Homework Week 4-5 FINC 5000 FINANCE IMBA Fall 1 2015
Week 4;
1) Beta’s on the internet
We discussed Beta’s in class. A measure of Systematic risk relative to the market.
The market’s beta is 1. All other beta’s are related to this market beta.
Your first assignment this session is to find the Beta of your company (Yahoo
Finance – Key Statistics)
2) Again Beta’s but now calculated by your team
Try to calculate the Beta of your Team’s Company
(use Beta= COV(Rj,Rm)/VAR (Rm)
Compare the result with the Beta you find under 1. Why is it different?
3) Companies with a Beta of ZERO or close to ZERO
Search for companies with a Beta of ZERO or close to ZERO.
What kind of Companies are these and why is the Beta so low?
4) Companies with a Negative Beta
Is it possible that a Company could have a ZERO Beta? (Yes,. Nothing is impossible
or anything is possible). Search on line and try to find some examples.
What kind of companies have Negative Beta’s?
5) The Cost of Capital or WACC
The Cost of capital that we will from now on call the WACC can be calculated and I
gave some examples in class:
You are required to calculate the WACC for your Team’s company:
Calculate: Cost of Equity Ce (CAPM) with Rf+Beta*(Rm-Rf) in which Rf is the 10 year
T Bond rate (Yahoo Finance) Beta is your (above) calculated Beta and Rm is the
return on the S&P500 (Damodaran On Line; see the link in the syllabus)
Then: Cost of Debt Cd: as Rf+default spread (default spread from Damodaran )
Then D/(D+E) in which D and E are the Market Value or best estimates of them and
E/(D+E) note that these weights should be 100% together
WACC= D/(D+E)*Cd*(1-tax rate)+E/(D+E)*Ce
Use as Tax rate: Tax Expense/EBT (Income statement ,annual report 2014)
Great! You have now for the first time calculated the Cost of Capital of your Team’s
Company without having to rely on other people’s judgment !
Week 5;
1) Valuing the Stock of your Company
Use the Valuation method we used in class (afternoon session) called the Dividend
Growth Model (or if you forgot look it up in the book or in the PPT) to Value your
Team’s company stock:
Value the stock of your company this way!
Remember if your company does not pay any dividends now you will need to
assume a starting date (in class we discussed Facebook as an example)
2) Valuing Bonds
Use the valuation method we used in class (also see the PPT or your book) to value a
Bond. Look up the details of the bond (maturity, coupon, size) in the notes of the
companies 10K report if it was recently issued. If it was issued many years ago you
can choose; still to go back and value it based on a value many years ago, value it per
today based on today’s market rates (ignoring past coupons, OR take another
company that recently issued bonds (like Apple Inc.) to do this assignment.
NOTE; your homework for these two sessions is due in week 9 (when you come to
the Final Exam)
Shanghai,
13 September 2015
ENJOY FINANCE!