TRident fin301 module 2-4 (case+ slp + discussion) 2019

Module 2 - Background

PRESENT VALUE AND BOND VALUATION

Required Reading

To start off this class, take a look at these three short videos. The first two cover present value in general, and the third video covers a specific application of present value to pricing a bond:

Clifford, J. (2014). Time value of money. ACDC Leadership. https://www.youtube.com/watch?v=nfkqCv3Rd_g

Khan, S. (2008). Introduction to present value. Khan Academy. https://www.youtube.com/watch?v=ks33lMoxst0&t=483s

Davis, A. (2016). Bond pricing. Retrieved from: https://www.youtube.com/watch?v=-DnARyndirI

Now read up in more detail on these topics. Pay special attention to the examples of how to calculate present value, and how to use Excel:

Ross, S., Westerfield, R., & Jordan, B. (2007) Chapter 5: Introduction to valuation: The time value of money. Fundamentals of Corporate Finance. McGraw Hill.  http://highered.mheducation.com/sites/dl/free/0078034639/941423/Sample_Chapter.pdf

Ross, S., Westerfield, R., & Jordan, B. (2007) Chapter 6: Interest rates and bond valuation. Corporate Finance. McGraw Hill. Retrieved fromhttp://course.sdu.edu.cn/G2S/eWebEditor/uploadfile/20121125110341494.pdf

Finally, take a look at these videos on how to calculate present value using Microsoft Excel. These videos will take you through these calculations step by step:

Davis, J. (2013). Present value of a single amount in Excel. Retrieved from: https://www.youtube.com/watch?v=ruIfnNoe1Co&t=85s

Moy, R. (2014). Present value of multiple cash flows in Excel. Retrieved from: https://www.youtube.com/watch?v=kDOIuJbHpLc

Moy, M. (2014). Bond valuation in Excel. Retrieved from: https://www.youtube.com/watch?v=H-_NP0UxX_U

You can also view a spreadsheet with the calculations from this video if you want to try this example out on your own].

Optional Reading

GCFLearnFree.org. (2016). Excel 2016: Functions. Retrieved from: https://www.youtube.com/watch?v=-9d4m79twdA

Brigham, Davies (2013). Chapter 28: The time value of money. Intermediate Financial Management. Cengage Learning. Retrieved from: http://www.cengage.com/resource_uploads/downloads/0324594690_148107.pdf

Gitman, L. (2005). Chapter 6: Interest rates and bond valuation. Principles of Managerial Finance. Pearson Education. Retrieved from: http://wps.aw.com/wps/media/objects/222/227412/ebook/ch06/chapter06.pdf

Alternative links for Gitman article and video PowerPoint version of this chapter:

http://wps.aw.com/wps/media/objects/338/347080/ebook/ch06/chapter06.pdf

https://mbagroup12.files.wordpress.com/2012/03/gitman_12_prnc-mgt-fin13e_password_downloadslide_10.pdf

https://www.youtube.com/watch?v=77_CM5LI7ic

Bierman, H. (2010). Chapter 2: The time value of money. An Introduction to Accounting and Managerial Finance: A Merger Of Equals. Singapore: World Scientific. [EBSCO eBook Colllection]

Droms, W. G., & Wright, J. O. (2015). Chapter 11: Mathematics of compound interest. Finance and Accounting for Nonfinancial Managers: All the Basics You Need to Know. New York: Basic Books. [EBSCO eBook Colllection]

 

 

 

Microsoft Excel videos/Discussion

 

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For the Module 1 discussion, you looked at some goofy videos on finance.  Now that we are in Module 2 and doing some more serious calculations, find some videos on Microsoft Excel that you find useful and provide some easy-to-follow instructions.  If you are new to Excel, find some videos that help you get started with basics such as entering data and creating formulas.  If you had some experience with Excel prior to this class, then find some videos on some Excel’s more advanced present value functions such as PV or NPV.  Note you do not need to use the PV or NPV functions for this module, but they might come in handy for Module 4.  Share the video link with your classmates, and give a brief overview of what the video covers and what you found useful about it.  In addition to posting your own video, take a look at a couple of videos that your classmates post and give your own review of these videos.

