6 Requirement Assignment. Please ensure you use at least 5 references and 10 in text citations. Early Submission is appreciated. Additionally, any computations shall be done through excel unless noted otherwise. Each assignment will be a separate document. Please utilize the example template below. Module 1 is attached for reference. Use the company “Walmart” for continuation of the SLP. Ensure module 4 and any other module has an excel that utilized the template provided in the reading material to accompany it.

Module 2 – SLP

STOCK AND BOND VALUATION

For your second SLP assignment, continue to do research on the company you chose to write about for your Module 1 SLP. This time you will be doing research about the valuation of the company to try to determine if its stock price is overvalued or undervalued. You can use Google Finance, Yahoo Finance, or similar Web pages to find the financial information about this company.

Write a 2- to 3-page paper with the following items:

1. What is the P/E ratio of this company? How does the P/E ratio compare to other companies in this industry? Based on the P/E ratio, do you think the company is overvalued or undervalued?
2. Find the company’s balance sheet. Calculate the book value of each share. This can be done by taking the total assets and subtracting total liabilities. Then divide the number you get by the total number of outstanding shares. Is the number you get higher or lower than the current price of the share? Based on what you’ve found, would you say the stock is overvalued or undervalued?
3. Finally, do a search on what different analysts have to say about your company. Do they generally recommend buying the stock or selling the stock? What reasons to they give for their assessment? Find at least three analyst reports about this company.

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 2 – Background

STOCK AND BOND VALUATION

REQUIRED READING

Start off with these two tutorials that will give you an overview of the basic methods of valuing stocks and bonds from Subjectmoney:

Subjectmoney. (2013, January 2). How to price/value bonds – formula, annual, semi-annual, market value, accrued interest [Video file]. Retrieved from https://www.youtube.com/watch?v=7zCqoED8MVk

Subjectmoney. (2013, January 3). Dividend discount model (DDM) – constant growth dividend discount model – how to value stocks [Video file]. Retrieved from https://www.youtube.com/watch?v=n76Pz3HOBPo

Now dig much deeper into bond and stock valuation with the following books chapters. They cover not only the computational methods but also provide a general overview of stock and bond markets:

Ross, S., Westerfield, R., & Jordan, B. (2007). Chapter 6: Interest rates and bond valuation. Essentials of Corporate Finance. McGraw Hill. Retrieved from http://novellaqalive2.mhhe.com/sites/dl/free/007000000x/484691/Part4_Chap6.pdf [If this link is down, click Interest Rates and Bond Valuation for an alternative link.]

Fabozzi, F. J., & Peterson Drake, P. (2009). Chapter 7: Asset valuation: Basic bond and stock valuation models. Finance: Capital markets, financial management, and investment management. Wiley. Available in the Trident Online Library.

Finally, for some examples of valuation calculations in Excel see the following videos:

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

Girvin, M. (2010). Stock valuation with dividend growth model. ExcellsFun. Retrieved from https://www.youtube.com/watch?v=cbRIhwkGAnQ

Girvin, M. (2010). Stock value based on present value of future dividend cash flows. ExcellsFun. Retrieved from https://www.youtube.com/watch?v=G2VIY5E3I3s&t=163s

OPTIONAL READING

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

Ahmad, A. (n.d.). Bonds part II: Pricing. Coursera. Retrieved from https://www.coursera.org/learn/finance-markets/lecture/EpByC/bonds-part-ii-pricing

Ozoguz, A. (n.d.) Basics of equity valuation. Coursera. Retrieved from https://www.coursera.org/learn/global-financial-markets-instruments/lecture/vHPRN/basics-of-equity-valuation

Vishwanath, S. (2007). Chapter 24: Debt markets. Corporate finance: Theory and practice. SAGE Publications India. Available in the Trident Online Library.

Module 3 – SLP

CAPITAL BUDGETING AND THE COST OF CAPITAL

For your Module 3 SLP assignment, continue to do research on the company that you wrote about for Modules 1 and 2. For this assignment, you will be estimating the weighted average cost of capital (WACC) for your chosen company. The final calculation will be fairly straightforward, as it involves just plugging in some numbers into an equation. However, the more challenging task will be finding the necessary numbers to plug into the formulas. You will need information such as the beta for your company, the bond-rating, and various information from its balance sheet. Links to some suggested Web pages for finding this kind of information is included in the instructions, but you might be able to find other sources of information. Go step by step and present your information for Steps 1-4 below in a Word document. Make sure to show all of your steps one by one and include the sources of your information:

