FIN 432
Investment Analysis
Spring I 2008
INSTRUCTOR:
Robert Castaneda, DBA, CPA
PHONE:
312-498-2028
EMAIL:
[email protected]
FAX:
312-945-3169
REQUIRED TEXTS:
Title
Author(s)
Copyright
Publisher
ISBN
Edition
Investments: Analysis and management
Jones, Charles P.
(2006)
Wiley Publishing
9780470047811
10th
This Course Requires the Purchase of a Course Packet:
YES
NO
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Argosy University
COURSE SYLLABUS
FIN432
Investment Analysis
Faculty Information
Faculty Name: Robert Castaneda
Campus: Chicago
Contact Information: [email protected] 312-498-2028 Fax: 312-945-3169
Office Hours: 9AM to 10PM Mon-Fri 9AM to 5PM Saturday
Short Faculty Bio: Roberto Castaneda received his graduate degree (DBA) in Accounting from Argosy University/Schaumburg;
(MM/MBA) in Marketing and Finance from Northwestern University, and his undergraduate degree in Accounting and Marketing
from DePaul University. He is also a Certified Public Accountant. Dr. Castaneda has worked in senior finance positions at American
Express, PepsiCo and McDonald’s Corporation in a number of international countries.
Course description:
This course focuses on investment principles and problems. Topics include the effects of current financial events upon the markets and
their operations. Students analyze the selection of investments that provide the maximum future return at an acceptable level of risk.
Examination of marketable financial instruments, common stocks, preferred stocks, bonds, put options, call options, futures contracts
on the traditional commodities, and financial futures.
Course Pre-requisites: None
Required Textbook:
Jones, Charles P. (2006). Investments: Analysis and management. (10th ed.). Wiley Publishing. ISBN# 9780470047811
Course length: 7.5 Weeks
Contact Hours: 45 Hours
Credit Value: 3.0
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Program Outcomes:
1. Communication
1.1 Communicate business concepts effectively, both written and orally appropriate to the audience
2. Team
2.1 Define the attributes of an effective team member and leader and the characteristics of an effective team in reaching specific
business goals
3. Cognitive
3.1 Problem Solving – Given a business problem, select and defend a business solution chosen from specific alternatives
3.2 Information Literacy – Given a business research question, access information from a variety of sources, select appropriate
sources to respond to a business question
4. Analysis/Application
4.1 Integration – Describe the interrelationship of the functional business areas of statistics, accounting, operations, finance,
marketing, and strategy
5. Ethics/Diversity
5.1 Diversity – Identify the issues and challenges related to diversity in current business organizations
5.2 Ethics – Identify the issues and challenges related to ethics in current business organizations
6. Financial Application
6.1 Given a specific business case, choose a financial strategy to reach a business goal
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Course Objectives:
1) Distinguish the differences between liquidity and marketability. (Program Outcomes: 1.1, 3.2, 4.1)
2) Assess the impact of a given monetary of fiscal policy on interest rates and/or security prices. (Program Outcomes: 1.1, 3.1,
4.1, 6.1)
3) Compare and contrast various types of investment risks. (Program Outcomes: 1.1, 3.1, 4.1, 6.1)
4) Describe the terminology, characteristics, and sources of risk of debt securities and preferred stock. (Program Outcomes: 1.1,
3.1, 3.2, 4.1, 6.1)
5) Discuss equity investment valuation models. (Program Outcomes: 1.1, 3.1, 3.2, 4.1, 6.1)
6) Calculate the intrinsic value of a stock value and expected rate of return. (Program Outcomes: 1.1, 3.1, 4.1, 6.1)
7) Calculate the price, compound return, taxable yield equivalent, and yield to maturity of a bond. (Program Outcomes: 1.1, 3.1,
3.2, 4.1, 6.1)
8) Analyze the characteristics and sources of risk within various option strategies. (Program Outcomes: 1.1, 3.1, 3.2, 4.1, 6.1)
9) Evaluate the risk-adjusted performances of investment securities or portfolios. (Program Outcomes: 1.1, 2.1, 3.1, 3.2, 4.1, 6.1)
10) Determine suitability of equity investment using ration analysis. (Program Outcomes: 1.1, 2.1, 3.1, 3.2, 4.1, 6.1)
Assignment Table
Topics
1


