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Monday, September 26, 2011

EMFPS: How Can We Obtain the “Beta” to Analyze CAPM?


We need to CAPM analysis not only to evaluate the risk of company’s assets portfolio but also to assess the feasibility of the projects by using of capital budgeting method. As you know, the formula of Capital Asset Pricing Model (CAPM) is as follow:
CAPM = Rf + [B * (Rm – Rf)]
In this article, I am willing to expand my debate on “B”.
At the first, we should divide the companies in two groups:
                      ·                      Private companies: Where the expected return of the company has been calculated in accordance with EBITDA multiplier’s method.
                      ·                      Public companies: Where the expected return of the company has been calculated in accordance with the share price.
Here, I am willing to depict the Beta of public companies. Then I will bring you an example as the practice and finally I will compare the market return of a Stock Index with historic market return of the world in which the result will be referred to the Economic Systems.
Before everything, we should clear our target as follows:
1) Do we want to anticipate the Beta for next several years?
2) Do we want to calculate the Beta by using of historical information? In this case, we should classify the companies in accordance with their dividend policy as follows:
Ø  The company has paid the dividend in the period of our limited time.
Ø  The company has not paid any dividend in the period of our limited time.
If we are expected to anticipate “B” for next several years, we should use from behavioral approach for instance, simulation method such as the Monte Carlo simulation programs in which we have to define several possible alternative outcomes just like to Scenario Analysis and then we should try to determine probability distribution and random numbers to estimate the percentage of probability which is matched to each required return and market return for each one of the outcomes. For example, we can extract some economic data forecasts from IMF (International Monetary Fund) such as GDP Growth (Constant Prices, National Currency) for revenue growth, Inflation (Average Consumer Price Change %) for COGS, Unemployment Rate (% of Labour Force) and government interest rate for Selling and Administrative Expenses and so on. Then we need to build an Excel spreadsheet such as Kimi Ford’s sensitivity analysis included in Exhibit (2) of Case analysis of Nike, Inc: Cost of Capital (see the link of http://emfps.blogspot.com/2011/06/case-analysis-of-nike-inc-cost-of.html). Finally we will obtain something like below example by using of the Monte Carlo simulation program:


Assume we want to calculate the Beta of Company “M” for the period of next ten years. According to above mentioned, we have obtained below data:
Outcomes of the Economy  Probability  Market Return  Company’s Return
  Stagnant                                  15%                    7%                        9%
  Slow growth                            25%                    11%                     13%
  Medium growth                       30%                    14%                     18%
  Rapid growth                          30 %                    21%                     27%
Now, we are able to calculate the expected return of Market and Company by multiplying the percentage of probability by them as follows:
Expected return of Market = SUM [(probability)*(Market Return)] = 14.30 %
Expected return of Company = SUM [(probability)*(Company’s Return)] = 18.10 %
Regarding to the formula of the Beta, we have:
B = Cov (ra, rm) / Qm^2
Where:
Cov (ra, rm) = SUM [(probability) * (Market return - Expected return of Market) * (Company's return -Expected return of Company)]
Qm^2 = variance of the return on the market portfolio = SUM [(probability)* ((Market return - Expected return of Market)^2)]
Cov (ra, rm) = 0.003207
Qm^2 = 0.00242
B = 0.003207 / 0.00242 = 1.325
Now, let us focus on historical data to analyze the Beta of Company “M”. In this case, we do not need to have any probability distribution because all events have been already occurred and we can consider the related probabilities to be equal. Therefore, the expected return is the same the average of Company’s returns during the period of our chosen time.
The method of the Beta analysis will be done step by step as follows:
-Go to one of the financial websites such as: http://finance.yahoo.com
-On “GET QUOTES” search the name of your chosen Company
-Click on “Historical prices”
-I usually search for monthly but you can also search daily or weekly (you should remember that finally the return rate should be changed to annually).
-Copy and Paste all data on your Excel spreadsheet
- On “GET QUOTES” search the related Stock Index of the company to obtain the market return
-Click on “Historical prices”
-Search your chosen time just like to the time extracted for the company
-Copy and Paste all data on your Excel spreadsheet
To be continued …….

Note:  “All spreadsheets and calculation notes are available. The people, who are interested in having my spreadsheets of this method as a template for further practice, do not hesitate to ask me by sending an email to: soleimani_gh@hotmail.com or call me on my cellphone: +989109250225.   Please be informed these spreadsheets are not free of charge.”

