FIN 435 Class Web Page, Spring '16
Instructor: Maggie Foley
Weekly SCHEDULE, LINKS, FILES and Questions
Coverage, HW, Supplements
WSJ Papers for Discussion in following week
Daily earning announcement: http://www.zacks.com/earnings/earnings-calendar
IPO schedule: http://www.marketwatch.com/tools/ipo-calendar
Chapter 3 Financial Statement Analysis
Chapter 3 Case study (first case study, due in the 4th week)
Q1: Why are financial statements important?
Q2: What are the three major financial statements?
Q3: Free cash flow: concept and equation. What is FCF?
Capital expenditure = increases in NFA + depreciation
Or, capital expenditure = increases in GFA
Chapter 4 Ratio Analysis
Chapter 4 case study (second case study, due in the 4th week)
HW of chapters 3, 4 (due on 1/27)
1. Firm A's sales last year = $280,000, net income = $23,000. What was its profit margin? (8.21%)
2. Firm A’s total assets = $415,000 and its net income = $32,750. What was its return on total assets (ROA)? (7.89%)
3. Firm A’s total common equity = $405,000 and its net income = $70,000. What was its ROE? (17.28%)
4. Firm A’s stock price at the end of last year = $23.50 and its earnings per share for the year = $1.30. What was its P/E ratio? (18.08)
5. Meyer Inc's assets are $625,000, and its total debt outstanding is $185,000. The new CFO wants to establish a debt/assets ratio of 55%. The size of the firm does not change. How much debt must the company add or subtract to achieve the target debt ratio? ($158,750)
6. Chang Corp. has $375,000 of assets, and it uses only common equity capital (zero debt). Its sales for the last year were $595,000, and its net income was $25,000. Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15.0%. What profit margin would the firm need in order to achieve the 15% ROE, holding everything else constant? ( 9.45%)
7. A firm has $300 in inventory, $600 in fixed assets, $200 in accounts receivable, $100 in accounts payable, and $50 in cash. What is the amount of the current assets? ($550)
8. Art's Boutique has sales of $640,000 and costs of $480,000. Interest expense is $40,000 and depreciation is $60,000. The tax rate is 34%. What is the net income? ( $39,600)
9. Use the following information to prepare the cash flow statement in 2008 of Nabors, Inc.
Useful website for stock picks
www.finviz.com (stock screener)
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))
To get FV, use FV function. =abs(fv(rate, nper, pmt, pv))
To get PV, use PV function = abs(pv(rate, nper, pmt, fv))
To get r, use rate function = rate(nper, pmt, pv, -fv)
To get number of years, use nper function = nper(rate, pmt, pv, -fv)
To get annuity payment, use PMT function = pmt(rate, nper, pv, -fv)
To get Effective rate (EAR), use Effect function = effect(nominal_rate, npery)
To get annual percentage rate (APR), use nominal function = nominal(effective ratge, npery)
Chapter 5 HW Assignments
1. 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? How much is the lump sum value as of today (NPV)?
2. 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)
3. 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)
4. 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)
9. 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)
14. What is the future value of weekly payments of $25 for six years at 10 percent? ($10,673.90)
Chapter 6 Interest rate
chapter 6 case study (third case study, due in the 4th week)
Market data website:
http://finra-markets.morningstar.com/BondCenter/Default.jsp (FINRA bond market data)
Market watch on Wall Street Journal has daily yield curve and interest rate information.
r = r* + IP + DRP + LP + MRP
r = required return on a debt security
r* = real risk-free rate of interest
IP = inflation premium
DRP = default risk premium
LP = liquidity premium
MRP = maturity risk premium
MRPt = 0.1% (t – 1)
DRPt + LPt = Corporate spread * (1.02)(t−1)
HW1 The following yields on U.S. Treasury securities were taken from a financial publication:
HW2 You read in The Wall Street Journal that 30-day T-bills are currently yielding 5.5%. Your brother-in-law, a broker at Safe and Sound Securities, has given you the following estimates of current interest rate premiums:
On the basis of these data, what is the real risk-free rate of return?
HW3 The real risk-free rate is 3%. Inflation is expected to be 2% this year and 4% during the next 2 years. Assume that the maturity risk premium is zero. What is the yield on 2-year Treasury securities? What is the yield on 3-year Treasury securities?
HW4 A Treasury bond that matures in 10 years has a yield of 6%. A 10-year corporate bond has a yield of 8%. Assume that the liquidity premium on the corporate bond is 0.5%. What is the default risk premium on the corporate bond?
HW5 The real risk-free rate is 3%, and inflation is expected to be 3% for the next 2 years. A 2-year Treasury security yields 6.2%. What is the maturity risk premium for the 2-year security?
