FIN 500 Class Web Page, Fall '15
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
Week |
Coverage, HW, Supplements -
Required |
WSJ Papers Reference |
Videos (optional) |
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Week 1 , 2 |
Market
Watch Games Use the information
and directions below to join the game. 1. URL for your game: 2. Password for this private game: havefun! 3. Click on the 'Join Now' button to get
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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! General
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 5 Time value of money
1 Concept of FV, PV, Rate, Nper Calculation of FV, PV, Rate, Nper Concept of interest rate, compounding rate, discount rate Chapter 6 Time Value of Money
2 Concept of PMT, NPV Calculation of FV, PV, Rate, Nper, PMT, NPV, NFV Concept of EAR, APR Calculation of EAR, APR Week 1 In Class Exercise
Solutions (Updated) HW of week 1: 1. 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) 2. 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) 3. 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) 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) 5. 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) 6. 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) 7. 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) 8. 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)
10. 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) 11. 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) 12. 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) 13. 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) 14. What is the future value of weekly payments of $25 for
six years at 10 percent? ($10,673.90) 15. 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) 16. 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? 17. 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) 18. You want to save $75 a month for the next 15 years and
hope to earn an average rate of return of 14 percent. How much more will you
have at the end of the 15 years if you invest your money at the beginning of
each month rather than the end of each month? ($530.06) 19. What is the effective annual rate of 10.5 percent
compounded semi-annually? (10.78 percent) 20. What is the effective annual rate of 9 percent
compounded quarterly? (9.31 percent) 21. Fancy Interiors offers credit to customers at a rate of
1.65 percent per month. What is the effective annual rate of this credit
offer? (21.70 percent) 22. What is the effective annual rate of 12.75 percent
compounded daily? (13.60 percent) 23. Your grandparents loaned you money at 0.5 percent interest
per month. The APR on this loan is _____ percent and the EAR is _____
percent. (6.00; 6.17) 24. Three years ago, you took out a loan for $9,000. Over
those three years, you paid equal monthly payments totaling $11,826. What was
the APR on your loan? (18.69 percent) |
The one skill you need in today’s jobs market…
American companies are rewarding people who have one special
quality. Jobs like computer
research scientists are in higher demand than the average
rate of job growth, government figures show, but that’s also because they are
among the math- and computer-centric jobs that also require polished social
skills, according to a new study by David
Deming, an associate professor of education and education at Harvard Graduate
School of Education and faculty research fellow at the National Bureau of
Economic Research, private and nonpartisan research organization based in
Cambridge, Mass. “The slow growth of
high-paying jobs in the U.S. since 2000 and rapid advances in computer
technology have sparked fears that human labor will eventually be rendered obsolete,”
he writes. The latest example: A machine that claims to be the world’s first laundry-folding robot,
which aims to liberate users from 375 days of this particular chore over the
course of a lifetime. But he concludes, “The labor market increasingly
rewards social skills.” Deming found that jobs requiring high social skills are
outpacing those jobs requiring low social skills, regardless of whether they
require people with high/low knowledge of math.He
analyzed jobs that required math and social skills among the Occupational
Information Network, a nationally representative survey on job tasks
administered by the U.S. Department of Labor, and cross-referenced these with
job growth from the U.S. Census. One caveat: There are a lot more high-paying jobs that require
high math skills and high social skills. Jobs with high social and math
skills include registered nurses, physicians, financial managers, engineers,
