Professional Assignment 2 – CLO 1, CLO 2, CLO 3, CLO 4, CLO 5, CLO 6

PA 2 included two parts: Part 1 about evaluating beta and WACC, and Part 2 is about data acquisition in preparation of the CLA 2. You need to do both parts to demonstrate your comprehensive evaluation of the company’s opportunity cost as well as your skills in retrieving and organizing historical data on securities for the purpose of portfolio formation.

1. Search Yahoo Finance, or any other credible source to retrieve the most recent income statement and balance sheet for a major leveraged corporation.

– Provide these statements in proper format and include a screenshot of the data.

– Retrieve the data on the company’s historical data and calculate annual rate of return by using adjusted closing prices for the past 20 years.

– Using the data on the company’s stock rate of return and the index’s rate of return estimate beta of the corporation. Compare this value with the value stated by the source.

– Retrieve the risk-free rate of return as the annual interest rate of US treasuries. Based on these values estimate the expected annual rate of return of the corporation’s security. Compare your estimate with the expected rate of return as evaluated based on your data in part b.

– Using the financial statements mentioned above estimate the annual rate of interest paid by the corporation (cost of debt). Also, find the tax rate and capitalization ratio (proportions among equity and debt). Using these values that you have found, estimate the annual weighted cost of capital (WACC) of the corporation.

2. This part of the assignment is in preparation for CLA 2. Choose 5 major securities from different industries, among which one can be the one you chose in part 1 of the question. Retrieve the data on the companies’ historical data and calculate annual rate of return for the past 20 years for each security.

Provide your explanations and definitions in detail and be precise. Comment on your findings. Provide references for content when necessary. Provide your work in detail and explain in your own words. Support your statements with six (6) peer-reviewed in-text citation(s) and reference(s).

Note:

1. Please stick to the company that you analyzed for PA 1 assignment, which is Walmart. I have also attached the PA 1 assignment which had been done for your reference.

2. The paper needs to be formatted in APA 7th edition

3. Provide your explanations and definitions in detail and be precise.

4. Provide work in detail and explain in your words.

5. Provide references for content when necessary. Support your statement with peer-reviewed in-text citations and references.

6. Need to have at least 6 peer-reviewed articles as the references (Recommend to find the articles from ProQuest), which should include the source of the data.

7. Need to include textbooks as references.

8. Please find the textbook and class PPTs in the attachment section.

9. Comment on your finding.

10. Textbook Information:

Bowerman, B., Drougas, A. M., Duckworth, A. G., Hummel, R. M. Moniger, K. B., & Schur, P. J. (2019). Business statistics and analytics in practice (9th ed.). McGraw-Hill

ISBN 9781260187496

11. Please find the Course Learning Outcome list of this course in the attachment.

Financial &

managerial

Accounting

John J. Wild

Ken W. Shaw

Barbara Chiappetta

5th

edition

information

for decisions

5th

edition

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Wild

Shaw

chiappetta

9 7 8 0 0 7 8 0 2 5 6 0 0

9 0 0 0 0

www.mhhe.com

ISBN 978-0-07-802560-0

MHID 0-07-802560-5

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STOCK VALUATION

CHAPTER 8

Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

8-‹#›

7.1

Explain how stock prices depend on future dividends and dividend growth

Show how to value stocks using multiples

Lay out the different ways corporate directors are elected to office

Define how the stock markets work

Key Concepts and Skills

Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

8-‹#›

Common Stock Valuation

Some Features of Common and Preferred Stocks

The Stock Markets

Chapter Outline

Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

8-‹#›

If you buy a share of stock, you can receive cash in two ways:

The company pays dividends.

You sell your shares, either to another investor in the market or back to the company.

As with bonds, the price of the stock is the present value of these expected cash flows.

