FIN301 Class Web Page, Summer' 19
Instructor: Maggie Foley
Jacksonville University
Business
Finance Online, an interactive learning tool for the Corporate Finance
Student https://www.zenwealth.com/BusinessFinanceOnline/index.htm
Weekly SCHEDULE, LINKS, FILES and Questions
Chapter |
Coverage, HW, Supplements -
Required |
References
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Chapter
1, 2 |
Discussion: How to pick stocks (finviz.com) Daily earning announcement: http://www.zacks.com/earnings/earnings-calendar IPO schedule: http://www.marketwatch.com/tools/ipo-calendar FYI: MarketWatch Stock
Game written by Maelyn O’Connor (Thanks, Maelyn) Chapter 1: Introduction 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 1.
What
are the six parts of the financial markets
Money: · To pay for purchases and store wealth (fiat money, fiat currency) Financial Instruments: · To transfer resources from savers to investors and to transfer risk to those best equipped to bear it. Financial
Markets: · Buy and sell financial instruments · Channel funds from savers to investors, thereby promoting economic efficiency · Affect personal wealth and behavior of business firms. Example? Financial Institutions. · Provide access to financial markets, collect information & provide services · Financial Intermediary: Helps get funds from savers to investors Central Banks · Monitor financial Institutions and stabilize the economy Regulatory Agencies · To provide oversight for financial system. 2.
What
are the five core principals of finance
Introduction
to Capital Markets - ION Open Courseware (Video) How the stock market works (video) No homework for chapter 2 |
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Chapter
5 |
Chapter 5 Time value of Money Time
value of money (Video) The
time value of money - German Nande (video)
Chapter
5 Homework (due with mid term) 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 tod7ay, for ten years. Jordan plans to
save $175 a month for ten years, starting one month from today. Both Bridget
and Jordan expect to earn an average return of 8 percent on their savings. At
the end of the ten years, Jordan will have approximately _____ more than
Bridget. ($4,391) 28.
What
is the future value of weekly payments of $25 for six years at 10
percent? ($10,673.90) 29.
At
the end of this month, Bryan will start saving $80 a month for retirement
through his company's retirement plan. His employer will contribute an
additional $.25 for every $1.00 that Bryan saves. If he is employed by this
firm for 25 more years and earns an average of 11 percent on his retirement
savings, how much will Bryan have in his retirement account 25 years from
now? ($157,613.33) 30.
Sky
Investments offers an annuity due with semi-annual payments for 10 years at 7
percent interest. The annuity costs $90,000 today. What is the amount of each
annuity payment? ($6,118.35) 31.
Mr.
Jones just won a lottery prize that will pay him $5,000 a year for thirty
years. He will receive the first payment today. If Mr. Jones can earn 5.5
percent on his money, what are his winnings worth to him
today? ($76,665.51) |
Summary of math and excel equations Math
Equations FV
= PV *(1+r)^n PV
= FV / ((1+r)^n) N
= ln(FV/PV) / ln(1+r) Rate
= (FV/PV)1/n -1 Annuity:
N = ln(FV/C*r+1)/(ln(1+r)) Or
N = ln(1/(1-(PV/C)*r)))/ (ln(1+r)) EAR
= (1+APR/m)^m-1 APR
= (1+EAR)^(1/m)*m Excel
Formulas To get FV, use FV function. =abs(fv(rate, nper,
pmt, pv)) To get PV, use PV
function = abs(pv(rate, nper,
pmt, fv)) To get r, use rate
function =
rate(nper, pmt, pv, -fv) To get number of years,
use nper function = nper(rate, pmt, pv,
-fv) To
get annuity payment, use PMT function = pmt(rate, nper, pv,
-fv) To
get Effective rate (EAR), use Effect function =
effect(nominal_rate, npery) To
get annual percentage rate (APR), use nominal function =
nominal(effective rate, npery) Calculators
(FYI) |
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Chapter 6 Risk and Return Chapter
6 In Class Exercise
Use
the following information in the in class exercise Excel file here (updated) Excel Exercise Steps: 1. Visit finance.yahoo.com 2. Search for WalMart, Amazon,
Apple, and S&P500 3. Click on historical data 4. Time period: 5/1/2014 – 5/1/2019 Show: Historical price Frequency: Monthly 5. Click download data 6. Open in Excel the downloaded file 7. Delete all columns except “date” and “adj close” 8. Repeat the above for Amazon, Apple, and
S&P500 9. Combine the three companies into one excel
file. 10. Calculate average return and risk (standard deviation),
correlation matrix, portfolio returns and portfolio standard deviation, 11. Calculate Beta, stock return based on
CAPM, and draw SML Class
videos Monday 5/20 Part
I Part II Part III Part IV How to understand the following graph? How to understand the following graph?
Other exercises: 1. What is Holding Period Return? Example: You bought 1
share of HPD for $19.70 in May 2008 and sold it for $32.32 in May 2009. The
company paid divided of 8 cents every quarter during the last two years. How much is
holding period return? 2.
Stock A has the
following returns for various states of the economy: State
of the
Economy Probability Stock
A's Return Recession 20% -30% Average 60% 10% Boom 10% 40% Stock
A's expected return is? Standard deviation?