Note that while Excel is most famous as a finance tool, it is also used in many other areas of management. For example, a human resource department might use Excel to keep track of payroll.  If you have already used Excel in your workplace, share your experiences with how you used it.  If you have not yet used Excel in your workplace, discuss whether or not you might use it in the future.

Finally, at the end of each module, give an update on the stock price changes for the four companies that you are writing about for your SLP.  How much is your initial $20,000 worth now?

 

 

Module 2 - Case

PRESENT VALUE AND BOND VALUATION

Assignment Overview

This assignment is in a different direction than your Module 1 Case in that it is mostly computational in nature.  Before starting this assignment, work through some of the examples in the background readings to make sure you understand all of the steps involved in future value and present value, including use of present value formulas to compute the value of a bond.  Question 4 requires the use of Excel, although you can get partial credit if you solve it instead using a calculator and show all of your work.  Go through the videos and sample Excel spreadsheet in the background readings before starting on Question 4.  Note that while Excel is only required for Question 4, you may also wish to use it for Questions 1-3.

Case Assignment

Present your answers to the following problems in a Word document, and include an Excel spreadsheet with your computations for Question 4 or any other questions that you use Excel for. Note that you will get partial credit if you show your work even if the answers are incorrect, and Excel is only required for Question 4 (it is greatly recommended for Questions 1-3 but not required). Also, if you are unable to get up and running with Excel then you can get partial credit by instead using a calculator as long as you carefully show all of your steps in a Word document.

1. Compute the future value for the following:
   1. $2,000 after being invested for two years in a savings account with 3% interest rate
   2. $5,000 after being invested for ten years in a savings account with a 1% interest rate
   3. $3,500 after being invested for nine years in a savings account with an 11% interest rate
2. Compute the present value for the following:
   1. $3,000 to be paid in one year with a 9% discount rate
   2. $3,000 to be paid in three years with a 9% discount rate
   3. $4,000 to be paid in ten years with a 5% discount rate
3. Compute the present value for the following:
   1. An investment that will pay you $1,000 in one year, another $1,000 in two years, and a third payment of $1,000 in three years (e.g., three payments of $1,000 to be paid once a year for three years). The discount rate is 4%.
   2. The same three $1,000 payments as in part a) above, but with a 6% discount rate
   3. An investment that will pay you $2,000 in one year, another $1,500 in two years, and a third payment of $3,000 in three years. The discount rate is 4%.
4. Compute the value of the following bonds assuming a 3% discount rate (required rate of return):
   1. A zero-coupon bond that pays $1,000 in five years
   2. A bond that pays $1,000 in five years, with five annual coupon payments of $20 each
   3. What is the coupon rate if coupon payments are $20 per year? At what discount rate would the value of the bond be “at par” (e.g., be worth $1,000?). Explain your reasoning.
5. This part of the assignment is purely conceptual with no computations required. Explain the following with references to the required readings:
   1. What is likely to happen to interest rates if the rate of inflation suddenly increases?
   2. Suppose there are two bonds each with coupon payments of $50. The first bond pays $1,000 in five years, and the other one pays $1,000 in ten years. If interest rates increased, would the value of the bonds increase or decrease? Which of the two bonds would have their value change more after the increase in interest rates? Explain your reasoning.

Assignment Expectations

 Answer the assignment questions directly.

• Stay focused on the precise assignment questions. Do not go off on tangents or devote a lot of space to summarizing general background materials.
• For computational problems, make sure to show your work and explain your steps.
• For short answer/short essay questions, make sure to reference your sources of information with both a bibliography and in-text citations. See the Student Guide to Writing a High-Quality Academic Paper, including pages 11-14 on in-text citations. Another resource is the “Writing Style Guide,” which is found under “My Resources” in the TLC Portal.

