Minor Project 2. Using clarity and concision, please calculate using Excel and provide explanations/rationales for answers in short answers in a Word document. Please use academic references (minimum of 4 including
the text) in your post using APA format.
Take it
to the Bank
Daryl Bank is an investment broker with Bank, Tank, &
Shank, a full-service financial services firm serving the regional area of
southern West Virginia. From the corporate offices in Beckley, Daryl manages a large
number of clients throughout the southern part of the state.
Daryl is very customer service-oriented and makes a personal
effort to visit every client at least twice a year, even if it means traveling
to his or her hometown. He usually travels to different county seats throughout
the state and stays a couple of days in a local hotel so clients can visit him
in these various locations. With his laptop, Daryl can access account
information and the latest information about traded securities using any number
of software programs. His clients also enjoy seeing the demonstrations of
portfolio programs for their specific accounts.
Daryl also uses these trips to visit West Virginia companies
for potential investment possibilities. He likes to know the companies he invests
in and wants to get a competitive advantage in any investment decision. Since
not many investment brokers are taking the time to visit some of the smaller
publicly traded West Virginia companies, Daryl feels that he knows
substantially more about these companies and their potential for excess returns
than the general market. He is always looking for undervalued opportunities for
investment purposes so that his customers can also enjoy many happy returns on
their portfolios.
On a recent trip to Curve in the road in the far southwestern
part of the state, Daryl had the opportunity to visit three companies. He has
been able to maintain a friendship with the top management of these companies
and was given access to important financial data, which he planned to use to
determine stock valuation.
The first company is Dig Deep (stock ticker “DD”), a regional
coal mining company. They have been in operation for over 20 years and have the
mining rights to over 100 square miles of land. Most of the coal they mine is
the more clean-burning anthracite coal. Even though they are a relatively
small company, they possess modern equipment and a very efficient mining
operation.
The stock price for DD was $32 on January 1, 20×0, $35 on
December 31, 20×0, $31 for 12/31/x1, $36 for 12/31/x2, $40 for 12/31/x3 and $41
for 12/31/x4. In the year 20×0, they paid a dividend of $1.00, the same for
20×1, $1.10 in 20×2, $1.25 in 20×3, and that amount again in 20×4. The standard
deviation for their stock is 5%, beta is 0.75, and the correlation coefficient is
.60.
The second company is Moon Shine, a regional naturopathic
medicine company (stock ticker “MS”). MS got its start about 75 years ago and has
been very successful in establishing a niche market in all-natural herbal
remedies. What makes this company especially appealing to Daryl is its ability
to do well during times when the general economy is in a depression or
recession.
The stock price for Moon Shine was $10 on January 1, 20×0, $18
on December 31, 20×0, $13 for 12/31/x1, $21 for 12/31/x2, $35 for 12/31/x3 and
$32 for 12/31/x4. The company does not pay a dividend. The standard deviation
for their stock is 19%, beta is 1.70, and the correlation coefficient is -0.30.
Finally, Daryl met the management team at Pork, Byrd and
Belly. In spite of the name, this was not an agricultural company but a heavy construction
and infrastructure engineering company with major government contracts for
roads and bridges. The company has had some very successful contracts in the
past which have led to great growth, but their rate of growth has slowed a
little in the last couple of years. The stock price for Pork, Byrd and Belly was $15 on January 1,
20×0, $22 on December 31, 20×0, $40 for 12/31/x1, $38 for 12/31/x2, $37 for
12/31/x3 and $32 for 12/31/x4. In the year 20×0, they paid a dividend of $0.80,
$1.50 in 20×1, $1.50 in 20×2, $0.50 in 20×3, and that amount again in 20×4. The
standard deviation for their stock is 15%, beta is 1.25, and the correlation
coefficient is .45. Since these are all small regional companies, Daryl uses the
Russell 4000 index as a measure of the market standard. He likes to compare the
performance of his companies against this index along with other criteria to
determine if a company’s stock price offers a good value.
The index price for the Russell 4000 was 1200 on January 1,
20×0, 1400 on December 31, 20×0, 1800 for 12/31/x1, 1750 for 12/31/x2, 1600 for
12/31/x3 and 1700 for 12/31/x4. The standard deviation for the index is 5%,
beta is 1.0, and the correlation coefficient is 1.00.
Currently, the rate of return on Treasury bill is 1.25%.
Required: Please write out formulas and explain anwers
1. (20 points) a. Compute and show the annual holding period
return for each of the stocks, and also for the market for each of 20×0, 20×1,
20×2, 20×3, 20×4. b. compute and show a total return including dividends, for
each stock for the entire 5 year period of time. c. Convert the 5-year total
return into an annual simple average return, and into an effective annual rate
(EAR) compound return.
2. (20 points) Use the Capital Asset Pricing Model to compute
the expected return for each stock, and the market. Assume the expected return
on the market (”Rm”) is 7.0%
3. (10 points) Compute the coefficient of variation (“cv”) for
each stock and the market for the total 5 year period from 20×0 to 20×4. Use
the effective annual rate of return (EAR) for a measure of a stock’s average
return. The cv indicates the amount of risk incurred on an investment, per unit
of return.
4. (10 points) Determine whether Daryl should buy or sell any
of the stocks based on your quantitative analysis.
