MaryORourke

MGMT260:
Finance
Portfolio1
Chapters1,3,4,&Ratios
9/28/15

PrinciplesofFinancePortfolioORourke2

ChapterOne

1. Whatisafirmsintrinsicvalue?Whatisitscurrentstockprice?Isthestockstrue
longrunvaluemorecloselyrelatedtointrinsicvalueorcurrent?
Afirmsintrinsicvalueisanestimateoftheactualortruevalueofa
stockthatisfoundusingaccurateriskandreturndata.Itcanneverbe
measuredprecisely.
Currentstockpriceisthepriceatwhichstockisbeingsoldonthemarket,
or,thecurrenttradingprice.
Astockslongrunvalueismorecloselyrelatedtointrinsicvalue,as
managerswithinthecompanyarebestabletoestimatethetruelongrun
valueofacompany(whencomparedtooutsidesources).
6.Whatarethevariousformsofbusinessorganizations?Whataretheadvantages/
disadvantagesofeach?
Proprietorship:anunincorporatedbusinessownedbyoneperson.

Pros

Cons

Easyandcheaptoform.

Solelyresponsible...noonetosharethe
blame.

Subjecttofewregulations.

Lifeofbusinesslimitedtolifeofowner
(withoutrestructuringassomethingother
thanaproprietorship).

LowIncomeTaxes.

Hardtoobtaincapital,whichmakesithardto
growacompany.

Partnership:Anunincorporatedbusinessownedbytwoormorepeople.

Pros

Cons

Easyandinexpensivetostart.

Highlydependentoneachother/held
accountableforeachothersdownfalls.

Abletoavoidcorporateincometax.

Sharethesuccess.

Sharetheblame.

Corporation:Alegalentitycreatedbyastate,separateanddistinctfrom
itsownersormanagers.

PrinciplesofFinancePortfolioORourke3

Pros

Cons

Unlimitedlife.

CorporateTaxes.

Easytransferabilityofownership.

LimitedLiability.

Easytofinance.

SCorps:Allowssmallbusinessestobetaxedasaproprietorshipratherthana
corporation.

Pros

Cons

Avoidscorporatetaxes.

Constrainedto100stockholders.

Unlimitedlife,easytransferability.

Limitedliability.

LLC:Hybridbetweenapartnershipandcorporation.

Pros

Cons

Unlimitednumberofmembers.

AsamemberofanLLC,yourenotallowed
topayyourselfwages

Memberscanenjoythebenefitsofreceiving
profits(andwritingofflosses)inexcessof
theirindividualownershippercentage.

LimitedLiability

LLP:SimilartoLLCbutusedforthefieldsofaccounting,law,andarchitecture.
8.Whataresomeactionsthatstockholderscantaketoensurethatmanagementsand
stockholdersinterestsarealigned?
Stockholdersneedtogivemanagersfinancialincentivetokeepstockpricehigh.Direct
stockawardsshouldbephasedinoveranumberofyearstoprovidethatincentive.
Stockholdersshouldvoicetheiropinionsinshareholdersmeetingwiththeboardof
directors.
Theyshouldvoteinboardelections.
Theyshouldprovidereasonablecompensation(seeabove).
Ifitcomestoit,theyshouldexhibittheirthreatoftakeover.

PrinciplesofFinancePortfolioORourke4

11.EdmundEnterprisesexample:
Sincethefirmhasrecentlyinvestedlargecapitaltoupgradetheirtechnology,earningper
shareofthefirmwillgodownbecausethefirmhaslessmoney(asexpensesgoesup,profit
decreasesduetocapitalinvestment)todistributedividendstotheshareholders.
Theintrinsicvalueoffirmmayincreaseduetopositivefutureperceptionofinvestortowardsfirm
thatfirmsfuturecashflowwillincreaseduetothechangeintechnology.Sinceinvestorshave
positiveperceptiontowardsthefirm,thedemandofstockgoesupasaresultintrinsicvalueand
stockpricegoup.

ChapterThree
1. Whatfourfinancialstatementsareusuallycontainedintheannualreport?
1) IncomeStatement:netincome.
Afinancialstatementthatmeasuresacompany's
performanceoveraspecificaccountingperiod.Financialperformanceis
assessedbygivingasummaryofhowthebusinessincursitsrevenuesand
expensesthroughbothoperatingandotheractivities.Italsoshowsthenetprofit
orlossincurredoveraspecificaccountingperiod,typicallyoverafiscalquarteror
year.
2) StatementofCashFlows:s
howshowchangesinbalancesheetaccountsand
incomeaffectcashandcashequivalents.
3) BalanceSheet:Networth.
astatementoftheassets,liabilities,andcapitalofa
businessorotherorganizationataparticularpointintime,detailingthebalance
ofincomeandexpenditureovertheprecedingperiod.

