BUS 420 Excel Project Part 2-calculate annual returns for Bartman, Reynolds, and the Market Index…

a. Use the data given to calculate annual returns for Bartman, Reynolds, and the Market Index, and thencalculate average returns over the five-year period. (Hint: Remember, returns are calculated by subtracting thebeginning price from the ending price to get the capital gain or loss, adding the dividend to the capital gain or loss,and dividing the result by the beginning price. Assume that dividends are already included in the index. Also, youcannot calculate the rate of return for 2004 because you do not have 2003 data.)Data as given in the problem are shown below:Bartman IndustriesYearStock PriceDividend2009$17.25$1.152008$14.75$1.062007$16.50$1.002006$10.75$0.952005$11.37$0.902004$7.62$0.85Reynolds IncorporatedStock Price$48.75$52.30$48.75$57.25$60.00$55.75Market IndexDividend Includes Divs.$3.0011,663.98$2.908,785.70$2.758,679.98$2.506,434.03$2.255,602.28$2.004,705.97We now calculate the rates of return for the two companies and the index:Bartman24.7%-4.2%62.8%2.9%61.0%Reynolds-1.1%13.2%-10.0%-0.4%11.7%Index32.8%1.2%34.9%14.8%19.0%29.5%200920082007200620052.7%20.6%AverageNote: To get the average, you could get the column sum and divide by 5, but you could also use the function wizard, fx.Click fx, then statistical, then Average, and then use the mouse to select the proper range. Do this for Bartman and thencopy the cell for the other items.b. Calculate the standard deviation of the returns for Bartman, Reynolds, and the Market Index. (Hint: Use thefunction wizard to calculate the standard deviations..STDEV)Bartman31.5%Standard deviation of returnsReynolds9.7%Index13.8%Bartman seems to be more risky than both Reynolds and the index.c. Now calculate the coefficients of variation Bartman, Reynolds, and the Market Index.Divide the standard deviation by the averages.Bartman1.07Coefficient of VariationReynolds3.63Index0.67Discuss numbers aboved. Construct a scatter diagram graph that shows Bartmans and Reynolds returns on the vertical axis and themarket indexs returns on the horizontal axis.It is easiest to make scatter diagrams with a data set that has the X-axis variable in the left column, so wereformat the returns data calculated above and show it just below.YearIndex32.8%1.2%34.9%14.8%19.0%2009200820072006200570.0%Bartman24.7%-4.2%62.8%2.9%61.0%Reynolds-1.1%13.2%-10.0%-0.4%11.7%Stock Returns vs. Index Returns60.0%St oc k Re t ur ns50.0%40.0%30.0%BartmanReynolds20.0%10.0%0.0%0.0%-10.0%10.0%20.0%-20.0%30.0%40.0%Index Ret urnsDiscuss graph abovee. Estimate Bartmans and Reynoldss betas as the slope of a regression with stock return on the vertical axis (yaxis) and market return on the horizontal axis (x-axis). (Hint: use Excels SLOPE function.) Are these betasconsistent with your graph above?Bartman’s beta =1.54Reynolds’ beta =-0.56Discuss numbers above with tie-in to graph abovef. The risk-free rate on long-term Treasury bonds is 6.04%. Assume that the market risk premium is 5%. What is the expectedreturn on the market? Now use the SML equation to calculate the two companies required returns.Market risk premium (RPM)=Risk-free rate =5.000%6.040%Expected return on market =Risk-free rate6.040%11.040%++Market risk premium5.000%=Risk Free +Market Risk Premium==6.040%13.734%5.000%1.539====6.040%3.238%5.000%-0.560Required returnBartman:Required returnReynolds:Required return*BetaDiscuss numbers aboveg. If you formed a portfolio that consisted of 50% Bartman and 50% Reynolds, what would be its beta and itsrequired return?The beta of a portfolio is simply a weighted average of the betas of the stocks in the portfolio, so this portfolio’s betawould be:Portfolio beta =0.49h. Suppose an investor wants to include Bartman Industries stock in his or her portfolio. Stocks A, B, and C arecurrently in the portfolio, and their betas are 0.769, 0.985, and 1.423, respectively. Calculate the new portfoliosrequired return if it consists of 25 percent