1. Find out your chosen company’s credit rating. Rating agencies such as Moody’s and Standard and Poor’s assign ratings to companies. AAA is high, AA is lower, BBB is even lower, etc. The higher the rating, the lower the cost of debt capital. Explain what your company’s credit rating is and the reasons for the high or low rating based on your research. Also, use the Fidelity Fixed Income Web page to find out what the current return is for a 30-year bond for a corporation with the rating that your company has. This yield will be the approximate cost of debt capital for your company. We will call the cost of debt RD.
2. Now estimate the cost of equity for your company. First you will need the beta; you already found this for your Module 1 SLP. You will also need the three-month treasury bill yield, which we will use as our measure of the risk-free rate. This rate should be listed on the Fidelity Fixed Income Web page linked above. Finally, you will need the equity risk premium. You can find estimates of this on many Web pages including Fidelity Fixed Income or Gutenberg Research. It is usually around 5%. Once you have this information, you can estimate the cost of equity as the 30-year treasury bill yield rate plus beta multiplied by the equity premium:

   Cost of Equity = risk-free rate + Beta * (Equity Premium).

   Show your calculations. We will call the cost of equity RE.

1. Now find out how much of the firm’s capital is equity and how much is debt. For the total value, look at the balance sheet for your company as found on Google Finance or a similar Web page. The total value of your company will be “total liabilities and shareholder’s equity.” The proportion of debt will be total liabilities divided by total value, which we will call D/V. The proportion of equity will be shareholder’s equity divided by total value, or E/V. If you calculate them correctly, the proportions will add up to one.
2. Now we have all the information we need to get at least a rough ballpark estimate of WACC. Let’s assume a corporate tax rate of 35%. So the formula we will use is WACC = (E/V)* RE +(D/V)* RD *(1-.35)

   Calculate WACC and show your computations. As a “reality check” on your calculations, the WACC should likely be in the single digits and positive. Compare what you found to the average WACC in your company’s industry, which should be available on Web pages such as Cost of Capital by Sector (US). Note that 35% is the official corporate tax rate, but many corporations find tax breaks. If your WACC is too low, try computing it with a lower tax rate such as 25% or 10%.

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

CAPITAL BUDGETING AND THE COST OF CAPITAL

REQUIRED READING

Start off the module by viewing these videos from Professor Roberts of the Wharton School of Business at the University of Pennsylvania and Professor Roberts of Rice University. These videos will give you a general overview of the key concepts of capital budgeting and the cost of capital:

Roberts, M. (2017). Decision criteria. Coursera. Retrieved from: https://zh.coursera.org/learn/wharton-finance/lecture/hRuBX/decision-criteria

Weston, J. (2017) Putting it all together as WACC (weighted average cost of capital). Coursera. Retrieved from: https://www.coursera.org/learn/finance-for-non-finance/lecture/07ldB/putting-it-all-together-as-the-wacc-weighted-average-cost-of-capital

Ross, S., Westerfield, R., & Jordan, B. (2007) Chapter 8: Net present value and other investment criteria. Essentials of Corporate Finance. McGraw Hill. http://novellaqalive2.mheducation.com/sites/dl/free/007000000x/484691/Part5_Chap8.pdf[If the link is down, click Net Present Value or Fundamentals of Corporate Finance for an alternative link]

Ross, S., Westerfield, R., & Jordan, B. (2007) Chapter 12: Cost of capital. Essentials of Corporate Finance.McGraw Hill. Retrieved from: http://novellaqalive2.mheducation.com/sites/dl/free/007000000x/484691/Part7_Chap12.pdf
[If the link is down, click Cost of Capital or Fundamentals of Corporate Finance for an alternative link]

Finally, check out the following video that will show you how to make capital budgeting calculations using Excel:

Graulich, V. (2012). How to calculate NPV and IRR. IHateMath.com. Retrieved from: https://www.youtube.com/watch?v=kCnwCplibAk&t=230s

Hamilton, K. (2014). Excel NPV IRR. Retrieved from: https://www.youtube.com/watch?v=HTJh5yxphMs

If you still have difficulty with the material after reviewing the required materials, check out the optional materials below. Included are two additional videos, including one on using Excel to compute NPV and IRR. Also included are some additional book chapters that cover the same material but explain it in a slightly different way with different examples.

OPTIONAL READING

BlueBookAcademy.com. (2015). Learn it FAST: Weighted average cost of capital explained. Retrieved from: https://www.youtube.com/watch?v=JIvokDfW9AQ&t=48s

Girvin, M. (2010). Investment criteria: NPV, IRR, payback, AAR, profitability index. Retrieved from: https://www.youtube.com/watch?v=U2aH4xH5Fz0

Fabozzi, F. J., & Peterson Drake, P. (2009). Chapter 14: Capital budgeting techniques. Finance: Capital markets, financial management, and investment management. Wiley. Available in the Trident Online Library.