HW6 One-year Treasury securities yield 5%. The market anticipates that 1 year from now, 1-year Treasury securities will yield 6%. If the pure expectations theory is correct, what is the yield today for 2-year Treasury securities?
Q: What is negative term premium? Why do investors pay more for long term treasury bonds than for short term bond?
Q: Why does the market believe that Fed will not raise interest rate in the upcoming FOMC meeting?
Q: Do you think that Fed is responsible for the recent volatile market?
Q: What is the issue here? Why does it sound like it is so difficult for bondholders to get their investment back?
Q: Who is the new CEO of Adidas? Can he turn the company around as expected?
Q: What is the problem that bitcoin is facing in this developer’s view? Why is it hard to fix this problem?
Q: China has $4 trillion foreign exchange reserve. So can China manipulate its currency?
Q: Why? ECB is still pushing for easy monetary policy. US starts to raise interest rate. Do the differences in monetary policy have any impact in currency value?
Q: Why are the European banks in a state of delayed recovery, as compared with their US peers?
Q: Why does Amundi buy lower rated debt in European market but buy investment grade bond in the US market?
Q: What are the pros and cons in buying companies from private equity firms?’
Q: What does Venezuela’s economy reply on? Oil. Right? So why can the fall in oil prices cause default of this country?
Q: What is the concern here is a person sits in more than four seats?
What is interest rates
How interest rates are set
What happens if Fed raise interest rates
Mid Term (due of cases, and the your answers of all WSJ Questions in the mid column)
Mid Term Exam Part I – Conceptual
Study Guide (close book section)
Multiple Choice Questions (15*2=30 and the last two are bonus questions)
6. Default risk premium, maturity risk premium and liquidity risk premium question
7. Interest rate question (interest rate break down)
8. Interest rate break down.
9. Yield curve question
11. Default risk premium, maturity risk premium and liquidity risk premium question
12. Interest rate question (interest rate break down)
13. Interest rate break down.
14. Yield curve question
15. Comparison of interest rates
16. Comparison of interest rates
17. Expectation theory
Mid Term Exam Part II – Calculation – Study Guide
1. Interest rate calculation: given real rate, inflation, market risk premium.
2. Calculate default risk premium: given t bond rate, corp bond rate, liquidity premium, market risk premium.
3. Calculate default risk premium, given t bond rate, corp bond rate, liquidity premium, market risk premium.
4. Maturity risk premium, given corp bond rate, t bond rate, real rate, default premium, liquidity premium and inflation.
5. Expectation theory to figure out future rate.
6. Expectation theory to figure out future rate.
7. Expectation theory to figure out future rate.
8. Time value of money question
9. Time value of money question
10. Time value of money question
11. Time value of money question
12. FCF calculation
13. FCF calculation
14. Operating cash flow calculation
15. Investment cash flow calculation
16. Financing cash flow calculation
17. Ratio analysis calculation
18. Ratio analysis calculation
19. Ratio analysis calculation
20. Yield curve questions
21. Yield curve questions (optional)
22. Yield curve questions (optional)
Final is non-cumulative and starts from here J
Chapter 7 Bond Evaluation
Market data website:
http://finra-markets.morningstar.com/BondCenter/Default.jsp (FINRA bond market data)
Market watch on Wall Street Journal has daily yield curve and bond yield information.
3. Bond Online
No other Homework for chapter 7. Just finish the case study and review for the following.
