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 97.4899988063200 Mean (Average): 97.1061902857
1/23/19 98.870003 99.349998 97.529999 98.7099998345800 Standard Deviation: 1.9628098393
1/24/19 98.199997 98.459999 96.43 98.3600017609700
1/25/19 98.75 98.9100 96.75 96.9400027218200
1/28/19 96.5 97.07 96.080002 97.0599985875800
1/29/19 96.769997 97.160004 96.510002 96.7099995253400
1/30/19 96.68 96.800003 94.260002 94.80000311849300
1/31/19 94.629997 96.8700039514723000
2/1/19 95.91999893.110001 93.86000112591900
2/4/1994.769997 93.3499987268600
2/5/19 95.25 95.940002 95.019997 95.5999986099900
2/6/19 95.43 96.010002 95.220001 95.6399994264900
2/7/19 95.110001 96.8296.7300037010100
2/8/19 96.339996 96.690002 95.139999 95.5800026169200
2/11/19 95.650002 96.34999896.1999975542800
2/12/1997.16999896.9700015881300
2/13/19 97.30000397.089996 97.9400025458500
2/14/19 97.68 99.199997 97.019997 98.5199977200800
2/15/19 98.98000398.860001 99.9899989481000
2/19/19 102.379997 104.18 102.07 102.19999720685100
2/20/19 101.809998 102.339897 98.650002 99.33000212292228

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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