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IE 305 Fall 2016

Stock Project

For this project you will conduct a detailed analysis of a personal investment choice. Assume
that you have $10,000 to invest, and that you invest this $10,000 on January 1, 2017. Assume
also that you will not need this money for 3 years after you invest it.

Your goal is to decide whether to buy stock in Amazon or in Duke Energy Corporation (a large
investor-owned electric utility). For the purpose of this project, you must choose one or the
other (or neither) – you cannot diversify the investment of this $10,000. Because you are
adopting a value-based buy-and-hold strategy, if you buy stock in one of these companies on
January 1st, 2017, you will hold it for three years before selling all of your stock.

The following provides more detailed information and requirements for the project.
 You should base your investment decision on publicly available financial data from
both companies. Historical closing stock prices of both companies will be provided for
you below – do not attempt to determine them yourself, as there can be a discrepancy
between some databases.
 You can use the following links to access Duke and Amazon. Once there, select
“Interactive chart” and you will be able to see how closing stock prices were estimated,
but again, do not attempt to determine them yourself.
o https://beta.finance.yahoo.com/quote/DUK
o https://beta.finance.yahoo.com/quote/AMZN

 You will want to use the “Interactive chart” feature to determine historical dividends.
At the bottom of the interactive chart, you may find multiple “D” letters contained in a
diamond shape. If you put your cursor over the “D,” you can see when and how much
dividends were paid to shareholders per share. If there are no “Ds” at the bottom of the
interactive chart, then that company paid no dividends.
 Use the following historical stock closing price data for this project. We will assume
this data is accurate, although in a few cases the closing prices were based on data that
was a day or two different than that indicated below.

Quarter Date AMZN DUK


1 3/31/2013 266.98 72.56
2 6/30/2013 279.00 67.9
3 9/30/2013 319.04 66.43
4 12/31/2013 396.44 67.92
5 3/31/2014 323.00 70.49
6 6/30/2014 337.49 71.39
7 9/30/2014 322.74 75.17
8 12/31/2014 308.52 84.05
9 3/31/2015 372.25 76.97
10 6/30/2015 437.71 72.53
11 9/30/2015 532.54 71.96
12 12/31/2015 675.89 71.39
13 3/31/2016 599.00 81.15
14 6/30/2016 725.68 85.63
15 9/30/2016 837.31 80.04
16 12/31/2016 ?? ??

 You can see there are a total of 15 prices over 15 quarters that you will use to project
future stock prices. You will use regression analysis to determine the stock price for
quarter 16, and for quarter 28 as well. These 2 quarters are critical, because the
estimated closing price at the end of quarter 16 on December 31st will be the purchase
price of the stock first thing on January 1st. The estimated closing price at the end of
quarter 28 is the price at which you will sell all shares of your stock.

Estimating stock prices


 Use the “Add Trendline” feature in EXCEL to derive an appropriate regression
equation for both stock prices. You should develop regression equations for both
stocks using exponential, linear, logarithmic (natural log), polynomial (order 3), and
power functions. Pick the regression equation with the highest R-squared according to
the following rules:
o For Duke, you believe the closing price at the end of 3 years will be between
$85 and $100 per share. Ignore any regression equations that do not project a
closing price for quarter 28 in this range.
o For Amazon, you believe the closing price at the end of 3 years will be between
$1,000 and $1,500 per share. Ignore any regression equations that do not
project a closing price for quarter 28 in this range.
 Determine how many shares of stock you can purchase in quarter 16. For purposes of
this project, it is acceptable to purchase fractions of shares of stock, so that your entire
$10,000 is invested.
 Regression. When developing your regression equations for the future stock prices, do
not use dates as your X value -- use quarters instead.
 You will find it helpful to approach this project from a quarterly standpoint. Use
EXCEL, and have time periods ranging from 0-12 across the top of columns. Time
period 0 is when you invest your $10,000; at the end of time period 12 is when you will
sell your stock for a projected price that you will determine. You may earn dividends
during this 3-year period as well, depending on historical analysis of each stock. USE
THE PROVIDED TEMPLATE ON BLACKBOARD FOR YOUR WORK. NOTE:
QUARTER 12 ON THE TEMPLATE IS ACTUALLY QUARTER 28 FROM YOUR
REGRESSION ANALYSIS. Note: if there are no cash flows for a particular quarter, be
sure to enter “0” in the cells on the spreadsheet. This ensures the EXCEL function IRR
works properly.

Dividend information
 Dividends may come into play for this project. You'll see from historical data that
dividends often occur quarterly, and that their value often remains the same for 4
quarters before going up. However, they may not go up at quite the same rate
historically. For evaluating the future cash flows, always assume that dividends remain
constant for 4 consecutive quarters. If the firm pays dividends, assume the dividends
will rise by $0.02 after remaining constant for 4 consecutive quarters. This is close to the
historical change.
 Do not use regression analysis to compute dividends!
 Assume all future dividends will be paid at the end of the quarter.
 Dividends are paid on a per share basis. So if dividends for a quarter are $0.40 and you
have 100 shares of stock, total dividends for that quarter would be $40. Treat dividends
as income at the end of each quarter, and pay taxes on those dividends each quarter at
the full applicable tax rate.

Tax information
 When you sell a stock you pay taxes on gains. If you buy stocks for $10,000 and sell
them for $10,000, there is no tax, for example.
 For individuals, long-term capital gains and qualified dividends (those received after one
year) are taxed by the federal government at 15%. For the first year though (i.e., January
1, 2017 through December 31, 2017), they are taxed as ordinary income at 35%. For the
second and third years, they are taxed by the federal government at 15%.
 The state of Iowa income tax rate is 5%. The state of Iowa does not provide any
dividend or capital gains tax break. The state of Iowa does allow you deduct what you
pay in federal income taxes. Thus, the total amount paid in taxes = income * federal tax
rate + income * (1-federal tax rate) * state tax rate.
 Compute taxes and dividends every quarter -- it makes things much easier to do so. So,
if you have a stock that is projected to receive dividends in all 12 quarters, then all 12
columns will have values contained in the "NET" row.

Inflation, rate of return, present worth analysis


 All dollar amounts are given in actual dollars here -- the investment, dividends, taxes,
and projected prices are based on actual dollars.
 Assume the average annual (general) inflation rate is 1.5% and will remain at 1.5% for
the next 3 years.
 Your inflation-free MARR (or inflation-free interest rate 𝑖′) is 6%.
 To find the rate of return, first calculate the quarterly rate of return (using Excel). (Do
not be concerned about slight differences in the lengths of quarters – some quarters may
be 90 days long and others may be 92 days long, for example.) Find the annual effective
rate of return based on the quarterly rate of return. For example, if you are making a 4%
return per quarter, you would expect your annual return to be somewhere slightly above
16%, as a quick check. Combine the annual effective rate of return with the annual
inflation rate to calculate IRR’.
 To conduct present worth analysis, you can calculate the annual market interest rate 𝑖
based on the inflation-free interest rate and the inflation rate. You’ll want to find the
quarterly market interest rate and then solve for NPV using the quarterly market interest
rate.