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Fingen’s

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Fingen’s1212-year, $1,000 par value bonds pay 9percent interest annually. The market price of the bonds is $1,150

and the market’s required yield to maturity on a comparable-risk bond is 6 percent.

(a) compute the bond’s yield to maturity

(b) determine the value of the bond to you, given your required rate of return

(c) should you purchase the bond?

 
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Assessing the Stalchecks’s Portfolio Performance

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Case Problem 13.1

Assessing the Stalchecks’s Portfolio Performance

LG3 LG4 Mary and Nick Stalcheck have an investment portfolio containing 4 investments. It was developed to provide them with a balance between current income and capital appreciation. Rather than acquire mutual fund shares or diversify within a given class of investments, they developed their portfolio with the idea of diversifying across various asset classes. The portfolio currently contains common stock, industrial bonds, mutual fund shares, and options. They acquired each of these investments during the past 3 years, and they plan to purchase other investments sometime in the future.

Currently, the Stalchecks are interested in measuring the return on their investment and assessing how well they have done relative to the market. They hope that the return earned over the past calendar year is in excess of what they would have earned by investing in a portfolio consisting of the S&P 500 Stock Composite Index. Their research has indicated that the risk-free rate was 7.2% and that the (before-tax) return on the S&P 500 portfolio was 10.1% during the past year. With the aid of a friend, they have been able to estimate the beta of their portfolio, which was 1.20. In their analysis, they have planned to ignore taxes because they feel their earnings have been adequately sheltered. Because they did not make any portfolio transactions during the past year, all of the Stalchecks’s investments have been held more than 12 months, and they would have to consider only unrealized capital gains, if any. To make the necessary calculations, the Stalchecks have gathered the following information on each investment in their portfolio.

  • Common stock. They own 400 shares of KJ Enterprises common stock. KJ is a diversified manufacturer of metal pipe and is known for its unbroken stream of dividends. Over the past few years, it has entered new markets and, as a result, has offered moderate capital appreciation potential. Its share price has risen from $17.25 at the start of the last calendar year to $18.75 at the end of the year. During the year, quarterly cash dividends of $0.20, $0.20, $0.25, and $0.25 were paid.
  • Industrial bonds. The Stalchecks own 8 Cal Industries bonds. The bonds have a $1,000 par value, have a 9.250% coupon, and are due in 2024. They are A-rated by Moody’s. The bonds were quoted at 97.000 at the beginning of the year and ended the calendar year at 96.375%.
  • Mutual fund. The Stalchecks hold 500 shares in the Holt Fund, a balanced, no-load mutual fund. The dividend distributions on the fund during the year consisted of $0.60 in investment income and $0.50 in capital gains. The fund’s NAV at the beginning of the calendar year was $19.45, and it ended the year at $20.02.
  • Options. The Stalchecks own 100 options contracts on the stock of a company they follow. The value of these contracts totaled $26,000 at the beginning of the calendar year. At year-end the total value of the options contracts was $29,000.

Questions

  • a.   Calculate the holding period return on a before-tax basis for each of these 4 investments.
  • b.   Assuming that the Stalchecks’s ordinary income is currently being taxed at a combined (federal and state) tax rate of 38% and that they would pay a 15% capital gains tax on dividends and capital gains for holding periods longer than 12 months, determine the after-tax HPR for each of their 4 investments.
  • c.   Recognizing that all gains on the Stalchecks’s investments were unrealized, calculate the before-tax portfolio HPR for their 4-investment portfolio during the past calendar year. Evaluate this return relative to its current income and capital gain components.
  • d.   Use the HPR calculated in question c to compute Jensen’s measure (Jensen’s alpha). Use that measure to analyze the performance of the Stalchecks’s portfolio on a risk-adjusted, market-adjusted basis. Comment on your finding. Is it reasonable to use Jensen’s measure to evaluate a 4-investment portfolio? Why or why not?
  • e.   On the basis of your analysis in questions a, c, and d, what, if any, recommendations might you offer the Stalchecks relative to the revision of their portfolio? Explain your recommendations
 