4) StatementofStockholdersEquity:A
lsoknownas"equity"and"networth",the
shareholders'equityreferstotheshareholder's'ownershipinterestinacompany.

BSCRAssets=Own
BSDRLiability=Owe
ISDRIncome(revenue)=Earn
BSDRCapital(equity)=Keep
ISCRExpense=Incur

Statement=Periodoftime,IstartedoneplaceIendedupinanother
Sheet=Momentintime,thisiswhereIam

CashMethod:Recordassoonasreceived(onlyusedintheStatementofCashFlows)
AccrualMethod:Onlyrecordwhenearnedwhenreferencingrevenue,andincurredfor
expenses.

2.Whoaresomeofthebasicusersoffinancialstatementsandhowdotheyusethem?

PrinciplesofFinancePortfolioORourke5

Stockholdersusefinancialstatementstoseehowwellthecompanymatchesuptotheir
expectedperformance.Interestedstockholdersusethemtodeterminewhetherornot
theyshouldinvest.Banksusethemtodeterminewhetherornottheyareeligiblefora
loan.Thegovernmentusesthemtodeterminetheamountoftaxesthattheyhaveto
pay.
InvestorsandBankers:Forecastfutureearnings
Managers/Employees:Runbusinesseffectively
Government:Taxassessment
GeneralPublic:Peopleinterestedinpurchasingcommonstock
IndividualscanuseBSandIStodeterminetheirnetworthandnetincome(worthforbalance
sheet,incomeforIS).Incomeusuallyperyear,netincome

4.Explainthefollowingstatement:Whilethebalancesheetcanbethoughtofasasnapshot
ofafirmsfinancialpositionata
pointintime,t
heincomestatementreportsonoperationso
ver
aperiodintime.

Balancesheetrepresentsfirmsfinancialsummaryataspecificpointoftime.Theleftsideof
balancesheetshowsallassetsoffirmsandrightsideofbalancesheetshowsallcapitaland
liabilitiesoffirmfortheparticularpointoftime.Forexample,October31orNovember30.
Incomestatementrepresentscompanysfinancialperformanceoveraperiodoftimesuchasa
fiscalyear.Leftsideofincomestatementincludesalltheexpensesmadebycompanyduring
thefiscalyearwhereasrightsideofincomestatementincludesalltheincomegainedby
companyduringthefiscalyear.Theoverallpurposeofincomestatementistoshowfirms
performanceoveraperiodoftime.

5.Doinvestorsneedtoworryaboutthevalidityofacompanysfinancialstatements?
Yes,investorsneedtoworryaboutthevalidityofacompanysfinancialstatementsbecause
muchofwhatisreportedonthemisuptothemanagersdiscretion.

1.
a.)Whatisthecompanystotaldebt?
$2,500,0001,500,000=$1,000,000
b.)Whatistheamountoftotalliabilitiesandequitythatappearsonthefirmsbalancesheet?
$2.4million.
c.)Whatisthebalanceofthecurrentassets?
$0.5million.
d.)Currentliabilities?
$0.
e.)Whatistheamountofaccountspayableandaccrualsonitsbalancesheet?
f.)Whatisthefirmsnetworkingcapital?(currentassetscurrentliabilities)
0.50=$0.5million.
g.)Whatisthefirmsnetworkingcapital?(Netoperatingworkingcapitalisdefinedas
noninterestbearingcurrentassetsminusnoninterestchargingliabilities).

PrinciplesofFinancePortfolioORourke6

h.)Networkingcapitalcanbedefinedascurrentassetscurrentliabilities.Netoperatingworking
capitalisdefinedasnoninterestbearingcurrentassetsnoninterestchargingliabilities.This
meansyouonlytakeintoconsiderationtheassetsandliabilitiesthatdonotaccrueinterest.

2.LittleBooksIncExample:
$3,000,000/0.6=$5,000,000(EarningsBeforeTax)
EBITwas$6,000,000,theInterestisthedifferencebetween$6,000,000EBITandthe
$5,000,000EBT.

Sotheinterestamount=$1,000,000
4.NewhouseInc.Example:
$780Mbeginningretainedearnings.
+$50Mnetincome
=$830Mendingretainedearningsbeforedividends
$810Mendingretainedearningsafterdividends
=$20milliondividendspaid

11.W.C.CyclingExample:
A)$25,000$55,000=$30,000totalcashflowfor2008.
Cashflowfrominvesting=$250,000
Cashflowfromfinancing=$170,000
Cashflowfromoperating=x
250,000+170,000+x=30,000
80,000+x=30,000
x=30,00080,000
x=$110,000=cashflowfromoperatingactivities

B)cashflowfromoperatingactivities=$110,000
lessdepreciation10,000
plusincreaseinreceivables$100,000
plusincreaseinaccruals$25,000
netincome=$5,000

ChapterFour

PrinciplesofFinancePortfolioORourke7

1.)
CreditAnalystsanalyzeratiostodetermineacompanysabilitytorepaydebt.Itwould
makesenseforsuchanalyststofocusonliquidityratiosbecauseitallowsthemtosee
howwellacompanymanagesitsassets,liabilities,andequity,andhowmuchofthe
companyisalreadyfinancedbydebt.
StockAnalystsareinterestedinacompanysefficiency,riskandgrowthprospects,the
stockofparticularinteresttothemwouldlogicallybeReturnonEquity.
Managersuseratiostomanage,control,andimproveafirmsoperations.Astheyare
concernedwithoperations,aratioofparticularinteresttothemisInventoryTurnover.

2.)
Inventoryturnoverismoreimportantwhenanalyzingagrocerystoreversusan
insurancecompanybecauseagrocerystoreprovidesgoodswhileaninsurancecompany
providesservice.Agrocerystoreactuallyhasinventorytoturnover,inventorythatishighly
perishable,andsotheInventoryRatioishighlyimportanttothem.Itwouldnotmakemuch
sensetocalculatetheInventoryTurnoverofaninsurancecompany.

4.)
Turnoverratios,profitmargins,andDupontSystemsvaryduetothedifferencesinthe
twoseparateindustriesthatagrocerystoreandasteelcompany.Grocerystoresproducemore
dollarspershareandhavehigherturnoverratiosduetoperishablegoods.Steelcompanies
havehigherexpensesinregardstothingslikePPEandlabor.TheyalsohaveahigherDupont
equation.

5.)InflationwillcauseearningstoincreasefortheIncomeStatement.Revenueincreasesasthe
priceofthecommodity.Atthesametime,thecostofcommodityremainsconstantasyouare
sellingthingsthatwerecostedpriortoinflation.

8.)Analyzingtwocompaniesinthesameindustrycanbemisleading.Thisisbecausemanagers
canrecorddatainmultipleways.Thecompaniesmaydifferinhowmuchisfinancedbydebt,
whichmanipulatestheappearanceofhealthwithinthecompany.Thesizeofthetwocompanies
changeswhatitsdatameans.Acompanybeingprivateversuspublicalsomakesahuge
differenceinhowthecompanyisrun.

11.)ReturnonEquitymeasuresNetIncomecomparedtoOwnersEquity.ReturnonInvested
Capital.ROICmeasuresessentiallythesamething,howeveritalsotakesdebtinto
consideration.

12.)

PrinciplesofFinancePortfolioORourke8

Total
Current
Current Ratio
Assets

Effecton
Net
Income

A.)cashisacquiredthroughtheissuance +
ofadditionalcommonstock

B.)merchandiseissoldforcash

C.)federalincometaxdueforthe
previousyearispaid

D.)afixedassetissoldforlessthanbook +
value

E.)afixedassetissoldformorethan
bookvalue

F.)merchandiseissoldoncredit

G.)paymentismadetotradecreditorsfor
previouspurchases

H.)acashdividendisdeclaredandpaid

I.)cashisobtainedthroughshortterm
bankloans

J.)shorttermnotesreceivablearesoldat
adiscount

K.)marketablesecuritiesaresoldbelow
cost

L.)advancesaremadetoemployees

M.)currentoperatingexpensesarepaid

N.)shorttermpromissorynotesare
issuedtotradecreditorsinexchangefor
pastdueaccountspayable

O.)10yearnotesareissuedtopayoff
accountspayable

P.)Afullydepreciatedassetisretired

Q.)accountsreceivablearecollected

R.)equipmentispurchasedwithshort

PrinciplesofFinancePortfolioORourke9

termnotes
S.)merchandiseispurchasedoncredit

T.)theestimatedtaxespayableare
increased

Ratios:

CurrentRatio

currentassets currentliabilities

QuickRatio

currentassets inventories currentliabilities

AverageCollectionPeriod

netAR (sales 365)

InventoryTurnover

cogs inv

FixedAssetTurnover

sales netfixedassets

TotalAssetTurnover

sales totalassets

DebtRatio

totalliabilities totalassets

TimesInterestEarned

EBIT interestcharges

GrossProfitMargin

(revenue cogs) revenue

PrinciplesofFinancePortfolioORourke10

OperatingProfitMargin

OP INEBIT sales

NetProfitMargin

netincome sales

ReturnonTotalAssets

netincome totalassets

ReturnonEquity

netincome ownersequity

currentratio:doesafirmhaveenoughresourcestopayitsdebtsoverthenext12
month?
quickratio:gaugesliquidity
averagecollectionperiod:measurestheaverageamountoftimeittakestocollect
accountsreceivable
inventoryturnover:howmanytimesacompany'sinventoryissoldandreplacedovera
period.
fixedassetturnover:m
easuresacompany'sabilitytogeneratenetsalesfrom
fixedassetinvestmentsspecificallypropertyplantandequipmentnetofdepreciation
operatingprofitmargin:amarginratiousedtomeasureacompany'spricingstrategyand
operatingefficiency.Operatingmarginisameasurementofwhatproportionofa
company'srevenueisleftoverafter
payingforvariablecostsofproductions
uchas
wages,rawmaterials,etc.

PrinciplesofFinancePortfolioORourke11

MaryORourke
MGMT260:
Finance
Portfolio2
Chapters5,7,&9
11/01/15

Chapter5Homework
ST1

PrinciplesofFinancePortfolioORourke12

a.)

b.)

c.)

TimeLine:Animportanttoolusedintimevalueanalysisitisagraphical
representationusedtoshowthetimingofcashflows.
FVn:FutureValueofanannuityovernperiods
PV:PresentValue,orbeginningamount
I:Interestrateearnedperyear
INT:Dollarsofinterestearnedduringtheyear
N:numberofyears/periodsinvolvedintheanalysis
FVAn:FutureValueAnnuity
Compounding:Thearithmeticprocessofdeterminingthefinalvalueofacash
floworseriesofcashflowswhencompoundinterestisapplied
Discounting:Theprocessoffindingthepresentvalueofacashfloworaseriesof
cashflowsthereverseofcompounding.

d.)

Simpleinterest:occurswheninterestisnotearnedoninterest
Compoundinginterest:occurswheninterestisearnedonpriorperiodsinterest

Opportunitycost:Therateofreturnyoucouldearnonanalternativeinvestment
ofsimilarrisk.

Annuity:Aseriesofequalpaymentsatfixedintervalsforaspecifiednumberof
periods
Ordinary(deferred)Annuity:Anannuitywhosepaymentsoccurattheendof
eachperiod
AnnuityDue:Anannuitywhosepaymentsoccuratthebeginningofeachperiod.
Perpetuity:Astreamofequalpaymentsatfixedintervalsexpectedtocontinue
forever

e.)

f.)

g.)

h.)

Uneven(nonconstant)cashflow:Aseriesofcashflowswheretheamountvaries
fromoneperiodtothenest.
Payment(PMT):Thistermdesignatesequalcashflowscomingatregular
intervals.
CashFlow(CF):Thistermdesignatesacashflowthatisnotpartofanannuity.
AnnualCompounding:Thearithmeticprocessofdeterminingthefinalvalueofa
cashfloworseriesofcashflowswheninterestisaddedonceayear.
SemiannualCompounding:Thearithmeticprocessofdeterminingthefinalvalue
ofacashfloworseriesofcashflowswheninterestisaddedtwiceayear.

i.)

Nominal(quoted)interestrate:Thecontractedinterestrate.

PrinciplesofFinancePortfolioORourke13

AnnualPercentageRate(APR):Theperiodicratetimesthenumberofperiods
peryear.
Effective(equivalent)AnnualRate(EARorEFF%):Theannualrateofinterest
actuallybeingearned,asopposedtothequotedrate.

j.)

AmortizedLoan:Aloanthatisrepaidinequalpaymentsoveritslife.
AmortizationSchedule:Atableshowingpreciselyhowaloanwillberepaid.It
givestherequiredpaymentoneachpaymentdateandabreakdownofthe
payment,showinghowmuchisinterestandhowmuchisrepaymentofprinciple.

Questions
1.) Opportunitycostistherateofreturnthatyoucouldearnonanalternativeinvestmentof
similarrisk.Itgivestheinvestortheopportunitytochoosedifferentlenderstoseewhich
willgivethebestrateofinterestorreturn,thereforeincreasingthefuturevalueofthe
money.Itwillbeshowneverycashinflowsandcashoutflowsonatimeline.Interest
rateisthesinglenumberinallsituations.
2.) Yesthestatementistrue.Thefirstscenarioisanannuitybecausetheypaymentsare
equal.Thesecondsituationisnotanannuitybecausethepaymentsaredifferent,
however,itcontainsanannuitybecauseyears310areanannuitybecausethe
paymentsareequal
3.) Dailycompoundingbecauseyouearninteresteverydayinsteadoftwiceayear,andso
yourFVwillbehigher.
4.)IwouldratherhavetheaccountthatiscompoundeddailybecauseIwouldmakemorein
interest.
5.)False:FindthePVofanembeddedannuityandaddthepresentvaluesofindividualcash
flowswhichisdeterminedbythepresentvalueofthecashflowstream.
7.)APRstandsforAnnualPercentageRateanditistheperiodicratetimesthenumberof
periodsperyear.
Interestrateoftheloan+allchargestosecuretheloanoverthepaymentperiod.
Bankdisclosestheinterestrate
determinewhichloanisbetteryouneedbothinterestrateandAPRbecause
neithertellsthewholestory.
EAR:Annualrateofinterestactualbeingearned
8.)Aloanamortizationscheduleisatableshowingpreciselyhowaloanwillberepaid.It
givestherequiredpaymentoneachpaymentdateandabreakdownofthepayment,showing
howmuchisinterestandhowmuchisrepaymentofprinciple.EX:MortgagesandCreditCards.

ELDCapitalMarkets
NoFrillsMoneySkillsBondVideoSummary:

Abondismuchlikealoan,itisadebtinstrument.Whenyoubuyabondyouarelending
moneytoagovernmentorcorporation.Abondissuermayuseyourmoneytofundaproject,
andinreturnyoureceiveinterest.Bondpricesmoveoppositethemarketinterestrate.Ifthe

PrinciplesofFinancePortfolioORourke14

yieldonotherinvestmentsbecomesgreaterthantheyieldofbonds,bondholdersmaywantto
selltheirbondsinfavorofamorelucrativeinvestment.Inthiscase,toattractbuyers,bond
priceswillcomedown.Thisincreasestheyieldonbonds.
Bondsvarywhethertheyarecouponornoncouponbonds.Investorspurchasenewly
issuedcouponbondsatadollaramountcalledface/parvalue.Theinvestorreceivesinterest
paymentsforasettime(usuallysemiannuallyorannually)untilthebondmatures.Attheendof
thetermtheinvestorreceivestheinitialpaymentbackwithafinalinterestpayment,assuming
thebondissuerhasthefunds.Zerocouponbondsaresoldataratelowerthantheirvalue,
becausethebuyerreceivesalloftheirreturnandinterestwhenthebondmatures.Treasury
InflationProtectedSecuritiesorTIPS,isatypeofbondthatprovidesprotectionfrominflation.If
twobondsareidenticalineveryway,oneshouldconsidertheriskofdefaulttomakeadecision.
Highinterestisequaltohighrisk,lowinterestcorrelateswithlittlerisk.

RiskPyramid

NoFrillsMoneySkillsStockVideoSummary:
Peoplegenerallybuystockstoearncapitalgain,ortoreceiveincomethroughdividends.
IfIbuyastockat$20andsellitat$25,Ireceiveacapitalgain.Astockisashareofownership
inapublicallytradedcompany,theamountofownershipthatyouhaveinacompanyisthe
numberofsharesthatyouhold,relativetothetotalnumberoutstanding.Mostlargecompanies

PrinciplesofFinancePortfolioORourke15

paydividendsoncommonstock.Preferredstockholdersdonothavevotingrightsinthe
company,butreceivedividendsbeforeanyreturnispaidtocommonstockholders.Stockrisk
dependsonanumberoffactors,includingthefinancialhealthofthecompany,thepotential
demandforthegoodorservicethecompanyprovidesandhowcompetitivethecompanyisin
itsindustry.Asaninvestor,itisimportanttodiversifyyourportfolioofinvestments(dontputall
ofyoureggsinonebasket).Diversificationreducesyourriskandincreasesyouropportunityfor
return.

I.
BondVideo

1. Whatarethetwowaysforcompaniestoraisecapital?
Companiescanraisecapitalbyusingequity,andbyusingdebt.
2.Nametheprimaryinstrumentforeachofthesetwowayslistedfortheabovequestion.
Primarily,companiessellsecuritiesaseitherstockstoraisecapitalorbondsinorderto
financethroughdebt.
3.Whichthreecategoriesarefoundonthebalancesheet?
ThethreecategoriesfoundonthebalancesheetareAssets,Liabilities,andEquity.
4.Wheredothetwoinstrumentsfromquestiontwogetreportedonthebalancesheet?
Bondsarereportedintheliabilitiessectionofthebalancesheet.Stocksarereportedin
theequitysectionofthebalancesheet.
5.DefinetheFollowing:
a. ParValue:Theparvalueisanotherwaytosaythefacevalueofabond.Itisthe
amountofmoneythatabondholderreceivesoncethebondreachesmaturity.
b. MarketValue:themarketvalueofabondishowmuchthebondwouldsellforon
themarket.NothowmuchInecessarilypaidforit,buthowmuchitwouldgofor
today.
c. AdditionalPaidinCapital:Additionalpaidincapitalwouldbehowmuchan
individualpaidinexcessovertheparvalueofabond.
d. Premium&Discount:Apremiumbondisonethatsellsaboveitsparvalue.This
occurswhenthegoingrateofinterestisbelowthecouponrate.Adiscountbond
isabondthatsellsbelowitsparvalue,whichhappenswhenthegoingrateof
interestisabovethecouponrate.
e. ZeroCouponBond:Azerocouponbonddoesnotpaytheholderanyinterest.
However,theyaresoldatadiscount,belowpar,andsoinvestorsreceivecapital
gainascompensation.
6.Whatisthedifferencebetweenbankruptcyreorganizationandbankruptcyliquidation?
Bankruptcyreorganizationiswhenthebusinessisgood,butitcannotpayoffitsdebts,and
bankruptcyliquidationiswhenthebusinessisnotanygood,andsothecompanyjustdecidesto
selloffallofitsassets.

II.WarrenBuffettSuccessTips.

PrinciplesofFinancePortfolioORourke16

1. Findyourpassionyoullbesuccessful.
Findingyourpassionnotonlyisgoodadviceforfinancialincentives,butultimatelyyouspenda
goodportionofyourlifeworking,andsoyouwanttoensurethatyouenjoythatwork.
2. HirewellconsiderIntegrityandIntelligence.
3. Dontcarewhatothersthinkofyouknowwhatyouknow.
Especiallyforawomanintheworkplace,itisimportanttoremainconfidentinyourknowledge,
skills,andability,asyouwillbequestionedmorethanyourmalecounterparts.Buffetthitsiton
thehead,confidencepaysoffintheworkplace.
1. Read,Read,Read.
Inconjunctionwithtip#3,youwillbeabletoknowwhatyouknowandremainconfidentifyou
knowmorethananyoneelseifyouRead,Read,Read.Buffettreadsabreadthanddepthof
informationeverydaysothathecanbesecureinhisbackgroundofknowledge.
2. Haveamarginofsafety.
3. Haveacompetitiveadvantage.
4. ScheduleforyourpersonalityIfyoudontlikemeetings,dontschedulethem.
5. Alwaysbecompeting.
6. ModelSuccess.
7. GiveUnconditionalLove.

III.Brookings:BondArticle
TheBrookingsBondArticlemakesitclearthatinvestingina4yeardegreeprovidesa
muchgreaterlifetimereturnthananyotherinvestment.A4yeardegreeoffersarateofreturnof
15.2%peryear,muchlargerthanthenextbestalternativeof6.8%averagerateofreturnonthe
stockmarket.ItmaybehardersincetheGreatRecessiontofindworkaftercollege,buta
comfortablelivingwagejobisnearlyimpossibletofindoutofhighschool.Arguablythe
moderatelackofjobsforcollegegraduatesmakesitevenmoreimportanttogetadegree...of
thosewithadegreearestillstruggling,imaginehowmuchyouwouldstrugglewithoutone?Not
tomention,manystudentsreceivescholarshipsandgrantmoneytohelpfindtheircollege
education,whichissomethingthatjustdoesnthappenforanyotherformofinvestment,noone
justhandsoutmoneyforyoutoinvestinthestockmarket.Iworkasawaitressataverybusy
restaurant,andthereareserverstherewithoutdegreeswhohaveworkedtherefordecades,
andthephysicaltollithastakenonthemisevident,thisissomethingthatusuallyisnotpresent
inajobthatrequiresadegree.IfIhad$102,000today,noquestionIwouldinvestitina4year
degree.

IntelCase

1. HowmanyinstancesofthewordBondwerefoundinthedocument?

ThewordbondcanbefoundinIntels10ks78times.

2.Identifytwoofthevarioustypesofbondsinthe10kandexplaintheirdifferences.

PrinciplesofFinancePortfolioORourke17

BothtreasurybondsandcorporatebondscanbefoundonIntels10k.Treasurybonds,
orgovernmentbonds,areissuedbythefederalgovernment.Asthegovernmentcanbeviewed
asgenerallytrustworthy,itcanbeassumedthesebondshavenodefaultrisk.Municipalbonds
areissuedbystateandlocalgovernments.Corporatebonds,however,areissuedby
businesses.Theydifferfromgovernmentbondsbecausetheydocarryriskofdefault.

3.Explainthedifferencebetweenacompanywhoinvestsinabondandacompanywhousesa
bondasadebtinstrument.Whataresomevalueconsiderationsforeach?