 

Module 2 - SLP

PRESENT VALUE AND BOND VALUATION

For your Module 2 SLP, continue your research on the four companies that you selected for your Module 1 SLP. Whereas you focused on the stocks of each company in Module 1, we will now be looking at the bonds of these four companies. Do some research on credit ratings of the bonds of these companies as well as the yields and bond prices. Specifically, write a two-page paper presenting the following information:

1. What is the bond ratings of each of these companies? Do a search online and see what credit rating Standard & Poor’s or Moody’s has given these companies. What reasons do you see for the differences in credit ratings between these companies?
2. Go to FINRA’s Bond Center and click on the “search” button. Then enter the ticker symbol of the different companies to see their bond yields and maturity dates. You can also do a Google search on the bond yields for your four companies. Note that most companies have multiple bonds that are currently being traded. Which bond has the longest time before maturity? The least time to maturity? What are the bond prices and bond yields of these bonds? Discuss which of your four companies has the greatest bond yields and which ones have the lowest bond yields. Do these correspond well to the credit ratings that you found for these companies?
3. Pick out one bond from one of your four companies. Calculate the present value of this bond using the following steps:
   1. Look at the maturity date of the bond. If the maturity date is in five years, then assume you will get five more coupon payments before the bond matures.
   2. Look at the coupon rate for the bond and calculate what the coupon payments will be. For example, if the coupon rate is 4.3% then the payments should be $43.
   3. Take the interest rate you get at your local bank and use this as the discount rate. Calculate the present value of the final bond payment of $1,000 that you will get at the maturity date, and calculate the present value of each of the remaining coupon payments. Compare the present value you get with the current bond price. Divide the present value by ten and see if this is similar to the price of this bond that you see on Morningstar. Note that bond prices are quoted so a bond price of $1,000 would be denoted as “100” or a bond price of $1,100 would be “110”. Comparing the price to the present value you computed based on the interest rate you get from your local bank, is the bond a good value? For example, if you get a present value of $1,200 and the bond price is 110, then the bond is a good value given your bank’s interest rate.

SLP Assignment Expectations

• Answer the assignment questions directly.
• Stay focused on the precise assignment questions. Do not go off on tangents or devote a lot of space to summarizing general background materials.
• For computational problems, make sure to show your work and explain your steps.
• For short answer/short essay questions, make sure to reference your sources of information with both a bibliography and in-text citations. See the Student Guide to Writing a High-Quality Academic Paper, including pages 11-14 on in-text citations. Another resource is the “Writing Style Guide,” which is found under “My Resources” in the TLC Portal.

Module 3 - Background

Trendy IPOs/Discussion

 

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 When it comes to new companies that begin to sell shares on the stock market, hype can be just as much of a factor as the actual potential of the company.  The first time a company issues stock to be purchased by the public, it is called an initial public offering (IPO).  Snapchat was heavily hyped when it went through its first IPO, but they were not as successful as they hoped.  Upcoming IPOs that some investors are eagerly waiting for include Airbnb, Spotify, Uber, Pinterest, SpaceX, and Dropbox.

Do you think any of these companies will live up to the hype? Or do you think if you invest in them you will become a “fashion victim” and lose money from following trends and hype? Give your analysis based both on what you have seen in the news about any of these companies as well as any personal experience you might have had with use of their services.

Also, remember to post an update on the value of your four companies that you are researching for your SLP. What is the current value of the $20,000 that you initially invested based on stock prices for this module?

 

 

Module 3 - Case

RISK, RETURN, AND STOCK VALUATION

Assignment Overview

For this assignment, Questions 1, 3, and 5 are computational in nature. Questions 2 and 4 are conceptual questions. So make sure to thoroughly review the required background readings and make sure you understand the material at a conceptual level and also understand the steps involved in the computations.

