BUS 420 Excel Project Part 2-calculate annual returns for Bartman, Reynolds, and the Market Index...

a. Use the data given to calculate annual returns for Bartman, Reynolds, and the Market Index, and then
calculate average returns over the five-year period. (Hint: Remember, returns are calculated by subtracting the
beginning price from the ending price to get the capital gain or loss, adding the dividend to the capital gain or loss,
and dividing the result by the beginning price. Assume that dividends are already included in the index. Also, you
cannot calculate the rate of return for 2004 because you do not have 2003 data.)
Data as given in the problem are shown below:
Bartman Industries
Year
Stock Price
Dividend
2009
$17.25
$1.15
2008
$14.75
$1.06
2007
$16.50
$1.00
2006
$10.75
$0.95
2005
$11.37
$0.90
2004
$7.62
$0.85

Reynolds Incorporated
Stock Price
$48.75
$52.30
$48.75
$57.25
$60.00
$55.75

Market Index
Dividend Includes Divs.
$3.00
11,663.98
$2.90
8,785.70
$2.75
8,679.98
$2.50
6,434.03
$2.25
5,602.28
$2.00
4,705.97

We now calculate the rates of return for the two companies and the index:
Bartman
24.7%
-4.2%
62.8%
2.9%
61.0%

Reynolds
-1.1%
13.2%
-10.0%
-0.4%
11.7%

Index
32.8%
1.2%
34.9%
14.8%
19.0%

29.5%

2009
2008
2007
2006
2005

2.7%

20.6%

Average

Note: To get the average, you could get the column sum and divide by 5, but you could also use the function wizard, fx.
Click fx, then statistical, then Average, and then use the mouse to select the proper range. Do this for Bartman and then
copy the cell for the other items.
b. Calculate the standard deviation of the returns for Bartman, Reynolds, and the Market Index. (Hint: Use the
function wizard to calculate the standard deviations..STDEV)

Bartman
31.5%

Standard deviation of returns

Reynolds
9.7%

Index
13.8%

Bartman seems to be more risky than both Reynolds and the index.
c. Now calculate the coefficients of variation Bartman, Reynolds, and the Market Index.
Divide the standard deviation by the averages.
Bartman
1.07

Coefficient of Variation

Reynolds
3.63

Index
0.67

Discuss numbers above
d. Construct a scatter diagram graph that shows Bartmans and Reynolds returns on the vertical axis and the
market indexs returns on the horizontal axis.
It is easiest to make scatter diagrams with a data set that has the X-axis variable in the left column, so we
reformat the returns data calculated above and show it just below.
Year

Index
32.8%
1.2%
34.9%
14.8%
19.0%

2009
2008
2007
2006
2005

70.0%

Bartman
24.7%
-4.2%
62.8%
2.9%
61.0%

Reynolds
-1.1%
13.2%
-10.0%
-0.4%
11.7%

Stock Returns vs. Index Returns

60.0%
St oc k Re t ur ns

50.0%
40.0%
30.0%

Bartman

Reynolds

20.0%
10.0%
0.0%
0.0%
-10.0%

10.0%

20.0%

-20.0%

30.0%

40.0%

Index Ret urns

Discuss graph above

e. Estimate Bartmans and Reynoldss betas as the slope of a regression with stock return on the vertical axis (yaxis) and market return on the horizontal axis (x-axis). (Hint: use Excels SLOPE function.) Are these betas
consistent with your graph above?
Bartman's beta =

1.54

Reynolds' beta =

-0.56

Discuss numbers above with tie-in to graph above

f. The risk-free rate on long-term Treasury bonds is 6.04%. Assume that the market risk premium is 5%. What is the expected
return on the market? Now use the SML equation to calculate the two companies required returns.
Market risk premium (RPM)=
Risk-free rate =

5.000%
6.040%

Expected return on market =

Risk-free rate
6.040%
11.040%

+
+

Market risk premium
5.000%

=

Risk Free +

Market Risk Premium

=
=

6.040%
13.734%

5.000%

1.539

=
=

=
=

6.040%
3.238%

5.000%

-0.560

Required return
Bartman:
Required return

Reynolds:
Required return

*

Beta

Discuss numbers above

g. If you formed a portfolio that consisted of 50% Bartman and 50% Reynolds, what would be its beta and its
required return?
The beta of a portfolio is simply a weighted average of the betas of the stocks in the portfolio, so this portfolio's beta
would be:
Portfolio beta =

0.49

h. Suppose an investor wants to include Bartman Industries stock in his or her portfolio. Stocks A, B, and C are
currently in the portfolio, and their betas are 0.769, 0.985, and 1.423, respectively. Calculate the new portfolios
required return if it consists of 25 percent of Bartman, 15 percent of Stock A, 40 percent of Stock B, and 20
percent of Stock C.