Acompanythatinvestsinabondisloaningmoneytosomeoneelseandcollecting
interest.Theyareincreasingtheirequity.Acompanythatusesabondasadebtinstrumentis
gettingloanedmoneyfromathirdpartyandispayinginterest.Theyareincreasingtheirdebt.
Whenafirmdecideswhetherornotitwantstoinvestinabond,oruseabondasadebt
instrument,theyhavetodecidewhetherornottheywanttomakethefinancingdecisionto
increasetheirequityorincreasetheirdebt.

4.Definedebenturebondsandconvertiblebonds.Howaretheyusedwithcorporatedebt
financingstrategies?

Aconvertiblebondisabondthatcanbeexchangedforcommonstockatafixedpriceat
theoptionofthebondholder.Convertiblebondsofferinvestorsthechanceforcapitalgainsifthe
stockpriceincreases,howevertheissuingcompanyisabletosetalowercouponrate.A
debenturebondprovidesnocollateral,andisalongtermbond.Companiesthatusuallyuse
debenturesareeitherverystrongcompanies,whoaretrustedenoughtonotneedcollateral,or
weakcompanies,whohavealreadyusedalloftheirtangibleassetsascollateralontheir
mortgageloans.Forweakcompanies,theriskinessoftheirbondswillbereflectedbyveryhigh
interestrates.

5.In2009and2010,21%ofIntelsCapitalstructureisdebtwhile79%isequity.Isthisnormal?
Explainwhy.

Intelisahealthycompany.79%ofthecompanyisfinancedthroughequity,andonly
21%isfinancedbydebt.Thismeansthattheywouldhavealowdebttoequityratio,andare
probablydoingbetterthannormalwithintheindustry.Generalruleofthumbis6040equityto
debt.
6.WhichequityaccountsareshownonIntelsBalanceSheet?

PrinciplesofFinancePortfolioORourke18

Preferredstock,commonstock,accumulatedothercomprehensiveincome,andretained
earnings.

7.Explainhoweachequityaccountisuniquefromoneanotherandwhywetracktheirvalues
separately.

Commonstockholdershaveownershipoverthecompany,whichentailsrights,andthey
mayormaynotreceivedividends.Preferredstockholdersdonothaveownershipofthe
companyhowevertheyarepaidfirstandreceivelargerreturnsthancommonstockholders.
Accumulatedothercomprehensiveincomeisusedtosumupunrealizedgainsandlosses
becausethoseitemshavenotbeensettled.Thisaccountcanincludeunrealizedgainsand
lossesfrominvestmentsheldbythefirm,companypensionfundsandforeigncurrency
transactions.Retainedearningsisthevalueofwhatthecompanywasabletoretainand
reinvestinthebusinessfromlastyear,itistheleftoverprofitthatwasnotpaidonindividends.It
isimportanttorecordeachequityaccountseparatelybecausethesourcesofeachaccountare
different,andtheyeachimplydifferentindicatorsofthehealthofthebusiness.

8.Compareandcontrastbondandstockinvestmentstrategiesandfinancingstrategies.

Ifyouneedtofinanceyourbusinessyoumayaskforabondfromanoutsidesource,this
allowsyoutoreceivealargeamountofmoney,andtobeabletopayitbackeitherinsmall
couponpayments,orfurtherdownthelineinfull.Bondsarealsogoodbecauseyoudonotgive
upownershipinyourbusiness.Whenyousellcommonstockyouaregivingupownershipof
yourbusiness,andyoudonothavemuchcontroloveryourstockprice.Ifyourstockisonlyat
$10pershare,youonlyreceive$10persharetofinanceyourbusiness.Thiscanbetricky
becausewhenyouneedthemoneymost(whenyourstockislowitisanindicatorofpoor
financialperformance)youareunabletogetit,alsothemoreownershipyouarelikelyto
relinquishinstocks.

MaryORourke
MGMT260:
Finance
Portfolio3
12/02/15

PrinciplesofFinancePortfolioORourke19

I.
MGMT260
Ch8Risks&RatesofReturn

Usetheinternettoresearchanswerstothefollowing.Besuretociteyoursource.

