCH INBEV WORLDWIDE INC

BUD4612346

4.750%

04/15/2058

/

100.30600

99.37700

99.78400

0.212000

ANHEUSER-BUSCH INBEV WORLDWIDE INC

BUD4612177

3.500%

01/12/2024

/

100.50800

99.50700

99.78100

0.155000

DELL INC

DELL.GK

5.875%

06/15/2019

Ba2/BB-

103.62400

101.75000

101.75000

-0.875000

4.388649

SLM CORP MEDIUM TERM NTS BOOK ENTRY

NAVI4051910

5.500%

01/15/2019

Ba3/B+

101.77100

100.18600

100.18600

-0.908000

5.252094

IHEARTCOMMUNICATIONS INC

IHRT4275629

10.625%

03/15/2023

Caa2/D

80.12500

79.87500

80.00000

-0.250000

CENOVUS ENERGY INC

CVE4481641

4.250%

04/15/2027

Ba2/

96.98200

96.52200

96.89600

0.152000

4.673772

CHS / CMNTY HEALTH SYS INC

CYH4464595

6.250%

03/31/2023

B2/B-

93.07500

91.93750

92.00000

-2.350000

8.226991

 

Chapter 8 Stock Valuation

 

ppt

 

 

Chapter 8 Study Guide

 

.      Calculate stock prices

1)      Given next dividends and price expected to be sold for

image008.jpg

 

 

 Po= (D1 + P1)/ (1+r)

Po=  (D1)/ (1+r) + (D2 + P2)/ (1+r)^2

Po=  (D1)/ (1+r) + (D2 )/ (1+r)^2 + (D3 + P3)/ (1+r)^3

Po=  (D1)/ (1+r) + (D2 )/ (1+r)^2 + (D3)/ (1+r)^3+ (D4 + P4)/ (1+r)^4

……

 

2) Given all dividends Dividend growth model
        Po= D1/(r-g) or Po= Do*(1+g)/(r-g)

     R = D1/Po+g = Do*(1+g)/Po+g

     D1=Do*(1+g); D2= D1*(1+g)…

 

Exercise:

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

2.      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?

 

 

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.      

from google.com/finance for Wal-Mart  (NYSE:WMT)

 

86.05-1.45 (-1.66%)

 

Previous Close

87.50

Open

87.96

Bid

86.05 x 500

Ask

86.20 x 100

Day's Range

85.48 - 88.04

52 Week Range

69.33 - 109.98

Volume

6,395,554

Avg. Volume

11,923,339

Market Cap

254.913B

Beta

0.48

PE Ratio (TTM)

26.23

EPS (TTM)

3.28

Earnings Date

May 17, 2018

Forward Dividend & Yield

2.08 (2.39%)

Ex-Dividend Date

2018-05-10

1y Target Est

105.32

 

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?

 

 

 

HW of chapter 8    (due before final)

1. Northern Gas recently paid a $2.80 annual dividend on its common stock. This dividend increases at an average rate of 3.8 percent per year. The stock is currently selling for $26.91 a share. What is the market rate of return? (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: D3 = D2*(1+g) = D1*(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%)

Dividend Growth model template excel simple version  - my contribution (FYI)

Where Po: current stock price; D1: next period dividend; r: stock return; g: dividend growth rate

Do: current dividend

 

 

 

 

Stock Calculator (Constant Growth)

Thanks to Dr. Lane

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The Constant Growth Stock Calculator can be used to find the value of a Constant Growth Stock. The calculator can also be used to solve for the Current Dividend (D0), the Next Dividend (D1), the Dividend Growth Rate (g), or Required Return (r) given the values of the other variables.

  1. Dividend Popup - Use the popup to choose whether the Current Dividend (D0) or Next Dividend (D1) is displayed or entered in this field.
  2. Dividend Fields - The Current Dividend (D0) or Next Dividend (D1) is displayed or entered in this field.
  3. Growth Rate Field - The Dividend Growth Rate is displayed or entered in this field.
  4. Required Return Field - The Required Return on the Stock is displayed or entered in this field.
  5. Stock Price Field - The Stock Price is displayed or entered in this field.
  6. Buttons - Press these buttons to calculate the corresponding value.
    • Div Button - Press to calculate the Current Dividend (D0) or the Next Dividend (D1). The current selection in the pop-up in the Dividend Field determines which value is calculated.
    • g Button - Press to calculate the Dividend Growth Rate.
    • r Button - Press to calculate the Required Return on the Stock.
    • P0 Button - Press to calculate the Stock Price.

 

 

 

 

 

Useful website 

 

www.finance.yahoo.com

www.finviz.com

www.getaom.com

money.msn.com/investing