Clive, M. (2012). Chapter 14: The cost of capital. Financial management for non-financial managers. Kogan Page. Available in the Trident Online Library.

Block, S. & Hirt, G. (2008). Chapter 12: The capital budgeting decision. Foundations of Financial Management. McGraw-Hill, Retrieved from: http://studylib.net/doc/8149455/12-the-capital-budgeting-decision

Module 4 – SLP

LEVERAGE, CAPITAL STRUCTURE, AND DIVIDEND POLICY

Review the 1) dividends for the past three years and 2) capital structure of the company you have been researching for your SLP assignment. Then answer the following questions in a Word document (except for the Excel portion specifically noted). The paper should be 2 pages in length.

1. What has occurred with your selected company’s dividend payout, dividend yield, and dividend per share over the past three years? Do you have any explanations for what has occurred? Also, has this company had any stock splits or stock repurchases in recent years?
2. How does your selected company’s dividend payout, dividend yield, and dividend per share compare with other companies in its industry? Has the company’s dividend strategy been similar to other companies in its industry?
3. Use Excel to plot your selected company’s earnings and dividends over the past three years. Do you notice any patterns? What dividend policies from the background readings best match these patterns?

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

LEVERAGE, CAPITAL STRUCTURE, AND DIVIDEND POLICY

REQUIRED READING

Capital Structure

Start by viewing the following video. It will introduce you to capital structure and provide you with a basic understanding of the main topics from this module:

Obi, P. (2014). Capital structure and financial leverage. Purdue University. Retrieved from: https://www.youtube.com/watch?v=xKBdJX-rHMg

Now go through the following tutorials from Investopedia which include some videos. Start out with the tutorial on degree of operating leverage, then scroll down to the sections on earnings before interest and taxes and degree of financial leverage:

Degree of operating leverage. (n.d.). Investopedia. Retrieved from: http://www.investopedia.com/terms/d/degreeofoperatingleverage.asp

Now dive deeper into the concepts of capital structure with the following two book chapters. Pay special attention to the concepts of operating leverage, financial leverage, business vs. financial risks, and the major theories of capital structure choices. While the tutorials above will give you a broad overview of the main topics, the following readings have worked out problems and solutions that will be essential for completing the Case Assignment:

Vishwanath, S. (2007). Chapter 19: Optimal capital structure. Corporate finance: Theory and practice. SAGE Publications India. Available in the Trident Online Library.

Brigham, E. & Houston, J. (n.d.). Chapter 13: Capital structure and leverage. Fundamentals of Financial Management.Cengage Learning.

Finally, take a look at the following book chapter on dividend policy. Take a close look at the concepts of regular dividend policy and low-regular-and-extra dividend policy, as well as stock splits and stock repurchases:

Clive, M. (2012). Chapter 15: Dividend policy. Financial management for non-financial managers. Kogan Page. Available in the Trident Online Library.

OPTIONAL READING

Ahmad, A. (n.d.) Firm debt part 1: Calculating how much to borrow. Coursera. Retrieved from: https://www.coursera.org/learn/finance-debt/lecture/0P8l0/firm-debt-part-1-calculating-how-much-to-borrow

Sexton, N. (2010). Introduction to dividend policy. LSBF Global MBA. Retrieved from: https://www.youtube.com/watch?v=wPVdxCJ2iCI

11 days ago

ATTACHMENTS

example.docx

Module 1 – Case

PRESENT VALUE AND THE RISK/RETURN TRADE-OFF

ASSIGNMENT OVERVIEW

For this assignment, make sure to first carefully review all of the required readings about present value, future value, risk and return, and the CAPM. Once you are relatively comfortable with these concepts, try working through some of the examples in the background readings and try computing the answers on your own. Once you are confident you both understand the concepts and the computational steps, complete the assignment below.

CASE ASSIGNMENT

Present your answers to the problem below in a Word document, and also upload an Excel file with your computations. Excel is required for Questions 2 and 3. Excel is optional for Questions 1 and 4, but you are required to show your steps for all quantitative problems. Even if you get the answer wrong, you can still get partial credit if you show your work.

