­­FIN301 Class Web Page, Spring ' 20

Instructor: Maggie Foley

Jacksonville University

 

The Syllabus    

Business Finance Online, an interactive learning tool for the Corporate Finance Student http://www.zenwealth.com/BusinessFinanceOnline/index.htm

 

Weekly SCHEDULE, LINKS, FILES and Questions

Chapter

Coverage, HW, Supplements

-        Required

References

 

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: 
https://www.marketwatch.com/game/fin301-20s

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

 

FYI:  MarketWatch Stock Game written by Maelyn O’Connor (Thanks, Maelyn)

 

 

Chapter  1: Introduction

 

ppt

 

image001.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

 

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

  • Time has value
  • Risk requires compensation
  • Information is the basis for decisions
  • Markets determine prices  and allocation resources
  • Stability improves welfare

 

Introduction to Capital Markets - ION Open Courseware (Video)

How the stock market works (video)

 

No homework for chapter 2

 

  

Chapter 5 Time value of Money

ppt

Time value of money (Video)

The time value of money - German Nande (video)

 

Tutoring of Time Value of Money calculation in Excel video

 

 

Chapter 5 in class exercise

 

 

Chapter 5 Homework (due on first 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 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

 

image002.jpg

 

Excel Formulas 

To get FV, use FV function.   

      =abs(fv(rate, nper, pmt, pv))

 

To get PV, use PV function                           

     = abs(pv(rate, nper, pmt, fv))

 

To get r, use rate function                          

     = rate(nper,  pmt, pv, -fv)

 

To get number of years, use nper function       

     = nper(rate,  pmt, pv, -fv)

 

To get annuity payment, use PMT function

     = pmt(rate, nper, pv, -fv)

 

To get Effective rate (EAR), use Effect function

 = effect(nominal_rate, npery)

 

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

 = nominal(effective rate,  npery)

 

 

NPV NFV calculator(FYI, might be helpful)

www.jufinance.com/nfv

 

 

 

Time Value of Money Calculator

http://www.jufinance.com/tvm/

Chapter 6 Risk and Return

ppt

 

Risk and Return in class exercise

 

Excel file here will be provided soon

 

Steps:   In class exercise  Excel Results (BABA, TESLA, Apple, S&P500)

1.      Pick three stocks. Has to be the leading firm in three different industries. 

2.      From finance.yahoo.com, collect stock prices of the above firms, in the past five years 

Steps:

·        Goto finance.yahoo.com, search for the company

·        Click on “Historical prices” in the left column on the top and choose monthly stock prices.

·        Change the starting date and ending date to “1/24/2019” and “1/24/2020”, respectively.

·        Download it to Excel

·        Delete all inputs, except “adj close” – this is the closing price adjusted for dividend.

·        Merge the three sets of data just downloaded

3.      Evaluate the performance of each stock:

·        Calculate the monthly stock returns.

·        Calculate the average return

·        Calculate standard deviation as a proxy for risk

·        Calculate correlation among the three stocks.

·         Calculate beta. But you need to download S&P500 index values  in the past five years from finance.yahoo.com.

·        Calculate stock returns based on CAPM.

·        Draw SML

fig0609

·        Conclusion and take away?

 

 

Effect of Diversification

 

fig0603

 

 

 

Please refer to template

 

 

  Chapter 6 In Class Exercise(Word file here )  

 

HW of chapter 6  (Due with the second mid Term exam)

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? (ANSWER: 8.2%)

 

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? (ANSWER: 15%)

 

3. You own a portfolio with the following expected returns given the various states of the economy. What is the overall portfolio expected return? (ANSWER: 9.05%)

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. (ANSWER: 2.12%)

      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?  (ANSWER: 11%)

  

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? (ANSWER: 1.99)

  

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? (ANSWER: 13%)

  

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? (ANSWER: 1.15)

 

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? (ANSWER: 11.4%)
  

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.  (ANSWER: 1.15)

b.                  Calculate the expected return of your portfolio. (ANSWER: 11.05%)

  

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. (ANSWER: 50%, -25%)

Period             Jazman           Solomon

1                      $10                  $20

2                      $12                  $25

3                      $15                  $15

  