of Bartman, 15 percent of Stock A, 40 percent of Stock B, and 20percent of Stock C.BartmanStock AStock BStock CBeta1.5390.7690.9851.423Portfolio Beta =1.179Required return on portfolio:===Portfolio Weight25%15%40%20%100%Risk-free rate +6.04%11.93%Market Risk Premium *5.00%XXBeta1.179NOTE: Review your notes for the Chapter 4 lecture as well as the Chapter 4 excel video before proceeding.Every yellow cell should have a formula or text, you should not type numbers in cells. (except for letter f starting data)Chapter 4.Rework Text Problem 4-12 using a spreadsheet. A 10-year 12 percent semiannual coupon bond, with a par value of$1,000, may be called in 4 years at a call price of $1,060. The bond sells for $1,100. (Assume that the bond has justbeen issued.)W ork parts a through d with the spreadsheet. I would also recommend working these parts with a calculator to check yourspreadsheet answers.a. What is the bond’s yield to maturity?Basic Input Data:Years to maturity:Periods per year:Periods to maturity:Coupon rate:Par value:Periodic payment:Current priceCall price:Years till callable:Periods till callable:YTM =1022012%$1,000$60$1,100$1,06048This is a nominal rate, not the effective rate. Nominal rates are generallyquoted. Use the rate function to calculate.5.18%b. What is the bond’s current yield?Current yield =Annual Coupon$120.0010.91%//Price$1,100c. What is the bond’s capital gain or loss yield?Cap. Gain/loss yield =Note that this is an economic loss, not a loss for tax purposes.d. What is the bond’s yield to call?Here we can again use the Rate function, but with data related to the call.YTC =This is a nominal rate, not the effective rate. Nominal rates are generallyquoted.The YTC is lower than the YTM because if the bond is called, the buyer will lose the difference between the call price andthe current price in just 4 years, and that loss will offset much of the interest imcome. Note too that the bond is likely to becalled and replaced, hence that the YTC will probably be earned.NOW ANSWER THE FOLLOWING NEW QUESTIONS USING PARTS OF THE DATA ABOVE:e. How would the price of the bond be affected by changing interest rates? (Hint: Conduct a sensitivity analysis ofprice to changes in the yield to maturity, which is also the going market interest rate for the bond. Assume that thebond will be called if and only if the going rate of interest falls below the coupon rate. That is an oversimplification,but assume it anyway for purposes of this problem.)Nominal market rate, r:12%Note: We can value the bonds (called vs. not called) using different rates (in the table below).(remember to use formulas (PV function) and check with your calculator).The third column is a decision column, and IF statement works very well here (but, is not required).The IF statement or decision is to determine which value is appropriateand thus, which value the company would choose based upon the differing rates.Value of Bond If:Rate, r Not calledCalled0%2%4%6%8%10%12%14%16%18%20%Value,consideringcall likehood:ModifiedNote: The bond would not be called unless r<coupon rate = 12%.We can graph the above data(3 lines) to show a visual of the bond’s price sensitivity.If you study the graph, you will see that the "not called" situation shows the greatest price sensitivity, the "called" the leastsensitivity, and the "modified" falls somewhere in between. Actually, the modified situation, which is representative of mostactual bonds because most bonds are callable, shows that bondholders will not win big if rates fall because then the bond willbe called, but they do lose big if rates rise because then the bonds will not be called. In terms of the graph, the sensitivity lineis not steep where we want it to be steep, to the left of the 12% coupon rate, but it is steep where we do not want it to besteep, to the right of 12%. Thus, the conclusion is that callable bonds are riskier than non-callable bonds, and their risk isasymmetric.f. Now assume the date is 10/25/2009. Assume