and jobs with high social but low math skills include police officers,
detectives, social workers, lawyers and dentists. While millions of jobs have
been replaced by computers within the last
half-century, nearly all job growth since 1980 has been in occupations that
are relatively social skill-intensive, Deming says. Jobs that require high
levels of math but low levels of social interaction have fared especially
poorly, he adds. These include book-keeping, machinists, bank tellers,
statistical clerks, electricians and general office clerks. (Jobs that
require both low math and social skills fared even worse; they include
carpenters, auto mechanics, truck drivers, laborers and welders.) The growing
importance of social skills can potentially explain a gradual closing of the
gender gap in earnings, Deming says. (Women dominate in fields such
as nursing, teaching, social work and education, accounting, which require
high social skills.) Read: Here’s one thing Mark Zuckerberg
looks for in a job candidate His research is supported by
a 2014 report by the Pew Research Center, a
nonprofit think-tank based in Washington, D.C. That study’s authors
interviewed nearly 1,900 experts, including programmers, executives,
economists and Internet entrepreneurs. Automation and artificial intelligence
will permeate most jobs by 2025, they found, but experts were divided over
whether this will displace more jobs than they create. “Computers had typically been thought of as best suited for
jobs that involve routine, repetitive tasks that can easily be reduced to
lines of code,” they found. “But with computer-controlled devices and systems
already capable of doing far more than projected even a few years ago, many
experts now see more complex jobs coming into play.” The Pew report looked at
everything from driverless cars potentially replacing taxi drivers or truck
drivers to artificial intelligence replacing legal clerks and, in some
cases, earnings reports released by automation instead of
journalists. “Certain types of jobs will resist the pressure of automation
than others,” says Aaron Smith, associate director of research at Pew, and
co-author of the report, which is part of an ongoing 10-year project. “Traits
such as empathy, creative thinking and judgment are things that machines will
never be able to do, or anything approaching a short timeline. We still have
a lot to offer.” (The Pew report canvassed opinion and, unlike Deming’s
recent study, was not a nationally representative survey.) Why are social skills still so important in a market when so
many jobs are automated? This should be reflected in
how students are taught in schools. “If you close your eyes and picture what
a classic fourth grade math class looks like, it’s
obedient children and sitting at their desk passively receiving information
from their teacher,” Deming says. “That’s the industrial revolution model for
education. It’s important, but it’s not enough. We need to encourage schools
to look like the modern workplace.” (In fact, one
recent study found that students who use computers at school
frequently do worse than those who don’t.) Computers are becoming more
cognitively sophisticated, beating people at the television show ‘Jeopardy’
and are even world-class chess champions, Deming
says. “But the one thing that computers aren’t good at is social
interaction.” Of course, this also means the employee — not the computer —
must take responsibility when things go wrong. As C-3PO said in “Star Wars”
(1977): “I don’t know what all this trouble is about, but I’m sure it must be
your fault.” |
Fall of Lehman Brother part i https://www.youtube.com/watch?v=aPOtQkSiCk8 Fall of Lehman Brother part ii https://www.youtube.com/watch?v=l0N_FX0kUMI&feature=relmfu Fall of Lehman Brother part iii https://www.youtube.com/watch?v=YmZd3vVoPgY&feature=relmfu Fall of Lehman Brother part iv https://www.youtube.com/watch?v=FcO_dQCJ3HA&feature=relmfu Fall of Lehman Brother part v https://www.youtube.com/watch?v=L4gqzRePtes Fall of Lehman Brother part vi https://www.youtube.com/watch?v=Ms_tnEe4wFk&feature=relmfu
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Week 3 |
Chapter 7 Bond
Market 1.
Definition 2.
FINRA.org (www.findra.org, è
Investor center è market data è
bond è
corporate bond) 3.
Cash flows of a
bond Annual coupon bond, semi-annual coupon
bond. Zero coupon bond. 4.
Bond Pricing Annual coupon bond, semi-annual
coupon bond. Zero coupon bond. 5.
Bond Yield Annual coupon bond, semi-annual
coupon bond. 6.
Bond rating
agencies Three rating agencies; how to
understand the ratings 7.