(or
use calculator at www.jufinance.com/return) Wednesday 5/22
Part I Part II Part III HW
of chapter 6 (Due with mid term) 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
13. Calculate the expected returns of the
following cases, respectively 1) Invest
$10,000 in Treasury bill with guaranteed return of 4%. 2) Investment
$10,000 in Apple. 50% possibility to earn 20% return and 50% possibility to
lose 10% of investment. 3) Investment
$10,000 in Wal-Mart. 50% possibility to earn 5% return and 50% possibility to
earn 0% of investment. 14. Rank the risk of the following cases, from
the least risky one the most risky one 1) Invest
$10,000 in Treasury bill with guaranteed return of 4%. 2) Investment
$10,000 in Apple. 50% possibility to earn 20% return and 50% possibility to
lose 10% of investment. 3) Investment
$10,000 in Wal-Mart. 50% possibility to earn 5% return and 50% possibility to
earn 0% of investment. 15. An
investor currently holds the following portfolio: Amount Invested 8,000
shares of
Stock A $10,000 Beta = 1.5 15,000
shares of Stock B $20,000 Beta = 0.8 25,000
shares of Stock C $20,000 Beta = 1.2 Calculate
the beta for the portfolio. 16. Joe
purchased 800 shares of Robotics Stock at $5 per share on 1/1/13. Bill sold
the shares on 4/18/13 for $6. Robotics stock has a beta of 1.2, the risk-free
rate of return is 1%, and the market risk premium is 10%. Joe's holding
period return is how much? |
Excel Command: sumproduct(array1, array2) stdev(observation1, obv2, obv3,….) correl(stock 1’s return, stock 2’s return) beta = slope(stock return, sp500 return)) Two Stock
Portfolio Calculator
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Chapter 3 Financial
Statement Analysis Experts Explain: Financial Statements (well
explained, video) ******* Part I: Balance Sheet and Income Statement
************** Home Depot (Ticker in the market: HD) reported the following
information for the year ended January 30th, 2011 (expressed in
millions). Sales: $67,977 Cost of goods sold: $44,693 Marketing, general and administrative expenses: $15,885 Depreciation expenses: $1,616 Interest expense: $530 Tax rate: 36.70% Number of shares outstanding: 1,623 Dividends paid to stockholders: $1,569. Use the above information to try to prepare the
income statement of Home Depot for the year ended January 30th,
2011 Home Depot (Ticker in the market: HD) reported the following
information for the year ended January 30th, 2011 (expressed in
millions). Cash: $545 Accounts receivables: $1,085 Inventories: $10625 Other current assets: $1,224 Gross fixed assets: $38,471 Accumulated depreciation: $13,411 Other fixed assets: $1,586 Accounts payable: $9,080 Short term notes payable: $1,042 Long term debt: $11,114 Total common stock: $3,894 Retained earnings: $14,995 Use the above information to try to prepare the
balance sheet of Home Depot for the year ended January 30th, 2011. |
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********* Part II: Cash
Flow Statement ******************
|
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 |
2. What does net change in cash mean?
Now
let’s learn how to calculate cash changes in each session
Source
of cash
Use
of Cash
Cash
Flow from Operations: Five Steps
1. Add back depreciation.
2. Subtract (add) any increase (decrease) in accounts
receivable.
3. Subtract (add) any increase (decrease) in inventory.
4. Subtract (add) any increase (decrease) in other current
assets.
5. Add (subtract) any increase (decrease) in accounts
payable and other accrued expenses
Chapter 3 HW
1. For the above precision tool example,
work out the cash flow statement
2. Firm
AAA just showed how it operated in the prior year.
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)
Exercise:
Prepare the cash flow statement based on the above information
Chapter 4: Ratio Analysis
Chapter 4 how to
master analyzing financial statement (FYI only)
Stock screening tools
FINVIZ.com
http://finviz.com/screener.ashx
We will focus on the following several ratios:
P/E (price per share/earning per share, P/E < 15, a bargain)
PEG (PE ratio /
growth rate. PEG<1, undervalued stock)
EPS (earning per
share)
ROA (Return on Asset
= NI/TA, ROA>10% should be a nice benchmark)
ROE (return on
equity = NI/TE, ROE>15% should be good)
Current ratio (liquidity measure. = CA/CL, has to be greater than one)
Quick ratio (liquidity measure. = (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).
Nike --- Valuation |
|
P/E Current |
70.74 |
P/E Ratio (w/o extraordinary items) |
61.37 |
Price to Sales Ratio |
3.28 |
Price to Book Ratio |
11.72 |
Price to Cash Flow Ratio |
24.04 |
Enterprise Value to EBITDA |
25.71 |
Enterprise Value to Sales |
3.62 |
Total Debt to Enterprise Value |
0.03 |
Efficiency |
|
Revenue/Employee |
497,442.00 |
Income Per Employee |
26,443.00 |
Receivables Turnover |
10.14 |
Total Asset Turnover |
1.59 |
Liquidity |
|
Current Ratio |
2.51 |
Quick Ratio |
1.63 |
Cash Ratio |
0.87 |
Profitability |
|
Gross Margin |
44.03 |
Operating Margin |
12.38 |
Pretax Margin |
11.89 |
Net Margin |
5.32 |
Return on Assets |
8.44 |
Return on Equity |
17.4 |
Return on Total Capital |
30.17 |
Return on Invested Capital |
13.26 |
Capital Structure |
|
Total Debt to Total Equity |
38.83 |
Total Debt to Total Capital |
27.97 |
Total Debt to Total Assets |
16.91 |
Long-Term Debt to Equity |
35.34 |
Long-Term Debt to Total Capital |
25.46 |
Between
Nike and GoPro, which one is better? How can you tell?
Class videos Part I Part II Part III Part IV
GoPro ---
Valuation |
|
P/E Current |
-5.55 |
P/E Ratio (with extraordinary items) |
-6.59 |
Price to Sales Ratio |
0.89 |
Price to Book Ratio |
3.47 |
Enterprise Value to EBITDA |
-10.29 |
Enterprise Value to Sales |
0.83 |
Total Debt to Enterprise Value |
0.14 |
Efficiency |
|
Revenue/Employee |
926,741.00 |
Income Per Employee |
-143,655.00 |
Receivables Turnover |
8.5 |
Total Asset Turnover |
1.33 |
Liquidity |
|
Current Ratio |
1.55 |
Quick Ratio |
1.14 |
Cash Ratio |
0.67 |
Profitability |
|
Gross Margin |
34.86 |
Operating Margin |
-11.37 |
Pretax Margin |
-14.95 |
Net Margin |
-15.5 |
Return on Assets |
-20.63 |
Return on Equity |
-49.05 |
Return on Total Capital |
-30.64 |
Return on Invested Capital |
-41.77 |
Capital Structure |
|
Total Debt to Total Equity |
43.54 |
Total Debt to Total Capital |
30.33 |
Total Debt to Total Assets |
15.3 |
Long-Term Debt to Equity |
43.54 |
Long-Term Debt to Total Capital |
30.33 |
Mid term between 5/31 and 6/2, will
be posted on blackboard under course
introduction
Take home exam. Individual work,
please
Chapter 7 Bond pricing
Simplified Balance Sheet of WalMart
In Millions of USD |
As
of 2014-01-31 |
Total Assets |
204,751.00 |
Total Current Liabilities |
69,345.00 |
Long Term Debt |
41,771.00 |
Other liabilities |
17,380.00 |
Total Liabilities |
128,496.00 |
Total Equity |
76,255.00 |
Total Liabilities & Shareholders' Equity |
204,751.00 |
For discussion:
· What is this “long term debt”?
