BUS 5111 - Financial Management

Written Assignment Unit 4

Dr. Kirk Fischer

Case Study:

A friend has confided in you that they have recently inherited a moderately sized investment portfolio from a relative.
They don’t know what to do with the assets. The friend comes to you for advice. Your immediate advice, of course, is
for your friend to seek professional advice from a tax expert as well as a financial adviser. Your friend persists,
however, and asks how the investment returns of the portfolio compare to other investments. You agree to review the
portfolio and calculate the yields of each investment as well as determine the weighted average yield for the entire
portfolio.

To complete this assignment, download and refer to the investment schedule (Excel file). For your quantitative
analysis compute the current market value of each security position of the portfolio, calculate individual yields based
on current market pricing, and determine the weighted average factor and the weighted average yields.

• Explain the basis upon which you determined the weighted average yield.
• Explain the difference between a yield that is based on cost, as opposed to one that is based on current market
value.
o What are the different uses of both?
• What non-quantitative observations can you make about the portfolio?

Although you can transfer tables from Excel into Word, include the original Excel file in addition to the Word
file with your submission.

• The solved solutions for:Present your calculated answers in schedule format (a table) along with your
narrative.
o The current market value of each security position of the portfolio.
o Individual yields (estimated current yield) based on current market pricing.
o The weighted average factor.
o The weighted average yields.
• An explanation of how the weighted average yield was determined.
• An explanation for the difference between a yield that is based on cost, as opposed to one that is based on
current market value. The explanation discussed the different uses of both.
• Non-quantitative observations (conclusion) about the portfolio.
 Introduction

To alleviate the risk of investment analysists always try to calculate the yield amount for each investment. “Yield refers to the

earnings generated and realized on an investment over a particular period. It's expressed as a percentage based on the invested

amount, current market value, or face value of the security. It includes the interest earned or dividends received from holding a

particular security. Depending on the valuation (fixed vs. fluctuating) of the security, yields may be classified as known or

anticipated.” (Chen, 2020).

Computations and Narratives

Type of Company Stock Portfolio Current Current Estimated Estimated Weighted Weighted
Investment Name Symbol Position Market Market Dividend/ Current Average Average
(# of Price Value Interest Yield Factor Yield
shares)

Common Altria MO 119 50.04 $5,954.76 $247.00 4.15% 11.23% 0.47%

Common AT&T T 173 32.09 $5,551.57 $325.00 5.85% 10.47% 0.61%

Common Chevron CVX 26 125.82 $3,271.32 $111.00 3.39% 6.17% 0.21%

Common Coca Cola KO 59 54.33 $3,205.47 $77.00 2.40% 6.04% 0.15%

Common Duke DUK 65 87.68 $5,699.20 $206.00 3.61% 10.75% 0.39%

Common Johnson & JNJ 31 128.84 $3,994.04 $86.00 2.15% 7.53% 0.16%
stock Johnson

Common McDonalds MCD 52 214.31 $11,144.12 $176.00 1.58% 21.01% 0.33%

Common Pepsi Cola PEP 17 130.74 $2,222.58 $44.00 1.98% 4.19% 0.08%
stock

Common Philip PM 70 86.75 $6,072.50 $280.00 4.61% 11.45% 0.53%

Common Proctor & PG 52 113.85 $5,920.20 $133.00 2.25% 11.16% 0.25%

Total Portfolio Market Value $53,035.76 Weighted Average Yield: 3.18%

Computations:

The computations for each line item will be the same for all the stocks. First. The current market share/value, which is the value

of each stock is multiplied by number of shares. Example, for Altria we can calculate the current market value as follows:

119 x 50.04= $ 5,954.76, then followed by AT&T which is 173x 32.09 = $5,551.57, and so on and so on.

We then compute total portfolio market value by adding each common stock value which will eventually come up to a total of

53,035.76. The next that we need to calculate is the the current yield by dividing the estimated dividend by the market value for
instance, for Altria $247 / 5,954.76 = 4.15%. Then we can calculate the weighted average factor which is the “is a measure that is

used by credit rating companies to indicate the credit quality of a portfolio -this measure aggregates the credit ratings of the

portfolio's holdings into a single rating. WARFs (weighted average rating factor) are most often calculated for collateralized debt

obligations.” (Kenton, 2019). For example, to calculate the WARF for Altria 53,035.76 / 5,954.76 = 11.23% At the end we can

calculate the weighted average yield by adding each common stock yield to the overall yield which will result in 3.18%.