Term Structure (yield
curve) Summary of bond pricing excel functions To calculate bond
price (annual coupon bond): Price=abs(pv(yield to maturity, years left to maturity, coupon
rate*1000, 1000) To calculate yield to
maturity (annual coupon bond):: Yield to maturity =
rate(years left to maturity, coupon rate *1000, -price, 1000) To calculate bond
price (semi-annual coupon bond): Price=abs(pv(yield to maturity/2, years left to maturity*2,
coupon rate*1000/2, 1000) To calculate yield to
maturity (semi-annual coupon bond): Yield to maturity =
rate(years left to maturity*2, coupon rate *1000/2, -price,
1000)*2 To calculate number of years left(annual coupon bond) Number of years =nper(yield to maturity,
coupon rate*1000, -price, 1000) To calculate number of years left(semi-annual coupon bond) Number of years =nper(yield to maturity/2,
coupon rate*1000/2, -price, 1000)/2 To calculate coupon (annual coupon bond) Coupon = pmt(yield to
maturity, number of years left, -price, 1000) Coupon rate = coupon /
1000 To calculate number of years left(semi-annual coupon bond) Number of years =
pmt(yield to maturity/2, number of years left*2, -price, 1000) Coupon rate = coupon /
1000 (annual coupon bond) (semi annual coupon bond) Homework WAL-MART
STORES INC Coupon Rate 3.300%
Maturity Date 04/22/2024
Credit and Rating
Elements
Refer
to the above table and answer questions 1-8. 1. How much is the coupon? 2. This WMT bond is callable. This means that when interest rate increases, Wal-Mart might call this bond back from bondholders. True _____ False _____ 3. Moody’s rating of this bond is Aa2 for this bond. Assume that GE’s bond rating is A. JEA’s rating is B+. Treasury bond’s rating is AAA. Rank the risk of the four bonds from low to high. 4. Calculate the current yield based on the above table. (3.11%) 5. Imagine that the interest rate has increased to 4%. Calculate the new bond price. (semi-annual, coupon rate = 3.3%, 9 years left). ($947.53) 6. Imagine that the interest rate has increased to 4%. Calculate the new bond price. (annual, coupon rate = 3.3%, 9 years left). ($947.95) 7. Imagine that the price is $850. Calculate the new yield to maturity. (semi-annual, coupon rate = 3.3%, 9 years left). (5.43%) 8. Imagine that the price is $850. Calculate the new yield to maturity. (annual, coupon rate = 3.3%, 9 years left). (5.45%) 9.
9.
Firm AAA’s bonds price = $850. Coupon
rate is 5% and par is $1,000. The bond has six years to maturity. Calculate
for current yield? (5.88%) 10.
For a zero coupon bond, use the following
information to calculate its yield to maturity. (14.35%) Years left to maturity = 10 years. Price = $250. 11.
For a zero coupon bond, use the following
information to calculate its price. ($456.39) Years left to maturity = 10 years. Yield = 8%. 12. Imagine that an annual coupon bond’s coupon rate = 5%, 15 years left. Draw price-yield profile. (hint: Change interest rate, calculate new price and draw the graph). 13.
IBM 5 year 2% annual coupon bond is
selling for $950. How much this IBM bond’s YTM? 3.09% 14.
IBM 10 year 4% semi-annual coupon bond
is selling for $950. How much is this IBM bond’s YTM? 4.63% 15.
IBM 10 year 5% annual coupon bond
offers 8% of return. How much is the price of this bond? 798.7 16.
IBM 5 year 5% semi-annual coupon bond
offers 8% of return. How much is the price of this bond? $878.34 17.
IBM 20 year zero coupon bond offers 8% return.
How much is the price of this bond? 18.
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? (8.90%) 19.
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? ($895.43) 20.
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) 21.
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%) 22. 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%) Mid Term (chapters 5, 6, 7,8) due on 11/17/2015 |
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Introduction
to bond investing (video) Treasury Bond Auction
and Market information Bond risk (video) Bond risk – credit risk (video) Bond risk – interest rate risk (video) Bond risk – how to reduce your risk (video)
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Week 4 |
Chapter 8 Stock Valuation from google.com/finance 58.70 +0.21 (0.36%) After
Hours: 58.63 -0.07 (-0.11%) Nov
10, 4:58PM EST
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Fall of Lehman Brother part i https://www.youtube.com/watch?v=aPOtQkSiCk8 Fall of Lehman Brother part ii https://www.youtube.com/watch?v=l0N_FX0kUMI&feature=relmfu Fall of Lehman Brother part iii https://www.youtube.com/watch?v=YmZd3vVoPgY&feature=relmfu Fall of Lehman Brother part iv https://www.youtube.com/watch?v=FcO_dQCJ3HA&feature=relmfu Fall of Lehman Brother part v https://www.youtube.com/watch?v=L4gqzRePtes Fall of Lehman Brother part vi |
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1. Comparison between bond and stock
2.
Stockholders’
rights 3.
Risk
and return – where to find how risky the stock is 4.
Calculate
stock prices 1) Given next dividend and
next period price 2)
Given all dividends – Dividend growth model 5.
Avoid
emotional investing 1) Herding 2)
Overconfidence 3) Mental
accounting 4) Anchoring
5) Gambler’s
fallacy 6) Momentum 6.