1. Calculate the following:
   1. Suppose you wish to raise some money for your favorite local charity. This charity needs $50,000 a year to run its operation and you want to make sure that it is ensured an annual payment of this amount from now on for every year in the foreseeable future. Given an interest rate of 5%, how much would you have to fund this perpetuity to guarantee the charity a payment of $50,000 per year?
   2. You decide to put $1,000 in a new bank account and don’t plan to withdraw the money for 10 years. If your bank does continuous compounding and the interest rate is 1%, what will be the value of this bank account in 10 years?
2. Suppose you won the lottery but not all of your winnings will come in one year. Instead, you will get a series of annual payments over the next five years. The table below tells you what your payment will be every year for the next five years. Use the information in the table to make the following computations:
   1. The present and future value of your lottery ticket if the interest rate is 8%
   2. The present and future value of your lottery ticket if the interest rate is 10%

Year	Payment
1	5000
2	6000
3	7000
4	8000
5	9000

1. The table below gives the probability of different returns for three different assets. Using this table, calculate the following:
   1. The expected return of each asset
   2. The standard deviation of returns of each asset
   3. The coefficient of variation of each asset
   4. Based on your answers to B) and C) above, which asset has the highest total risk and highest relative risk?

Asset A		Asset B		Asset C
Probability	Return	Probability	Return	Probability	Return
0.3	5	0.1	25	0.1	4
0.4	8	0.3	20	0.8	5
0.3	9	0.5	15	0.1	6
		0.1	14

1. Suppose the market return is 8%, the risk-free rate is 1% and the beta for a given stock is 1.2. Answer the following questions based on this information:
   1. What is the required return for this stock?
   2. If the beta increases by 50% (but risk-free rate remains 1%), what will be the new required return for the stock? What is the percentage-wise change in required return compared to your answer to A) above?
   3. If the market return increases by 50% (but beta remains at 1.2), what will be the new required return for the stock? What is the percentage-wise change in required return compared to your answer to A) above?
2. Suppose there are three different companies. The first one, Trendy Tech Inc., has investors who are “fair-weather friends.” When the stock market is going up, everybody wants to invest in Trendy Tech, but as soon as the market goes down everyone jumps ships and sells their shares. The second company is Oily Oil Inc. Oily’s stock price seems to depend only on the price of oil and nothing else. Finally, there is Conglomerated Conglomerate Inc. Conglomerated is a giant company with holdings in almost every industry imaginable—from cell phones to grocery stores and even amusement parks. Based on this information, which company would you think has the highest beta? The lowest beta? Which one do you think has a beta closest to 1?

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 1 – Background

PRESENT VALUE AND THE RISK/RETURN TRADE-OFF

To begin the module, start off with these two videos to give yourself an overview of the main concepts covered in this module. The first video is from Professor Holthausen of the Wharton School of Business at the University of Pennsylvania. He explains the concept of the time value of money and also goes through some calculations using Microsoft Excel. The second video is from Professor Pinder of the University of Melbourne and covers some basic concepts of risk and return.

Holthausen, R. (2015). Time value of money. Coursera. Retrieved from: https://www.coursera.org/learn/wharton-decision-making-scenarios/lecture/ZE2tE/1-2-time-value-of-money

Pinder, S. (2017) Unsystematic versus systematic risk. Coursera. Retrieved from: https://www.coursera.org/learn/valuation/lecture/LLtZP/2-1-unsystematic-versus-systematic-risk-getting-rid-of-unrewarded-risk

A second video from Dr. Pinder on the capital asset pricing model is highly recommended but not required. A link to Dr. Pinder’s video is included under the optional reading list below.

Once you have finished viewing the videos, take a closer look at the concepts covered in the videos by reading through these book chapters. In addition to reading about the basic concepts, make sure to work through some of the numerical examples as these will help you with your assignments:

Vishwanath, S. (2007). Chapter 2: Time value of money. Corporate finance: Theory and practice. SAGE Publications India. Available in the Trident Online Library.

Vishwanath, S. (2007). Chapter 3: Risk and return. Corporate finance: Theory and practice. SAGE Publications India. Available in the Trident Online Library.

If you have any difficulty with the material above, it is highly recommended that you take a look at some of the optional readings below. The materials below cover the same material but sometimes concepts can be absorbed better if you see some explained in a different manner or see additional examples.

Finally, if you don’t have much experience with Microsoft Excel then please take a look at the following videos:

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

Codible. (2012). Future value for a series of annual deposits. Retrieved from: https://www.youtube.com/watch?v=EcfmEVVHDsw

OPTIONAL READING

Pinder, S. (2017). Capital asset pricing model (It’s all about the discount rate). Coursera. Retrieved from: https://www.coursera.org/learn/valuation/lecture/6Oh5F/2-2-capital-asset-pricing-model-its-all-about-the-discount-rate

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

Module 2 – Case

STOCK AND BOND VALUATION

ASSIGNMENT OVERVIEW

Before starting on this assignment, make sure to thoroughly review the required background materials. This assignment will require you to use the various discounted cash flow methods and dividend models to make computations. In addition to knowing the computational steps involved in stock and bond valuation, make sure you also understand the basic concepts.