Bartman
Stock A
Stock B
Stock C

Beta
1.539
0.769
0.985
1.423

Portfolio Beta =

1.179

Required return on portfolio:

=
=
=

Portfolio Weight
25%
15%
40%
20%
100%
Risk-free rate +
6.04%
11.93%

Market Risk Premium *
5.00%

X
X

Beta
1.179

NOTE: Review your notes for the Chapter 4 lecture as well as the Chapter 4 excel video before proceeding.
Every yellow cell should have a formula or text, you should not type numbers in cells. (except for letter f starting data)

Chapter 4.

Rework Text Problem 4-12 using a spreadsheet. A 10-year 12 percent semiannual coupon bond, with a par value of
$1,000, may be called in 4 years at a call price of $1,060. The bond sells for $1,100. (Assume that the bond has just
been issued.)

W ork parts a through d with the spreadsheet. I would also recommend working these parts with a calculator to check your
spreadsheet answers.

a. What is the bond's yield to maturity?
Basic Input Data:
Years to maturity:
Periods per year:
Periods to maturity:
Coupon rate:
Par value:
Periodic payment:
Current price
Call price:
Years till callable:
Periods till callable:
YTM =

10
2
20
12%
$1,000
$60
$1,100
$1,060
4
8
This is a nominal rate, not the effective rate. Nominal rates are generally
quoted. Use the rate function to calculate.

5.18%

b. What is the bond's current yield?
Current yield =

Annual Coupon
$120.00
10.91%

/
/

Price
$1,100

c. What is the bond's capital gain or loss yield?
Cap. Gain/loss yield =

Note that this is an economic loss, not a loss for tax purposes.
d. What is the bond's yield to call?
Here we can again use the Rate function, but with data related to the call.
YTC =

This is a nominal rate, not the effective rate. Nominal rates are generally
quoted.
The YTC is lower than the YTM because if the bond is called, the buyer will lose the difference between the call price and
the current price in just 4 years, and that loss will offset much of the interest imcome. Note too that the bond is likely to be
called and replaced, hence that the YTC will probably be earned.
NOW ANSWER THE FOLLOWING NEW QUESTIONS USING PARTS OF THE DATA ABOVE:
e. How would the price of the bond be affected by changing interest rates? (Hint: Conduct a sensitivity analysis of
price to changes in the yield to maturity, which is also the going market interest rate for the bond. Assume that the
bond will be called if and only if the going rate of interest falls below the coupon rate. That is an oversimplification,
but assume it anyway for purposes of this problem.)
Nominal market rate, r:

12%

Note: We can value the bonds (called vs. not called) using different rates (in the table below).
(remember to use formulas (PV function) and check with your calculator).
The third column is a decision column, and IF statement works very well here (but, is not required).
The IF statement or decision is to determine which value is appropriate
and thus, which value the company would choose based upon the differing rates.

Value of Bond If:
Rate, r Not called
Called
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%

Value,
considering
call likehood:
Modified

Note: The bond would not be called unless r<coupon rate = 12%.

We can graph the above data(3 lines) to show a visual of the bond's price sensitivity.

If you study the graph, you will see that the "not called" situation shows the greatest price sensitivity, the "called" the least
sensitivity, and the "modified" falls somewhere in between. Actually, the modified situation, which is representative of most
actual bonds because most bonds are callable, shows that bondholders will not win big if rates fall because then the bond will
be called, but they do lose big if rates rise because then the bonds will not be called. In terms of the graph, the sensitivity line
is not steep where we want it to be steep, to the left of the 12% coupon rate, but it is steep where we do not want it to be
steep, to the right of 12%. Thus, the conclusion is that callable bonds are riskier than non-callable bonds, and their risk is
asymmetric.
f. Now assume the date is 10/25/2009. Assume further that our 12%, 10-year bond was issued on 7/1/2009, is callable
on 7/1/2013 for $1,060, will mature on 7/1/2019, pays interest semiannually (January 1 and July 1), and sells for
$1,100. Use your spreadsheet to find (a) the bonds yield to maturity and (b) its yield to call.

Begin by setting up the input data as shown below: (note: much of this data will need to be typed in.)
Basic info:
Call info:
Settlement (today)
Same
Maturity
True maturity for YTM, call date for YTC
Coupon rate
Same
Current price (% of par)
Same
Redemption (% of par value)
Par for YTM, Call price for YTC
Frequency (for semiannual)
Same
Basis (360 or 365 day year)
0
Same
(NOTE: leave basis at "0" for 360)
With the input data set, put the pointer on D133 and then click fx, Financial, YIELD, OK to get the yield menu. Fill in the
menu by using the point-and-click procedure, and then click OK to get the bond's yield:
Yield to Maturity:
The completed menu is shown below.
Tip: Use Yield function. For dates, either refer to cells D122 and D123, or enter the date in quotes, such as " 10/25/2009".

D122

D124

D123

D125

D124

D126

D125

D127

D126

D128

Scroll down here

To find the yield to call, use the YIELD function, but with the call price rather than par value as the
redemption
Yield to call:

Every cell should have a formula or text, you should not type numbers in cells.

Chapter 12.
Gardial Fisheries is considering two mutually exclusive investments. The projects' expected net cash flows are as
follows:
Time
0
1
2
3
4
5
6
7

Expected net cash flows
Project A Project B
($375)
($575)
($300)
$190
($200)
$190
($100)
$190
$600
$190
$600
$190
$926
$190
($200)
$0

a. If you were told that each project's cost of capital was 12 percent, which project should be selected? If the cost of
capital was 18 percent, what would be the proper choice?
@ a 12% cost of capital
WACC =

@ a 18% cost of capital
12%

WACC =

NPV A =

NPV A =

NPV B =

Use Excel's NPV function as explained in this
chapter. Note that the range does not include the
costs, which are added separately.

18%

NPV B =

Based upon the data above, what decision would be made at a cost of capital of 12%, how about at a cost of capital of 18%?

b. Construct NPV profiles for Projects A and B.
Before we can graph the NPV profiles for these projects, we must create a data table of project NPV relative to differing costs of
capital.
Project A

Project B

0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
22%
24%
26%
28%
30%

Create a line graph of the two columns of data for Project A and B.

c. What is each project's IRR?
We find the internal rate of return with Excel's IRR function:
IRR A =
IRR B =

Note in the graph above that the X-axis intercepts are equal to the two projects' IRRs.

e. What is the crossover rate, and what is its significance?

Time
0
1
2
3
4
5
6
7

Cash flow
differential

Crossover rate =
The crossover rate represents the cost of capital at which the two projects
have the same net present value. In this scenario, that common net
present
value is:

d. What is each project's MIRR at a cost of capital of 12 percent? At r = 18%? (Hint: Consider Period 7 to be the end of Project B's
life.)
@ a 12% cost of capital

@ a 18% cost of capital

MIRR A =
MIRR B =

MIRR A =
MIRR B =

f. What is the regular payback period for these two projects?
Project A
Time period:
Cash flow:
Cumulative cash flow:
% of year required for payback:
Max Row 93=Payback:

0
(375)

1
(300)

2
(200)

3
(100)

4
600

5
$600

6
$926

7
($200)

0
(575)

1
190

2
190

3
190

4
190

5
$190

6
$190

7
$0

Project B
Time period:
Cash flow:
Cumulative cash flow:
% of year required for payback:
Payback:

g.

At a cost of capital of 12%, what is the discounted payback period for these two projects?

WACC =

12%

Project A
Time period:
Cash flow:
Disc. cash flow:
Disc. cum. cash flow:
% of year required for payback:
Discounted Payback:

0
(375)

1
(300)

2
(200)

3
(100)

4
600

5
$600

6
$926

7
($200)

0
(575)

1
190

2
190

3
190

4
190

5
$190

6
$190

7
$0

Project B
Time period:
Cash flow:
Disc. cash flow:
Disc. cum. cash flow:
% of year required for payback:
Discounted Payback:

h. What is the profitability index for each project if the cost of capital is 12 percent?
PV of future cash flows for A:
PI of A:
PV of future cash flows for B: