FIN2030: Foundation of Financial Management
July 8, 2019
Course Project Summary
The course project began with the selection of a publically traded company. Apple Inc. was chosen for this portion of the project. Apple Inc.s business operations and the market it is a part of had to be evaluated. Apples annual report for 2018 was used to evaluate economic value added (EVA) which is the excess of net operating profit after taxes (NOPAT) over capital costs.
(Brigham, 81). The annual report was also used to evaluate Apples free cash flow (FCF), which is defined as the amount of cash that could be withdrawn without harming a firms ability to operate and to produce future cash flows. (Brigham, 77). The return on total assets (ROA) which is determined by the ratio of net income to total assets and the return on common equity (ROE) which is determined by the ratio of net income to common equity (Brigham, 114) had to be analyzed.
Week twos portion of the course project was designed to calculate the peak car payment and mortgage payment that could be afforded in the given scenario. The task also required that an amortization table be created to show the relationship between principle payments and interest payments and how they affected the total balance owed on the vehicle being financed. The amount of interest expended over the life of the loan was calculated. The summary was stated that the buyer could afford a more expensive vehicle if they had a higher down payment or made more money per month. They could purchase a more expensive vehicle with the same down payment and the same monthly payment if they wanted to extend the years the vehicle was financed from four to six years.
Week threes portion of the course project, the purchase of stock via online brokerage accounts and the use of dividend reinvestment plans or mutual or index funds were evaluated. (SU, 2019). An analysis was completed in regards to online trading sites and their requirements for trading stock. There are many online sites where an individual can purchase and sell stocks. Each company has their own set of requirements for trading stocks through them. There are some online options that are said to be great for beginners in the investing market who have limited money to invest. There are others that are more appropriate for seasoned investors who have more money to invest.
Week fours portion of the course project was analyzing the yields and maturity rates for government securities. Government securities are promissory notes or investment bonds that are sold and secured by the government. Government securities come with a promise of the full repayment of invested principal at maturity of the security. (Chen, June. 2019). The three government securities that will be discussed for this assignment are US Treasuries, Municipal Bonds, and Corporate Bonds. These types of investments for consumers are similar in some ways and different in others. People who are low-risk investors tend to be more comfortable investing in government securities because they are backed by the government. Having the government to back up the investments lead investors to believe that they will actually make some money without taking the risk of losing their initial investment. We had to justify which type of security we would hold as individuals relative to the interest rate risk we were comfortable taking. It can be noted that in all three types of securities the values have continually decreased since 2018.
Week fives portion of the course project is a summarization of the course itself. It is an overview of what we have learned through the readings, discussions, and projects throughout the course. An additional explanation of how the amortization schedule could play a role in an organization is included in the final project. It is a compilation of the coursework that we have completed over the last five weeks. Amortization Chart
The amortization chart that was created in week two was a representation of how interest affects the overall balance of a funded purchase or loan. I personally work in car sales. For my organization, I actually use amortization charts quite often. They are extremely useful when explaining to customers how a larger down payment can save them a lot of money over time. It also allows me to show them how much they can expect to pay in interest if they pay the loan as agreed. The chart is also great for showing customers how much money they can save over the term of the loan if they simply pay an extra $20-$25 a month on their payment. People are amazed and sometimes even angered when they see how much they will be paying in interest for a car loan. For example, if I have a customer come in that wants to purchase a $26,000.00 car with a $2000.00 down payment, an 11% interest rate, and financed for 60 months their payments will be $561.39 a month. However, on the same vehicle if they pay $5000.00 down and the rest of the parameters stay the same their payment will drop to $496.16 per month. That is a savings of $3913.80 over the life of the loan. This also helps customers decided if paying the extra up front is worth the sacrifice in the long run.
Online Trading Sites
There are many online sites where an individual can purchase and sell stocks. Each company has their own set of requirements for trading stocks through them. There are some online options that are said to be great for beginners in the investing market who have limited money to invest. There are others that are more appropriate for seasoned investors who have more money to invest.
Merrill Edge is an online investment company that falls under its parent company Bank of America. Merrill Edge charges $6.95 per trade. They do not have a minimum investment requirement. Merrill Edge is considered the best site for current Bank of America customers and customers who are considered high-balance customers. They offer a wide array of stocks, bonds, options, and ETF trades. The commission fees can be waived after a certain number of monthly trades and the tier the investor is part of. There are commission fees charged for any trades below the required minimums. Other fees and costs may be incurred. (BAC, 2019).
TD Ameritrade is another online trading platform that has gained popularity in recent years. TD Ameritrade is a good fit for new investors because it offers options for beginners, long-term investors, and active traders, (TD Ameritrade, 2019). They have been in business more than 40 years. They have the option for new investors to make commission free trades for 60 days. Otherwise their cost per trade is $6.95 the same as Merrill Edge. They have options for investors to purchase stocks, bonds, CDs, options, mutual funds, and over 300 EFTs that are commission free.
InteractiveBrokers is an online investing platform that is a little different than most. They do not have a set fee per trade; on stock options they charge USD 0.000119 quantity stock sold with a maximum of $5.95 per trade. They also charge a 1% fee on deposits that are required to be no less than $50.00. They also charge commissions on trades that are a minimum of $0.35 per share and up to 1% of the total value of the trade. (InteractiveBrokers, 2019). InteractiveBrokers also offers other options for investing such as stocks, bonds, and futures.
Dividend Reinvestment Plans
Another type of investment that individuals can participate in is a dividend (portion of profits paid to shareholders) replacement plan (DRIP). With DRIPs, the dividends that an investor receives from a company go directly towards the purchase of more stock, making the investment in the company grow little by little. (Beers, 2018). DRIPs are shares that come directly from the company that the individual is already invested in. The investors are given the option to received their dividends in payment form or to have them reinvested to gain more shares of stock over time. This is a great option for some because they are obtaining more shares without having to pay more money out of pocket.
AbbVie (ABBV) is in the pharmaceutical market. They have direct purchase plans (DPP) and DRIPs. There is a minimum initial investment for non-shareholders to participate in the DPP. Investors must either pay $250.00 or enroll in ten monthly deductions of $25.00 each for their initial investment. Investors are also required to pay a one-time $10.00 enrollment fee to establish a new account. (AbbVie, 2019). The ABBV DRIP offers established shareholders the chance to buy more shares, commission-free, through automatic dividend reinvestment. (AbbVie, 2019). ABBV has 46 years of consecutive increases in dividend growth. The annual growth for 2018 was 40.2%. (Dividend, 2019). Their current dividend payout is $1.07 quarterly which is an increase of $0.11 over 2018 quarterly amount of $0.96.
JPMorgan Chase & Co (JPM) is in the financial services industry. JPM requires and initial investment of $250.00 which is the same as ABBV. However, under their DRIP their minimum purchase has to be at least $50.00 and can be no greater than $10,000.00. JPM also charges an account setup fee of $15.00 which is $5.00 more than the setup fee charged by ABBV. Their quarterly payout right now is $0.80 which is $0.27 lower than ABBV. There is no reinvestment fee that has to be paid by investors. (DRIP, 2019).
Cisco Systems, Inc. (NASDAQ:CSCO) announced a $25 billion repurchase plan in February of 2019. (Ryle, 2019). CSCO is in the computer hardware industry. In order to participate in their DRIP investors must invest a minimum of $50.00 and their investments cannot exceed $250,000.00 per year. They must purchase at least 1 share in the company to qualify for participation in DRIP. CSCO charges an investing fee of $5+$0.05/share. They also charge a DRIP of 5% of the amount reinvested up to $3.00. (directinvesting, 2019). CSCO may require a lower minimum investment than BAC, but BAC does not charge a DRIP fee and CSCO does. CSCO does not offer OCP to its investors either.
T-Notes and T-Bonds: US Treasuries offer many different notes and bonds. One note that is offered is the Treasury notes (T-Notes). T-Notes have different maturity terms depending on the face value of the note. For example, two and three-year notes have $5,000 face values. (Chen, 2019). Yields on T-Notes are not static. Another US treasury security is Treasury bonds or (T-Bonds). (T-Bonds) have maturities of between 10 and 30 years. These investments have $1,000 face values and pay semiannual interest returns. The government uses these bonds to fund deficits in the federal budget. (Chen, 2019). According to the text the Pure Expectations Theory (PET) is a theory that states that the shape of the yield curve depends on investors expectations about future interest rate. (Brigham, 208). If that holds true for T-Bonds, the yield curve would be curving downward because looking at the rates for three different dates that continually decrease would not give investors much hope of an increase in rates in the near future.
Municipal Bonds: Municipal bonds (or munis for short) are debt securities issued by states, cities, counties and other governmental entities to fund day-to-day obligations and to finance capital projects such as building schools, highways or sewer systems. (USSEC, 2019). Municipal bonds are government securities; however, unlike T-Bonds, they do not have to be issued by the federal government. Like other bonds, munis are a debt for the government entity because that entity has to pay out interest payments to the investors that purchase the munis. The yield rates on munis are also currently in a downward trend. However, munis do not appear to be decreasing as fast as T-Bonds. If PET holds true for munis, the yield curve would be curving downward because looking at the rates for today versus last week, last month, and last year the rates continually decreasing would not give investors much hope of an increase in rates in the near future.
Corporate Bonds: Corporate bonds are issued by a company or corporation as a debt security for the corporation. A corporate bond is riskier than a T-Bond or a muni because it is not backed by the government. The investor is taking a gamble on the credit worthiness and future profitability of the company or corporation issuing the bond. Corporate bonds are a form of debt financing. They can be a major source of capital for many businesses, along with equity, bank loans and lines of credit. (Chen, Feb. 2019). Although the risk is higher for corporate bonds in comparison to government backed bonds, the yield is also higher. For an investor willing to take the greater risk, there is a possibility of a greater reward as well. For me, as an investor, I would be more inclined to take the greater risk and invest in corporate bonds. I am only 21, if I take a risk now and it ends badly, I still have time to recover the loss. For older people who are retired, a T-Bond or T-Note would pose the least risk for them. Investing is a personal choice. An individual has to research the market and determine their own personal preference in regard to risk and return.
All of the projects are intertwined in the world of finance. From calculating ROA and ROE, the interest rates and payments on personal debt, and the cost of investing, it is all about money. It is about how to determine what you have, what you need, and what you can afford. Finances look different from a corporate and a personal perspective. ROA and ROE are corporate calculations and evaluations. The interest paid on personal debt is revenue for the lender and an expense for the borrower. The purchase of stock by an individual increases the companies purchasing power while it decreases the cash balance for the individual. The risk in purchasing stocks lies with the one who owns it. If the company does not remain profitable, the investor can lose every dollar they have spent on shares of the company. The company has already used the investors money to try to increase or better their business. Sometimes it works for all involved and sometimes it does not work for either party. It is about investments and securities and risk management. Government securities are the investment of choice for many if not most risk adverse investors. People tend to trust that the government is a better investment than most private corporations.
Investing is a leap of faith in that an individual must believe that their investment will increase in value and make them wealthier in the process. If they did not believe in the dream of a better future, they would not risk spending their money on the investment to begin with. As we have learned there are many ways to get into the investment game. Now investments can be made from the privacy of your own home via an online broker. There are also some companies that offer DSSP as a means of purchasing shares directly from the company. There are also many companies who offer DRIPs as an option to cash payouts on dividends. Investors who do not need the money right now can opt to reinvest their dividends and purchase more shares. Anyone who is thinking of investing in stocks needs to do their research and find the company and the method that is a best fit for them.
AbbVie. (2019). Shareholder Information. AbbVie Investors. Retrieved from (2019). Streamline Your Investing. Merrill A Bank of America Company. Retrieved from B. (2018 March 20). What is a DRIP? Investopedia. Retrieved from E. Fundamentals of Financial Management, Concise Edition. [South University]. Retrieved from
Chen, J. (2019 February 23). Corporate Bond. Investopedia. Retrieved from J. (2019 June 25). Government Securities. Investopedia. Retrieved from (2019). Cisco Systems Inc. (CSCO). A reliable investment strategy: Identify a widely diversified portfolio of high-quality stocks and build up additional holdings at favorable prices. Retrieved from (2019). AbbVie Inc. Retrieved from Advice. (2019). JP Morgan Chase (JPM) DRIP. Retrieved from (2019) Other Fees. Retrieved from University. (2019). Week 3 Project. FIN2030 Foundation of Financial Management. Retrieved from
TD Ameritrade. (2019). Investing Built Around You. Retrieved from (2019). Municipal Bonds. What are Municipal Bonds? US Securities and Exchange Commission. Retrieved from