Submit your answers as a Word document. Make sure to show your work for all quantitative questions, and make sure to fully explain your answers using references to the background readings for any conceptual questions. Questions 1 and 3 will require Excel, so submit an Excel file that shows your computational steps as a separate file in addition to your Word file. Question 4 is purely conceptual, no computations are necessary but make sure to apply and reference concepts from the required readings in your answers to each of the scenarios.

CASE ASSIGNMENT

1. Suppose you buy a bond that will pay $1000 in ten years along with an annual coupon payment of $50 and the interest rate is 4%. Answer the following questions:
   1. What is the value of this bond?
   2. Now suppose the bond has no coupon payments (it is a “zero coupon” bond) but still pays $1000 in ten years. What is the value of this bond?
   3. What would happen to the value of the bond if the inflation rate unexpectedly goes up? What the bond value increase or decrease?
   4. Now suppose the bond still pays an annual coupon of $50 but the interest rate drops to 2%. What is the new value of this bond?
2. The XYZ Corporation pays a dividend of $1 for each share and its required rate of return is 8%. Answer the following questions:
   1. Assuming zero growth in dividends, what is the value of each share?
   2. Now assume a 4% annual growth rate in the dividend paid. What is the value of each share?
   3. Assume the growth rate is still 4%, but the required rate of return drops to 6%. What is the new value of each share?
3. Acme Medical Corp. is expecting the cash flows from 2018-2022 in the table below. After 2022 it is expecting growth in cash flow at an annual rate of 3%. The firm has determined that its weighted average cost of capital (discount rate) is 7%. Using the table below calculate the following:
   1. What is the present value of Acme’s future cash flows using the discounted cash flow model?
   2. If the firm has 200,000 common shares outstanding, zero preferred shares, and debt with a market value of $10,000,000 what would be the value of each share?
   3. Now suppose the discount rate increases to 10%. How would your answers to a) and b) above change based on the new discount rate?

Year	Cash flow
2018	500,000
2019	550,000
2020	620,000
2021	700,000
2022	800,000

1. Suppose the Alpha Manufacturing Corporation is experiencing extreme financial difficulties and is considering bankruptcy. Its shareholders are currently almost equally divided about whether or not the company should go bankrupt, with one outspoken faction pushing for bankruptcy and the other strongly opposing it. They have $50 million in debt all in the form of bonds, and bondholders are pretty well united in that they want the firm to declare bankruptcy.
   1. The CEO announces that he is leaning against bankruptcy. This means one faction of shareholders is happy, but another faction of shareholders is very upset and the bondholders are also unhappy. Can the unhappy faction of shareholders team up with the bondholders to vote out the CEO? Explain your reasoning using references from the background readings.
   2. Suppose Alpha ends up declaring bankruptcy. They do not have any cash in the bank but they own $60 million worth of real estate. They only have one type of shareholder—common shareholders. If they sell the real estate, how much of this will bondholders get and how much with shareholders get? Explain your reasoning using references from the background readings.
   3. Now suppose that Alpha has two classes of shareholders—common shareholders and preferred shareholders. Preferred shareholders are owed $20 million in dividends that have been unpaid in the last two years. If Alpha goes bankrupt and sells its $60 million worth of real estate, how much will bondholders get, how much will common shareholders get, and how much will preferred shareholders get? Explain your reasoning using references from the background readings.

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 – Background

STOCK AND BOND VALUATION

REQUIRED READING

Start off with these two tutorials that will give you an overview of the basic methods of valuing stocks and bonds from Subjectmoney:

Subjectmoney. (2013, January 2). How to price/value bonds – formula, annual, semi-annual, market value, accrued interest [Video file]. Retrieved from https://www.youtube.com/watch?v=7zCqoED8MVk

Subjectmoney. (2013, January 3). Dividend discount model (DDM) – constant growth dividend discount model – how to value stocks [Video file]. Retrieved from https://www.youtube.com/watch?v=n76Pz3HOBPo

Now dig much deeper into bond and stock valuation with the following books chapters. They cover not only the computational methods but also provide a general overview of stock and bond markets:

Ross, S., Westerfield, R., & Jordan, B. (2007). Chapter 6: Interest rates and bond valuation. Essentials of Corporate Finance. McGraw Hill. Retrieved from http://novellaqalive2.mhhe.com/sites/dl/free/007000000x/484691/Part4_Chap6.pdf [If this link is down, click Interest Rates and Bond Valuation for an alternative link.]

Fabozzi, F. J., & Peterson Drake, P. (2009). Chapter 7: Asset valuation: Basic bond and stock valuation models. Finance: Capital markets, financial management, and investment management. Wiley. Available in the Trident Online Library.

