FIN 500 Class Web Page, Spring '16

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

Videos (optional)

Week 1

Market Watch Game

Use the information and directions below to join the game.

http://www.marketwatch.com/game/jufin500

2.      Password for this private game: havefun.

4.

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 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

HOMEWORK of Chapters 5 and 6

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)

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)

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?
(\$6,118.35)

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)

Fall of Lehman Brother part i

Fall of Lehman Brother part ii

Fall of Lehman Brother part iii

Fall of Lehman Brother part iv

Fall of Lehman Brother part v

Fall of Lehman Brother part vi

How the stock market works

How the market works

Week 2,  3

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?

How Bonds Work (video)

FINRA – Bond market information

WAL-MART STORES INC

Coupon Rate 3.300%         Maturity Date  04/22/2024

 Symbol CUSIP Next Call Date 01/22/2024 Callable Yes Last Trade Price \$106.18 Last Trade Yield 2.512% Last Trade Date 04/09/2015 US Treasury Yield —

Credit and Rating Elements

 Moody's Rating Aa2 (04/21/2014) Standard & Poor's Rating AA (04/16/2014) Fitch Rating AA (09/30/2014) Coupon Payment Frequency Semi-Annual

HW due on 3/30 before 6pm

Refer to the above table and answer questions 1-8 (Use 2015 as current year; Sorry for not updating).

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%)

Week 3

Week 4 –

Mar 28

Chapter 8 Stock Valuation

1.    Introduction

from google.com/finance for Tesla Motors Inc  (NASDAQ:TSLA)

226.89

Mar 30, 4:11PM EDT

 Range 226.50 - 235.50 52 week 141.05 - 286.65 Open 235.09 Vol / Avg. 3.91M/4.73M Mkt cap 29.95B P/E -

 Div/yield - EPS -6.90 Shares 132.06M Beta 1.25 Inst. own 68% In Millions of USD (except for per share items) As of 2015-12-31 Total Assets 8,092.46 Total Current Liabilities 2,816.27 Long Term Debt 2,082.42 Capital Lease Obligations - Total Long Term Debt 2,082.42 Total Debt 2,715.59 Deferred Income Tax - Minority Interest - Other Liabilities, Total 2,104.82 Total Liabilities 7,003.52 Redeemable Preferred Stock, Total - Preferred Stock - Non Redeemable, Net - Common Stock, Total 0.13 Additional Paid-In Capital 3,414.69 Retained Earnings (Accumulated Deficit) -2,322.32 Treasury Stock - Common - Other Equity, Total -3.56 Total Equity 1,088.94 Total Liabilities & Shareholders' Equity 8,092.46 Shares Outs - Common Stock Primary Issue - Total Common Shares Outstanding 131.43

2.      Stockholders’ rights

3.      Risk and return – where to find how risky the stock is

4.      Calculate stock prices

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

2) Given all dividends Dividend growth model
Po = D1/(r-g); r = D1/Po + g

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

Exercise:

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

2.      The current market price of stock is \$90 and the stock pays dividend of \$3 with a growth rate of 5%. What is the return of this stock?

5.      Avoid emotional investing

1) Herding

2) Overconfidence

3) Mental accounting

4) Anchoring

5) Gamblers 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 next week)

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)
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? (\$3.3)

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)

Week 5

Chapter 9 Capital Budgeting

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

 Period Project A Project B 0 -500 -400 1 325 325 2 325 200 IRR NPV

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
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)?

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?

Chapter 14 Cost of Capital

A firm borrows money from bond market. The price they paid is \$950 for the bond with 5% coupon rate and 10 years to mature. Flotation cost is \$40.  For the new stocks, the expected dividend is \$2 with a growth rate of 10% and price of \$40. The flotation cost is \$4. The company raises capital in equal proportions i.e. 50% debt and 50% equity (such as total \$1m raised and half million is from debt market and the other half million is from stock market). Tax rate 34%. What is WACC (weighted average cost of capital, cost of capital)?

1)      Why does the firm raise capital from the financial market? Is there of any costs of doing so? What do you think?

2)      What is cost of debt?

(Kd = rate(nper, coupon, -(price – flotation costs \$)), 1000)*(1-tax rate))

3)      Cost of equity? (Ke = (D1/(Price – flotation costs \$)) +g, or Ke = Rrf + Beta*MRP))

Why no tax adjustment like cost of debt?

4)      WACC=Cost of capital = Percentage of Debt * cost of debt + percentage of stock * cost of stock = Wd*Kd + We* Ke

Meaning: For a dollar raised in the capital market from debt holders and stockholders, the cost is WACC (or WACC * 1\$ = several cents, and of course, the lower the better but many companies do not have good credits)

No homework for chapter 14

# ‘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, tooanalyzing 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 ruleshelp 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 algorithmsone 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 resourceseither people or money or attentioncan benefit from simple rules.

WSJ: Can you give an example of how that simplification works in a company?

Sull: Theres 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 didnt 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 projectsthat 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 Frontierstuff 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 factorsis 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, youll 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. Theyre easy to remember, they dont confuse or stress you, they save time.

They should be tailored to your specific goals, so you choose the rules based on what exactly youre 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: Lets 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 insteadhe decided what the most important goals were. You cant 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 thats where the money will stretch farther.

Week 6

Chapter 13 Return, Risk and Security Market Line

Video of Class on 11/24/2015 (www.jufinance.com/fin500_15f)

Study Guide

1.      Pick three stocks. Has to be the leading firm in three different industries. (We chose Tesla, MNKD, 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 March 2011 to April 2016)

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 “April 13th, 2016” and “April 13th, 2011”, respectively. (Download it to Excel

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

(Tesla raw data,  Wal-mart raw data  , MNKD raw data, and SP500 are here)

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 and the portfolio (1/3 of investment in each stock)

6.      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

Use slope function to find beta in Excel    beta = slope(return of each stock, market return)

7.      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.

Week 7 ,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)