For computational questions, you are not required to use Excel, but make sure to show all of your steps as part of your Word document. If you decide to use Excel, attach your spreadsheet in addition to a Word document with your answers. For conceptual questions, make sure to thoroughly explain the reasoning behind your answer and to use references from the required background reading.

Case Assignment

Submit your answers to the following questions in a Word document that includes both your computational steps in Questions 1, 3, and 5, and thoroughly explains your reasoning for Questions 2 and 4:

1. Using a dividend discount model, what is the value of a stock that pays an annual dividend of $5 that is not expected to grow and the discount rate is 10%? What will be the value of the stock if the dividend is expected to grow 5% per year?
2. Explain whether each of the following is systematic or unsystematic risk using references to the required background readings:
   1. There is a large recession.
   2. It is discovered that a company lied about its earnings and it is not nearly as profitable as they claimed.
   3. The CEO of a successful company gets arrested for some serious crimes, and the company has trouble finding a good replacement.
3. Use the CAPM to calculate the following:
   1. The expected return of a stock with a beta of 2, and risk-free rate of 1%, and a market return of 7%.
   2. The beta if the expected return of the stock is 8%, the risk-free rate is 2%, and the market rate of return is 6%.
4. Do you think the following companies would have a high, low, or average beta? Explain your answer using references from the background readings and your knowledge of CAPM and beta:
   1. The ACME Umbrella company’s stock goes up a lot when it rains, but goes down when it is sunny. Nothing else but the weather seems to impact ACME’s stock price.
   2. Vultures, Inc., specializes in buying assets of bankrupt companies at a discount. Vultures’ stock price seems to go up whenever other companies are doing poorly and going bankrupt, but goes down when other companies are doing well and they have few bankrupt companies to prey on.
   3. Unoriginal, Inc., can never decide what products they want to focus on so they make many different products in several different industries. They also invest much of their profits into 100 or so other companies that are listed on the stock exchange.
5. Suppose the Tweedledee Company has an average return of 18%, and the Tweedledum Company has an average return of 10%. They both have a standard deviation of return of 10%, but Tweedledee has a beta of 2 and Tweedledum has a beta of 1. The risk-free rate is 1%. What are the Treynor and Sharpe Ratios of these two companies? What do these ratios tell you about the relative risk and return of these two companies?

Assignment Expectations

  Answer the assignment questions directly.

• Stay focused on the precise assignment questions. Do not go off on tangents or devote a lot of space to summarizing general background materials.
• For computational problems, make sure to show your work and explain your steps.
• For short answer/short essay questions, make sure to reference your sources of information with both a bibliography and in-text citations. See the Student Guide to Writing a High-Quality Academic Paper, including pages 11-14 on in-text citations. Another resource is the “Writing Style Guide,” which is found under “My Resources” in the TLC Portal.

 

 

 

Module 3 - SLP

RISK, RETURN, AND STOCK VALUATION

For your Module 3 SLP, we will go back to looking at information about the stock price and stock returns of your four companies. Look up the following information about your four companies on Yahoo Finance, Investing.com, Morningstar, or a similar page:

1. The current stock prices
2. The stock prices five years ago
3. The dividend yield for each stock
4. The beta for each stock
5. Look up the current three-month treasury bill rate on Fidelity’s Fixed Income page

Now do the following calculations with this information:

1. Calculate the average annual capital gain or loss (stock price change) over the last five years. Calculate the percentage change from five years ago, and divide by five. For example, if the stock price increased from 50 to 100 in five years, the percentage increase would be 100% and the average annual gain would be 20% (100 divided by 5). Which of these companies has the highest or lowest capital gain?
2. Now estimate the average total return, which is the capital gain plus dividends. If the dividend yield is 2%, then the average total return would be 22% in the example above. Which of these four companies has the highest or lowest total return? Does the order change?
3. Finally, calculate the Treynor Ratio. First, take the total return for each of your four companies and subtract the three-month treasury bill rate (the “risk-free rate”). Then divide this by the beta of each company. This ratio is a measure of the risk-adjusted return of each stock. The higher the return, the higher the Treynor Ratio. But the higher the beta (which is a measure of risk), the lower the Treynor Ratio. Which of your companies has the highest or lowest risk-adjusted return? Does the order change from what you found in 1) and 2) above?