Finally, for some examples of valuation calculations in Excel see the following videos:

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

Girvin, M. (2010). Stock valuation with dividend growth model. ExcellsFun. Retrieved from https://www.youtube.com/watch?v=cbRIhwkGAnQ

Girvin, M. (2010). Stock value based on present value of future dividend cash flows. ExcellsFun. Retrieved from https://www.youtube.com/watch?v=G2VIY5E3I3s&t=163s

OPTIONAL READING

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

Ahmad, A. (n.d.). Bonds part II: Pricing. Coursera. Retrieved from https://www.coursera.org/learn/finance-markets/lecture/EpByC/bonds-part-ii-pricing

Ozoguz, A. (n.d.) Basics of equity valuation. Coursera. Retrieved from https://www.coursera.org/learn/global-financial-markets-instruments/lecture/vHPRN/basics-of-equity-valuation

Vishwanath, S. (2007). Chapter 24: Debt markets. Corporate finance: Theory and practice. SAGE Publications India. Available in the Trident Online Library.

Module 3 – Case

CAPITAL BUDGETING AND THE COST OF CAPITAL

ASSIGNMENT OVERVIEW

Before starting on this assignment, make sure to thoroughly review the required background materials. Make sure you fully understand both the basic concepts as well as how to calculate payback period, NPV, IRR, and WACC. Submit your answers in a Word document. Make sure to show your work for all quantitative questions and fully explain your answers using references to the background readings for any conceptual questions. Questions 1 and 2 will require Excel. Attach an Excel file to show your computations for Questions 1 and 2.

CASE ASSIGNMENT

1. The table below gives the initial investment and expected cash flows over the next five years for two different projects. Assume that the industry you are in expects a return of 10%, which you use as the discount rate in net present value (NPV) calculations and as the required rate of return for purposes of deciding on projects. Also, assume that management only wants to invest in projects that pay off within four years.

For each project, compute the payback period, NPV, and internal rate of return (IRR). Then explain whether each project should be accepted based on these three criteria.

	Project A	Project B
Initial Investment	$40,000	$28,000
Year	Cash Flows
1	$10,000	$10,000
2	$10,000	$13,000
3	$10,000	$5,000
4	$10,000	$5,000
5	$10,000	$6,000

1. Suppose you are planning on becoming a vendor at the arena where your favorite sports team plays. You are trying to decide between opening up a souvenir stand selling T-shirts, caps, etc., with your sports team’s logo or opening up a hot dog and beer stand. It is more expensive to open up the hot dog and beer stand because you need to purchase a license to serve alcohol and you need to spend money to comply with health department regulations. Revenue from the souvenir stand is likely to be unpredictable because fans of your favorite team tend to want to purchase hats and T-shirts only when the team is winning. Revenue from hot dogs and beer seem to be a little more steady since fans want to eat and drink regardless of whether the team is winning.

   Below is a table with the initial investment cost of each type of stand and the annual payments you expect over the next five years. The annual payments will be different depending on how well your team does. Therefore, you will estimate how much cash flow you will get depending on whether your team does better than expected (optimistic), the same as the past few years (most likely), and worse than expected (pessimistic). Use a discount rate of 8%.

Based on the table below, answer the following items:

1. Calculate the net present value (NPV) for each type of stand under each of the three scenarios. Calculate the range of possible NPV values for each type of stand.
2. Based on your answer to A) above and your own guesses about how well you think your favorite team will do over the next five years, which type of stand would you rather invest in?

	Souvenir Stand	Hot Dog and Beer Stand
Initial Investment	$100,000	$150,000
	Annual Cash Inflows (5 Years)
Outcome
Pessimistic	$30,000	$50,000
Most likely	$50,000	$60,000
Optimistic	$70,000	$70,000

1. Suppose you are a corn farmer in your home state. You have to decide between two projects. One project is to purchase new equipment for your farm that will help boost your profits for the next 10 years. You also find out that you can purchase a large banana farm in Brazil for the same price as the equipment, and at the current market price for bananas you will make a lot more profit than you would from purchasing new corn farming equipment.

   After asking around, you find out that the standard discount rate for evaluating the NPV of the farming project is 6%. Most farmers in your home state seem to use this rate successfully. However, you don’t know any other banana farmers and you don’t know too much about farming in Brazil, so you have to make a guess on an appropriate discount rate for the Brazilian banana farm. Based on the concepts from the background readings, would you say the Brazilian banana farm will need a lower or higher discount rate? A lot larger or smaller, or only a little?