Monday, September 5, 2011

Case Analysis of Nike, Inc.: Cost of Capital (CON)


Referring to my previous article (http://emfps.blogspot.com/2011/06/case-analysis-of-nike-inc-cost-of.html), someone who had received my spreadsheet, had the problem to calculate the Cost of Debt by using of IRR method (Method 2). As the matter of fact, this method can be utilized to obtain the required return rate on Bonds in which you can use it even in your own business.
How can we use from this spreadsheet to calculate the required return rate of Bonds?
Here I am willing to explain it step by step as follows:
Please look at the spreadsheet.
-Enter your new Coupon rate (annually) on Cell C9 and Price of Bond based on par value equal $100 on Cell C10
-You should use the try and error method by changing on required return rate speculated by you on Cell C21 and C22 in which finally Cell C23 will be equal to Cell C17 (C23 = C17).
How can you guess the required return rate?
I have already depicted it on below link:
Where I stated: “Which method is to calculate cost of debt better than others?  It is important to find the relationship between the required return and the coupon interest rate. When the required return is greater than the coupon interest rate, the bond value ……”
Let me bring you an example as follows:
Assume the company has issued the $500,000 nominal amount of 8% rate of Bonds from 1999 to 2009 was issued by a subsidiary at $95.068 per $100 par value. How can we calculate the required return rate by using of my spreadsheet?

-Enter on Cell C6: 1999
-Enter on Cell C6: 2009
-Enter on Cell C9: 8%
-Enter on Cell C10: 95.068
-Since the price of Bond is less than Par value, our speculate on required return rate should be more than Coupon rate (annually)
-Click on Cell C21where we can see this formula: = - PV (rate, number of years, Coupon payment). Of course, the previous numbers on Cell C21 are: = - PV (0.1415, 25,135)
-Replace the amount for required return more than Coupon rate, for instance, 8.5%. Where we have: = - PV (0.085, 10, 80) or = - PV (0.085, C19, C18)
-Click on Cell C22 where we can see this formula: = Par Value / (1+required return) ^n. Of course, the previous numbers on Cell C22 are: = 1000/ ((1+0.1415) ^ 25)
-Replace the same amount of required return (8.5%) and power equal to 10. Where we have: = 1000 / ((1+0.085) ^ 10 or = C20 / ((1+0.085) ^ C19

-We can see that Cell C23 is more than Cell C17 (967.19 > 950.68). Therefore, we should increase again the required return rate to 8.8%
-All previous steps should be repeated. Now, we have: C23 = 948.20 which is less than C17= 950.68
-In this case, we should decrease the required return for instance to 8.76%. Finally we will have C23 approximately equal to C17 (C23 = 950.71 and C17 = 950.68)

In the result, the required return rate will be equal to 8.76%.

 

Note:  “All spreadsheets and calculation notes are available. The people, who are interested in having my spreadsheets of this case analysis as a template for further practice, do not hesitate to ask me by sending an email to: soleimani_gh@hotmail.com or call me on my cellphone: +989109250225. Please be informed these spreadsheets are not free of charge.”

Wednesday, August 31, 2011

Risk of Assets


Let us look at the price of Soybeans as one of the agriculture commodities and price of Gold during the period of one year (From Aug 31, 2010 to Aug 31, 2011) as follows:

Date                                          Aug 31, 2010                            Aug 31, 2011   
Price of Soybeans                   1,045.25(¢ / bushel)                    1,457.00 (¢ / bushel)
Price of Gold                          1247.29 ($ / troy ounce)              1,829.80 ($ / troy ounce)   
                   
If you have stored one troy ounce of Gold, your real rate of return will be: ra = 46.7%

But if you have invested on Soybeans during the period of one year, definitely you can earn minimum 8% of  your initial investment which is equal to 9978.32 cent (1247.29 * 8%  * 100 ) as your cash earning or cash dividend.  To calculate the rate of return for Soybeans, we have:

V(t-1) = 124729  cent 
Amount of bushel = 124729 / 1045.25 = 119.33 bushel
V t = 119.33 * 1,457 = 173862.86 cent
ra = 9978.32+ (173862.86 -124729) / 124729  =  47.4%

As you can see, the risk of two assets is approximately the same.

Of course, soybean oil alone accounts for about ninety percent of all fuel stocks in the US.

“Biodiesel produced from soybeans produces more usable energy and reduces greenhouse gases more than corn-based ethanol, making it more deserving of subsidies, according to a study being published this month in The Proceedings of the National Academy of Sciences.
Now, I willing to know if above mentioned is a good news or bad news.

Friday, August 26, 2011

Research Proposal: An Application of Six Sigma


Referring to my previous article of “Application of Six Sigma to Improve Process in Construction Projects” on link http://emfps.blogspot.com/2011/08/application-of-six-sigma-to-improve.html”, let me bring you another example in the case of Research proposal as application of Six Sigma. I think we will be able to match this research into framework of Six Sigma where we have DMAIC as follows:

 

-Define phase

-Measure phase

-Analysis phase

-Improve phase

-Control phase

 

Now, please carefully read below Research Proposal and overlap it into a Six Sigma’s framework.

 

                                    Research Proposal



Topic: Exploring the New Idea to Manage the Cost and the Time of Geotechnical Investigation Projects


Introduction
Geotechnical investigations are performed to evaluate those geologic, seismologic, and soils conditions that affect the safety, cost effectiveness, design, and execution of a proposed engineering project.
Insufficient geotechnical investigations, faulty interpretation of results, or failure to portray results in a clearly understandable manner may contribute to inappropriate designs, delays in construction schedules, costly construction modifications, use of substandard borrow material, environmental damage to the site, post- construction remedial work, and even failure of a structure and subsequent litigation. Investigations performed to determine the geologic setting of the project include: the geologic, seismologic, and soil conditions that influence selection of the project site; the characteristics of the foundation soils and rocks; geotechnical conditions which influence project safety, design, and construction; critical geomorphic processes; and sources of construction materials. A close relationship exists between the geologic sciences and other physical sciences used in the determination of project environmental impact and mitigation of that impact. Those individuals performing geotechnical investigations are among the first to assess the physical setting of a project. Hence, senior-level, experienced personnel are required to plan and supervise the execution of a geotechnical investigation.

Geotechnical investigations are to be carried out by engineering geologists, geological engineers, geotechnical engineers, and geologists and civil engineers with education and experience in geotechnical investigations. Geologic conditions at a site are a major influence on the environmental impact and impact mitigation design, and therefore a primary portion of geotechnical investigations is to observe and report potential conditions relating to environmental impact. Factors influencing the selection of methods of investigation include:

a. Nature of subsurface materials and groundwater conditions.
b. Size of structure to be built or investigated.
c. Scope of the investigation, e.g., feasibility study, formulation of plans and specifications.
d. Purpose of the investigation, e.g., evaluate stability of existing structure, and design a new structure.
e. Complexity of site and structure.
f. Topographic constraints.
g. Difficulty of application.
h. Degree to which method disturbs the samples or surrounding grounds.
i. Budget constraints.
j. Time constraints.
k. Environment requirements/consequences
l. Political constraints.

Problem Statement
Most investigators involved in geotechnical projects are faced with the problem of obtaining reliable data within a short time from an enormously complex subsurface medium at minimal cost.
Geotechnical engineering inevitably involves the use of engineering judgment and dealing rational with considerable uncertainty. At the time of designing as part of tender specifications, substantial difference between actual soil profiles and available soil profile is very important. Since time interval between issue of tender document and submission of technical bid is very short, we need to have an estimation of the allowable bearing capacity of soil. Soil investigation is very expensive. Engineering judgment comes from execution and experience comes from bad engineering judgment. Sometimes when we study Geotechnical reports, we perceive that there is the great mistake because the results of Triaxial(U.U) and Shear box(C.D) tests are too much less than the results of S.P.T tests. It can be raised due to below reason.
It seems that they have done Triaxial and Shear box tests on undisturbed samples collected from High Over Consolidation clay (H.O.C clay layers) and it have been caused that undisturbed samples are changed to disturbed samples in Laboratory(the allowable bearing capacity have been calculated in accordance with laboratory tests).

Goals and Objective
Throughout a project’s planning, design, and construction phases, Cost Management is employed as a means of balancing a project’s scope and expectations of quality and budget.
The approach can be summarized as requiring the following three steps:
1. Define the scope, the level of quality desired, and the budget
2. Ensure that the scope, quality, and budget are aligned
3. Monitor and manage the balance of these three components throughout the life of the project.
There are many objectives to conduct this research as follows:
-To identify the scope of geotechnical investigation program
-To analyze the influence of the loading on field investigation
-To optimize the plan for Geotechnical investigation. For instance, sometimes we have to increase the number of Boreholes or Test pits abnormally because of the huge fluctuation of soil profile whereas it is possible we gain the benefits to decrease the number of Boreholes by utilizing of data obtained from other field of study such as Geology, Geophysics, and Hydrogeology and so on.
One of the most crucial goals to decrease the cost and the time of Geotechnical investigation at this research is to use of a new idea or new strategy by mixing ASTM and DIN standards of SPT (Standard Penetration Test) in the field study. In fact, the variation can be minimized if standard practices are followed during the soil investigation.


Scope of Study
The limitation of this research is to prepare the data of soil for insensitive projects such as the buildings less than twenty floors in which we do not need to generate the exact mechanical characteristics of soil, low loading and where Allowable Bearing Capacity of soil is more than 1kg/cm2. For instance, shear strength parameters of soil such as Phi and C can be measured with error and decimal around 0.01 to 0.001 by using of Triaxial tests. But we are not urged to obtain these results for some of the projects while for designing of an earth dam, we should present these parameters with the least error and decimals. The meaning of this reality is the same the quality of designing. As an example, we can change Phi = 45.37 degree to the range of Phi = 32 -42 degree or instead of C = 0.278 kg/cm2, we consider C = 0.2 – 0.25 kg/cm2. Another limitation is related to total statistics result of correlation between ASTM and DIN standard penetration test because it is clear that we proceed to correlate two standards on page by using of energy balancing but we should experience the confirmation of this correlation at the site.

Literature Review
 At the first, a geotechnical expert should be fully connected with structure engineer and architectural designer because of checking the types of loading, Code height, Benchmark, Layout and so on. I had an experience in the case of soft saturated clay by using of pre-cast concrete piles. Finally I understood we had the lack of Geophysics and Geology investigation before geotechnical investigation because there was different data from stratum in the distance of less than 5 meter between two points on the ground. In fact, Geomorphology of area was dendrite shape.

Braja M Das (2006) stated a soil exploration program for a given structure can be broadly divided into four phases:
1. Compilation of the existing information regarding the structure
2. Collection of existing information for the subsoil condition in which the useful information can be obtained from the following sources:
a. Geologic survey maps
b. Country soil survey maps prepared by the U.S. Department of Agriculture and the Soil Conservation Service
c. Soil manuals published by the state highway department
d. Existing soil exploration reports prepared for the construction of nearby structures
Information gathered from the preceding sources provides insight into the type of soil and problems that might be encountered during actual drilling operations.
3. Reconnaissance of the proposed construction site
4. Detailed site investigation
We have spacing of boring and the depth of Boreholes. In this research we will take a debate about them mentioned by Sowers (1970) and the American Society of Civil Engineers (1972) by utilizing the loading of construction and Bossinesq method and Vertical stress of soil layers.
On the other hand, Bowles (1996) mentioned that the standard penetration test, developed around 1927, is currently the most popular and economical means to obtain subsurface information (both on land and offshore). It is estimated that 85 to 90 percent of conventional foundation design in North and South America is made using the SPT. This test is also widely used in other geographic regions. The method has been standardized as ASTM D 1586 since 1958 with periodic revisions to date.

Research Methodology
In this research, I am willing to present you how we should select and collect data and use them accompanied by mixed standards of DIN (Germany) and ASTM (USA) to manage a geotechnical investigation project in which we will have the minimum cost and time. In fact, the questions are: Do we actually need to do expensive laboratory tests such as three-axial, Sheer Box or Consolidation for all of the projects? What are the controlling factors to design a comprehensive program for field investigation and laboratory tests? I have brought here two samples which are real projects conducted in Iran.

Pyramid Diagram
Geotechnical Investigation Plan

Here are other sources for this research as follows:
ü  Using of reference books such as Bowles and Braja M Das
ü  Using of ASTM (American Standard)
ü  Using  of DIN (Germany Standard)
ü  Using of Internet to collect secondary
ü  Using of Actual projects fulfilled in Iran as sample


Significant of Research
The most important significant of this research is to examine a new idea as a strategy and applications of it to decrease the time and the cost of geotechnical projects.
In the matter of fact, this research have revealed the actual applications of the light hammer of DIN that it can used for SPT tests in which we had have cut-fill and have to recognize the boundaries of loose and hard soil at the site. Sometimes, we cannot use from heavy hammer of ASTM for SPT.

