FHCE 3200 Lecture Notes - Lecture 14: Russell Investments, Risk Aversion, Wealthfront

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amaranthsquirrel732

21 Mar 2017

School

University of Georgia

Department

Financial Planning, Housing and Consumer Economics

Course

FHCE 3200

Professor

Goren

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Document Summary

Ge(cid:374)erall(cid:455) u(cid:374)derstood that (cid:862)(cid:373)ore risk = (cid:373)ore retur(cid:374)(cid:863) Accepting more volatility means more return (more on this soon!) Accepting other risks may not increase return! Inflation is how much prices paid goods and services increase: nominal dollars: the face value paid for goods, services, real dollars: the cost of goods, services controlling for income inflation. Inflation is also good for people in debt: the larger the debt and longer the period, the better inflation is. Invest in the stock market: general inflation averages 2. 5 to 3%, the stock market averages 6. 5 to 8% In contrast, savings accounts average 0 to 2: even though savings are increasing in nominal dollars they are diminishing in real dollars, purchase inflation adjusted insurance investments and policies, ho(cid:373)e o(cid:449)(cid:374)er(cid:859)s i(cid:374)sura(cid:374)(cid:272)e i(cid:374)flatio(cid:374) adjusted repla(cid:272)e(cid:373)e(cid:374)t (cid:448)alue. Inflation adjusted annuities (e. g. , social security: tips = bonds with interest rate tied to inflation. Inflation is a major problem for people living off savings!

Related Questions

The goal of the firm is to ____ because _____. Answer maximize shareholders' wealth; it considers all risks invest funds in real estate; the return is longer maximize shareholders' profit; it is a short term outlook closely matching management goals Mike is paying $8,000 a year on his mortgage at 6% nominal annual interest. He has 15 more years to make payments. He wants to sell his house today. The lowest [minimum] price he can sell the house without losing any money on the house would be about ___. Answer $120,000 $ 50,000 $77,698 $ 186,208 A firm's net income before tax, EBT [NIBT] (on the income statement) is affected by _____. Answer taxes interest dividends Common Stock as listed on the Balance Sheet could include which of the following? Answer A) retained earnings B) additional paid in capital over par value C) preferred capital Both A) and B) If an asset is sold for ___ than its basis, the tax effect would be ____. Answer A) more; capital gain and depreciation recapture B) less; depreciation recapture C) more; capital loss Both A) and B) The main reason for a firm to have assets is to _______. Answer generate revenue match the liabilities and equity both of the above be able to borrow money and pay its debts none of the above The only risk you would NOT have in loaning money to the United States Government (Uncle Sugar) is _____ risk. Answer liquidity maturity default A(n) ____ shows _____. Answer balance sheet; sources and uses of funds income statement; net income as of a specific date cash flow statement; how well the firm is doing relative to its competition You can compare dollars _____ because ______. Answer computed using equations; any math is always correct at any point in time; time is never a factor if they are at nominal value; that is when decisions are made only at the same point in time; dollars can be invested to earn interest There ___ a tax benefit to the company with paying preferred dividends because _______. Answer is; investors can write them off is not; investors declare them as income is; the company can use the payments as an expense is not; the company cannot use the payments as an expense XYZ issued a 6% coupon, $1,000 par, 30 year to maturity bond. It is now 6 years to maturity. What is the price of the bond if the yield to maturity [market interest rate] is 10%? Answer $1,000 $659.46 $825.79 $705.33 The valuation process can be described as ______. Answer calculating the present value of an expected future cash flow using the investor's required rate of return as the discount rate calculating the future value of an expected future cash flow using the investor's required rate of return as the discount rate amortizing the value of the asset over its holding period The ______ is the minimum required rate of return a firm must earn on its investments. Answer net present value opportunity cost of capital or weighted average cost of capital. internal rate of return gross profit margin The value of an asset is the _____ dollar price someone is willing to pay for it. Answer usual maximum minimum Companies use ____ in capital budgeting project analysis because ________. Answer accounting profit; that is the total net income after tax cash flow; that is what the owners would receive from the project and reinvest accounting profit; that is what the owners would receive from the project and reinvest after tax cash flow; that is the result of prudent accounting When borrowing money, you want to know the ____ interest rate because ____. Answer nominal; it is the easiest to find. effective; it is the true cost of borrowing risk free; that is what the government pays Fed funds; that is what you would pay the bank Cash available to pay out to the investors after the firm pays for new investments or additions to working capital is _____. Answer a statement of cash flows operating after tax cash flow free cash flow net income An organization that raises money from investors and provides financing for individuals and businesses is a ___. Answer factor federal government regulatory unit state government taxing authority financial intermediary Negatives/cons of the Net Present Value (NPV) technique include: Answer least conservative reinvestment assumption multiple rates of return for non-conventional cash flows all of the above none of the above A fixed exchange rate means a country _____. Answer can only use gold coins as money is limited in the amount of paper money it can print can print money as the economy demands Your company is considering an investment with the following expected cash flows: Initial Investment = $407,596 Operating Cash Flows = $73,428 per year Terminal Cash Flow = $11,872. The company's WACC is 11% for similar risk projects. The proposed project would have an expected life of 9 years. Your boss asks you to do the analysis. You would tell your boss this proposed project ___ because ____. Answer is acceptable; NPV is about $3,620 is acceptable; NPV is zero should be rejected; NPV is about -$5,660 [negative $5,660]. should be rejected; NPV is zero All ratios are ___ and a reason to analyze ratios is ____. Answer good; to continue to look productive good and bad; because seemingly good ratios can be masking something bad bad; to try to rework the numbers to have them look good basically irrelevant; there really is no need to analyze financial statements When analyzing financial statements, ratio analysis gives ____ and provides insight into ____. Answer very little useful information; practically nothing good practice in logical thinking; what has occurred and the logic behind it financiers something to do during slow periods; how the financier spends his time accountants a reason to provide financial statements; why accountants do what they do while at work Given: Economic State[i]: Good Average Expected Return[i]: 10% 8% Probability[i]: 30% 70% What is the Standard Deviation? Answer 3% 8.4% 0.92% 5.6% Chapter 9: XYZ has a projected project to install a new press. The expected cash revenue is $175,000 per year. Expected yearly expenses are: Operatinf costs of $50,000; Rental of $17,000; Utilities of $20,500; and Depreciation of $10,000. The tax rate is 35%. What is the expected After-Tax Operating Cash Flow for the first year? Answer $65,500 $60,375 $77,500 $97,500 A stock just paid a dividend of $1.60 per year. The dividend is expected to grow at 3% per year indefinately. Equally risky stocks offer expected rates of return of 8%. What should be the stock price? Answer 53.33 $16.00 $32.96 None of the above. A plot of the CAPM is the _____. Answer wrong thing to do Security Market Line a function showing how to calculate TVM All of the above. Derivatives are used to ___. Answer divide one number by another find old ways to do things hedge risk none of the above With the end of the Gold Standard in the 1970's, what new risk did business face in the international market? Answer Comjpetition Exchange rate Worker compensation Property taxes One of the positive aspects [pros] of a Floating Exchange Rate System is ____. Answer money can be printed as needed to support financial/economic growth no/reduced inflation economic growth is reduced as a result of reduced liquidity [lower money supply] business planning is more difficult A(n) ____ contract obligates the seller to execute the contract and the contract is executed. Answer backwards forward future option What policies did countries institute after the Great War that help lead to the Great Depression? Answer A. Mandatory military service B. Trade restrictions C. High tariffs D. Isolationism Only B., C. and D. All of the above