1. Calculate the following:
   1. The cost of equity if the risk-free rate is 2%, the market risk premium is 8%, and the beta for the company is 1.3.
   2. The cost of equity if the company paid a dividend of $2 last year and is expected to grow at a constant rate of 7%. The stock price is currently $40.
   3. The weighted average cost of capital (WACC) if the company has a total value of $1 million with a market value of its debt at $600,000 and a market value of its equity at $400,000. Its cost of debt is 6% and its cost of equity is 15%. The tax rate it pays is 25%.
2. Suppose you own a chain of dry cleaners and the WACC you’ve been using to make decisions on new purchases of dry cleaning equipment is a steady 9%. Recently, gambling has been made legal in your home town so you decide to expand and open up a casino. Should you use the same WACC to evaluate purchases of casino equipment? Why or why not? What are some alternatives to using the same WACC to make decisions on casino equipment? Explain your reasoning, and make references to concepts from the background readings.

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

CAPITAL BUDGETING AND THE COST OF CAPITAL

REQUIRED READING

Start off the module by viewing these videos from Professor Roberts of the Wharton School of Business at the University of Pennsylvania and Professor Roberts of Rice University. These videos will give you a general overview of the key concepts of capital budgeting and the cost of capital:

Roberts, M. (2017). Decision criteria. Coursera. Retrieved from: https://zh.coursera.org/learn/wharton-finance/lecture/hRuBX/decision-criteria

Weston, J. (2017) Putting it all together as WACC (weighted average cost of capital). Coursera. Retrieved from: https://www.coursera.org/learn/finance-for-non-finance/lecture/07ldB/putting-it-all-together-as-the-wacc-weighted-average-cost-of-capital

Ross, S., Westerfield, R., & Jordan, B. (2007) Chapter 8: Net present value and other investment criteria. Essentials of Corporate Finance. McGraw Hill. http://novellaqalive2.mheducation.com/sites/dl/free/007000000x/484691/Part5_Chap8.pdf [If the link is down, click Net Present Value or Fundamentals of Corporate Finance for an alternative link]

Ross, S., Westerfield, R., & Jordan, B. (2007) Chapter 12: Cost of capital. Essentials of Corporate Finance.McGraw Hill. Retrieved from: http://novellaqalive2.mheducation.com/sites/dl/free/007000000x/484691/Part7_Chap12.pdf
[If the link is down, click Cost of Capital or Fundamentals of Corporate Finance for an alternative link]

Finally, check out the following video that will show you how to make capital budgeting calculations using Excel:

Graulich, V. (2012). How to calculate NPV and IRR. IHateMath.com. Retrieved from: https://www.youtube.com/watch?v=kCnwCplibAk&t=230s

Hamilton, K. (2014). Excel NPV IRR. Retrieved from: https://www.youtube.com/watch?v=HTJh5yxphMs

If you still have difficulty with the material after reviewing the required materials, check out the optional materials below. Included are two additional videos, including one on using Excel to compute NPV and IRR. Also included are some additional book chapters that cover the same material but explain it in a slightly different way with different examples.

OPTIONAL READING

BlueBookAcademy.com. (2015). Learn it FAST: Weighted average cost of capital explained. Retrieved from: https://www.youtube.com/watch?v=JIvokDfW9AQ&t=48s

Girvin, M. (2010). Investment criteria: NPV, IRR, payback, AAR, profitability index. Retrieved from: https://www.youtube.com/watch?v=U2aH4xH5Fz0

Fabozzi, F. J., & Peterson Drake, P. (2009). Chapter 14: Capital budgeting techniques. Finance: Capital markets, financial management, and investment management. Wiley. Available in the Trident Online Library.

Clive, M. (2012). Chapter 14: The cost of capital. Financial management for non-financial managers.Kogan Page. Available in the Trident Online Library.

Block, S. & Hirt, G. (2008). Chapter 12: The capital budgeting decision. Foundations of Financial Management. McGraw-Hill, Retrieved from: http://studylib.net/doc/8149455/12-the-capital-budgeting-decision

Module 4 – Case

LEVERAGE, CAPITAL STRUCTURE, AND DIVIDEND POLICY

ASSIGNMENT OVERVIEW

Before starting on this assignment, make sure to carefully review the background readings. Part A requires you to make some computations, and Part B requires you to analyze some scenarios using your knowledge of the concepts. So make sure to go through the computational examples in the required readings and also thoroughly review the key concepts before starting on this assignment.