· Who is the lender of this “long term debt”?
So this long term debt is called bond in the
financial market. Where can you find the pricing information and other
specifications of the bond issued by WMT?
Investing
Basics: Bonds(video)
FINRA – Bond market information
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.org, è Investor
center è market data è bond è corporate
bond
Corporate Bond
Issuer Name |
Symbol |
Callable |
Sub-Product Type |
Coupon |
Maturity |
Moody's® |
S&P |
Price |
Yield |
WMT.GP |
Corporate Bond |
7.55 |
02/15/2030 |
Aa2 |
AA |
142.426 |
2.905 |
||
WMT.GG |
Corporate Bond |
6.75 |
10/15/2023 |
Aa2 |
AA |
118.81 |
2.219 |
||
WMT.HV |
Corporate Bond |
5.25 |
9/01/2035 |
Aa2 |
AA |
124.975 |
3.257 |
||
WMT.IA |
Corporate Bond |
5.875 |
4/05/2027 |
Aa2 |
AA |
122.533 |
2.668 |
||
WMT.IC |
no |
Corporate Bond |
6.5 |
08/15/2037 |
Aa2 |
AA |
139.878 |
3.514 |
|
WMT.IE |
No |
Corporate Bond |
6.2 |
04/15/2038 |
Aa2 |
AA |
136.429 |
3.537 |
|
WMT.IJ |
Corporate Bond |
5.625 |
4/01/2040 |
Aa2 |
AA |
129.89 |
3.577 |
||
WMT.AB |
No |
Corporate Bond |
5.625 |
04/15/2041 |
Aa2 |
AA |
131.722 |
3.53 |
|
WMT4117477 |
Yes |
Corporate Bond |
3.3 |
04/22/2024 |
Aa2 |
AA |
103.758 |
2.437 |
|
WMT4117478 |
Yes |
Corporate Bond |
4.3 |
04/22/2044 |
Aa2 |
AA |
110.812 |
3.628 |
|
WMT3991377 |
Yes |
Corporate Bond |
4 |
4/11/2043 |
Aa2 |
AA |
106.786 |
3.569 |
|
WMT3991485 |
Yes |
Corporate Bond |
2.55 |
4/11/2023 |
Aa2 |
AA |
100.78 |
2.323 |
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. (based on z
score. What is z score?)
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
with final)
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%
Class videos
Part I Part II Part III Part IV
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)
C: Coupon, M: Par, $1,000; i: Yield to maturity; n: years left to maturity
For Semi-annual, F=2 for semi-annual coupon
M: Par, $1,000; i:
Yield to maturity; n: years left to maturity
Bond calculation (Thanks to Dr. Lane)
FINRA
TRACE Bond Market ActivityView: Corporate 144A Agency Structured
Products
|
All
Issues |
Investment
Grade |
High
Yield |
Convertible |
Total
Issues Traded |
8643 |
6407 |
2070 |
166 |
Advances |
5316 |
4527 |
722 |
67 |
Declines |
2869 |
1648 |
1135 |
86 |
Unchanged |
65 |
31 |
29 |
5 |
52
Week High |
1619 |
1495 |
121 |
3 |
52
Week Low |
136 |
44 |
82 |
10 |
Dollar
Volume* |
29373 |
20709 |
7513 |
1149 |
* Par value in millions
Most Active Investment Grade Bonds
Issuer
Name |
Symbol |
Coupon |
Maturity |
Moody’s®/S&P |
High |
Low |
Last |
Change |
Yield% |
INTERNATIONAL
BUSINESS MACHS CORP |
4.250% |
05/15/2049 |
A1/A |
102.79852 |
101.65600 |
102.76300 |
0.783000 |
4.089047 |
|
INTERNATIONAL
BUSINESS MACHS CORP |
3.500% |
05/15/2029 |
A1/A |
102.22000 |
101.57200 |
102.14700 |
0.702000 |
3.245560 |
|
INTERNATIONAL
BUSINESS MACHS CORP |
3.300% |
05/15/2026 |
A1/A |
101.47800 |
100.85300 |
101.44000 |
0.505000 |
3.068078 |
|
INTERNATIONAL
BUSINESS MACHS CORP |
4.150% |
05/15/2039 |
A1/A |
102.83900 |
101.03900 |
102.64300 |
0.363000 |
3.957019 |
|
INTERNATIONAL
BUSINESS MACHS CORP |
3.000% |
05/15/2024 |
A1/A |
100.92200 |
100.49800 |
100.92200 |
0.405000 |
2.798919 |
|
GE
CAP INTL FDG CO MEDIUM TERM NTS BOOK |
4.418% |
11/15/2035 |
Baa1/BBB+ |
95.45700 |
94.91200 |
95.45700 |
-0.120000 |
4.820977 |
|
PETROLEOS
MEXICANOS |
6.750% |
09/21/2047 |
Baa3/ |
93.50000 |
89.50000 |
93.12700 |
2.127000 |
7.327999 |
|
SHERWIN-WILLIAMS
CO |
2.250% |
05/15/2020 |
Baa3/BBB |
99.96500 |
99.43000 |
99.56300 |
-0.041000 |
2.719676 |
|
ABBVIE
INC |
2.500% |
05/14/2020 |
Baa2/A- |
100.17000 |
99.30000 |
99.30000 |
-0.550000 |
3.257578 |
|
SHELL
INTL FIN B V |
2.125% |
05/11/2020 |
Aa2/ |
99.78100 |
99.38100 |
99.61600 |
0.010000 |
2.541897 |
Most Active High Yield Bonds
Issuer
Name |
Symbol |
Coupon |
Maturity |
Moody’s®/S&P |
High |
Low |
Last |
Change |
Yield% |
TEVA
PHARMACEUTICAL FIN NETH III B V |
3.150% |
10/01/2026 |
Ba2/ |
79.29900 |
73.75000 |
76.50000 |
-0.125000 |
7.355862 |
|
PETROBRAS
GLOBAL FIN B V |
7.375% |
01/17/2027 |
Ba2/ |
113.00000 |
110.20000 |
112.45000 |
1.260000 |
5.361652 |
|
WEATHERFORD
INTL LTD |
9.875% |
02/15/2024 |
Ca/ |
50.50000 |
49.25000 |
49.50000 |
-1.750000 |
30.911975 |
|
WEATHERFORD