Liquidity and
marketability
considerations
The effect of the
Monetary and Fiscal
Policies on the
Financial Markets
Readings
Assignments
DB: Discussion Board or in Class Assignment. Suggested length
is 3-5 Paragraphs ( Approx. 300-500 words), or as determined
by instructor
IP : Independent Project
GP: Group Project
Chapters: 1, 2, 4
DB 1.1: (Relates to course objectives 1 & 2)
Discuss the distinctions between liquidity and marketability. In
what way(s) are they related? What is the correlation between
liquidity and safety? What is the correlation between safety and
an investor’s required rate of return? Next, conduct an internet
search to find an example of: 1) a specific investment with high
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liquidity; 2) a specific investment with low liquidity; 3) a
specific investment with moderate liquidity and moderate to high
returns. Make sure to provide detailed info about each
investment’s yield (return) and relative safety.
DB 1.2: (Relates to course objective 2)
The Federal Reserve largely worked to decrease interest rates
from 2001 (after the 9/11 terrorist attacks) until 2004. In the
early part of 2004, the Fed then began raising interest rates once
more. What are some reasons that the Fed lowered rates in the
prior time periods and then switch to increasing interest rates in
2004 and 2005? What were some of the effects of Feds actions
on the stock markets and the general levels of interest rates?
Provide examples to support your rationale.
Next, review the Fed’s most recent Beige Book report at:
http://www.federalreserve.gov/fomc/beigebook/2007/default.htm
and comment on how the Fed’s recent monetary actions are
affecting the overall economy, the general interest rates levels,
and various financial markets.
2
Equity Investments: Part I




Diversifiable versus
non-diversifiable risk
Beta Coefficient
Expected returns
The Constant dividend
Growth Model
Chapters: 6, 10
DB 2.1: (Relates to course objectives 3, 5, & 6)
Describe systematic and unsystematic risk and discuss which
type of risk can be effectively managed through diversification.
Next, research the Internet for an article from a reputable source
that addresses the issue of how many securities are enough to
properly diversify an investment portfolio. Discuss the salient
points of the article and argue why you agree or disagree with
the article’s main points.
IP 2.1: (Relates to course objectives 6 & 7)
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Mr. Martinez is a conservative investor who is interested in a
required rate of return of 10% on his stock investments while
assuming lower market risk. The three possible stock choices
for Mr. Martinez and their respective betas are as follows:
Stock
AAA
GHL
BAC
Expected Return
10%
11%
12%
Beta
.75
1.0
1.25
Part I
A) Determine the expected returns and beta for a portfolio
consisting of one third of Mr. Martinez’s funds in each
stock.
Part II
Assume that:
 Each AAA stock pays current dividends of $1.50
annually with 6% expected annual increases. The current
market stock price for AAA is $30/Share.

Each GHL stock pays current dividends of $1.75
annually with 6% expected annual increases. The current
market stock price for GHL is $27/Share.

Each BAC stock pays current dividends of $2.25
annually with 7% expected annual increases. Current
market stock price for BAC is $35/Share.
A) Using the Constant Dividend Growth Model,
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determine whether AAA, GHL and BAC are over or
undervalued.
B) For what types of companies, is the constant growth
model an appropriate analysis tool?
C) What are the limitations of the constant growth model?
IP 2.1_ Instructor Answer Key
IP 2.1.doc
3
Equity Investments: Part II




