FIN301 Principles of Finance

Module 1 Case

INTRODUCTION TO FINANCIAL MANAGEMENT AND THE STOCK MARKET

Assignment Overview

This assignment will cover both the role of the financial manager as well as the introductory material on stock market investing. Make sure to fully review all of the required reading material before you begin this assignment. Note that all of the questions are conceptual in nature and will not require any computations (you will do plenty of computations for your Modules 1-3 Cases). But make sure to thoroughly explain your reasoning behind each answer, and to support your answer using references to the required background readings.

Case Assignment

Write a three- to five-page paper answering the following questions:

1. Suppose you own a small business. You have two choices on how to run the business. One is to manage the business yourself, the other is to hire a manager and spend your time vacationing in Hawaii most of the time. Which situation is more likely to induce agency costs, and what kind of ways could you use to deal with these agency costs? Explain your answer with references to the required background readings.

2. In your small business you have a finance department with a CFO, controller, and treasurer. For the following scenarios, explain which of these three financial executives would be the most likely to work on the issue based on the descriptions of the roles of the CFO, controller, and treasurer from Brealey, et al. (2009) in the background readings

a. You suspect that a lower-level employee has embezzled around $50,000 over the last three years and you want to try to find out who based on past financial records. Who would be most likely person to look into this issue – the CFO, the treasurer, or the controller?

b. Your chief marketing officer wants to take out a large loan to finance a major advertising campaign that he claims will bring in large sums of new profits over the next few years. However, your chief operating officer wants to take out a large loan to purchase some new equipment and machinery that she claims will save your company a lot of money over the next few years. You would like to see some estimates about which of the two projects will be most likely to increase profits enough to be able to pay back the loan. Who would be most likely person to look into this issue – the CFO, the treasurer, or the controller?

3. Explain whether the following assets are a real asset or a financial asset. Explain your reasoning using the definitions of real versus financial assets in Brealey, et al. (2009).

a. A certificate of deposit at your local bank

b. A two-bedroom house

c. $50,000 worth of bonds from an airline company

d. Ownership of a copyright to a hit song

4. Do some research on Facebook and General Motors using a web page such as investing.com for financial information. Based on their P/E ratios, dividend yields, and other information, compare and contrast these two stocks. How would you classify these stocks: growth stock, a value stock, or an income stock? Explain your reasoning using both concepts from the background readings as well as any information you find on these two companies. Your answer to this question should be 1 to 1-1/2 pages.

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.

FIN301 Principles of Finance

Module 1 SLP

INTRODUCTION TO FINANCIAL MANAGEMENT AND THE STOCK MARKET

For your SLP, you will be creating an imaginary investment portfolio of four companies of your choice. You will be investing a total of $20,000 in imaginary money, with $5,000 invested in each of these four companies. We will track the progress of your portfolio over Modules 1-4, and also take a closer look at various aspects of these four companies.

To start with, choose your four companies. Don’t worry, you don’t have to use any fancy methods to pick them. The only restrictions are A) they need to be publicly traded companies with data available on web pages such as Investing.com or Morningstar.com, and B) they need to be from four different industries – don’t pick four companies all from the same industry. Your choice of companies can be made based on a variety of factors. For example, you may want to invest in a company simply because you like its products and personally use them. You can also apply some of the criteria from the background readings such as the P/E ratio, or you can search the internet and see what different analysts are saying about this company.

In addition to choosing four companies, review the links on Microsoft Excel in the background readings if you are new to using Excel. To get full credit you need to submit some information in the form of an Excel spreadsheet. But if you are struggling with Excel you can submit the information in a Word table and get partial credit for this assignment.

Once you have chosen your four companies, complete the following two sections of this assignment:

1. Write a short description of each of your four companies and why you chose it. Be specific for your reasons – is it based on research, your gut feelings, your own experience with the company, etc. Also, explain whether you think each is a growth stock, a value stock, or an income stock using the definitions of these types of stocks from the background readings as well as the information you find about each company. Have at least one paragraph for each company, and about one and a half pages total for this section of the assignment in a Word document.

2. Go to a web page that has stock quotes and financial information about publicly traded stocks and find information about stock prices and P/E ratios for your four companies. There are many such webpages, such as Investing.com’s stock quote page. In an Excel file, create a table with the following items:

a. The name of each company

b. The current stock price

c. The stock price one year ago

d. The percentage change in stock price from one year ago (the capital gain). Use the tutorial in the background page on the use of formulas in Excel to calculate this for each company

e. The P/E ratio for each company

If you are new to Excel, view an example of a spreadsheet with the above information on four fictional companies. You can use this as a template for your own spreadsheet for this assignment.

SLP Assignment Expectations

Answer the assignment questions directly.

o Stay focused on the precise assignment questions. Do not go off on tangents or devote a lot of space to summarizing general background materials.

o For computational problems, make sure to show your work and explain your steps.

o 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.

FIN301 Principles of Finance

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:

a. $2,000 after being invested for two years in a savings account with 3% interest rate

b. $5,000 after being invested for ten years in a savings account with a 1% interest rate

c. $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:

a. $3,000 to be paid in one year with a 9% discount rate

b. $3,000 to be paid in three years with a 9% discount rate

c. $4,000 to be paid in ten years with a 5% discount rate

3. Compute the present value for the following:

a. 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%.

b. The same three $1,000 payments as in part a) above, but with a 6% discount rate

c. 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):

a. A zero-coupon bond that pays $1,000 in five years

b. A bond that pays $1,000 in five years, with five annual coupon payments of $20 each

c. 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:

a. What is likely to happen to interest rates if the rate of inflation suddenly increases?

b. 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.

FIN301 Principles of Finance

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:

a. 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.

b. 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.

c. 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.

FIN301 Principles of Finance

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:

a. There is a large recession.

b. It is discovered that a company lied about its earnings and it is not nearly as profitable as they claimed.

c. 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:

a. The expected return of a stock with a beta of 2, and risk-free rate of 1%, and a market return of 7%.

b. 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:

a. 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.

b. 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.

c. 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.

FIN301 Principles of Finance

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:

a. The current stock prices

b. The stock prices five years ago

c. The dividend yield for each stock

d. The beta for each stock

e. 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.

FIN301 Principles of Finance

Module 4 Case

CAPITAL BUDGETING AND CAPITAL STRUCTURE

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:

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.

.