Tag Archives: Financialliteracy

Solution to Management Science Series #167: Estimating the risk of Apple’s automotive venture

Estimating the risk of Apple’s automotive venture (will it ever happen?) 🧮

Apple is considering entering automotive industry. The analysts at Apple identified three pure plays: namely, Ford, General Motors, and Stellantis.

Determine the risk of this new project for Apple! Applicable tax rate is 35%! Use appropriate current yields on risk-free assets! Equity risk premium is estimated to be 7.4%. For all pure plays, proxy market is S&P 500.

Assume that Apple’s new project will be 100% equity-financed. Assess whether the value for the risk of this new project would make sense practically!

Solution to Management Science Series #166: Estimating Betas: Real-world example #4 🧮(Tesla)

Estimating Betas: Real-world example #4 🧮

Estimate the beta of Tesla stock.

First, observe the time period from 2019 to 2023.

Then observe the time period from 2014 to 2018, as well as from June 29, 2010 (the day TESLA went public) to 2013.

Proxy market is S&P 500. Time interval is monthly.
Compare the betas you estimated!

Identify the industry Tesla operates in. Relying on that identification, use the industry-wide betas shared publicly. Compare that estimate to those you calculated in the first step above.

Solution to Management Science Series #165: Estimating Betas: Real-world example #3 🧮(Walmart)

Estimating Betas: Real-world example #3 🧮

Calculate beta of the Walmart stock through regression analysis.

Time interval will be monthly and the time period to be observed will be last 5 years.

The proxy for the market portfolio will be S&P 500.

Solution to Management Science Series #164: Estimating Betas: Real-world example #2 🧮(P&G)

Estimating Betas: Real-world example #2 🧮

Calculate beta of the P&G stock!

Use the monthly returns for the last 5 years: i.e. 2019-2023.

S&P 500 will be the proxy for the market portfolio.

Lastly, regress P&G’s returns on the market returns and calculate beta that way for the monthly case!

Rely on publicly available data resources and compare your results with the values already calculated on these platforms! Explain the difference or the similarity!

Solution to Management Science Series #163: Estimating Betas: Real-world example 🧮

Estimating Betas: Real-world example 🧮

Calculate beta of the Visa stock!

Use the monthly returns for the last 5 years.
S&P 500 will be the proxy for the market portfolio.
Lastly, regress Visa’s returns on the market returns and calculate beta that way for the monthly case! Rely on publicly available data resources and compare your results with the values already calculated on these platforms!

Explain the difference or the similarity!

Create an additional model for which every input value is the same except for market portfolio being NASDAQ!

Solution to Management Science Series #162: Project Evaluation and Beta 🧮

Assume that Hyrule Electronics is an all-equity firm producing and marketing video game consoles and software. Hyrule has a beta of 1.35. The market risk premium is 7.2% and the risk-free rate is 3.5%.

There are three projects Hyrule is considering investment. Projects have the same beta as that of the firm. What should the discount rate be for these projects?

Also, each project requires an investment of $1,000,000 and lasts for a single year after the initial investment. Project A’s expected cash flows next year is $1,500,000, B’s $1,250,000, and C’s $1,050,000.

Calculate each project’s IRR and NPV!

Which projects should Hyrule invest considering that each project is independent? Plot the security market line (SML), label the regions within which you should accept or reject a project, also show each project on that plot!

How to account for the changes in depreciation estimates 🧮

How to account for the changes in depreciation estimates 🧮

Assume that Sega purchased an arcade cabin production machinery for $80,000,000 with an estimated useful life of 15 years and estimated residual value of $5,000,000. Shortly after the start of Year 6, Sega changed the initial estimated life to 10 years and lowered the estimated residual value to $7,500,000.

What will be the depreciation expense that needs to be recorded by Sega from Year 6 onwards?

Statistical modeling in corporate finance: Determining beta 🔮

Statistical modeling in corporate finance: Determining beta 🔮

As a statistical measure, beta estimation is prone to measurement error.

Which of the following inputs do affect beta estimates?

-Time period observed

-Time interval used

-Market portfolio against which the individual stock is benchmarked

-Whether close or adjusted close values are used

Solution to ‘Understanding Inventory Valuation for Automakers, a real-world example: Medium From the courses I have been teaching 📖

Understanding Inventory Valuation for Automakers, a real-world example: Medium
From the courses I have been teaching 📖

The following note was contained in a recent Ford Motor Company annual report:

Inventory Valuation–Automotive.

Inventories are stated at the lower of cost or market. The cost of most US inventories is determined by the last-in, first-out (“LIFO”) method. The cost of the remaining inventories is determined substantially by the first-in, first-out (“FIFO”) method.

If FIFO were the only method of inventory accounting used by the company, inventories would have been $1,235 million higher than reported this year and $1,246 million higher than reported last year.

1. Determine the ending inventory that would have been reported in the current year if Ford had used only FIFO.
2. The cost of goods sold reported by Ford for the current year was $74,315 million. Determine the cost of goods sold that would have been reported if Ford had used only FIFO for both years.
3. If the company had always used FIFO, what would have been the effects on taxes and retained earnings? Assume 30% marginal tax rate.