Explain the difference between a yield that is based on cost, as opposed to one that is based on current market

value. What would be the different uses of both?

What is 'Yield On Cost - YOC'

The yearly dividend yield of a security is calculated by dividing the investment's average cost basis by the yield on cost. An

investment's cost basis is its original purchase price or current market value, whichever is lower. In the event that an investor

purchases a position in a firm in small increments over time, an average cost basis might be helpful; this is the average price paid

for each of those purchases.

Divide the annual dividend by the average cost basis per share and multiply by 100 to get the return on cost for a company (to get

a percentage).

To put it another way, if an investor purchased 10 stock shares at $15, and 20 stock shares at $18, they would have an average cost

basis of $17/share. Investors who retain bonds to maturity will receive a higher return than those who only hold them for one year,

because the yearly dividend yields out at $0.90 per share.

Current Yield = Annual Cash flows /Market Price

Computation of Weighted Average Yield

By dividing each investment's current market value by the overall current market value, we arrive at the weighted average factor

for each investment. For each investment, we multiply the Current Yield by the weighted average factor to get the weighted average

yield. The weighted average yield of the portfolio is calculated by combining the weighted average yields of all of the investments

in the portfolio together.

Yield that is based on cost vs Yield based on current market value

Divide the dividend by the amount you paid to buy the stock to get the yield based on cost. Using this information, you can see if

the corporation is increasing the dividends, it pays out over time. Dividing the dividends and current market value yields the current

market value yield. A stock's effective yield is calculated by taking into account the current market price, and it's often taken into

account in stock valuations.

value of money, the market worth of most items is constantly rising. The cost-based yield is more commonly utilized by

manufacturing companies, whereas the market-value-based yield is more commonly used in the service industry, that is 5.29%

($0.90/$17 * 100).

What is the 'Current Yield'

Investment returns (interest or dividends) are divided by the current price of the securities to arrive at the current yield.

Measurement of the current price of a bond rather than its face value is the focus here. When a bond's current yield is calculated,

it indicates the return an investor can expect if they buy the bond and hold it to maturity.

What non-quantitative observations can you make about the portfolio?

It can be concluded that the portfolio is well diversified as it contains the stock of many firms from different industry such as food,

communication and oil and gas. This diversity reduces the associated risk in investing one company only. It can also be observed

that the top investment which produces the highest yields belongs to telecommunication industry – AT&T. This observation on

the way the portfolio investments behave make sense as in the advance technology that we have right now, communication and

information become highly valued commodity.

Having a diversified portfolio follows the adage of not putting all your eggs in one basket. However, it is still a good reminder that

regardless of the investment an individual or corporate investor will make, a thorough research should always be part of the plan

to ensure that the best economic decision will be made.

Base Hit Investing, Quantitative vs Qualitative Methods for Stock Analysis,http://basehitinvesting.com/quantitative-vs-

qualitative-methods-for-stock-analysis/

Chen, J. (2020, March 5). Yield. Retrieved February 23, 2022, from https://www.investopedia.com/terms/y/yield. asp

Finance Formulas, Weighted Average, http://financeformulas.net/Weighted_Average.html

Hill, R.A. (2008). Strategic Financial Management. Bookboon.com

Investopedia, Current Market Value CMV, https://www.investopedia.com/terms/c/cmv.asp

Investopedia, Yield on Cost (YOC),https://www.investopedia.com/terms/y/yield-on-cost.asp

Kenton, W. (2019, September 10). Weighted Average Rating Factor (WARF). Retrieved February 23, 2022, from

https://www.investopedia.com/terms/w/warf. asp

Miller, T. (2019, May 23). What Is Yield? Definition and Examples. Retrieved February 23, 2022, from

https://www.thestreet.com/how -to/what is-yield-14969848

The Motley Fool, How to calculate a Weighted Average, https://www.fool.com/investing/general/2015/05/29/how-to-calculate-a-

weighted-average-and-why-it-mat.aspx