How
to pick stocks – Does it work? PE
ratio PEG
ratio (peg ratio vs. PE
ratio – video) Relative Strength Index (How To
Profit From The Relative Strength Index - RSI - Like A Pro Part 4)
HOMEWORK (Due on 11/17/2015) 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? (14.60
percent) 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? ($2.12) 4. 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? (10%) 5. 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? ($70.67) |
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Week 5 – Nov 17 |
Chapter 9 Capital Budgeting NPV, IRR,
Payback, PI, MIRR template (excel, simple, my contribution, updated) 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.
Chapter 9
Study Guide Part I: Single
project Consider
the following scenario. You
are reviewing a new project and have estimated the following cash flows:
Year 0: CF = -165,000
Year 1: CF = 63,120; NI = 13,620
Year 2: CF = 70,800; NI = 3,300
Year 3: CF = 91,080; NI = 29,100 Your required
return for assets of this risk level is 12%. 1) Using payback period method to make capital budgeting decision. 2) Using discounted payback period method to make capital budgeting decision. 3) Using net present value method (NPV) 4) Using profitable index method (PI) 5) Using the Internal Rate of Return method (IRR) 6) Using modified IRR method (MIRR) – on slide 75 Part II:
Multi-Projects
If the required rate of return
is 10%. Which project shall you choose? 1) How much is the cross over rate? 2) How is your decision if the required rate of return is 13%? 3) Rule for mutually exclusive projects: 4) What about the two projects are independent? More
on IRR – (non-conventional cash flow) (slide 73) Suppose an investment will cost
$90,000 initially and will generate the following cash flows: –
Year 1: 132,000 –
Year 2: 100,000 –
Year 3: -150,000 The
required return is 15%. Should we accept or reject the project? 1) How does the NPR profile look like? 2) IRR1= 3) IRR2= Exercise
(slide 82) An
investment project has the following cash flows: CF0 =
-1,000,000; C01 – C08 = 200,000 each If
the required rate of return is 12%, what decision should be made using NPV? How
would the IRR decision rule be used for this project, and what decision would
be reached? How
are the above two decisions related? HOMEWORK 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)? 2) If
the firm has a 10% required rate of return. How much is NPV (approach
2)? 3) If
the firm has a 10% required rate of return. How much is IRR (approach
3)? 4) If
the firm has a 10% required rate of return. How much is PI (approach
4)? 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 and PI. 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? |
‘Simple Rules’ for
Running a Business
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.” After that, only the “maybes”
were sent to management. This dramatically decreased the amount of time
management spend evaluating these projects–that time was decreased by almost
a factor of 10. Or, take Frontier Dental
Laboratories in Canada. They were working with a sales force of two covering
the entire North American market. Limiting their sales guidelines to a few
factors that made someone likely to be receptive to 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 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. |
Net Present Value NPV Explained with
NPV Example for NPV Calculation (Cartoon,
video)
https://www.youtube.com/watch?v=7FsGpi_W9XI Using Excel for Net Present Values, IRR's and MIRR's
https://www.youtube.com/watch?v=YgVQvn51noc |
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Week 6, 7 – Nov 24 |
Chapter
13 Return, Risk and Security Market Line Study
Guide 1. Pick
three stocks. Has to be the leading firm in three different industries. (We chose Tesla, Amazon, and Wal-mart) 2. From
finance.yahoo.com, collect stock prices of the above firms, in the past five
years (Here is the excel solution, from Dec 1st 2010 to Nov
2nd, 2015) Steps: Goto
finance.yahoo.com Search for the company Click on “Historical prices” in the left
column on the tope Change the starting date and ending date
to “December 1st, 2014” and “November 2nd, 2015”, respectively.
(last t Download it to Excel Delete all inputs, except “adj close” – this is the closing price adjusted for
dividend. (Amazon raw data, Tesla raw data, and Wal-mart raw
data are here) Merge the three datasets (Here is
the final dataset with closing prices of the three firms) 3.
Evaluate the performance of each stock:
average return, and risk (standard deviation) (return and risk
results in excel here) 4.
Let’s draw a normal distribution CURVE using the average
return and the standard deviation of each firm. (here it is in
Excel) Calculate the possibilities of profit or
loss levels for each firm. (Excel file here) 5.
Now let’s set up portfolio (equally valued
portfolio: 1/3 in each stock) 6. Evaluate
the performance of the portfolio: return, and risk (portfolio’s
return and risk calculation is here) 7. What
is your conclusion? 8. Imagine
you are rational and hold a highly diversified portfolio: return and risk of
this portfolio? Systematic risk vs. idiosyncratic risk; Beta and its calculation (Excel calculation is here) Use
slope function to find beta in Excel
beta = slope(return of each stock, market return) 9. SML(Security
market line) and CAPM (Capital asset pricing model) Stock
return = risk free rate + beta *(market return – risk free rate) ---- CAPM HOMEWORK: 1.
An investor currently holds the following
portfolio: He invested 30% of the fund in Apple with Beta equal 1.1. He also
invested 40% in GE with Beta equal 1.6. The rest of his fund goes to Ford,
with Beta equal 2.2. Use the above information to answer the following
questions. The beta for the portfolio is? 1.63. The
three month Treasury bill rate (this is risk free rate) is 2%. S&P500
index return is 10% (this is market return).
Now calculate the portfolio’s return. 15.04% 2.
The three month Treasury bill rate (this is risk
free rate) is 2%. S&P500 index return is 10% (this is market
return). 2. What is the value of A? 2% 3. What is the value of B? 10% 4. How much is the slope of the
above security market line? 8% 5. Your uncle bought Apple in January,
year 2000 for $30. The current price of Apple is $480 per share. Assume there
are no dividend ever paid. Calculate your uncle’s
holding period return. 15 times 6. Your current portfolio’s
BETA is about 1.2. Your total investment is worth around $200,000. You uncle
just gave you $100,000 to invest for him. With this $100,000 extra funds in
hand, you plan to invest the whole $100,000 in additional stocks to increase
your whole portfolio’s BETA to 1.5 (Your portfolio now worth $200,000 plus
$100,000). What is the average BETA of the new stocks to achieve your goal?
(hint: write down the equation of the portfolio’s Beta first) 2.10 7. Years Market r Stock A Stock B 1 3% 16% 5% 2 -5% 20% 5% 3 1% 18% 5% 4 -10% 25% 5% 5 6% 14% 5%
·
Calculate the average returns of the market r
and stock A and stock B. · Calculate the standard deviations of the market, stock A, and stock B. · Calculate the correlation of stock A and stock B. ·
Assume you invest 50% in stock A and 50% in stock
B. Calculate the average return and the standard deviation of the portfolio. · Calculate beta of stock A and beta of stock B, respectively. |
Excel Command: sumproduct(array1,
array2) stdevp(observation1, obv2, obv3,….) correl(stock
1’s return, stock 2’s return) beta
= slope(stock return, sp500 return) normdist(X,
mean, standard_dev, cumulative) Normal Distribution Syntax (https://support.office.com/en-us/article/NORMDIST-function-126db625-c53e-4591-9a22-c9ff422d6d58) NORMDIST(x,mean,standard_dev,cumulative) The NORMDIST function syntax has the following arguments: ·
X
Required. The value for which you want the distribution. ·
Mean
Required. The arithmetic mean of the distribution. ·
Standard_dev Required. The standard deviation of
the distribution. ·
Cumulative Required. A logical value that
determines the form of the function. If cumulative is TRUE, NORMDIST returns
the cumulative distribution function; if FALSE, it returns the probability
mass function. Remarks ·
If mean or standard_dev is
nonnumeric, NORMDIST returns the #VALUE! error
value. ·
If standard_dev ≤ 0, NORMDIST
returns the #NUM! error value. ·
If mean = 0, standard_dev = 1, and
cumulative = TRUE, NORMDIST returns the standard normal distribution,
NORMSDIST. ·
The equation for the normal density function (cumulative =
FALSE) is: ·
When cumulative = TRUE, the formula is the integral from
negative infinity to x of the given formula. |
The
Importance of Diversification
https://www.youtube.com/watch?v=RoqAcdTFVFY
Understanding Diversification in Stock Trading to Avoid
Losses
https://www.youtube.com/watch?v=FrmoXog9zig
How to Build a Portfolio | by Wall
Street Survivor
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Week 8 – Dec 8 |
Chapter 2 and 3: Financial Statement Analysis ******* 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. ******* Part II: Cash
Flow Statement ************** Use the above
information to prepare cash flow statement.
Answer
is here |
Cash
flow template (new and
simple, my contribution)
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Final-
part I and II (chapters 8, 9, 13, and
(2&3, ))- Exam is downloadable from blackboard
under course documents Due on the 14th |
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