The DOD stock
investment strategy
The Dow Jones
Industrial Stocks
Stock splits
Stock dividends
Chapters: 8, 9
DB 3.1: (Relates to course objectives 4, 9, & 10)
Compare and contrast a stock split with a reverse stock split and
a stock dividend with a cash dividend. Explain how each process
affects a company’s Earnings Per Share. Discuss whether you,
an investor, would take a cash or stock dividend? Justify your
rationale.
GP: (Relates to course objectives 6 & 10)
The Dogs of Dow (DOD) stock investment strategy is a fairly
simple way of selecting high dividend yield Dow stocks for your
investment portfolio. You are part of an investment club and
have about $25,000 to invest. You and other members of your
club are to:
1) Produce a 500 word summary explaining how DOD
works.
2) Provide current stock price, price earnings (P/E), and
dividend yield info. For all 30 Dow stocks using an Excel
spreadsheet.
3) Using the “Sort” function of Excel, split the $25,000
among three-to-five suitable Dow Jones stock based on
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the DOD investment strategy and criteria.
4) Pretend that you have bough the stocks this week (week
three), and liquidate your positions by the end of week
six. Assuming a 2% broker commission, calculate and
show each of your stock positions gain or losses.
Useful sites for your project:
Dogs of Dow Info. Page
http://www.dogsofthedow.com/
MSN stock quote page
http://moneycentral.msn.com/detail/stock_quote
Dow Jones Stocks List
http://www.stock1.com/dow30.htm
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4
Fixed Income Debt Securities




Taxable equivalent
yield calculations.
Yield to Maturity
Calculations.
Bond investment
strategies
Convertible securities
Chapters: 17, 18
DB 4.1: (Relates to course objectives 4 & 8)
Joseph Paul is a 72 year old retiree whose investment objectives
are safety of principal and current income. Mr. Paul is currently
in the 25% combined federal and state marginal tax rate. Mr.
Paul is considering an investment in one of the following bonds:
JKL Corporate Bond: A-Rated, 6.75% coupon rate, maturing in
7 years (recommended by a friend).
FHR Municipal Bond: AAA-rated, 5.25% coupon, also maturing
in 7 years (recommended by her ACG investment advisor).
Using the taxable equivalent yield concept, discuss and argue
which bond Mr. Paul should purchase. Your discussion should
also include risk and other possible pertinent qualitative
considerations. Support your rationale with research.
IP 4.1: The following WORD document contains a set of
computational problems. Please solve these and make sure to
show your computations. Submit this deliverable to the course
instructor by or before 00/00/00.
Problem Document (Relates to course objective 8)
IP 4.1.doc
IP 4.1_Instructor Answer Key
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IP 4.1 Answer
Key.doc
5
Technical & Fundamental
Analysis



The benefits and
limitations of ratio
analysis.
Ratio Calculations.
P/E
ROA
ROE
Current ratio
Fundamental versus
technical analysis.
Chapters: 13, 15, 16
DB 5.1: (Relates to course objective 10)
Explain how ratio analysis can serve as an effective tool to
assess the current and future financial status of firms. Describe
the limitations of ratio analysis. Also discuss how fundamental
type analysis, such as ratio analysis, differs from a technical
analysis. Which types of analysis make the most sense to you?
Provide evidence to support your rationale.
DB 5.2: (Relates to course objective 10)
Go to the EDGAR link on the SEC web page at :
http://www.sec.gov/edgar/searchedgar/webusers.htm to conduct
research about a public company of your choice.
Using the information in the company’s 10 K and stock research
sites such as www.hoovers.com and
http://moneycentral.msn.com/detail/stock_quote present the
following information in your post about the Company you
chose.
 Its most current stock price
 Its stock 52 week highs and lows
 Company stock’s beta
 The company’s following financial ratios:
o P/E ratio
o Return on Assets
o Return on Equity
o Current Ratio
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6
Portfolio Management
 Asset Allocation
Considerations.
 Suitability Factors
 Mutual Funds
Investing
Chapters: 3, 21, 22
DB 6.1: (Relates to Course objectives 9 & 10)
Shaun McGregor is a single, 47 year-old, plastic surgeon who
currently owns a condominium in San Francisco worth
$1,400,000. Dr. McGregor is doing quite well financially. His
gross income from his practice last year exceeded $450,000.
Due to his hectic schedule, Dr. McGregor has seldom taken the
time to evaluate his portfolio performance; however, he thinks it
isn't “quite up to par.”
Dr. McGregor has $325,000 in available funds currently sitting
in a tax-exempt money market fund. He also has $130,000
invested in several stocks at a local discount brokerage house
and he owns an IRA account funded with three mutual funds,
currently worth about $270,000.
Dr. McGregor has the following investment objectives:





A sum of $20,000 is to be earmarked for Dr. McGregor’s
upcoming wedding and honeymoon trip in June of next
year. Dr. McGregor wants this portion invested in a very
safe place with no expense, sales, or early withdrawal
charges.
He is also planning to assist his nephew with college
expenses in six years. To this end, he wants $30,000
earmarked in an account with higher than current
certificate of deposit or money market rates but minimal
market volatility.
His average, long-term (5+ years) minimum required rate
on equity investments is 8%.
Dr. McGregor has a moderate risk tolerance.
Construct an asset allocation model for Dr. McGregor,
including his financial objectives and risk tolerance level.
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Explain and defend the rationale behind recommending
the model. The asset allocation must have between 3-5
asset classes.
1) Recommend at least two suitable investment alternatives
for Shaun’s wedding.
2) Recommend a suitable stock for Dr. McGregor’s tuition
assistance objectives. Explain how you came about your
recommendation
DB 6.2: (Relates to course objectives 9 & 10)
Research the Internet and choose a suitable mutual fund that you
can use to fund your IRA account. Provide detailed information
about the fund, including the following:









The name of the fund
Its portfolio manager’s name, experience, and
qualifications
Its investment philosophy and strategy.
How long this fund has been in existence.
It’s current NAV (share price).
Its yearly management fees (must not exceed 1% of
amount invested).
The fund’s 1, 3 and 5 year returns*.
An assessment of some of the risks involved in investing
in this fund.
Names of some popular mutual fund families. (Please
note that a mutual fund family is comprised of many
funds. Make sure to recommend specific funds.) Do
not pick a mutual fund that has been in existence for less
than five years, as it will not have an established track
record. Providing a link to a fund web page is NOT an
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acceptable substitute for your discussion.
FranklinTempleton
Thornburg
Oppenheimer
Washington
Mutual Group
of Funds
7
Leveraged Investing
 Options & Futures
 Basic Hedging
Strategies
Chapters: 19, 20
T. Rowe
Price
American
funds
Fidelity
Evergreen
Pioneer
Scudder
Vanguard
Van Kampen
Jennison
Dryden
Utopia
Funds
Strong
Funds
Nuveen
DB 7.1: (Relates to course objective 8)
In your own words, provide a brief explanation each of the
following terms. For each term, define its potential risks and
corresponding rewards. In addition, identify the type of investor
who may be interested in purchasing (not selling) such
securities.
Calls
Puts
Futures contract
Financial future
IP 7.3The following WORD document contains a set of computational
problems. Please solve these and make sure to show your
computations. Submit this deliverable to the course instructor by
or before 00/00/00.
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Final Comprehensive IP ( relates to course objectives 6, 7, & 8)
IP 7.3.doc
IP 7.3 Instructor Answer Key
IP 7.3 Answer
Key.doc
8
DB 8.1: (Relates to course objective #8)
Peggy Jones, an investment portfolio manager at a local bank, is
in charge of managing a $5,000,000 stock portfolio. Ms. Jones is
considering the purchase of a large block of VCX stocks in
several weeks, but believes that the stock VCX stock prices are
very likely to go up by then. If Ms. Jones consults with you in
regard to the best plan of action for investment and portfolio
management of this account. How would you counsel her?
Should she consider a long or short hedge strategy? Explain your
reasoning behind your suggestion.
GP due - See Module 3 for the requirements for this group
project.
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Grading Criteria
Grading Scale
A
AB+
B
BC+
C
CD+
D
DF
100 – 93
92 – 90
89 – 88
87 – 83
82 – 80
79 – 78
77 – 73
72 – 70
69 – 68
67 – 63
62 – 60
59 and below
Grading Requirements
Attendance/participation
Weekly DB assignments
IP Assignments
GP
Final IP (8.3)
10%
30%
30%
15%
10%
100%
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