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1. Define the terms capital structure, cost of capital, and working capital. Focus on how they are different from each other and impact both profitability and risk.

2. Determine Grounds Keeperâs capital structure and working capital.

3. If Grounds Keeper has a required rate of return on its long-term debt of 9% (before taxes) and a required rate of return on its common stock, a tax rate of 40%, what is its weighted average cost of capital (WACC) for 2012? How could Grounds Keeper lower its WACC? (HINT: you will need to look at the balance sheet to determine the weight of debt to equity.

4. What are the advantages to Grounds Keeper in using money market instruments as financing? How does this related to financing net working capital?

	Grounds Keeper
	Consolidated Balance Sheets
	(Dollars in thousands)
	2012	2011
Assets
Current assets:
Cash and cash equivalents	78,240	44,395
Receivables	399,891	340,062
Inventories	844,737	736,677
Total current assets	1,322,868	1,121,133

Fixed assets, net	1,244,384	889,613
Other long-term assets	1,048,537	1,187,141
Total assets	3,615,789	3,197,887

Liabilities and Stockholdersâ Equity
Current liabilities:
Accounts payable	309,222	319,465
Accruals	201,017	145,240
Notes payable	9,748	6,669
Total current liabilities	519987	471374
Long-term debt	834574	814298
Total liabilities	1,354,561	1,285,672
Stockholdersâ equity:
Common stock, $0.10 par value:	15,268	15,447
Additional paid-in capital	1,464,560	1,499,616
Retained earnings	781400	397152
Total stockholdersâ equity	2,261,228	1,912,215
Total liabilities and stockholdersâ equity	3,615,789	3,197,887

Grounds Keeper

Consolidated Statements of Operations

(Dollars in thousands except per share data)

2012

2011

Net sales

3,889,426

2,642,390

Cost of sales

2,589,799

1,746,274

Gross profit

1,299,627

896,116

Selling and operating expenses

481,493

348,696

General and administrative expenses

219,010

187,016

Operating income

599,124

360,404

Interest expense

22,983

57,657

Income before income taxes

576,141

302,747

Income tax expense

212,641

101,699

Net Income

363,500

201,048

Basic income per share:

Average shares outstanding

154,933,948

146,214,860

Earnings per common share

2.35

1.38

Below is the provided information/scenario.

Grounds Keeper is considering adding fair trade coffee to their line of products. Other larger coffee companies are now including it, at consumersâ insistence. At a recent strategic management meeting, the companyâs officers identified the following points:

Fair trade coffee may attract new customers.