Data collection and analysis of discussion
 Sometimes alluviums or loose fill (made-up gravel) have been laid unconformity on geology formations included: out crops, folded rock stratums that their geomorphology have been shown in shape of up and down (roughness).
Therefore the logs of two bore holes, which have very low distance between them, are not compatible together. It is possible, one of them encounter to rock layer in depth of 1m but another bore hole come in contact with this rock layer in depth of 10m.
One of the best ways to specify this problem is to use of German Light S.P.T equipment (DIN 4094). The specifications of this equipment are as follows:
D =22 mm          Rod diameter
D*=35.6 mm      Point diameter
a =60 degree      Point angle
W = 10 kg          Hammer mass
H = 50 cm          Free falling height
 A = 10 cm2       Point area
In this research I am willing to exchange number blows of DIN 4094  to ASTM-D1586 in accordance with energy equilibrium’s principle where we will be able to use all correlation Tables of SPT test (N) which are covered by ASTM -D 1586  . Two record samples, which are real projects conducted in Iran, exactly have been examined. The reasons behind to select these projects by me are as follows:
- Jahan project was only investigated by 5 Bore holes while the area of the site was about 400000 m2.Of course, 12 test pits with average depth of 1.1 m  were excavated to confirm an Index layer. Maximum depth of Boreholes was equal to 15m.
- Khavar Dasht project was investigated by 6 test pits while the area of the site was only 1500 m2 exactly the opposite of Jahan project. There were 3 zones at the site and maximum depth of Boreholes was equal 10m. And so the cost and time for each status (ASTM method and DIN method) have been calculated and compared.
Finally, data collection and analysis of discussion are included as follows:

ü  Using of the balance of energy to exchange the result of SPT by DIN method to SPT by ASTM method
ü  Using of tables and graphs of ASTM method for the result of DIN method
ü  To illustrate the method of SPT test by DIN in Test pits
ü  Using of SPT results instead of Engineering Lab tests such as Three-axial or shear Box
ü  To obtain Allowable Bearing Capacity of the soil
ü  To calculate the cost and the time for at least two actual geotechnical project 
 
References
1. American Association of State Highway and Transportation
Officials, 444 N. Capitol St., N.W., Washington, DC 20001.
2. American Society of Civil Engineers, New York, NY
Journal of Geotechnical Engineering Division (1974-)
Journal of Soil Mechanics and Foundation Division, ASCE
(1955-1973, inclusive)
3. AASHTO (1990), Standard Specifications for Highway
Bridges, 14th ed., 420 pp.
4. Baguelin, F, et al. (1974), "Self-Boring Placement
Method of Soil Characteristics Measurement,"
Proceedings, Conference on Subsurface Exploration
for Underground Excavation and Heavy
Construction, ASCE, pp. 312-322.
5. Bowles, J. E. (1992), Engineering Properties of Soils and
Their Measurement, 4th ed., McGraw-Hill, New
York, 241 pp.
6. Dahlberg, R. (1974), "Penetration Testing in Sweden,"
Proc. 1 st ESOPT Stockholm, Sweden, vol. 1, pp.
115-131.
7. De Mello, V. F. (1971), "The Standard Penetration Test,"
4th Pan-American Conf on SMFE, San Juan,
Puerto Rico (published by ASCE), vol. 1, pp. 1-86
(with 353 references).
8. Hansen, J. B. (1970), "A Revised and Extended Formula
for Bearing Capacity," Danish Geotechnical Institute,
Copenhagen, BuI. No. 28, 21 pp. (successor
to BuI. No. 11).
9. Hvorslev, M. J. (1949), "Subsurface Exploration and
Sampling of Soils for Civil Engineering Purposes,"
Waterways Experiment Station (may still
be available from Engineering Foundation, NY),
521 pp.
10. Jamiolkowski, M., et al. (1988), "New Correlations of
Penetration Tests for Design Practice," Proc. 1st
ISOPT, vol. 1, pp. 263-296 (huge number of references
cited).
11. Kjellman, W. (1948), "A Method of Extracting Long Continuous Cores of Undisturbed Soil," 2nd ICSMFE, vol. 1, pp. 255-258.
12. Riggs, C. O. (1986), "American Standard Penetration
Test Practice," 14th PSC, ASCE, pp. 949-967.
13. Skempton, A. W. (1986), "Standard Penetration Test Procedures
...," Geotechnique, vol. 36, no. 3, pp.
425-447.
14. Soil Mechanics and Foundation Engineering
PSC Proceedings of Soil Mechanics and Foundation Division,
ASCE, 7th PSC: In Situ Measurements of Soil Properties (1975)
15. Wroth, C. P (1984), "The Interpretation of In Situ Tests,"
Geotechnique, vol. 34, no. 4, Dec, pp. 449-489.