INTL LTD |
8.250% |
06/15/2023 |
Ca/ |
49.75000 |
49.50000 |
49.75000 |
-2.750000 |
30.866940 |
|
MALLINCKRODT
INTL FIN SA |
4.750% |
04/15/2023 |
Caa1/B- |
62.50100 |
60.50000 |
62.27000 |
-0.230000 |
18.951083 |
|
PETROBRAS
GLOBAL FIN B V |
6.900% |
03/19/2049 |
Ba2/ |
101.35000 |
99.75000 |
100.35000 |
0.350000 |
6.871119 |
|
TEVA
PHARMACEUTICAL FIN NETH III B V |
4.100% |
10/01/2046 |
Ba2/ |
65.47200 |
64.21900 |
65.00000 |
-0.500000 |
6.986865 |
|
FRONTIER
COMMUNICATIONS CORP |
10.500% |
09/15/2022 |
Caa1/CCC+ |
74.04000 |
71.69900 |
72.75000 |
-0.750000 |
22.690025 |
|
NEWMARK
GROUP INC |
6.125% |
11/15/2023 |
/BB+ |
102.75600 |
102.20000 |
102.26800 |
-0.982000 |
5.533062 |
|
PACIFIC GAS & ELEC CO |
6.050% |
03/01/2034 |
WR/D |
101.06250 |
100.00000 |
101.00000 |
1.250000 |
Chapter 8 Stock Valuation
Dividend Growth Model
What is dividend growth model? Why can we use
dividend to estimate a firm’s intrinsic value?
· Are future dividends predictable?
· Refer to the following table for WMT’s
dividend history
http://stock.walmart.com/investors/stock-information/dividend-history/default.aspx
Record Dates |
Payable Dates |
Amount |
Type |
March
9, 2018 |
April
2, 2018 |
$0.52 |
Regular
Cash |
May
11, 2018 |
June
4, 2018 |
$0.52 |
Regular
Cash |
Aug.
10, 2018 |
Sept.
4, 2018 |
$0.52 |
Regular
Cash |
Dec.
7, 2018 |
Jan.
2, 2019 |
$0.52 |
Regular
Cash |
Record Dates |
Payable Dates |
Amount |
Type |
March
10, 2017 |
April
3, 2017 |
$0.51 |
Regular
Cash |
May
12, 2017 |
June
5, 2017 |
$0.51 |
Regular
Cash |
Aug.
11, 2017 |
Sept.
5, 2017 |
$0.51 |
Regular
Cash |
Dec.
8, 2017 |
Jan.
2, 2018 |
$0.51 |
Regular
Cash |
Record Dates |
Payable Dates |
Amount |
Type |
March
11, 2016 |
April
4, 2016 |
$0.50 |
Regular
Cash |
May
13, 2016 |
June
6, 2016 |
$0.50 |
Regular
Cash |
Aug.
12, 2016 |
Sep.
6, 2016 |
$0.50 |
Regular
Cash |
Dec.
9, 2016 |
Jan.
3, 2017 |
$0.50 |
Regular
Cash |
Record Dates |
Payable Dates |
Amount |
Type |
March
13, 2015 |
April
6, 2015 |
$0.490 |
Regular
Cash |
May
8, 2015 |
June
1, 2015 |
$0.490 |
Regular
Cash |
Aug.
7, 2015 |
Sep.
8, 2015 |
$0.490 |
Regular
Cash |
Dec.
4, 2015 |
Jan.
4, 2016 |
$0.490 |
Regular
Cash |
Can you estimate the expected dividend in
2019? And in 2020? And on and on…
Can you write down the math equation now?
WMT stock price = ?
Can you calculate now? It is hard right
because we assume dividend payment goes to infinity. How can we simplify the
calculation?
We can assume that dividend grows at certain
rate, just as the table on the right shows.
Discount rate is r (based on Beta and CAPM
learned in chapter 6)
Equations:
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)…
Dividend growth model
Calculator (FYI)
www.jufinance.com/stock
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 (due with 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 stockholder’s expected return is 8% and the stock is
expected to pay dividend of $2 with a growth rate of 4%. How much should the
stock be traded for? (answer: 50)
7. The stockholder’s expected return is 8% and the stock is
expected to pay dividend of $2 with a growth rate of 4%. How much
is the dividend expected to be three years from now? (Hint: D3 =
D2*(1+g) = D1*(1+g)2 )(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%)
Class videos
Details about how to derive the model
mathematically (FYI)
The Gordon growth model is a simple
discounted cash flow (DCF) model which can be used to value a stock, mutual
fund, or even the entire stock market. The model is named after Myron
Gordon who first published the model in 1959.
The Gordon model assumes that a
financial security pays a periodic dividend (D) which
grows at a constant rate (g). These growing dividend payments are
assumed to continue forever. The future dividend payments are discounted at
the required rate of return (r) to find the price (P) for the stock
or fund.
Under these simple assumptions, the
price of the security is given by this equation:
In this equation, I’ve
used the “0” subscript
on the price (P) and the “1” subscript
on the dividend (D) to indicate that the price is calculated at time zero and
the dividend is the expected dividend at the end of period one. However, the
equation is commonly written with these subscripts omitted.
