Posted: February 26th, 2023

Mod 3 assist

Please download the

Case 3 Template

. You will type your answers into this document. Save the document with your last name and submit to the dropbox. Note that you will get partial credit if you show your work even if the answers are incorrect.

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.

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.

Risk, Return, and Stock Valuation

Virtual Stock Exchange Project

Module 3 SLP Assignment

· Make 3 Stock Purchases, Provide Information about the Purchases, and Calculate and Interpret the Standard Deviation

Please download the

Module 3 SLP template

. You will type your answer into this Excel workbook. When finished with the SLP assignment, please save the document with your last name and submit to the dropbox.

1. Purchase 7 and 8: Buy stock in two companies that have returns that are inversely related. In other words, you might choose to buy stock in a company that does well when oil prices rise and one that does poorly when oil prices rise. You must explain this in the spreadsheet in the field “Reason for Buying.”

2. Purchase 9: Buy a stock that has countercyclical returns. In other words, its returns are inversely related to the business cycle.

You are free to make additional purchases, but you only need to explain the reasoning behind your required purchases 7 through 9.

3. You will need to include the following information for each stock in this workbook:

· Company Name

· Ticker Symbol

· Reason for Buying

4. In addition to making these purchases and recording the above information, you will need to calculate the mean and standard deviation of the daily stock price for TWO of your required stock purchases for the last year. The historical stock price can be downloaded from finance.yahoo.com. Once you have searched on the company, using the ticker symbol, you can select the “Historical Data” tab. Click on “Download Data.” You will copy and paste this information into the SLP template and calculate the mean and standard deviation for the “Adj Close” price.

Once you have downloaded the data and calculated the mean and standard deviation for both stocks, you will answer the following additional questions in the template:

5. Based on the standard deviation alone, can you make any conclusions about the relative risk of the two stocks?

6. Given the risk, what can you say about the relative expected return of the two stocks?

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.

Trident University

FIN301: Principles of Finance

Module 3: Case Template

Please remember to save this file with your last name in the file name. For example: FIN301 Module 3 Case Template, Doe

To type in this document, please click on the highlighted words, “

Click or tap here to enter text.

”

Name: Click or tap here to enter text.

Question 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%?

ANSWER:

Click or tap here to enter text.

What will be the value of the stock if the dividend is expected to grow 5% per year?

ANSWER:

Click or tap here to enter text.

Question 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.

ANSWER:

☐Systematic Risk

☐Unsystematic Risk

Explain: Click or tap here to enter text.

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

ANSWER:

☐Systematic Risk
☐Unsystematic Risk

Explain: Click or tap here to enter text.

c. The CEO of a successful company gets arrested for some serious crimes, and the company has trouble finding a good replacement.

ANSWER:

☐Systematic Risk
☐Unsystematic Risk
Explain: Click or tap here to enter text.

Question 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%.

ANSWER:

Click or tap here to enter text.

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%.

ANSWER:

Click or tap here to enter text.

Question 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.

ANSWER:

☐High Beta

☐Low Beta

☐Average Beta

Explain: Click or tap here to enter text.

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.

ANSWER:

☐High Beta
☐Low Beta
☐Average Beta
Explain: Click or tap here to enter text.

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.

ANSWER:

☐High Beta
☐Low Beta
☐Average Beta
Explain: Click or tap here to enter text.

Module 3, Questions 1 – 3

Company Name:

Ticker Symbol:

Company Name:

Ticker Symbol:

Trident University

FIN301: Principles of Finance

Module 3: SLP Template

FILL IN ALL CELLS THAT ARE HIGHLIGHTED IN YELLOW

Please remember to save this file with your last name in the file name. For example: FIN301 Module 3 SLP Template, Doe

Name:

STOCK 1: PRICE/RETURNS SHOULD BE INVERSELY RELATED TO STOCK 2

Company Name:

Ticker Symbol:

Reason for Buying (Explain how you know this stock’s price or returns are inversely or negatively related to stock 2’s price or returns):

STOCK 2: PRICE/RETURNS SHOULD BE INVERSELY RELATED TO STOCK 1

STOCK 3: STOCK SHOULD BE INVERSELY RELATED TO THE ECONOMIC BUSINESS CYCLE

Reason for Buying (Explain how you know this stock’s price or returns are inversely or negatively related to the economic business cycle. In other words, this stock does better when the economy is in a slowdown or recession; it does worse when the economy is in an upturn or expansion):