Source:Investopedia.com

1. Define Risk.

PrinciplesofFinancePortfolioORourke20

Investment risk is the uncertainty that you will gain a positive return, it is the probability that
you will receive a negative or low rate of return.
C: Control Procedures
R: Risk Assessment
I: Information/ Communication
M: Monitoring
E: Control Environment
2. Describe the relationship between risk and return.
Risk in investing involves the probability of return, and the quality of that return. The higher
the risk, the higher the possible return, but the higher the probability is that you will receive a
negative return. In most situations, risk is an indicator of return, and is correlated with it.
3. Explain common risks and rewards found in publicly traded markets.
Risks: Common risks found in publicly traded markets can include Loss of Investment, Price
of Stock Falls, Inflation causes loss of return
Rewards: Some of the most common rewards found in publicly traded markets are Interest
Payments, Dividends, and money made off of resale of stocks and bonds.
4. List and define some common types of risks.
Interest Rate Risk: The risk that an investments value will change due to a change in the
absolute level of interest rates.
Business Risk: Uncertainty in profits, or danger of loss.
Credit Risk: Risk of default resulting from a borrower failing to make payments.
Foreign Exchange Risk: The risk incurred when doing business in an exchange rate other
than ones own.
5. Explain why bonds are considered less risky than stocks.
Bonds are considered less risky than stocks because they have a stated, guaranteed rate of
return.
6. Explain why stock prices fluctuate over time.
Stock prices fluctuate over time based off of what the perceived profitability of the company
is at the time.
7. Compare and contrast systematic and unsystematic risk.
Systematic risk is risk that affects the entire market, as opposed to one company or one
stock, one cannot evade systematic risk by diversifying. Unsystematic risk is the risk that is
specific to the company that you are investing in, it can be reduced through diversification.
8. Explain how diversification reduces risk.
It is important to diversify your investments. Say for example, you had all of your money
invested in Enron in 2001, like most of their employees, and many members of the public
did. And why wouldnt you? Before their collapse no one thought Enron could fail, the stock
price just kept (artificially) rising, even when their competitors experienced losses. If you
invested your pension or your life savings into Enron, and bought when the market was at

PrinciplesofFinancePortfolioORourke21

$80 a share, and sold when it was at $0.40 a share, you fell prey to the danger of not
diversifying, you lost everything. Because there is risk involved in any investment, it is
important to diversify, to invest in different companies/ in different ways so that if one of
those investments falls short, you wont lose everything.
II. Article Summary From Library Day
http://www.cinemablend.com/new/DisneyAcquiresRightsLucasfilmDevelopingStarWarsEpi
sodeVII201533834.html

https://www.ftc.gov/sites/default/files/attachments/premergerintroductoryguides/guide1.pdf

In2012,DisneyacquiredtherightstoLucasFilm,thecompanythatproducestheStar
Warsfranchise.Theypaid$40.5billionforLucasFilmwhichwascontributedinabout50%cash
andtheissuanceof40millionsharesofcommonstockwhichdefinitelybringsmanymore
voicestoLucasFilmasitnowhasmanymorepeopleinvestedinitsfinancialconsiderations.
Sincetheacquisition,LucasFilmunderDisneyhasbeendevelopingStarWarsEpisodeVII
whichwillbereleasedonDecember18th,2015.Nowisagoodtimetopurchasestockin
Disneybecausetheywillbemakingmillionsintheboxofficewiththenewmovierelease,as
wellasmoremoneyinthesaleofmerchandise.Competitively,theStarWarsseriesisableto
capturealargetargetmarket.Theseriesappealstobabyboomerswhohavegrownupwithand
followedtheseriesformanyyears,butithasalsosuccessfullygarneredinterestofthechildren
ofthebabyboomerswithitsnewreleases,videogames,andotherrelatedmerchandise.Not
manyfranchisesareabletodothis,whichmakespurchasingLucasFilm,orowningstockin
LucasFilmauniqueopportunitybecauseaverylargeanddiversemarketiscaptured.
Thearticlealsomentionedthattheacquisitionwassubjecttoclearancethroughthe
HartScottRodinoAntitrustImprovementsAct,whichmeansthattheyhadtonotifytheFederal
TradeCommissionbeforethemergerinordertogetpermission.Permissionwouldhavebeen
deniedifitwasdeemedthatthemergerwouldbeuncompetitivetothemarket,orifDisney
wouldbetoolarge/monopolisticinorderforothercompaniestocompete.Theacquisitionwas
ultimatelycleared.

III.RatioWorksheet
MetroOneSportswear
ProfitMargin:9.57%,4points
DebtRatio:57.38%,4points
CurrentRatio:3.61,6points
ReturnonTotalAssets:5%,4points
InventoryTurnover:11.57,4points

CompanyPointTotal:22

PrinciplesofFinancePortfolioORourke22

Diagnosis15to24.99,yourcompanyneedstoimprovequickly!Thecompanyis
showingunhealthyindicatorsacrosstheboard.Theirprofitsarelow,theirdebtishigh,
theyaremoderatelyliquid,theirreturnonassetsisverylow,aswellastheirinventory
turnover.Ifthecompanyistosurvivetheymustrestructureandoverhaulthebusiness.