Fair trade coffee would allow Grounds Keeper to demonstrate its social responsibility.

Fair trade coffee would require more paperwork to meet certification and contract requirements.

The higher cost of Fair Trade Coffee would require a higher price or a reduced profit margin.

If coffee prices worldwide continue to increase, consumers may be reluctant to pay extra for Fair Trade Coffee.

Current suppliers of coffee to Grounds Keeper might be in competition with Fair Trade Coffee cooperatives.

One officer present asked the following question: Should we as a company have a good reason to try to influence actions in other parts of the world? Donât we have governments to do that?

Fair Trade Coffee

What is fair trade certification?
Much like organic certification, fair trade certification lets you know about the origin of a product. Fair trade certified products come from all over the world, but share a common history. Farmers who grow fair trade products receive a fair price, and their communities and the environment benefit as well.

Fair trade certified coffee directly supports a better life for farming families in the developing world through fair prices, community development and environmental stewardship. Fair trade farmers market their own harvests through direct, long-term contracts with international buyers, learning how to manage their businesses and compete in the global marketplace. Receiving a fair price for their harvest allows these farmers to invest in their families' health care and education, reinvest in quality and protect the environment. This empowerment model lifts farming families from poverty through trade, not aid, creating a more equitable and sustainable model of international trade that benefits producers, consumers, industry and the Earth. The Fair for Life label is backed by IMO, one of the third-party certifiers of fair trade products for the U.S. market.

The Fair for Life label guarantees:

Fair price: Family farmers receive fair prices for their harvest, and premiums specifically earmarked for community development projects; even higher premiums are given for certified organic products. Farmer organizations are also eligible for pre-harvest credit.

Environmental sustainability: Harmful agrochemicals and GMOs are strictly prohibited in favor of environmentally sustainable farming methods that protect farmers' health and preserve valuable ecosystems for future generations. Fair trade farmers protect the land and wildlife habitat by intercropping plant species to improve soil fertility and protect against erosion. Stringent environmental management programs, including water conservation, proper waste disposal and prohibitions on planting in protected areas further encourage environmental stewardship.

Fair labor conditions: Workers on fair trade farms enjoy freedom of association, safe working conditions and fair wages. Forced child labor is strictly prohibited.

Direct trade: Importers purchase from fair trade producer groups as directly as possible, eliminating unnecessary middlemen and empowering farmers to develop the business capacity needed to compete in the global marketplace.

Democratic and transparent organizations: Fair trade farmers and farm workers decide how to invest fair trade revenues, and proof of a democratic process is required.

Community development: Fair trade farmers and workers invest fair trade premiums in social and business development projects like scholarship programs, healthcare services and quality improvement training.

Examples of community projects include:

Members of the COSURCA coffee cooperative in Colombia successfully prevented the cultivation of more than 1,600 acres of coca and poppy used to produce illicit drugs.

In the highlands of Guatemala, indigenous Tzutuhil Mayans in the La Voz cooperative are sending local kids to college for the first time.

Near Lake Titicaca, in Peru, the CECOVASA cooperative is assisting members from Quechua and Aymara indigenous groups in improving coffee quality and transitioning to certified organic production.

The CECOCAFEN cooperative in Nicaragua established a reproductive health program providing tests for the virus that causes cervical cancer.

What is IMO "Fair for Life" fair trade certification?
"Fair for Life" is a brand neutral third party certification program for social accountability and fair trade in agricultural, manufacturing and trading operations. The program complements existing fair trade certification systems. Social accountability and fair trade have become important indicators to select business partners in a global market place. The Fair for Life Social & FairTrade Certification Program offers operators of socially responsible projects a solution for objective inspection and certification by a highly qualified external verifier. It combines strict social and fair trade standards with adaptability to local conditions.

Why is fair trade certification needed today?
Throughout the global south, family farmers follow generations of tradition to cultivate food products we enjoy every day. Yet many family farmers in the developing world don't receive a fair price for their crops. These isolated rural communities lack direct market access, often selling their premium crops below the cost of production to local middlemen who misrepresent global prices. This cycle of debt forces many to abandon their land and years of agricultural heritage, destroying the social and cultural fabric of these communities. When farming communities in the developing world suffer, the whole world suffers - forced immigration, inferior-quality products and large-scale farming methods that often compromise the environment.

Who benefits from fair trade certification?

Producers: Beyond receiving a fair, stable price, fair trade also empowers producers to invest in their organizations, improve their communities and protect the environment.

Consumers: Fair trade certification enables consumers to "vote with their dollar" by providing an independent guarantee that products were produced and traded fairly. We all lead busy lives, and we want to do the right thing, but we're busy. What if we could make a positive impact just with the purchases we make every day? And not have to go out of our way to do this? That's the compelling proposition of fair trade.

The Earth: Fair trade certification requires and rewards environmentally sustainable farming practices that protect farmers' health and preserve valuable ecosystems for future generations, and provides the resources and technical assistance needed for organic certification.

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FHCE 3200 Lecture Notes - Lecture 14: Russell Investments, Risk Aversion, Wealthfront

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