Cash Flows for Stockholders

Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

8-‹#›

7.4

Section 8.1 (A)

As the text points out, a stock that currently pays no dividends may or may not have value; a stock that will NEVER pay a dividend cannot have any value as long as investors are rational. For a stock that currently pays no dividend, market value derives from (a) the hope of future dividends and/or (b) the expectation of a liquidating dividend.

Suppose you are thinking of purchasing the stock of Moore Oil, Inc.

You expect it to pay a $2 dividend in one year, and you believe that you can sell the stock for $14 at that time.

If you require a return of 20% on investments of this risk, what is the maximum you would be willing to pay?

Compute the PV of the expected cash flows.

Price = (14 + 2) / (1.2) = $13.33

Or FV = 16; I/Y = 20; N = 1; CPT PV = -13.33

One-Period Example

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8-‹#›

7.5

Section 8.1 (A)

Note, the calculation can also be done as:

FV = 14; PMT = 2; I/Y = 20; N = 1; CPT PV = -13.33

Now, what if you decide to hold the stock for two years?

In addition to the dividend in one year, you expect a dividend of $2.10 in two years and a stock price of $14.70 at the end of year 2.

Now how much would you be willing to pay?

PV = 2 / (1.2) + (2.10 + 14.70) / (1.2)2 = 13.33

Two-Period Example

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8-‹#›

7.6

Section 8.1 (A)

If you have taught students how to use uneven cash flow keys,

CHAPTER 12

SOME LESSONS FROM CAPITAL MARKET HISTORY

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12-‹#›

Calculate the return on an investment

Discuss the historical returns on various types of investments

Discuss the historical risks on various important types of investments

Explain the implications of market efficiency

Key Concepts and Skills

Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

12-‹#›

Returns

The Historical Record

Average Returns: The First Lesson

The Variability of Returns: The Second Lesson

More about Average Returns

Capital Market Efficiency

Chapter Outline

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12-‹#›

We can examine returns in the financial markets to help us determine the appropriate returns on non-financial assets.

Lessons from capital market history

There is a reward for bearing risk.

The greater the potential reward, the greater the risk.

Risk, Return, and Financial Markets

Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

12-‹#›

Section 12.1

10.4

Total dollar return =

income from investment

+ capital gain (loss) due to change in price

Example:

You bought a bond for $950 one year ago. You have received two coupons of $30 each. You can sell the bond for $975 today. What is your total dollar return?

Income = 30 + 30 = 60

Capital gain = 975 – 950 = 25

Total dollar return = 60 + 25 = $85

Dollar Returns

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12-‹#›

10.5

Section 12.1 (A)

Lecture Tip: The issues discussed in this section need to be stressed. Many students feel that if you don’t sell a security, you won’t have to consider the capital gain or loss involved. (This is a common investor’s mistake – holding a loser too long because of reluctance to admit a bad decision was made.) Point out that non-recognition is relevant for tax purposes – only realized income must be reported. However, whether or not you have liquidated the asset is irrelevant when measuring a security’s pre-tax performance. Also, we need to annualize total returns so that we can compare the performance of different securities available in the market.

It is generally more intuitive to think in terms of percentage rather than dollar returns.

Dividend yield = income / beginning price

Capital gains yield =

(ending price – beginning price)/ beginning price

Total percentage return =

dividend yield + capital gains yield

Percentage Returns

Copyright © 2019 McGraw-Hill Educat

RETURN, RISK, AND THE SECURITY MARKET LINE

CHAPTER 13

Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

1-‹#›

Show how to calculate expected returns, variance, and standard deviation

Discuss the impact of diversification

Summarize the systematic risk principle

Describe the security market line and the risk-return trade-off

Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Key Concepts and Skills

1-‹#›

Expected Returns and Variances

Portfolios

Announcements, Surprises, and Expected Returns

Risk: Systematic and Unsystematic

Diversification and Portfolio Risk

Systematic Risk and Beta

The Security Market Line

The SML and the Cost of Capital: A Preview

Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter Outline

1-‹#›

11.3

Lecture Tip: You may find it useful to emphasize the economic foundations of the material in this chapter. Specifically, we assume:

-Investor rationality: Investors are assumed to prefer more money to less and less risk to more, all else equal. The result of this assumption is that the ex ante risk-return trade-off will be upward sloping.