further that our 12%, 10-year bond was issued on 7/1/2009, is callableon 7/1/2013 for $1,060, will mature on 7/1/2019, pays interest semiannually (January 1 and July 1), and sells for$1,100. Use your spreadsheet to find (a) the bonds yield to maturity and (b) its yield to call.Begin by setting up the input data as shown below: (note: much of this data will need to be typed in.)Basic info:Call info:Settlement (today)SameMaturityTrue maturity for YTM, call date for YTCCoupon rateSameCurrent price (% of par)SameRedemption (% of par value)Par for YTM, Call price for YTCFrequency (for semiannual)SameBasis (360 or 365 day year)0Same(NOTE: leave basis at "0" for 360)With the input data set, put the pointer on D133 and then click fx, Financial, YIELD, OK to get the yield menu. Fill in themenu by using the point-and-click procedure, and then click OK to get the bond’s yield:Yield to Maturity:The completed menu is shown below.Tip: Use Yield function. For dates, either refer to cells D122 and D123, or enter the date in quotes, such as " 10/25/2009".D122D124D123D125D124D126D125D127D126D128Scroll down hereTo find the yield to call, use the YIELD function, but with the call price rather than par value as theredemptionYield to call:Every cell should have a formula or text, you should not type numbers in cells.Chapter 12.Gardial Fisheries is considering two mutually exclusive investments. The projects’ expected net cash flows are asfollows:Time01234567Expected net cash flowsProject A Project B($375)($575)($300)$190($200)$190($100)$190$600$190$600$190$926$190($200)$0a. If you were told that each project’s cost of capital was 12 percent, which project should be selected? If the cost ofcapital was 18 percent, what would be the proper choice?@ a 12% cost of capitalWACC =@ a 18% cost of capital12%WACC =NPV A =NPV A =NPV B =Use Excel’s NPV function as explained in thischapter. Note that the range does not include thecosts, which are added separately.18%NPV B =Based upon the data above, what decision would be made at a cost of capital of 12%, how about at a cost of capital of 18%?b. Construct NPV profiles for Projects A and B.Before we can graph the NPV profiles for these projects, we must create a data table of project NPV relative to differing costs ofcapital.Project AProject B0%2%4%6%8%10%12%14%16%18%20%22%24%26%28%30%Create a line graph of the two columns of data for Project A and B.c. What is each project’s IRR?We find the internal rate of return with Excel’s IRR function:IRR A =IRR B =Note in the graph above that the X-axis intercepts are equal to the two projects’ IRRs.e. What is the crossover rate, and what is its significance?Time01234567Cash flowdifferentialCrossover rate =The crossover rate represents the cost of capital at which the two projectshave the same net present value. In this scenario, that common netpresentvalue is:d. What is each project’s MIRR at a cost of capital of 12 percent? At r = 18%? (Hint: Consider Period 7 to be the end of Project B’slife.)@ a 12% cost of capital@ a 18% cost of capitalMIRR A =MIRR B =MIRR A =MIRR B =f. What is the regular payback period for these two projects?Project ATime period:Cash flow:Cumulative cash flow:% of year required for payback:Max Row 93=Payback:0(375)1(300)2(200)3(100)46005$6006$9267($200)0(575)11902190319041905$1906$1907$0Project BTime period:Cash flow:Cumulative cash flow:% of year required for payback:Payback:g.At a cost of capital of 12%, what is the discounted payback period for these two projects?WACC =12%Project ATime period:Cash flow:Disc. cash flow:Disc. cum. cash flow:% of year required for payback:Discounted Payback:0(375)1(300)2(200)3(100)46005$6006$9267($200)0(575)11902190319041905$1906$1907$0Project BTime period:Cash flow:Disc. cash flow:Disc. cum. cash flow:% of year required for payback:Discounted Payback:h. What is the profitability index for each project if the cost of capital is 12 percent?PV of future cash flows for A:PI of A:PV of future cash flows for B: