FINA 3320.001 - Homework SOX & Table 1 Q1-8 S...

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Unformatted text preview: Homework SOX & Table 1 Q1-8 S PV(CS) = D1/(R-g) {R: Rate of return; g: Growth rate; D: Dividend) Maximize Shareholder's Wealth- CGS Maximize Retained Earning- S/A Selling & Administration Expenses Pay Preferred Shareholder Dividend- D/A Depreciation Expenses Pay Common Shareholder Dividend EBIT- I To calculate the value of the bond you need to know EBT- N: The time- T- FV: The future value of the born EAT- PSD Agency problem - The conflict between the interest of the agency and the EACS top manager. For ex: the agency want to increase the shareholder's- CSD wealth, but the top manager want to take money for themselves RE How to stop the agency problem? Dispersely held firm -- Your stock is dispersed among millions of shareholders, and no individual own large chunk of the stock --> No one has authority over you (Because the larger stock owner has the vote power) Agency Problem with the Creditor Borrow the money and don't use it as the intended purpose r^ = Sigma (I = 1 --> N) PiRi Type 1 risk: Standalone risk, all type of thing in 1 basket You assume all kind of risk when you investing in single company o = Sqrt [ Sigma(i=1 to n) Pi(ri-r^)^2 ] CV = o / r^ Bp = Sigma (I = 1 to n)WiBi Type 2 risk: Market risk ony (Have company of really far related, ex: holding IBM & hot-dog company stock) HW: 1-1, 1-8 TIAA-CPEF 2-1 --> 2.9 Who would buy a Treasury? Someone who want fixed incomes / Bank / Lower risk Negotiable Certificate of Deposit = Can serve as collateral, so you can use it whenever you need without any penalty from the regular CD Money Marlet Mutual Funds - they buy instrument with the maturity of 1 year or less How you get people to your money market? Cap your revenue Bp = Sigma (I = 1 to n) WiBi Standalone risk = Standard deviation = Sqrt ( Sigma (I = 1 to n) (Xi -X^)^2 Pi ) % Occurance Return Y X XY Xi-X^ (Xi-X^)^2*Y 30% 9% 0.027-1% 3.6E-005 40% 11% 0.044 1% 3.2E-005 30% 10% 0.03 0% 3.0E-007 X^= 10% Variance = 0.000069 Standard Deviation (o) = 0.008307 Coefficient Variation = 0.082244 You want the lowest CV when choosing stock Safe should earn around 5-6%, Medium should earn around 10-12%, Risk investor should earn around 16-18% Pg. 40: In a market dominated by risk-averse investors, riskier securities must have higher expected eturns, as estimated by the marginal investor, than less risky securities, If the situation does not exist, buying and selling in the market will force it to occur. Example: Bp = Sigma (1 to n) WiBi Rp = Sigma (1 to n) WiRi Stock Bx r^ $ Weights Bi Ri 1 1.5 10% 80000 0.2 0.3 0.02 2 1.7 12% 120000 0.3 0.51 0.036 3 0.6 8% 60000 0.15 0.09 0.012 4 0.8 9% 140000 0.35 0.28 0.0315 400000 Bp = 1.18 Rp = 0.0995 With around 15-20 diversified stock in your portfolio, your portfolio is diversified Pgs. 48 a = alpha = Independent B = beta = slope Dependent variable Independent Variable Stock X S&P 500 Stock Market Index 10 500 y X Use Lin in BA II --> y = .512 + .05X +1 11 510 +10 1 10 +1 12 511 +1 1 1-1 11 515 +4-1 4 +2 13 520 +5 2...
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FINA 3320.001 - Homework SOX & Table 1 Q1-8 S...

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