-As risk-averse return-seekers, investors will take actions consistent with the rationality assumptions. They will require higher returns to invest in riskier assets and are willing to accept lower returns on less risky assets.

-Similarly, they will seek to reduce risk while attaining the desired level of return, or increase return without exceeding the maximum acceptable level of risk.

Expected returns are based on the probabilities of possible outcomes.

In this context, “expected” means average if the process is repeated many times.

The “expected” return does not even have to be a possible return.

Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Expected Returns

1-‹#›

11.4

Section 13.1 (A)

Use the following example to illustrate the mathematical nature of expected returns:

Consider a game where you toss a fair coin: If it is Heads, then student A pays student B $1. If it is Tails, then student B pays student A $1. Most students will remember from their statistics that the expected value is $0 (=.5(1) + .5(-1)). That means that if the game is played over and over then each student should expect to break-even. However, if the game is only played once, then one student will win $1 and one will lose $1.

Suppose you have predicted the following returns for stocks C and T in three possible states of the economy. What are the expected returns?

State Probability C T___

Boom 0.3 0.15 0.25

Normal 0.5 0.10 0.20

Recessi

Running head: WALMART FINANCIAL ANALYSIS 1

WALMART FINANCIAL ANALYSIS 2

Wal-Mart financial analysis

Student’s name

Professor’s name

Date

Any investor in the business, must measure how his/her business is performing financially. It is a dream of every investor to stay in the business and make good profits thus every effort put into the business works towards this business goal of continuity and profitability (Tracy, 2012). For this reason the investor must ensure that his business is healthy financially and to be sure, a financial analysis must be done. This analysis will help the investor evaluate his business to determine whether the business is solvent and profitable or otherwise. This analysis is done using ratios like profitability ratios, liquidity ratios, leverage ratios etc.

Wal-Mart Company is an American company that deals with retailing of different merchandise like food staff, clothing, toys etc. it was founded in 1950 by Sam Walton in Bentonville (Tracy, 2012). The company has its operations in different countries globally. It is a listed company in NYSE trading in many shares in the market. The following are financial analysis of the company for the year 2020.

i) Debt ratio

Debt ratio shows how much the company’s assets are financed through debt. A higher percentage shows that the company is highly leveraged. It is express as a percentage (Drake & Fabozzi, 2012). A ratio that is greater than 100% indicates that most of the company’s assets are funded through debts in other words the company has more debts as compared to assets. It is calculated as shown:

i) Debt ratio

Debt ratio= Total debts/Assetsx100

Total debt = (236495-81552) =154,943

Total assets=236495

Debt ratio = 154,943/236495×100 = 65%

In the year 2020 Wal-Mart Company had more assets than debts thus its risk level was low.

ii) Debt to equity ratio

The debt to equity ratio indicates how the company is able to finance its debt using the owner net worth. It also shows how stable a company is in terms of financing its debt through equity (Drake & Fabozzi, 2012). The ideal ratio is believed to be between 1 and 1.5. However, the ratio varies from one industry to another depending on the operations. A ratio of 2 would be good for a company in manufacturing industry. It is calculated as shown.

Debt to equity ratio= total debt / equity

154,943/81552

= 1.8

This means that Wal-Mart need to reduce its borrowing as it is already highly leveraged.

iii) Return on assets

The ratio indicates how the company’s assets were used to generate profits (Tracy, 2012). A higher number shows how efficient the management is in terms of using the company’s assets to ensure the company remains profitable. Return on asset is calculated as a percentage of net profit to total assets’

ROA = Net profit/ total assets

14881/236495 x100

= 6.3%

This means that Wal-Mart Company earned $6.3 cent for every dollar invested in 2020.

Iv) Return on equity

A good ratio is between 10%

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