12.  Calculate expected return  (ANSWER: 12%)

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%. (ANSWER: 4%)

2)      Investment $10,000 in Apple. 50% possibility to earn 20% return and 50% possibility to lose 10% of investment.(ANSWER: 5%)

3)      Investment $10,000 in Wal-Mart. 50% possibility to earn 5% return and 50% possibility to earn 0% of investment.(ANSWER: 2.5%)

 

14.  Rank the risk of the following cases, from the least risky one the most risky one  (ANSWER: 1, 3, 2)

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.(ANSWER: 1.1)

 

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? (ANSWER: 20%)

Expected return calculator

www.jufinance.com/return

 

Image result for expected return"

 

Holding Period Return Calculator

www.jufinance.com/hpr

 

 

 

 

CAPM Model Calculator

www.jufinance.com/capm

Capital Asset Pricing Model Formula

 

 

Two Stock Portfolio Return and Standard Deviation

www.jufinance.com/portfolio

 

 

Equations (FYI)

 

image013.jpg

Excel for standard deviation:

stdev(array of returns)

 

 

 

 

image035.jpg

 

 

Excel for beta used in CAPM

slope(array of stock returns, array of market returns)

 

 

 

Portfolios – two stocks

 

Calculator

http://www.jufinance.com/portfolio/

 

 

Equations:

image026.jpg

W1 and W2 are the percentage of each stock in the portfolio.

image028.jpg

 

image031.gif

  • r12 = the correlation coefficient between the returns on stocks 1 and 2,
  • s12 = the covariance between the returns on stocks 1 and 2,
  • s1 = the standard deviation on stock 1, and
  • s2 = the standard deviation on stock 2.

 

image022.jpg

  • s12 = the covariance between the returns on stocks 1 and 2,
  • N = the number of states,
  • pi = the probability of state i,
  • R1i = the return on stock 1 in state i,
  • E[R1] = the expected return on stock 1,
  • R2i = the return on stock 2 in state i, and
  • E[R2] = the expected return on stock 2.

First Mid Term Part I (Chapter 5) -  2/18

 

First Mid Term Part II (Chapter 6) -  2/20

Study Guide

Multiple Choices (20*2.5=50)

company 1

company 2

company 3

company 4

market

1/1/2020

given

given

given

given

given

12/1/2019

given

given

given

given

given

11/1/2019

given

given

given

given

given

10/1/2019

given

given

given

given

given

9/1/2019

given

given

given

given

given

 

Refer to the above table to answer questions 1-10.

1.      How much is company 1’s average return in the past five months?

2.      How much is company 1’s risk level in the past five months (standard deviation) if it is evaluated individually?

3.      What is the beta of the company 1? (hint: check slope)

4.      What is the correlation between company 1 and company 2?

5.      What is the correlation between company 1 and company 4?

6.      What is the beta of the company 2? (hint: check slope)

7.      What is the beta of the company 3? (hint: check slope)

8.       Among company 1, 2, and 3, which one is the most risky one, based on beta?

9.      The correlation between a pair of stocks

10-12CAPM calculation

13-14SML line: slope, intercept

 

15.  Stock A has the following returns for various states of the economy:

Economy         Probability       Stock A's Return

Recession              given                 given

Average                 given                 given

Boom                    given                 given

 

Stock A's expected return is?

 

 

16.   holding period return?

 

17.   Calculate the portfolio’s beta given amount in each stock and beta.

18.  systematic risk example

19.  What is diversification

20.  What is risk and return relationship?

Chapter 3 Financial Statement Analysis

 

Ppt

 

Experts Explain: Financial Statements (well explained, video)

 

************* Introduction ***************

 

Let’s compare Nike with GoPro based on 10K (www.nasdaq.com)

 

Nike Income Statement (values in 000's)

Period Ending:

Trend

5/31/2018

5/31/2017

5/31/2016

5/31/2015

Total Revenue

$36,397,000

$34,350,000

$32,376,000

$30,601,000

Cost of Revenue

$20,441,000

$19,038,000

$17,405,000

$16,534,000

Gross Profit

$15,956,000

$15,312,000

$14,971,000

$14,067,000

Operating Expenses

Research and Development

$0

$0

$0

$0

Sales, General and Admin.

$11,511,000

$10,563,000

$10,469,000

$9,892,000

Non-Recurring Items

$0

$0

$0

$0

Other Operating Items

$0

$0

$0

$0

Operating Income

$4,445,000

$4,749,000

$4,502,000

$4,175,000

Add'l income/expense items

($66,000)

$196,000

$140,000

$58,000

Earnings Before Interest and Tax

$4,325,000

$4,886,000

$4,623,000

$4,205,000

Interest Expense

$0

$0

$0

$0

Earnings Before Tax

$4,325,000

$4,886,000

$4,623,000

$4,205,000

Income Tax

$2,392,000

$646,000

$863,000

$932,000

Minority Interest

$0

$0

$0

$0

Equity Earnings/Loss Unconsolidated Subsidiary

$0

$0

$0

$0

Net Income-Cont. Operations

$1,933,000

$4,240,000

$3,760,000

$3,273,000

Net Income

$1,933,000

$4,240,000

$3,760,000

$3,273,000

 

 

 

Nike Balance Sheet (values in 000's)

Period Ending:

Trend

5/31/2018

5/31/2017

5/31/2016

5/31/2015

Current Assets

Cash and Cash Equivalents

$4,249,000

$3,808,000

$3,138,000

$3,852,000

Short-Term Investments

$996,000

$2,371,000

$2,319,000

$2,072,000

Net Receivables

$3,498,000

$3,677,000

$3,241,000

$3,358,000

Inventory

$5,261,000

$5,055,000

$4,838,000

$4,337,000

Other Current Assets

$1,130,000

$1,150,000

$1,489,000

$1,968,000

Total Current Assets

$15,134,000

$16,061,000

$15,025,000

$15,587,000

Long-Term Assets

Long-Term Investments

$0

$0

$0

$0

Fixed Assets

$4,454,000

$3,989,000

$3,520,000

$3,011,000

Goodwill

$154,000

$139,000

$131,000

$131,000

Intangible Assets

$285,000

$283,000

$281,000

$281,000

Other Assets

$0

$0

$0

$0

Deferred Asset Charges

$2,509,000

$2,787,000

$2,422,000

$2,587,000

Total Assets

$22,536,000

$23,259,000

$21,379,000

$21,597,000

Current Liabilities

Accounts Payable

$5,698,000

$5,143,000

$5,313,000

$6,151,000

Short-Term Debt / Current Portion of Long-Term Debt

$342,000

$331,000

$45,000

$181,000

Other Current Liabilities

$0

$0

$0

$0

Total Current Liabilities

$6,040,000

$5,474,000

$5,358,000

$6,332,000

Long-Term Debt

$3,468,000

$3,471,000

$1,993,000

$1,079,000

Other Liabilities

$0

$0

$0

$0

Deferred Liability Charges

$3,216,000

$1,907,000

$1,770,000

$1,479,000

Misc. Stocks

$0

$0

$0

$0

Minority Interest

$0

$0

$0

$0

Total Liabilities

$12,724,000

$10,852,000

$9,121,000

$8,890,000

Stock Holders Equity

Common Stocks

$3,000

$3,000

$3,000

$3,000

Capital Surplus

$6,384,000

$5,710,000

$7,786,000

$6,773,000

Retained Earnings

$3,517,000

$6,907,000

$4,151,000

$4,685,000

Treasury Stock

$0

$0

$0

$0

Other Equity

($92,000)

($213,000)

$318,000

$1,246,000

Total Equity

$9,812,000

$12,407,000

$12,258,000

$12,707,000

Total Liabilities & Equity

$22,536,000

$23,259,000

$21,379,000

$21,597,000

 

 

Nike Cash Flow Statement  (values in 000's)

Period Ending:

Trend

5/31/2018

5/31/2017

5/31/2016

5/31/2015

Net Income

$1,933,000

$4,240,000

$3,760,000

$3,273,000

Cash Flows-Operating Activities

Depreciation

$774,000

$716,000

$662,000

$649,000

Net Income Adjustments

$766,000

($175,000)

$254,000

$502,000

Changes in Operating Activities

Accounts Receivable

$187,000

($426,000)

$60,000

($216,000)

Changes in Inventories