CASE ANALYSIS-01

On

Comprehensive/Spreadsheet Problem

Submitted To:
Faculty: Riyashad Ahmed (RyA)

Submitted By: Protiva Prova Das Ertiza Akando Shuvo Salma Jebin Md. Nawaz Sharif Tanvir Tanvir Ahmed Oni 1030224030 1030232030 1110122030 1110411030 1110412030

Course: Corporate Finance (FIN 440) Section: 02 Spring 2013

Bartman Industries and Reynolds Inc.s stock prices and dividends, along with the Winslow 5000 Index, are shown here for the period 2003-2011. The Winslow 5000 data are adjusted to include dividends. BARTMAN INDUSTRIES Year Stock Price Dividend REYNOLD INCORPORATED Stock Price Dividend MARKET INDEX Includes Dividends 2011 2010 2009 2008 2007 2006 $ 24.250 20.750 23.500 16.750 18.375 12.625 $ 2.250 2.100 2.000 1.950 1.860 1.800 $ 62.750 68.300 62.750 70.000 72.500 65.750 $ 4.000 3.950 3.850 3.650 3.400 3.000 $ 12,553.98 9,585.70 9,179.98 7,434.03 6,702.28 5,405.97

a.Use

the data given to calculate annual returns for Bartman, Reynolds,

and Market Index, and then calculate average returns over the five-year period. Answer: Annual Rates of Return =

Annual and average Returns of BARTMAN INDUSTRIES Year 2011 2010 2009 2008 2007 Average of Return Rate Calculation and Result = 27.71% = -2.77% = 52.24% = 1.77% = 60.28% = 27.85%

Annual and average Returns of REYNOLDS INCORPORATED Year 2011 2010 2009 2008 2007 Average of Return Rate Calculation and Result = -2.27% = 15.14% = -4.86% = 1.59% = 15.44% = 5.01%

Annual and average Returns of Market Index Year 2011 2010 2009 2008 2007 Average of Return Rate Calculation and Result = 30.97% = 4.42% = 23.49% = 10.92% = 23.98% = 18.76%

b. Calculate the standard deviations of the returns for Bartman, Reynolds, and the Winslow 5000. Answer: Standard Deviation =

Bartman Industries = 28.57% Reynolds Incorporated = 9.66% Market Index =10.79%

c.

Now calculate the coefficients of variation for Bartman, Reynolds, and

the Market Index . Answer:

Coefficient of Variation (CV) =

Bartman Industries, CV =

= 1.03

Reynolds Incorporated, CV =

= 1.93

Market Index, CV =

= 0.58

d) Construct a scatter diagram that shows Bartmans and Reynoldss return on the vertical axis and the market indexes returns on the horizontal axis. Answer:

BARTMAN & WINSLOW 5000 INDEX RETURN

70 60 50 BARTMAN 40 30 20 10 0 -10 0 10 20 WINSLOW 5000 30 40

y = 1.989x - 9.46 R = 0.5645

BARTMAN & WINSLOW 5000 INDEX RETURN Linear (BARTMAN & WINSLOW 5000 INDEX RETURN)

REYNOLDS & WINSLOW 5000 INDEX RETURN

20 15 10 BARTMAN 5 0 0 -5 -10 10 20 30 40 REYNOLDS & WINSLOW 5000 INDEX RETURN Linear (REYNOLDS & WINSLOW 5000 INDEX RETURN)

y = -0.4285x + 13.044 R = 0.2289

Winslow 5000

e) Estimate Bartmans and Reynolds betas by running regressions of their returns against the Market Indexs returns. Are these betas consistent with your graph? Answer: Bartmans Regression analysis:
SUMMARY OUTPUT Regression Statistics Multiple R 0.751352 R Square 0.56453 Adjusted R Square 0.419373 Standard Error 21.76791 Observations 5 ANOVA df 1 3 4 SS 1842.821 1421.526 3264.347 Standard Error MS 1842.821 473.842 F 3.889105 Significance F 0.143156