1. Can calculate price and YTM.
2. Understand relation between price and YTM.
3. Understand why bond price is changing daily.
4. Can figure out YTC.
5. Can draw graph of price and YTM.
6. Understand why investing in bond is risky as well. Understand the resources of risk in bond market.
7. Can calculate current yield, capital gain yield.
8. Can find bond information on FINRA.
To calculate bond price in EXCEL (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
Math Equations (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
1. AAA firm’ bonds will mature in eight years, and coupon is $65. YTM is 8.2%. Bond’s market value? ($903.04)
2. AAA firm’s bonds’ market value is $1,120, with 15 years maturity and coupon of $85. What is YTM? (7.17%)
3. AAA firm’ bonds market value is $1,050, with six years to maturity and coupon of $75. Current yield? (7.14%)
4. AAA firm’s semiannual bond has 12 years maturity and coupon rate of 8.75% semiannually. The firm also sells annual bonds with all the same condition except the coupon is paid annually (means ytm is the same). What is the price of this annual coupon bond?(hint: the two bonds should offer the same annual effective rate, not semi-rate * 2) (986.25)
5. Sadik Inc.'s bonds currently sell for $1,180 and have a par value of $1,000. They pay a $105 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,100. What is their yield to call (YTC)? (7.74%)
6. Malko Enterprises’ bonds currently sell for $1,050. They have a 6-year maturity, an annual coupon of $75, and a par value of $1,000. What is their current yield? (7.14%)
7. Assume that you are considering the purchase of a 20-year, noncallable bond with an annual coupon rate of 9.5%. The bond has a face value of $1,000, and it makes semiannual interest payments. If you require an 8.4% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond? ($1,105.69)
8. Grossnickle Corporation issued 20-year, noncallable, 7.5% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 19 years to maturity? ($1,232.15)
9. McCue Inc.'s bonds currently sell for $1,250. They pay a $90 annual coupon, have a 25-year maturity, and a $1,000 par value, but they can be called in 5 years at $1,050. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. What is the difference between this bond's YTM and its YTC? (Subtract the YTC from the YTM; it is possible to get a negative answer.) (2.62%)
10. Taussig Corp.'s bonds currently sell for $1,150. They have a 6.35% annual coupon rate and a 20-year maturity, but they can be called in 5 years at $1,067.50. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. Under these conditions, what rate of return should an investor expect to earn if he or she purchases these bonds? (4.2%)
11. A 25-year, $1,000 par value bond has an 8.5% annual payment coupon. The bond currently sells for $925. If the yield to maturity remains at its current rate, what will the price be 5 years from now? ($930.11)
Q: The government is suing Wells Fargo for what? Shall Wells Fargo be fully responsible for what had happened in the mortgage market?
Recession alarm may not ring this time (Paper not available in wsj yet. Hard copy is available)
Q1: In this paper, the author summarizes the anticipation of the economy in association with different types of yield curve. Please list each yield curve and its predication of the economy.
Q2: “Long term interest rate fell below short term interest rates, producing a yield curve inversion” – This is an indicator of upcoming recession.
Q1: Why does Mr. Fuss believe that the current market stress differs from those in the past?
Q2: In Mr. Fuss’ view, junk bonds are worth buying now. Why?
Q: Not raising interest rate is the only strategy that Fed can do to save the market. But it might not work this time. What is your opinion?
Q: What is debt burden? Where does it come from? Why is it getting less bad?
Q: Now it is a interest rate war. Where can investors invest when interest rate is actually negative? Money will flow out to other countries. Not a concern? What benefit can negative interest rate bring?
Q: The offer represented 75% of the amount bondholders say they are owed. Why did Argentina default on debt in 2001? Do you think that this resolution is reasonable? Why or why not?
Treasury Bond Auction Website
What is duration? (not required but useful)
Duration is defined as the weighted average of the present value of the cash flows and is used as a measure of a bond price's response to changes in yield.
If duration = 10 years, then for 1% increase in interest rate, the bond price will drop by 10 times of 1%, which is 10%.
You can calculate duration in excel.
DURATION(settlement, maturity, coupon, yld, frequency, [basis])
How to calculate bond prices using exact
date? (not required but useful)
Use price function in Excel. Returns the price
per $100 face value of a security that pays periodic interest.
PRICE(settlement, maturity, rate, yld, redemption, frequency, [basis])
Calculate bond yield using exact date?(not required but useful)
Use YIELD to calculate bond yield.
redemption, frequency, basis)
Excel yield function video
Risk of Bonds
Bond risk (video)
Bond risk – credit risk (video)
Bond risk – interest rate risk (video)
Chapter 8 Risk and Return
Summary of the steps in the case study:
1st, calculate expected return based on probabilities and corresponding returns
2nd, calculate standard deviation based on probabilities and corresponding returns
3rd, calculate expected return and standard deviation based on probabilities historical returns
4th, Use corr function to calculate correlation based on two stocks’ historical returns.
5th, Understand the concept of correlation and can pick stocks based on correlations
6th,understand what is beta and can calculate beta using slope function
7th, can use CAMP to calculate stock returns.
Chapter 9 Stock Return Evaluation
Stock screening tools
· Reuters stock screener to help select stocks
· WSJ stock screen
· Simply the Web's Best Financial Charts
You can find analyst rating from MSN money
Zacks average brokerage recommendation is Moderate Buy
How to pick stocks
Capital Asset Pricing Model (CAPM)Explained
Ranking stocks using PEG ratio
Summary of stock screening rules from class discussion
PE<15 (? FB’s PE>100?)
Analyst ranking: strong buy only
Zacks average =1 (from Ranking stocks using PEG ratio)
Useful website (recommended by David and Phil. Thanks, David and Phil)
Pick a couple of stocks using the techniques learned today. And explain why you pick those stocks. How diversified is your portfolio?