Obviously, the assumptions built
into this model are overly simplistic for many real-world valuation
problems. Many companies pay no dividends, and, for those that do,
we may expect changing payout ratios or growth rates as the
business matures.
Despite these
limitations, I believe spending some time experimenting with the Gordon
model can help develop intuition about the relationship between
valuation and return.
The Gordon growth model calculates the
present value of the security by summing an infinite series of discounted
dividend payments which follows the pattern shown here:
Multiplying both sides of the previous
equation by (1+g)/(1+r) gives:
We can then subtract the second equation
from the first equation to get:
Rearranging and simplifying:
Finally, we can simplify further to get
the Gordon growth model equation
Refer
to http://www.calculatinginvestor.com/2011/05/18/gordon-growth-model/
Useful website
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
Chapter 10 Capital Budgeting
Chapter 10 In Class Exercise
Question 1: Project with an initial cash outlay of
$20,000 with following free cash flows for 5 years.
Year Cash flows
1 $8,000
2 4,000
3 3,000
4 5,000
5 10,000
1) How much is the payback
period (approach one)?
· Does
this method consider time value of money?
· Easy
to explain to outsiders?
2) If the firm has a 10%
required rate of return. How much is NPV (approach 2)?
· What
does NPV means? NPV>0 indicates what? Otherwise?
· Does
this method consider time value of money?
· Easy
to explain to outsiders?
3) If the firm has a 10%
required rate of return. How much is IRR (approach 3)?
· What
does IRR mean? IRR > 10% indicates what? Otherwise?
· Does
this method consider time value of money?
· Easy
to explain to outsiders?
Question 2: Project with an initial cash outlay of $60,000
with following free cash flows for 5 years.
Year FCF
Initial
outlay –60,000
1 25,000
2 24,000
3 13,000
4 12,000
5 11,000
The firm has a 15% required rate of return.
Calculate payback period, NPV, IRR. Analyze
your results.
Question 3: Mutually Exclusive Projects
1) Consider the following
cash flows for one-year Project A and B, with required rates of return of 10%.
You have limited capital and can invest in one but one project. Which one?
§ Initial Outlay: A = $200; B = $1,500
§ Inflow: A
= $300; B = $1,900
2) Example: Consider two projects,
A and B, with initial outlay of $1,000, cost of capital of 10%, and following
cash flows in years 1, 2, and 3:
A:
$100 $200 $2,000
B:
$650 $650 $650
Which project should you choose if they are
mutually exclusive? Independent? Crossover rate?
Chapter 10 Homework (due with final)
1. Consider the following two projects, calculate
the NPVs of the two projects. If the two projects are mutually exclusive,
which one should you choose? What about they are independent projects?(answer:
NPVa: -8.67; NPVb: 12.65; Mutually exclusive: B; Independent:B)
Project |
Year
0 Cash
Flow |
Year
1 Cash
Flow |
Year
2 Cash
Flow |
Year
3 Cash
Flow |
Year
4 Cash
Flow |
Discount
Rate |
A |
-100 |
40 |
40 |
40 |
N/A |
.15 |
B |
-73 |
30 |
30 |
30 |
30 |
.15 |
2. You are
considering an investment with the following cash flows. If the required rate
of return for this investment is 15.5 percent, should you accept the
investment based solely on the internal rate of return rule? Why?
(answer: 17.53%; Yes, rate<IRR, accept)
3. It will cost $6,000 to acquire an ice cream cart. Cart
sales are expected to be $3,600 a year for three years. After the three
years, the cart is expected to be worthless as the expected life of the
refrigeration unit is only three years. What is the payback period? (answer:
1.67)
4. An
investment project provides cash flows of $1,190 per year for 10 years. If
the initial cost is $8,000, what is the payback period? (answer:
6.72)
5. A firm evaluates
all of its projects by using the NPV decision rule. At a required return of 14
percent, the NPV for the following project is _____ and the firm should _____
the project. (answer: 7264.95, accept)
6. Consider the following two mutually exclusive
projects. Use 10% for required rate of return.
What is the NPV of each project? What is the IRR of each project? (answer:
A- 922.78; 15.33%; B- 871.47; 14.68%)
What is the crossover rate for these two projects? (answer:
6.29%)
7. Cash Flow in Period
Initial
Outlay 1 2 3 4
$4,000,000 $1,546,170 $1,546,170 $1,546,170 $1,546,170
The Internal Rate of Return (to nearest whole
percent) i? (answer: 20.03%)
8 Welltran Corp. can purchase a new
machine for $1,875,000 that will provide an annual net cash flow of $650,000
per year for five years. The machine will be sold for $120,000 after taxes at
the end of year five. What is the net present value of the machine if the
required rate of return is 13.5%. (Answer: $447,291.91. Hint: year 5’s
cash flow is 650k+120k = 770k)
Class Videos
NPV, IRR, Payback period calculator
(www.jufinance.com/npv)
https://www.jufinance.com/npv_1/
Discounted payback period, MIRR
calculator
https://www.jufinance.com/capital/
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.
https://www.youtube.com/watch?v=7FsGpi_W9XI
https://www.youtube.com/watch?v=YgVQvn51noc
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, too—analyzing 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 algorithms–one 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 resources—either people or money or attention—can
benefit from simple rules.
WSJ: Can you give an example of how that simplification
works in a company?
Sull: There’s 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 didn’t 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.”
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 Frontier—stuff 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 factors—is 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,
you’ll 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. They’re easy to
remember, they don’t confuse or stress you, they save time.
They should be tailored to your
specific goals, so you choose the rules based on what exactly you’re 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: Let’s 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 instead, he
decided what the most important goals were. You can’t 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 that’s where the money
will stretch farther.
Chapter
9 The Cost of Capital
For class discussion:
What is WACC?
Why is it important?
WACC increases, good or bad to stock holders?
How to apply WACC to figure out firm value?
What is DCF?