CASE ASSIGNMENT

Part A: Quantitative Problems

1. Suppose QuickCharge Corporation manufactures phone chargers. They sell their chargers for $20. Their fixed operating costs are $100,000 and their variable operating costs are $10 per charger. Currently they are selling 30,000 chargers per year.
   1. What is QuickCharge’s EBIT (earnings before interest and taxes) at current sales of 30,000?
   2. What is QuickCharge’s breakeven point?
   3. Calculate the EBIT if QuickCharge’s sales increase 50% to 45,000 chargers. What is the percent of change in EBIT under this increase in sales? Also, calculate the EBIT if the company’s sales decrease 50% to 15,000 chargers. What is the percent of change in EBIT under this decrease in sales?
   4. What is QuickCharge’s degree of operating leverage? Based on your computation, what does its operating leverage say about QuickCharge’s business risk?
2. The StayDry Umbrella Corporation will have an EBIT of $100,000 if there is a normal amount of rain this year. But if there is a drought, they will have an EBIT of only $50,000. The interest rate on debt is 10%, and the tax rate is 35%. The company does not pay any preferred dividends.
   1. If StayDry has zero debt and 50,000 outstanding shares, what will its EPS (earnings per share) be if there is normal rain? What will its EPS be if there is a drought? What is its DFL (degree of financial leverage)?
   2. Now suppose StayDry has decided to take on $300,000 in debt and has used these funds to buy back half of the outstanding shares so now there are only 25,000 outstanding shares. What is the new EPS and DFL for both normal rain and drought?
   3. Based on your answers to a) and b) above, what are the trade-offs management has to make between zero debt or $300,000 in debt? What are the benefits and disadvantages of taking on this debt?

Part B: Conceptual Questions

1. For each of the following scenarios, explain whether the situation describes financial riskor business risk. Explain your answers to each scenario using at least one of the references from the background readings:
   1. A pharmaceutical company has developed a new cancer treatment drug that has a much higher success rate than other drugs currently in the market. It has the potential to triple the company’s profits. However, the FDA has expressed concern about some side effects, and it is not clear if the FDA will approve the drug.
   2. An airline has an EBIT of $100 million per year. However, it also has a huge amount of debt and pays $97 million per year in interest. Its EBIT is relatively stable but tends to go up or down by $5 million or so each year depending on the economy.
   3. A basketball franchise earns an EBIT of $50 million a year when its team has a winning year. However, it earns only $10 million when its team has a losing year.
2. Explain what capital structure theory (or theories) best describes the following situations. Make sure to cite at least one of the required textbook chapters for each answer, and to cite at least two references for this section:
   1. A CEO decides to borrow $50,000 in new debt, and the share prices rise dramatically. He then decides to sell half of his own personal shares, and when this is reported in the Wall Street Journal, the share prices drop dramatically in value.
   2. The corporate tax rate rises from 35% to 45%, and the XYZ Corporation decides to issue more debt. A year later, bankruptcy laws are changed to become much stricter and costlier. XYZ then decides to pay back half of its debt.
   3. A CEO named Joe Bigwig is known for living large with very expensive cars and a huge mansion. Joe is seeking a large loan from a bank to finance some new projects for his corporation. However, the bank becomes concerned when they find out that he recently used company funds to buy a brand-new company jet and also schedules numerous business trips to Hawaii and stays in five-star hotels. The bank tells Joe he will receive the loan only if he agrees to scale back on his personal expenses and not give himself or any other executives a raise until the loan is paid back.

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

LEVERAGE, CAPITAL STRUCTURE, AND DIVIDEND POLICY

REQUIRED READING

Capital Structure

Start by viewing the following video. It will introduce you to capital structure and provide you with a basic understanding of the main topics from this module:

Obi, P. (2014). Capital structure and financial leverage. Purdue University. Retrieved from: https://www.youtube.com/watch?v=xKBdJX-rHMg

Now go through the following tutorials from Investopedia which include some videos. Start out with the tutorial on degree of operating leverage, then scroll down to the sections on earnings before interest and taxes and degree of financial leverage:

Degree of operating leverage. (n.d.). Investopedia. Retrieved from: http://www.investopedia.com/terms/d/degreeofoperatingleverage.asp

Now dive deeper into the concepts of capital structure with the following two book chapters. Pay special attention to the concepts of operating leverage, financial leverage, business vs. financial risks, and the major theories of capital structure choices. While the tutorials above will give you a broad overview of the main topics, the following readings have worked out problems and solutions that will be essential for completing the Case Assignment:

Vishwanath, S. (2007). Chapter 19: Optimal capital structure. Corporate finance: Theory and practice. SAGE Publications India. Available in the Trident Online Library.

Brigham, E. & Houston, J. (n.d.). Chapter 13: Capital structure and leverage. Fundamentals of Financial Management. Cengage Learning.

Finally, take a look at the following book chapter on dividend policy. Take a close look at the concepts of regular dividend policy and low-regular-and-extra dividend policy, as well as stock splits and stock repurchases:

Clive, M. (2012).