Submit a one-page memo in Word summarizing your findings, and include an Excel file with your data and calculations. 

 

SLP Assignment Expectations

• Answer the assignment questions directly.
• Stay focused on the precise assignment questions. Do not go off on tangents or devote a lot of space to summarizing general background materials.
• For computational problems, make sure to show your work and explain your steps.
• For short answer/short essay questions, make sure to reference your sources of information with both a bibliography and in-text citations. See the Student Guide to Writing a High-Quality Academic Paper, including pages 11-14 on in-text citations. Another resource is the “Writing Style Guide,” which is found under “My Resources” in the TLC Portal.

Module 4 - Background

Retailer Dead Pool/Discussion

 

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Because of competition from Amazon and other online retailers, brick and mortar retailers have been struggling. In addition to increased competition, many retailers have large amounts of debt, which puts them at risk of bankruptcy. Some, such as American Apparel, have already filed for bankruptcy and closed all their stores, and many others are struggling and close to bankruptcy. Here is one article on retailers that are in trouble; but there are probably even more recent cases:

Timmerman, M. (2017). Retail alert: This major electronics retailer is closing more than 1,000 stores. Cox Media Group. Retrieved from: http://clark.com/shopping-retail/major-retailers-closing-2017/

If you and your coworkers or classmates got together to bet on a “dead pool” of which retailer will go bankrupt soon, which retail chain would you bet would be the next to fall? Base your guess on what you have read in the news, or what you have personally observed in terms of a retail shop being empty when you go there or having prices too high to compete with Amazon.

Finally, in the second week of the module, make sure to post an update on your stock portfolio. How much are your four stocks worth now? What is your gain or loss for each stock?

 

Module 4 - Case

CAPITAL BUDGETING AND CAPITAL STRUCTURE

Assignment Overview

 

Questions 1 and 2 for this assignment are computational in nature and require the use of Microsoft Excel. Questions 3 and 4 are conceptual in nature and do not require computations. Make sure to thoroughly review the required background readings and work through both the concepts and the computational examples. The videos on computing NPV and IRR using Excel along with the sample spreadsheet should also help. If you are unable to figure out how to make the computations in Excel, then you can get partial credit by computing the answers using a calculator and thoroughly explaining your steps. For conceptual questions, make sure to thoroughly explain the reasoning for your answers and to use references from the required background readings.

Case Assignment

Submit your answers to the following questions in a Word document, and also submit an Excel file with your computations for Questions 1 and 2:

1. The table below gives the initial investment (the negative numbers at “Year 0”) for two projects. Compute the payback period, the NPV, and the IRR using Excel. Then rank the two projects based on each of these three criteria, and discuss which projects should be funded based on your computations.

 

Firm Cost of Capital:		11%
Year	Project A	Project B
0	-100,000	-150,000
1	25,000	30,000
2	25,000	30,000
3	25,000	90,000
4	25,000	20,000
5	25,000	20,000
6	25,000	20,000

1. The ACME Umbrella Company is deciding between two different umbrella factories. Both factories will cost $500,000 to get started. However, the cash flows for each factory will depend on whether the next five years are rainier than average or sunnier than average. Factory A will have cash flows of $130,000 per year for the next five years if the weather is sunnier than average. But if it is rainier than average the cash flows will be $150,000 per year for the next five years. Factory B will have cash flows of $100,000 per year for the next five years if it is sunnier than average, but if it is rainier than average it will have cash flows of $200,000 per year. ACME has a cost of capital of 9%. Based on this information, calculate the following:
   1. Calculate the NPV for both factories and for both scenarios (rainy versus sunny). What is the range of NPV for each factory based on your scenario analysis?
   2. Based on your answer to a) above, do you think ACME should use the same discount rate of 9% for each factory? Or should they use a risk-adjusted discount rate (RADR)? If so, which factory should have a higher RADR? Explain your answer with references to the background readings.
2. Your neighbor Freewheeling Franklin has a very successful new internet-based technology company. While his company has great cash flow, you see Mr. Franklin has a collection of five expensive sports cars in his newly built garage. You also see him throwing some extravagant parties every weekend where he serves expensive champagne. Based on the required background readings such as Ross, et al. (2013)., explain how you would handle the following situations:
   1. Mr. Franklin asks you for a loan to help expand his business and offers you an interest rate considerably higher than you would get from leaving your money in the bank. As a lender, what measures might you take to make sure you get your money back and Mr. Franklin won’t waste the money?
   2. Mr. Franklin asks you to buy one-third of his company, and wants to use the money from selling this portion of the company to expand his business. As a shareholder, what steps might you take to make sure he spends his profits and the investment money you gave him wisely?
3. Suppose you own a new business and after a few rough years you now are making a solid profit of $150,000 per year and have built up some savings as well. While your business is successful, you realize that in order to expand and remain competitive you are going to have to raise a lot of money to invest in some new machinery and new stores. You have to decide between using your savings to finance your expansions and machinery upgrades, taking out a bank loan, or selling a portion of your equity to new investors. Explain the pros and cons of each of these three options in this situation, and make references to the required background readings such as Ross, et al. (2013).

Assignment Expectations

•  Answer the assignment questions directly.
• Stay focused on the precise assignment questions. Do not go off on tangents or devote a lot of space to summarizing general background materials.
• For computational problems, make sure to show your work and explain your steps.
• For short answer/short essay questions, make sure to reference your sources of information with both a bibliography and in-text citations. See the Student Guide to Writing a High-Quality Academic Paper, including pages 11-14 on in-text citations. Another resource is the “Writing Style Guide,” which is found under “My Resources” in the TLC Portal.

 

 

Module 4 - SLP

CAPITAL BUDGETING AND CAPITAL STRUCTURE

For your final SLP, you will be doing some research on the capital structure of your four companies. You will also be doing an overall assessment of these four companies based on the research you did for your Module 1-4 SLPs.

Write a two- to three-page paper addressing the following issues:

1. Go to investing.com or a similar page and find the long-term debt to total equity and the total debt to equity ratios for your four companies. Investing.com should also give you the industry averages for these ratios. Based on these ratios, do your four companies have a greater relative debt load than the average of their industry? Do any of them seem at risk for bankruptcy?
2. How does the debt ratios align with the credit ratings you found for your Module 2 SLP or the beta that you found for your Module 3 SLP? Do the companies with higher debt ratios have lower credit ratings or larger betas, and do the companies with lower debt ratios have higher credit ratings and lower betas?
3. Finally, what is your overall assessment of your four companies based on your research for your Modules 1-4 SLPs? Which ones do you think are good investments based on your research? Which companies do you think are bad investments? Rank your four companies from best to worst investment. This part of the assignment should be at least one page.

SLP Assignment Expectations

Answer the assignment questions directly.

• Stay focused on the precise assignment questions. Do not go off on tangents or devote a lot of space to summarizing general background materials.
• For computational problems, make sure to show your work and explain your steps.
• For short answer/short essay questions, make sure to reference your sources of information with both a bibliography and in-text citations. See the Student Guide to Writing a High-Quality Academic Paper, including pages 11-14 on in-text citations. Another resource is the “Writing Style Guide,” which is found under “My Resources” in the TLC Portal.

 

 

Final Reflections

 

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Has this class changed how you view investments and financial management?  Are there any concepts from the class that you will use for your career?  Are there any concepts that you will use for your own personal investment or money management strategies?