One
option (if beta is given)
Another
option (if dividend is given):
WACC
Formula
Discount rate to figure out the value of projects is called WACC
(weighted average cost of capital)
WACC = weight of debt * cost of debt + weight
of equity *( cost of equity)
Wd= total debt / Total capital =
total borrowed / total capital
We= total equity/ Total capital
Cost of debt = rate(nper, coupon, -(price – flotation costs),
1000)*(1-tax rate)
Cost of Equity = D1/(Po – Flotation Cost) +
g
D1: Next period dividend; Po: Current stock price; g: dividend
growth rate
Note: flotation costs = flotation percentage *
price
Or if beta is given, use CAPM model (refer to
chapter 6)
Cost of equity = risk free rate + beta
*(market return – risk free rate)
Cost of equity = risk free rate + beta *
market risk premium
Discussion:
· Cheaper to raise capital from debt market.
Why? Why not 100% financing via borrowing?
· Why tax rate cannot reduce firms’ cost of
equity?
In Class Exercise
IBM financed 10m via debt coupon 5%, 10 year,
price is $950 and flotation is 7% of the price, tax 40%.
IBM financed 20m via equity. D1=$5. Po=50, g
is 5%. Flotation cost =0. So WACC?
Wd=1/3. We=2/3.
Kd = rate(10, 5%*1000, -(950-950*7%),
1000)*(1-40%)
Ke = 5/(50 – 0) + 5%
WACC = Wd*Kd +We*Ke
WACC calculator (annual coupon bond only)
(www.jufinance.com/wacc)
WACC calculator (semi-annual coupon bond only)
(www.jufinance.com/wacc_1)
Homework (due with final)
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 (5.08%)
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.
4.
Wal-Mart plans to open a new store near JU. Wall Mart is going to finance via
bond market and stock market. Total
capital required is 10 million dollars. 3 million dollars are going to be
borrowed from the bond market and the rest will be from the stock
market. What is the percentage of
capital financed from the bond market (weight of debt)?
This
3% annual coupon bond is traded in the market for $950 and is going to be
matured in 10 years. There is no flotation fee. Tax rate is 30%. How much is
the cost of debt of Wal-Mart.
Wal-Mart
plans to pay $3 per share next year. The dividend is expected to grow at the
rate of 5% each year. The stock is traded at $60 per share. How much is the
cost of equity (stock)? The flotation fee is 5%.
Tax
rate is 30%. How much is the WACC?
Class videos
FYI
Walmart
Inc (NYSE:WMT) WACC %:5.4% As of Today
As of today, Walmart Inc's weighted average cost
of capital is 5.4%. Walmart Inc's ROIC % is 11.01% (calculated
using TTM income statement data). Walmart Inc generates higher returns on
investment than it costs the company to raise the capital needed for that
investment. It is earning excess returns. A firm that expects to continue
generating positive excess returns on new investments in the future will see
its value increase as growth increases.
https://www.gurufocus.com/term/wacc/WMT/WACC/Walmart%2BInc
Amazon.com Inc (NAS:AMZN) WACC %:12.09% As of
Today
As of today, Amazon.com Inc's weighted average
cost of capital is 14.27%. Amazon.com Inc's ROIC % is 31.32% (calculated
using TTM income statement data). Amazon.com Inc generates higher returns on
investment than it costs the company to raise the capital needed for that
investment. It is earning excess returns. A firm that expects to continue
generating positive excess returns on new investments in the future will see
its value increase as growth increases.
https://www.gurufocus.com/term/wacc/AMZN/WACC-Percentage/Amazon.com%20Inc
Apple Inc (NAS:AAPL) WACC %:9.34% As of
Today
As of today, Apple Inc's weighted average cost of
capital is 7.58%. Apple Inc's ROIC % is 36.58% (calculated
using TTM income statement data). Apple Inc generates higher returns on
investment than it costs the company to raise the capital needed for that
investment. It is earning excess returns. A firm that expects to continue
generating positive excess returns on new investments in the future will see
its value increase as growth increases.
https://www.gurufocus.com/term/wacc/AAPL/WACC/Apple%2Binc
Industry Name |
Number of Firms |
Cost of Equity |
E/(D+E) |
Cost of Debt |
Tax Rate |
D/(D+E) |
Cost of Capital |
Advertising |
40 |
8.27% |
57.51% |
6.91% |
6.38% |
42.49% |
6.99% |
Aerospace/Defense |
87 |
7.91% |
84.42% |
3.91% |
11.59% |
15.58% |
7.14% |
Air
Transport |
17 |
7.54% |
58.48% |
3.91% |
24.57% |
41.52% |
5.64% |
Apparel |
51 |
7.58% |
74.52% |
3.91% |
10.35% |
25.48% |
6.40% |
Auto
& Truck |
18 |
8.49% |
40.31% |
3.61% |
8.15% |
59.69% |
5.06% |
Auto
Parts |
62 |
7.68% |
77.94% |
3.91% |
7.71% |
22.06% |
6.64% |
Bank
(Money Center) |
11 |
5.65% |
38.87% |
3.61% |
27.31% |
61.13% |
3.87% |
Banks
(Regional) |
612 |
4.96% |
63.02% |
3.61% |
25.57% |
36.98% |
4.14% |
Beverage
(Alcoholic) |
28 |
9.15% |
79.27% |
3.91% |
10.12% |
20.73% |
7.87% |
Beverage
(Soft) |
35 |
5.99% |
81.26% |
3.91% |
6.41% |
18.74% |
5.42% |
Broadcasting |
27 |
8.10% |
47.13% |
3.91% |
17.18% |
52.87% |
5.39% |
Brokerage
& Investment Banking |
42 |
8.70% |
31.26% |
3.91% |
14.56% |
68.74% |
4.76% |
Building
Materials |
39 |
8.04% |
82.33% |
3.91% |
23.34% |
17.67% |
7.15% |
Business
& Consumer Services |
169 |
8.35% |
78.47% |
3.91% |
11.09% |
21.53% |
7.19% |
Cable
TV |
14 |
7.09% |
65.34% |
3.61% |
22.23% |
34.66% |
5.58% |
Chemical
(Basic) |
38 |
8.49% |
70.78% |
3.91% |
9.76% |
29.22% |
6.88% |
Chemical (Diversified) |
7 |
12.74% |
78.63% |
4.66% |
11.66% |
21.37% |
10.78% |
Chemical
(Specialty) |
99 |
8.07% |
77.52% |
3.91% |
9.64% |
22.48% |
6.93% |
Coal
& Related Energy |
30 |
8.75% |
68.77% |
8.16% |
4.94% |
31.23% |
7.96% |
Computer
Services |
111 |
8.00% |
76.43% |
3.91% |
9.40% |
23.57% |
6.82% |
Computers/Peripherals |
58 |
7.54% |
84.62% |
3.91% |
5.03% |
15.38% |
6.84% |
Construction
Supplies |
49 |
8.10% |
75.49% |
3.91% |
17.36% |
24.51% |
6.85% |
Diversified |
24 |
8.48% |
75.48% |
3.61% |
12.09% |
24.52% |
7.07% |
Drugs
(Biotechnology) |
459 |
9.72% |
86.33% |
8.16% |
1.36% |
13.67% |
9.24% |
Drugs
(Pharmaceutical) |
185 |
8.55% |
87.24% |
6.91% |
2.11% |
12.76% |
8.13% |
Education |
34 |
8.27% |
72.03% |
3.91% |
8.24% |
27.97% |
6.79% |
Electrical
Equipment |
118 |
7.92% |
86.32% |
4.66% |
5.06% |
13.68% |
7.32% |
Electronics
(Consumer & Office) |
24 |
7.96% |
93.51% |
4.66% |
5.98% |
6.49% |
7.67% |
Electronics
(General) |
167 |
7.17% |
86.98% |
3.91% |
8.34% |
13.02% |
6.63% |
Engineering/Construction |
49 |
8.86% |
77.09% |
3.91% |
13.37% |
22.91% |
7.51% |
Entertainment |
90 |
8.26% |
74.77% |
3.91% |
5.45% |
25.23% |
6.93% |
Environmental
& Waste Services |
87 |
6.87% |
74.15% |
4.66% |
4.45% |
25.85% |
6.01% |
Farming/Agriculture |
34 |
6.19% |
64.29% |
3.91% |
7.69% |
35.71% |
5.04% |
Financial Svcs. (Non-bank & Insurance) |
264 |
5.49% |
8.83% |
3.61% |
19.89% |
91.17% |
2.99% |
Food
Processing |
87 |
5.84% |
76.44% |
3.91% |
15.13% |
23.56% |
5.17% |
Food
Wholesalers |
15 |
11.48% |
72.75% |
3.91% |
11.91% |
27.25% |
9.16% |
Furn/Home
Furnishings |
31 |
6.42% |
78.21% |
3.91% |
12.56% |
21.79% |
5.67% |
Green
& Renewable Energy |
22 |
8.51% |
50.45% |
3.91% |
2.41% |
49.55% |
5.77% |
Healthcare
Products |
251 |
7.19% |
85.41% |
4.66% |
4.79% |
14.59% |
6.66% |
Healthcare
Support Services |
115 |
6.97% |
80.11% |
3.91% |
13.69% |
19.89% |
6.17% |
Heathcare
Information and Technology |
112 |
7.38% |
83.83% |
3.91% |
5.96% |
16.17% |
6.67% |
Homebuilding |
32 |
8.04% |
71.61% |
3.91% |
23.86% |
28.39% |
6.60% |
Hospitals/Healthcare
Facilities |
35 |
8.40% |
36.16% |
3.91% |
10.57% |
63.84% |
4.93% |
Hotel/Gaming |
70 |
7.18% |
71.48% |
3.91% |
14.01% |
28.52% |
5.98% |
Household
Products |
131 |
7.47% |
82.63% |
3.91% |
7.35% |
17.37% |
6.69% |
Information
Services |
61 |
6.89% |
86.42% |
3.91% |
15.90% |
13.58% |
6.36% |
Insurance
(General) |
21 |
6.39% |
72.20% |
3.61% |
14.71% |
27.80% |
5.38% |
Insurance
(Life) |
25 |
7.53% |
63.67% |
3.61% |
15.32% |
36.33% |
5.79% |
Insurance
(Prop/Cas.) |
50 |
6.67% |
79.10% |
3.61% |
18.50% |
20.90% |
5.85% |
Investments
& Asset Management |
165 |
7.43% |
70.38% |
3.91% |
8.30% |
29.62% |
6.11% |
Machinery |
126 |
8.25% |
83.51% |
3.91% |
14.05% |
16.49% |
7.38% |
Metals
& Mining |
102 |
8.01% |
76.61% |
6.91% |
1.66% |
23.39% |
7.37% |
Office
Equipment & Services |
24 |
9.39% |
65.94% |
3.91% |
18.37% |
34.06% |
7.20% |
Oil/Gas
(Integrated) |
5 |
9.38% |
86.74% |
3.11% |
10.96% |
13.26% |
8.45% |
Oil/Gas
(Production and Exploration) |
311 |
8.80% |
70.47% |
6.91% |
2.18% |
29.53% |
7.76% |
Oil/Gas
Distribution |
16 |
8.54% |
51.70% |
3.91% |
4.84% |
48.30% |
5.85% |
Oilfield
Svcs/Equip. |
130 |
8.64% |
76.35% |
4.66% |
5.27% |
23.65% |
7.44% |
Packaging
& Container |
25 |
6.16% |
66.57% |
3.61% |
22.37% |
33.43% |
5.02% |
Paper/Forest
Products |
21 |
8.50% |
71.42% |
3.91% |
14.18% |
28.58% |
6.92% |
Power |
61 |
4.97% |
56.70% |
3.61% |
20.31% |
43.30% |
4.01% |
Precious
Metals |
111 |
7.30% |
84.85% |
8.16% |
2.16% |
