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BUS 420 Excel Project Part 2




Question;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 0920082007200620052.7.6%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 09200820072006200570.0%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%10.0.0%-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 %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 %Value,consideringcall likehood:ModifiedNote: The bond would not be called unless r


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