Net cash flow= Net Inc After Taxes+Dep Exp for the year….add back depreciation for Net ProfitNominal/Quoted Rate= Exp. Infl. +(Real rate)(Exp. Infl.); Krf=k*+IRP+(k*IRP) k*=[Krf-IRP]/(1+IRP)IRP=[Krf-k*]/(1+k*)zero coupon bond- F/(1+r)^tn=LN(FV/PV)/LN(1+i)i=(FV/PV)^1/n-1PV=FV[1/(1+i)^n]FVA=PMT[(1+i)^n-1/i]how many deposits question: n=LN[1+[i*FVA/PMT]]/LN(1+i)how much are these payments worth to you today if the interest(withdraw): PVA=PMT[1-[1/1+i]^n/i]the value of any asset can be found at PV of its exp future CFs: V=CF1/(1+K)^1+CF2/(1+k)^2…….CFn/(1+K)^nYield to Maturity: Cur Yld.+Cap gains YieldCost of Internal Equity: rf+(rm-rf)*B where rf=risk free rate; rm= market return; B= beta of the stockProfitability Index: NPV/Initial InvestmentCost of Debt: Rd(1-Tc) where Rd= cost to issue new debt(coupon rate or interest rate) and Tc=tax rateCost of Equity: Div per share/ current mkt value of stock + Growth rateCPT Div Yield: RR=9.7% Cap Gains= 4.2% 9.7-4.2= 5.5% div yieldDetermine stock price: stock quoted @12.55% div yield. Stock pays $3 per share3/.1255=23.9Determine required return on stock: Buy stock for $90. Exp to pay in yr 1,2,3--$4,$0,$5. At the end you plan to sell for $100 CFO=-90 CO1=4 CO2=0 CO3=105 IRR CPTCPT growth rate based on internal funds. Firm has net income after taxes of $100. It pays $40 dividends. Common stock:$50. Ret Earnings: $30.Cap Surplus: $120Ret earnings:100-40=60; Percent Ret Earnings:60/100=60%; Common stock equity: 200; ROE:100/200=50%; Growth rate=(0.5)(0.6)=30%Find the required RateofRet for a stock following the constant growth model. The stock paid div of $10 this year. Growth rate is 20%. Stock selling for $100D1:10(1+0.2)=12;what is given is this years dividend which is D0. K=(12/100)+0.2=32%If problem says pmts are at the beginning of the year: 2nd PMT, 2nd ENTERIf you used CF keys do, 2nd CF, 2nd CF CE/CMoney leaving you is entered as a negative number; money coming to you is entered as a positive numberRequired Rate of Rate(Discount Rate): Constant Growth Rate ModelKs=[D1/P]+g Zero Growth Rate ModelKs=D/PD1=dividend exp at end of year, P=current priceDiscounted Cash Flow Model: P=PV(D1)+PV(D2)+--------PV(Dn)+PV(Pf) where P0= price today, D1, D2 etc are exp dividends in years 1,2 etc and Pf=future selling price set the current price equal to expected dividends and price the future and solve for rate of return(Compute IRR)`ROE=Net Income After Taxes/ Common S/EValue of stock=Psubscripto=PV of future dividendsFrom the investors POV- pick the lowest ask price and the highest bid pricesTechnical Analysis of Technicians or Chartists: pick stocks solely on the basis of historic price movement and/or historic volume of trading of stocks. Pay little attention to what the company does; concentrate on what the stock does. In short term value of stock reflects what people think they are worth, not what they are really worth. Ex: Dow theory, Odd lot index, moving average lines, advance/decline index, momentum indicators. Fundamental Analysis: look at what company does: its earnings, growth profitability, amount of debt carried, dividend history. Most of what we talk about in class is Fundamental. More support from academic research for this type analysis. Technical analysis some say is like astrology while fundamental analysis is like astronomy. It is best to combine both methods of analysis. Use technical in the short run to identify when to buy or sell something and use fundamental analysis for the long run to identify what to buy or sell. Securitiy Markets are efficient- Weak form: past date or historical data-already reflected in price of security. “Random Walk” Semi-strong form: current data-already reflected in security. Earnings, dividends etc. Strong Form: future, private unpublished data-already reflected in price of security. Top mgmt., specialist and brokers with special info access, prof investors like mutual fund managers cannot consistently bend marketStocks- better inflation protectors than bonds and treasury billsExchange rate risk- how does change in exchange rate between US dollar and foreign currency affect stock and bond pricesExpected Value- sum of product of profitibality of outcome and the associated return on the stock; also the mean or averageStandard Dev- Measure of how much the individual returns on the stock deviate from the exp value or the mean-equals the square root of the sum of the squared difference between each return and the mean multiplied by the associated probability of occurrence. Higher the std dev, the higher the riskTotal Risk=company specific risk+ market risk company specific risk: diversifiable by investors also called non-systematic riskMarket Risk- not diversifiable, anything that affects the whole economy. Also called systematic riskBeta- measure of systematic or non diversifiable or market riskFirm specific risk- ex; industry pollution, top mgmt. of firm caught in corruptionRisk of the portfolio- weighted average of the risk of the stock that make up the portfolio, while the return on the portfolio is just a weighted avg of the return of the stock in the portfolio. Risk of a portfolio is found by using a formule, which incorporates the degree of correlation b/w the secutiritesCAPM- capital asset pricing model and security market line Rf+Beta(Rm-Rf)= Equation of CAPMCalc Required Rate of Return Ex- List is using a 6% risk free rate and a long term mkt exp rate of return of 10%. A stock analyst following the firm has calculated that the firm beta is 1.2K=Rf+Bf(Rm-Rf)—K=6%+1.2(10%-6%)—K=10.8%Intrinsic Value- Lisa is using constant growth model. She estimates that the dividend next period will be .50 and the BW will grow at a constant rateof 5.8%. The stock is selling for $15. What is the intrinsic value? P=D1/k-g---intrinsic value= .50/.108-.058—the stock is overvalued as the market price is $15 and it exceeds the intrinsic value($10)Payback Period- (Take after tax cash flow per year-Cumulate) Initial Outlay-10kDiscounted CF Techniques- use after tax cash flows and for entire period of investment NPV- set PV of all cash flows in years one to N minus the cost or intial outlay. If positive, you accept. Profitability Index- Set PV of all cash flows in years one to N and divide it by the cost of investment or outlayIRR- set PV of all cash flows in years 1 to N equal to the intial outlay. Find unknown int rate by trial and error. If IRR exceeds