15.15% |
7.14% |
Publishing
& Newspapers |
41 |
7.59% |
69.21% |
3.91% |
11.92% |
30.79% |
6.17% |
R.E.I.T. |
244 |
5.76% |
56.02% |
3.61% |
1.96% |
43.98% |
4.43% |
Real
Estate (Development) |
20 |
6.22% |
68.82% |
3.91% |
5.80% |
31.18% |
5.21% |
Real
Estate (General/Diversified) |
10 |
6.20% |
80.90% |
3.91% |
12.77% |
19.10% |
5.58% |
Real
Estate (Operations & Services) |
60 |
7.60% |
68.16% |
3.91% |
8.82% |
31.84% |
6.13% |
Recreation |
70 |
6.73% |
77.17% |
3.91% |
10.16% |
22.83% |
5.87% |
Reinsurance |
3 |
5.06% |
78.29% |
3.11% |
10.92% |
21.71% |
4.47% |
Restaurant/Dining |
81 |
6.73% |
75.64% |
3.91% |
14.99% |
24.36% |
5.81% |
Retail
(Automotive) |
25 |
7.55% |
56.83% |
3.91% |
19.04% |
43.17% |
5.57% |
Retail
(Building Supply) |
8 |
6.76% |
84.85% |
3.91% |
15.36% |
15.15% |
6.19% |
Retail
(Distributors) |
92 |
8.25% |
68.69% |
3.91% |
14.20% |
31.31% |
6.59% |
Retail
(General) |
18 |
7.74% |
76.25% |
3.91% |
22.96% |
23.75% |
6.61% |
Retail
(Grocery and Food) |
14 |
6.00% |
54.44% |
3.91% |
21.04% |
45.56% |
4.62% |
Retail
(Online) |
61 |
8.41% |
89.76% |
3.91% |
7.57% |
10.24% |
7.86% |
Retail
(Special Lines) |
106 |
8.05% |
65.36% |
3.91% |
22.01% |
34.64% |
6.29% |
Rubber&
Tires |
4 |
7.25% |
56.18% |
3.91% |
7.91% |
43.82% |
5.38% |
Semiconductor |
72 |
8.37% |
88.42% |
3.91% |
8.04% |
11.58% |
7.74% |
Semiconductor
Equip |
45 |
7.40% |
89.66% |
3.91% |
8.51% |
10.34% |
6.94% |
Shipbuilding
& Marine |
9 |
9.22% |
68.05% |
8.16% |
8.31% |
31.95% |
8.26% |
Shoe |
11 |
6.89% |
91.20% |
3.91% |
16.75% |
8.80% |
6.54% |
Software
(Entertainment) |
13 |
6.94% |
93.94% |
3.91% |
2.21% |
6.06% |
6.70% |
Software
(Internet) |
305 |
8.52% |
96.79% |
4.66% |
2.50% |
3.21% |
8.36% |
Software
(System & Application) |
255 |
7.93% |
87.61% |
3.91% |
3.98% |
12.39% |
7.32% |
Steel |
37 |
11.64% |
73.41% |
4.66% |
7.05% |
26.59% |
9.49% |
Telecom
(Wireless) |
18 |
9.02% |
45.46% |
3.91% |
7.95% |
54.54% |
5.72% |
Telecom.
Equipment |
104 |
7.67% |
82.83% |
3.91% |
8.12% |
17.17% |
6.86% |
Telecom.
Services |
66 |
7.91% |
55.70% |
3.91% |
8.05% |
44.30% |
5.72% |
Tobacco |
24 |
8.82% |
85.37% |
3.91% |
5.25% |
14.63% |
7.97% |
Transportation |
18 |
7.23% |
76.91% |
3.91% |
21.92% |
23.09% |
6.25% |
Transportation
(Railroads) |
8 |
7.52% |
81.52% |
3.61% |
23.82% |
18.48% |
6.64% |
Trucking |
30 |
8.50% |
58.89% |
3.91% |
20.56% |
41.11% |
6.23% |
Utility (General) |
18 |
3.90% |
59.79% |
3.11% |
30.89% |
40.21% |
3.28% |
Utility
(Water) |
23 |
4.15% |
72.39% |
3.61% |
15.09% |
27.61% |
3.76% |
Total
Market |
7247 |
7.49% |
62.89% |
3.91% |
10.04% |
37.11% |
5.81% |
Total
Market (no financials) |
6057 |
7.84% |
76.49% |
3.91% |
7.92% |
23.51% |
6.69% |
http://people.stern.nyu.edu/adamodar/New_Home_Page/datafile/wacc.htm
Chapter 3 Cash Flow Statement Revisit
Below
are the 2017 and 2018 year-end balance sheets for firm AAA:
Assets: 2018 2017
Cash (?) (?)
Accounts
receivable 864,000 700,000
Inventories 0 2,000,000
1,400,000
Total current assets $3,064,000 $2,270,000
Net
fixed assets
6,000,000 5,600,000
Total
assets (?) (?)
Liabilities
and equity:
Accounts
payable $1,400,000 $1,090,000
Notes
payable
1,600,000 1,800,000
Total current liabilities $3,000,000 $2,890,000
Long-term
debt
2,400,000 2,400,000
Common
stock
3,000,000 2,000,000
Retained
earnings 664,000 580,000
Total common equity $3,664,000 $2,580,000
Total
liabilities and equity (?) (?)
Assume
sales in 2017 and 2018 were the same.
200,000 = depreciation. 500,000 = net income
·
Assume that sales=
1,889,231; COG = 800,000; Interest payment = 120,000; Tax rate = 35%; Prepare income statement.
·
Fill up the blanks of
the above balance sheet.
·
Prepare cash flow
statement
Solution here (Thank you,
Tristan)
Final (6/19, in class, close
book close notes, non-comprehensive)
Final Study Guide
Multiple
Choices (31*3.2=100)
Use
the following information to answer the questions 1-12
Given
cash flows and discount rate, calculate
npv, irr, payback period, crossover rate (chapter 10)
Also
understand that NPV>0 è
discount rate < IRR.
When
pick projects, always pick higher NPV project.
13-17
Cash flow and income statement questions, similar to in class exercise. (chapter 3)
18-20
Based on dividend growth model, calculate price, dividend yield, return,
dividend (chapter 8)
21-26:
bond calculation. Calculate price, ytm, current yield (chapter 7)
27:
zero coupon bond question (chapter 7)
28-31:
wacc questions, similar to homework (chapter 9)