Introduction to Financial Management - FIN

Introduction to Financial Management - Prof. Kathleen T. Hevert, Tomasso 222, 781.239.4630, EMAIL
hevert@babson.edu, Monday and Wednesday 1-3 p.m. and by appointment

Session 1: Oct 24, 2011
Google IPO case


Session 2: Oct 26t, 2011
Chapter 4: TVM



q1 q2 q3 q4 q5 q6
PV 100 ($46,650.74) -2960.4 -7225 0 0 -400
i 5% 10% 14% 8% 6% 4% 4%
N 20 8 4 7.63246072 19.99872146 18 17
PMT -2175 -400 -400
46650.73802
FV 265.3297705 100000 5000 13000 80000
FV ($265.33) $10,258.17 $10,258.17

q7 7%
0 1 2 3
300 400 150 200 ($300.00) ($373.83) ($131.02) ($163.26)
$968.11 ($968.11)

q8
a b c d e f
period beg balance payment interest principal reduction end balance PV 5000
1 5000 ($1,905.26) $350.00 ($1,555.26) $3,444.74 i 7%
2 3444.741672 ($1,905.26) $241.13 ($1,664.13) $1,780.62 N 3
3 1780.61526 ($1,905.26) $124.64 ($1,780.62) $0.00 FV 0
PMT ($1,905.26)

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Session 4: Oct 31, 2011
Beta calculation and implications

beta is a forward looking measure. It is not for historical data, we use beta for forward/future projections.
BUT in order to calculate it we use the regression on historical data.
when we look at teh regression line of the stock price to the SnP index we get the beta against the SnP (considering SnP is teh "market")

Risk free rate
for class discussion - Long term risk free rate with long term spread (long term treasury bond rate ~ 3.7%)
Equity analysts will be using the short term at times.

class question 1:
D0 = $1.2
g = 3%
beta (V) = 1.4
rRF = 4.5%
rRPM = 6%
Price, P0 = ?
Price, P2 = ?

rs = rRF + beta * rRPM = 4.5% + (6% * 1.4) = 12.9%
P0 = D1/(rs - g) = D0(1+g)/(rs - g) = 1.2(1.03)/(.129-0.3) = $12.48

class question 2:
solution in excel sheet

question 3:
IMPORTANT (look at teh solution)


Session 5: Nov 2, 2011
Case: valuing Wal-mart 2010


Facts:
P0 = $53.48
D0 = $1.09
rRF= 3.68%
P/E = 14.7
EPS= $3.72 / $3.71   (NI/#shares)
D1 = 1.21


Assumption:
MRP = 5.5%
beta = 0.66

growth in Div(perp) = 5%
r (Ks) ~= 7% (rate of return)
earnings growth (next 5 years) = 10.4%

Value Wal-Mart

a) Constant growth
P0 = D1/(rs - g)
     = 3.72*1.104 *(.30) / (7% - 5%)  { assuming the dividend payout ration of 30% exhibit 3}
     = $61.6
OR= 1.21/(7% - 5%)
     = $60.5

b) Dividends for next 3 years (using g=5%) 
0              1              2             3            4
|------------|-----------|-----------|----------|
               1.21        1.27        1.33        1.40

P3 = 1.4/(.07-.05) = 70.04
P0 = 1.21/(1.07) + 1.27/(1.07^2)  + 1.33/(1.33^3) + 70.04/(1.07^3)
     = $60.5

c) P/E approach
trailing P/E
forward P/E (today's price / expected earnings)

-> average trailing P/E from competitors = 15.5
trailing earning = 3.72
15.5 * 3.72 = $57.51

->average forward P/E from all competitors = 12.5
forward earning (3.71*1.104) = 4.11
12.5*4.11 = $51.29