Q: What is going on in the market? And why?
Negative rate nod as yields decline
Q: Sorry the paper is not available on WSJ.com.
Tell us your understanding of negative interest rate, please.
Q: What is “stress test” mentioned in the paper? After the release of the stress test results, in your view, the market’s view for banks will be more pessimistic or more optimistic?
Q: In your view, is that harder to buy back its own stocks than its own bond? Which way is more effective? Definitely, stocks (my personal opinion). So why does DB buy back bond instead?
Q: Goldman Sachs once helped Greek to use swap to hide its borrowing. So reaching an agreement on derivatives is very important. Summarize the purpose of this agreement.
Q: “Italian clients found themselves with basically nowhere to go”. What is your opinion on this remark. Is that impossible to evade tax in US as that said in Italy?
Stock trading will be ended by 2/24.
Chapter 10 WACC
Chapter 10 Review
Discount rate to figure out the value of projects is called WACC (weighted average cost of capital)
WACC = weight of debt * cost of debt *(1-tax rate) + weight of equity *( cost of equity)
Cost of debt = rate(nper, coupon, price – flotation costs, 1000)
Cost of Equity = D1/(Po – Flotation Cost) + g ---- Sorry, should take out flotation costs
D1: Next period dividend; Po: Current stock price; g: dividend growth rate
Cheaper to raise capital from debt market. Why? Why not 100% financing via borrowing?
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?
Kd = rate(10, 5%*1000, 950-950*7%, 1000)*(1-40%)
Ke = 5/(50 – 0) + 5%
WACC = Wd*Kd +We*Ke =
HOMEWORK of Chapter 10
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.
Chapter 11: Capital Budgeting
NPV Excel syntax
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
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.
MIRR Excel syntax
MIRR(values, finance_rate, reinvest_rate)
Values: required. An array of a reference to cells that contain numbers.
These numbers represent a series of payments (negative numbers) and income (positive values) occurring at regular period.
Finance_rate: Required. The interest rate you pay on the money used in the cash flow.
Reinvest_rate: Required. The interest rate you receive on the cash flows as you reinvest them
Chapter 12: Cash flow estimation
Last Six WSJ papers
Q: Why FORM 1099-B is the worst? Your opinion?
Q: What is the goal of Fed with respect to inflation? Does it mean that Fed raise interest rate due to concerns of inflation?
Q: As a mutual fund manager, shall you have a short term or long term goal?
Q: Why UK and Germany do not get along on this subject?
Q: As said, what about Europe?
Q: As an investor, what is your opinion about the impact of the so called BREXIT?
Exit Exam, Final and Due of Cases, HWs, and WSJ Qs
Final Exam Conceptual Section Study Guide
Multiple Choice: Conceptual (1*30=30, total 34 questions)
1-17. Conceptual questions from bond chapter
· What is bond rating? What is the association between bond rating and bond yield and price changes.
· Association between bond rating and leverage.
· The association between bond price, yield, par value, coupon, maturity, etc.
· Differences between long term bond and short term bond, and the differences when there is a sudden change in interest rate. Which one is more risky?
· Definition of current yield.
· What is flotation cost.
· Concept of diversification
· Risk, return and standard deviation
· What is beta? What is CAPM? What is Security market line? What is association between beta and stock return.
· How to pick stocks? (Hint: based on beta, not standard deviation for portfolio)
Final Calculation Sections (Open Book)
Multiple Choice Questions (2.5* 16 = 40, short answer question 1: 3*5=15, short answer question 2: 5*3=15)
1. Calculate payback period
2. Calculate multi-irrs, given uneven cash flow
3. Calculate IRR, given cash flow
4. Calculate crossover rate, given cash flows of two projects
5. Calculate MIRR
6. Given MACRS table, calculate depreciation of a certain year.
7. Given probability and return table (Chapter 8 case) calculate expected return, using sumproduct
8. Given a series of returns, calculate the standard deviation using stdevp (Chapter 8 case)
9. Given probability and return table (Chapter 8 case) calculate standard deviation (Tedious but doable, refer to case of chapter 8)
10. Stock price calculation using Po=D1/(r-g)
11-16: Bond calculations: Price calculation, yield to maturity, current yield calculation.
Short answer questions (3 questions * 5 = 15 points)
Similar to case study of chapter 12, calculate the followings.
1. What is the initial cost of this project?
2. What is the operating cash flows from year 1 to year 4
3. What is the operating cash flows in year 5 (last year)
Short Answers (total 15 points)
1. Find after tax cost of debt
2. Find cost of equity
3. What is weight of debt?
4. What is weight of equity?
5. What is WACC?