Directions for Question 4

.43

.779999

97.489998

98.709999

98.360001

04

96.940002

29999

97.059998

96.709999

94.800003

94.629997

.830002

95.830002

96

93.860001

93.860001

94.769997
94.769997

95.599998

95.639999

95

96.730003

95.580002

95.639999

96.199997

96.82

96.5

96.970001

98

97.940002

98.519997

100

99.989998

102.199997

99.330002

DIRECTIONS FOR MODULE 3 – QUESTION 4
	Copy and Paste the downloaded data for one stock here:
		Date			Open			High			Low			Close			Adj Close			Volume
1/22/19	97.150002		98		96		97.489998	8063200			Mean (Average):	97.1061902857
1/23/19	98.870003	99.349998	97.529999		98.709999	8345800			Standard Deviation:	1.9628098393
1/24/19	98.199997	98.459999	96.43		98.360001	7609700
1/25/19	98.75	98.9	100	96.75		96.940002	7218200
1/28/19		96.5	97.07	96.080002		97.059998	5875800
1/29/19	96.769997	97.160004	96.510002		96.709999	5253400
1/30/19	96.68	96.800003	94.260002		94.800003	11849300
1/31/19		94.629997	96.870003			95	14723000
2/1/19	95.919998	93.110001			93.860001	12591900
2/4/19			94.769997	93.349998	7268600
2/5/19	95.25	95.940002	95.019997		95.599998	6099900
2/6/19	95.43	96.010002	95.220001			95.639999	4264900
2/7/19	95.110001		96.82		96.730003	7010100
2/8/19	96.339996	96.690002	95.139999		95.580002	6169200
2/11/19	95.650002	96.349998		96.199997	5542800
2/12/19	97.169998		96.970001	5881300
2/13/19	97.300003	97.089996		97.940002	5458500
2/14/19	97.68	99.199997	97.019997		98.519997	7200800
2/15/19	98.980003	98.860001		99.989998	9481000
2/19/19	102.379997	104.18	102.07		102.199997	20685100
2/20/19	101.809998	102.339897	98.650002		99.330002	12292228

Question 4: Calculate the mean and standard deviation of the daily stock price for TWO of your required stock purchases for the last year. To do this, follow these steps:
1. Go to finance.yahoo.com.
2. Type in the ticker symbol for one of the stock that you purchased in the search bar at the top of the Yahoo! Finance page. Click the search button. For example, if you purchased Walmart stock, you would type in “WMT.”

3. Once you have searched on the company, using the ticker symbol, you can select the “Historical Data” tab:

4. Then select the “Download Data” link:

5. A .csv file will start downloading. Open that file to view the data. You should copy and paste this data into the tab labeled “

Module 3, Questions 4 – 6

,” in this workbook. An example of the data is included below. You will want to make sure you have a full year’s worth of daily stock prices.

6. Calculate the mean and standard deviation for the Adj Close price. The formula for the mean is =AVERAGE() and the formula for the standard deviation is =STDEV.S() You should type these formulas into the appropriate cells and highlight the data for which you want to generate these statistics. The cells that you highlight will show between the parentheses. You can practice calculating these statistics using the sample data in this worksheet and the formulas that are in the yellow highlighted cells to the left.
7. Repeat these steps for the second stock you chose. Answer questions 5 and 6 in the worksheet titled “Module 3, Questions 4 – 6.”

Module 3, Questions 4 – 6

Copy and Paste the downloaded data for one stock here:

Date
Open
High
Low
Close
Adj Close
Volume

Date
Open
High
Low
Close
Adj Close
Volume

Mean (Average):

Mean (Average):

Standard Deviation:

Standard Deviation:

FILL IN ALL CELLS THAT ARE HIGHLIGHTED IN YELLOW. SCROLL TO THE RIGHT TO ANSWER QUESTIONS 5 AND 6
Copy and Paste the downloaded data for the second stock here:	QUESTION 5: Based on the standard deviation alone, can you make any conclusions about the relative risk of the two stocks?
QUESTION 4 – STOCK 1:	QUESTION 4 – STOCK 2:
QUESTION 6: Given the risk, what can you say about the relative expected return of the two stocks?

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