Unit 4 - Weighted Average Yield - Case Study - WA PDF

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Running Head: Unit 4 - Weighted Average Yield - Case Study

Unit 4 - Writing Assignment Weighted Average Yield - Case Study BUS 5111 – Financial Management Anonymous University of the People

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Running Head: Unit 4 - Weighted Average Yield - Case Study

Introduction For an individual or an investor, when investing in multiple portfolios (eg, invest securities in different companies). While profitable, we need to consider how the return on investment of each portfolio compares to different investments. And which category yielded the most profitability and weighting. The paper will analyze the weighted average yield of portfolios. In addition, the article will analyze the difference a yield that is based on cost, and a yield that is based on current market value. Weighted Average Yield Calculation

Weighted average yield is the sum of weighted average yields of each type of stock in the portfolio. To understand this concept, each type of stock will have a different rate of return. Thus each portfolio will have a different weighted average yield that contributes to the total weighted average yield of all investments. To calculate the weighted average yield of each type of stock in the portfolio, we perform the following calculation. The Weighted average yield calculation: Appendix A.

- Step 1: Calculate the Current Market Value = Portfolio Position (# of shares) * Current Market Price So the Total Portfolio Market Value is the total of each current market value ($53,035.76). - Step 2: Calculate the Estimated Current Yield = Estimated Dividend/Interest / Current Market Value

- Step 3: Calculate the Weighted Average Factor = Current Market Value / Total Portfolio Market Value - Step 4: Calculate the Weighted Average Yield = Estimated Current Yield * Weighted Average Factor Apply all formulas, we will have the worksheet as above. Based on that we calculate the weighted average yield is 3.18%.

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Running Head: Unit 4 - Weighted Average Yield - Case Study Based on the calculation above, we can see that investments yield an annual return of 3.18%. The three stocks with the highest profit margins are Altria, AT&T, and Philip Morris Intl. And the three least profitable stocks are Pepsi Cola, Coca Cola, and Johnson & Johnson. So my advice to my friend is to be able to divest into low-yielding stocks and focus on other stocks. Although investing in stocks is a long-term investment. But this is information to consider. The yield on Cost vs the yield on Current Market Value

According to Finance to Managers (2012), when we invest in a project/stock, we receive dividends every year. This is called the return on investment. And when we divide these dividends along with the increase/decrease of the stock/share at a specific time by the amount of capital we invest, we get the yield of cost (YOC). To put it more simply, the YOC rate is the ratio that helps us know what percentage of the profits are generated from the initial investment at a particular time. The formula used to calculate YOC is: The yield on cost = (Price increase/decrease + Dividend paid)/ Purchase price

For example, an investor invested $1.000 to buy the stock of the company ABC. After five years, the stock increase and the investor gets $200 profit if sells. And he also gains $50 from a dividend paid by the company. The YOC calculates as ($200 + $50) / $1000 = 0.25 = 25%

However, many investors want to calculate the yield based on the current market value. This yield factor is called the current yield and the formula used to calculate is: The current yield = (Price increase/decrease + Dividend paid) / Current market price We use this definition in the above example, the current yield calculates as ($200 + $50) / $1200 = 0.2083 = 20.83% In essence, these two parameters are different and the application is also different. YOC is a tool that uses to measure the income performance of existing investments. And the most different point

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Running Head: Unit 4 - Weighted Average Yield - Case Study compared to the current yield is YOC does not depend on the current price of market. Meanwhile, the current yield is a tool that uses to measure the current income from potential investments to buy or sell investments. Therefore, it is important for investors to know what tools to use for what purpose and how to use them. The non-quantitative observations we can make about the portfolio Besides quantitative indicators, we need to consider the qualitative indicators. As in the above analysis, the companies that did not generate good profit margins were Pepsi Cola, Coca Cola, and Johnson & Johnson. But depending on the investment goals, these companies have very good competitive advantages and it is very difficult to collapse. Therefore, it can be said that these investments are safer than the rest. Investing in other companies, on the other hand, may yield a larger return. But profits come with risks. Investors should consider the following non-quantitative factors. 1. Intangible assets: Such as business culture, people, and organizational culture. Although it is difficult to assess this point, we can see that organizations that are responsible for the community, good company culture, and good employee culture will tend to create more sustainable profits. According to Curk (2012), the research that found out companies have good innovation, management capability, employee relations, quality, and brand value that creates the differences in US companies’ stock market values. 2. Non-financial: Such as the strategy competitive, the relationship with government, etc. These are important factors to help investors observe more. Because companies that have good strategies, may not yet produce profit or low profit, but the value of the company depends greatly on these factors. For example, Tesla's market capitalization is approximately $ 84.5 billion, much larger than Ford. While financial statements indicate Ford makes more profit in 2019. Conclusion

Through the analysis above, we can see the importance of using the weighted average yield to evaluate the effectiveness of investments. In addition, understanding the differences and how to use 4

Running Head: Unit 4 - Weighted Average Yield - Case Study the yield on cost and the yield on current market price to evaluate our investments. Besides, observing, and considering non-quantitative factors gives us more information to better evaluate our investments. References

Finance for Managers. (2012). Licensed under Creative Commons by-nc-sa 3.0. Retrieved from https://my.uopeople.edu/pluginfile.php/546007/mod_page/content/17/FinanceForManagers.pdf

Curk, L. (2017). Why Non-Financial Metrics Are Key for Measuring Portfolio Performance. Hockeystick.com. Retrieved from https://blog.hockeystick.co/why-non-financial-metrics-areessential-for-measuring-portfolio-performance

Appendix A

Type of Investment

Common stock Common stock Common stock Common stock Common stock Common stock Common stock Common stock Common stock Common stock

Estimate d Current Yield

Weighted Average Factor

Weighted Average Yield

$247.00

4.15%

0.1123

0.47%

$5,551.57

$325.00

5.85%

0.1047

0.61%

125.82

$3,271.32

$111.00

3.39%

0.0617

0.21%

Stock Symbol

Portfolio Position (# of shares)

Altria

MO

119

50.04

$5,954.76

AT&T

T

173

32.09

CVX

26

Company Name

Chevron

Current Market Price

Current Market Value

Estimate d Dividend/ Interest

Coca Cola Duke Energy Johnson & Johnson

KO

59

54.33

$3,205.47

$77.00

2.40%

0.0604

0.15%

DUK

65

87.68

$5,699.20

$206.00

3.61%

0.1075

0.39%

JNJ

31

128.84

$3,994.04

$86.00

2.15%

0.0753

0.16%

McDonalds

MCD

52

214.31

$11,144.12

$176.00

1.58%

0.2101

0.33%

Pepsi Cola Philip Morris Intl Proctor & Gamble

PEP

17

130.74

$2,222.58

$44.00

1.98%

0.0419

0.08%

PM

70

86.75

$6,072.50

$280.00

4.61%

0.1145

0.53%

PG

52

113.85

$5,920.20

$133.00

2.25%

0.1116

0.25% 1

Total Portfolio Market Value

$53,035.76

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Running Head: Unit 4 - Weighted Average Yield - Case Study Weighted Average Yield

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3.18%...