FIN 340 Final Project Scenarios and Tables
You will use these scenarios and tables to complete the
final project.
Client 1:
Ezra, age 26, is single. However, he is dating and preparing
to get engaged. He will need roughly $5,000 for an engagement ring almost
immediately, and expects he will need $10,000–$15,000 for the wedding in the
next 12–24 months. He is currently employed and earns about $70,000 a year in
salary. This salary is enough to cover all his taxes and normal living expenses
of approximately $4,800. This leaves him with about $1,000 in savings each
month ($350 to 401K, $650 to savings). He has been able to save roughly $15,000
to date in a 401K plan from work and about $20,000 in cash savings. His 401K
plan has been invested 100% in the stock market, including some sector-specific
funds. His other savings have been in interest-bearing savings and cash
substitutes such as money market funds. He recently received a windfall of
$60,000, and this prompted him to come to you for some advice. The following
are few of Ezra’s comments to help guide your thoughts:
1.
“I understand I am young, so I need to take on as much
risk as I can.”
2.
“I am willing to lose 30–40% on my invested capital if
the return is commensurate.”
3.
“I do like to have a decent sized cushion in the bank
in case something happens at my job.”
4.
“I don’t foresee my risk tolerance changing after I get
married.”
5.
“Do you have any good stock tips?”
Client 2:
Jacob and Rachel, 53 and 52 respectively, are married with
four children. Two of the children are currently in college, and two are in
high school. They expect the other two children to attend college. The couple
has done relatively well for themselves and earn roughly $275,000 before tax
between the two of them, which equates to $190,000 after taxes. They live well
below their means, and this should allow them to cover all of their children’s
college expenses out of pocket, but it will not leave much for them to save
over the next six to eight years. Through savings and portfolio growth, they
have managed to accumulate $900,000. To this point, they have been moderately
aggressive (70–75% equities) with their portfolio, but they feel that they need
to begin preparing the portfolio for partial retirement in eight years, and
full retirement in 13 years.
1. “I
know we still need to be somewhat aggressive—we could live until we’re 90—so we
need to plan for some growth even in retirement.”
2. “We
definitely can’t afford to take a big hit in our portfolio. We don’t have
enough time to recover.”
3. “Our
jobs allow us to work part-time in retirement, and we will probably do so as
long as we are able.” 4. “What
do bond yields look like today?”
5. “I think we’ll need to draw on 3–5% of
our portfolio in retirement. We’d like to earn enough income from the portfolio
to cover that.”
CAPM Inputs:
Market Return 9% Risk-free Rate 0.75%
Stock Analysis Table:
Symbol | Estimated Beta | Dividends | Earnings | Sales | Free Cash Flow | 5-Year Dividend Growth | Average Industry P/E Ratio | Average Industry P/S Ratio | Free Cash Flow Growth |
IBM | 0.86 | Use | Use | Use | Use | 13.7 | 23.7 | 1.12 | 2.60% |
KO | 0.66 | Use | Use | Use | Use | 8.3 | 22.6 | 2.2 | 6.50% |
BMY | 0.78 | Use | Use | Use | Use | 2.9 | 24.4 | 3.37 | N/A |
ORCL | 1.1 | Use | Use | Use | Use | 21.1 | 20.5 | 4.45 | 10% |
MMM | 0.98 | Use | Use | Use | Use | 15.1 | 23.8 | 2.59 | 7% |
BAX | 0.75 | Use | Use | Use | Use | -16.9 | 36.09 | 3.68 | N/A |
BIG | 1.04 | None | Use | Use | Use | N/A | 23 | 1.12 | N/A |
NFLX | 1.57 | None | Use | Use | Use | N/A | 52.5 | 6 | N/A |
AKAM | 1.34 | None | Use | Use | Use | N/A | 41.8 | 3.58 | 17% |
GE | 1.12 | Use | Use | Use | Use | 9.7 | 23.8 | 2.59 | N/A |
Available Assets Table: Stocks listed in Analysis Table and these
additional assets
Symbol | Estimated Beta | Standard Deviation |
SPY | 1 | 13% |
IWM | 1.15 | 16.50% |
EFA | 1.03 | 15% |
EEM | 1.09 | 20% |
SHY | 0 | 1% |
IEF | -0.2 | 6% |
TLT | -0.48 | 13% |
LQD | -0.02 | 5.25% |
HYG | 0.38 | 7.50% |
Ex-post Return Statistics:
Symbol | Holding Period Return | Standar d Deviatio n |
| Benchmarks | Holding Period Return | Standard Deviation |
IBM | 8% | 20.00% |
| Growth | 9.6% | 13.1% |
KO | 6% | 13.00% |
| Capital | 8.1% | 8.6% |
BMY | 13% | 28.00% |
| Income | 7.7% | 7.2% |
ORCL | 2% | 16.00% |
| Capital | 5.8% | 5.2% |
MMM | 6% | 14.00% |
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BAX | -6% | 16.00% |
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BIG | 13% | 32.00% |
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NFLX | 18% | 45.00% |
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AKAM | 21% | 37.00% |
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GE | 10% | 16.00% |
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SPY | 9% | 11.00% |
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IWM | 14% | 18.00% |
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EFA | 9% | 15.00% |
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EEM | -1% | 19.00% |
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SHY | 1% | 1.00% |
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IEF | 4% | 6.00% |
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TLT | 4% | 13.50% |
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LQD | 7% | 6.00% |
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HYG | 8% | 8.00% |
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