Regression Residual Total

Coefficients

t Stat

P-value

Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%

Intercept X Variable 1

-9.46003 1.989019

21.27497 1.008588

-0.44466 1.972081

0.686692 0.143156

-77.1665 58.24643 -1.22076 5.198797

77.1665 58.24643 1.22076 5.198797

RESIDUAL OUTPUT Observation Predicted Y 1 52.13987 2 -0.66857 3 37.26201 4 12.26005 5 38.23663 Residuals -24.4299 -2.10143 14.97799 -10.4901 22.04337

X Variable 1 Line Fit Plot

70 60 50 40 30 20 10 0 -10 0 5 10 15 20 25 30 35 X Variable 1 Y

y = 1.989x - 9.46 R = 0.5645

Y Predicted Y Linear (Y)

Beta for Bartman industries = 1.989

Reynolds regression analysis:
SUMMARY OUTPUT Regression Statistics Multiple R 0.478479 R Square 0.228942 Adjusted R Square -0.02808 Standard Error 9.797969

Observations 5 ANOVA df 1 3 4 SS 85.51291 288.0006 373.5135 Standard Error 9.576092 0.453976 Significance MS F F 85.51291 0.890758 0.4149 96.00019

Regression Residual Total

Coefficients Intercept X Variable 1 13.04425 -0.42846

t Stat

P-value

1.362168 0.266401 -0.9438 0.4149

Lower Upper Lower 95% 95.0% 95.0% -17.4312 43.51965 17.4312 43.51965 -1.87322 1.016293 1.87322 1.016293

Upper 95%

RESIDUAL OUTPUT Standard Observation Predicted Y Residuals Residuals 1 -0.22524 -2.04476 -0.24098 2 11.15044 3.989558 0.470173 3 2.979657 -7.83966 -0.92391 4 8.365434 -6.77543 -0.79849 5 2.769711 12.67029 1.493206

X Variable 1 Line Fit Plot

20 15 10 Y 5 0 0 -5 -10 X Variable 1 5 10 15 20 25 30 35 Y Predicted Y Linear (Y)

Beta for Reynolds Inc.s = -0.428.

Beta for Bartman industry and Beta for Reynolds Inc.s are consistent with the graph.

f) The risk-free return on long-term Treasury bond is 6.04%. Assume that the market risk premium is 5%.What is the expected return on the market? Now use the SML equation to calculate the two companies recquired return. Answer: Here, Risk free return is 6.04% Market risk premium is 5% So, expected return on the market = Market risk premium + Risk free return = (5+6.04) % =11.04% Required return of BARTMAN INDUSTRIES: Required return= risk free return+ (market return risk free return) * Beta = 6.04+ (11.04 6.04)* 1.989 = 6.04 + 9.945 = 15.99%

Required return of REYNOLDS INC.: Required return= risk free return+ (market return risk free return) * Beta = 6.04+ (11.04 6.04)* -0.43 = 6.04 2.15 = 3.89%

g) If you formed a portfolio that consisted of 50% Bartman and 50% Reynolds, what would be its beta and its required return? Answer: Calculating portfolios Beta: Company Bartman industries (50%) 1.99 Reynolds inc. (50%) -0.43

Beta Formula of portfolio Beta =

= (.50 * 1.99) + (.50* - 0.43) = 0.995 + (-0.215) = 0.78

Portfolio required rate of return: Portfolio required return = Risk free return+ (market return risk free return) * Portfolio Beta = 6.04 + (11.04 6.04) * 0.78 = 9.94%

h) Suppose an investor wants to includes Bartman Industries stock in his or her portfolio. Stocks A, B, C are currently in the portfolio; and their betas

are 0.769, 0.985, and 1.423 respectively. Calculate the new portfolios required return if it consists of 25% of Bartman, 15% of stock A, 40% of Stock B, and 20% of Stock C.

Answer: Stock Bartman A B C Now, New portfolio Beta = * 25% 15% 40% 20% 1.989 0.769 0.985 1.423

= (.25*1.989) + (.15*0.769) + (.40*0.985) + (.20*1.423) = 1.29%

Portfolio required return = Risk free return+ (market return risk free return) * Portfolio Beta = 6.04 + (11.04 6.04) * 1.29 =12.49%