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Jim and Polly Pernelli Try Hedging with Stock-Index Futures

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Case Problem 15.2

Jim and Polly Pernelli Try Hedging with Stock-Index Futures

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Jim Pernelli and his wife, Polly, live in Augusta, Georgia. Like many young couples, the Pernellis are a 2-income family. Jim and Polly are both college graduates and hold high-paying jobs. Jim has been an avid investor in the stock market for a number of years and over time has built up a portfolio that is currently worth nearly $375,000. The Pernellis’ portfolio is well diversified, although it is heavily weighted in high-quality, mid-cap growth stocks. The Pernellis reinvest all dividends and regularly add investment capital to their portfolio. Up to now, they have avoided short selling and do only a modest amount of margin trading.

Their portfolio has undergone a substantial amount of capital appreciation in the last 18 months or so, and Jim is eager to protect the profit they have earned. And that’s the problem: Jim feels the market has pretty much run its course and is about to enter a period of decline. He has studied the market and economic news very carefully and does not believe the retreat will cover an especially long period of time. He feels fairly certain, however, that most, if not all, of the stocks in his portfolio will be adversely affected by these market conditions—although some will drop more in price than others.

Jim has been following stock-index futures for some time and believes he knows the ins and outs of these securities pretty well. After careful deliberation, Jim and Polly decide to use stock-index futures—in particular, the S&P MidCap 400 futures contract—as a way to protect (hedge) their portfolio of common stocks.Questions

  1. a.  Explain why the Pernellis would want to use stock-index futures to hedge their stock portfolio and how they would go about setting up such a hedge. Be specific.
    1.   1.  What alternatives do Jim and Polly have to protect the capital value of their portfolio?
    2.   2.  What are the benefits and risks of using stock-index futures to hedge?
  2. b.  Assume that S&P MidCap 400 futures contracts are priced at $500 × the index and are currently being quoted at 769.40. How many contracts would the Pernellis have to buy (or sell) to set up the hedge?
    1.   1.  Say the value of the Pernelli portfolio dropped 12% over the course of the market retreat. To what price must the stock-index futures contract move in order to cover that loss?
    2.   2.  Given that a $16,875 margin deposit is required to buy or sell a single S&P 400 futures contract, what would be the Pernellis’ return on invested capital if the price of the futures contract changed by the amount computed in question b1?
  3. c.  Assume that the value of the Pernelli portfolio declined by $52,000 while the price of an S&P 400 futures contract moved from 769.40 to 691.40. (Assume that Jim and Polly short-sold one futures contract to set up the hedge.)
    1.   1.  Add the profit from the hedge transaction to the new (depreciated) value of the stock portfolio. How does this amount compare to the $375,000 portfolio that existed just before the market started its retreat?
    2.   2.  Why did the stock-index futures hedge fail to give complete protection to the Pernelli portfolio? Is it possible to obtain perfect (dollar-for-dollar) protection from these types of hedges? Explain.
  4. d.  The Pernellis might decide to set up the hedge by using futures options instead of futures contracts. Fortunately, such options are available on the S&P MidCap 400 Index. These futures options, like their underlying futures contracts, are also valued/priced at $500 times the underlying S&P 400 Index. Now, suppose a put on the S&P MidCap 400 futures contract (with a strike price of 769) is currently quoted at 5.80, and a comparable call is quoted at 2.35. Use the same portfolio and futures price conditions as set out in question c to determine how well the portfolio would be protected if these futures options were used as the hedge vehicle. (Hint: Add the net profit from the hedge to the new depreciated value of the stock portfolio.) What are the advantages and disadvantages of using futures options, rather than the stock-index futures contract itself, to hedge a stock portfolio?
 
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asreported lululemon athletica inc (NMS:

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Hi – 

I have attached the excel spreadsheet needed.   I need help with the following : 

What is the three-year return on the stock price ? Must use the appropriate formula in your spreadsheets to calculate the three-year return on the given company’s stock price. 

Also, need assistance with the following for all 3 years with excel formulas

price to earning ratio

debt to equity ratio

return on equity ratio

earnings per share

profit margins 

free cash flows

 
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