Finance Assignment 1

Assignment 1

Assignment 1, which is worth 10 percent of your total grade for the course, is made up of three parts:

 Part A consists of seven short-answer and problem-solving questions

worth a total of 40 marks.  Part B is a written analysis worth a total of 20 marks.

 Part C requires you to submit an outline for your final project (Assignment 4). Part C is worth a total of 10 marks.

Review the "Course Assignments" page in the Welcome and Orientation

section of this course website for important information regarding requirements for submitting your answers to problem-solving

questions. Include your student ID number and contact information on the top page of your assignment. If you have questions about any portion of

Assignment 1, contact the Student Support Centre.

Part A: (40 marks in total)

1. An executive makes so much money per year that the last

$50,000 of his income goes almost entirely into his income tax. Under this circumstance, should the executive ask for a

stock option of an equivalent amount? What tax benefits could a stock option bring to this executive?

(4

marks)

2. Discuss the role of financial engineering in response to taxation and regulation.

(4 marks)

3. T-Bill

Price

Time to

Maturity

Principle

$984.98 91 days

$1000

$970.87 182 days

$1000

$943.40 1 year

$1000

Given the information on the three treasury bills in the table above, calculate their bond equivalent yields and their

effective annual yields. Are their bond equivalent yields different from their effective annual yields? Why or why not?

Do treasury bills with the same bond equivalent yields also

(8 marks)

have the same effective annual yield? Why or why not?

4. Stock No.

of

Shares

Initial Price

Market Value

Final Price

Market Value

ABC 1000 $20 $20,000

$15 $15,000

XYZ 2000 $50 $100,000

$55 $110,000

Suppose that ABC and XYZ are the only companies in this

market. Based on the information in the table above, calculate the following:

1. the value-weighted average and price-weighted average at the beginning and at the end.

2. the historical rate of return for ABC and XYZ. 3. the historical rate of return for a portfolio that consists

of 500 shares of ABC and 200 shares of XYZ.

(6 marks)

5. Suppose that the current market price of Oxen stock is $50 per share. You expect that the Oxen stock is under downward

pressure, and you ask your broker to sell 100 shares short.

With a 60% margin requirement, how much short term securities do you need to possess before the short sale

transaction can take place? After the short sale transaction, what does your account with your broker look like? What is

the margin ratio immediately after the short sale took place? Given a minimum margin requirement of 40%, how far can

the Oxen price rise before you get a margin call? At the point of margin call, what does your account with your broker look

like? If Oxen did not pay any dividends, what would your rate of return be if you can sell the stock at $30 per share (ignore

interest on margin)?

(10 marks)

6. An investor’s portfolio is currently worth $1 million. During

the year, the investor sells 2000 shares of Talisman Energy at

a price of $50 per share and 1000 shares of Research in Motion at a price of $75 per share. If the Talisman Energy and

Research in Motion shares were originally purchased for $45 and $69 per share, respectively, and the investor’s tax rate

on capital gains income is 30%, how much additional tax will

(5

marks)

the investor have to pay as a result of these transactions?

7. Given the following information about a mutual fund, calculate the NAVPS.

Current market value of the fund’s portfolio of assets

$728,525,000

Number of shares outstanding 200,000,000

Unpaid bill for management fees $1,250,000

Unpaid bill for fund auditor’s fees $60,000

(3 marks)

Part B: (20 marks in total)

Write an analysis on the prevailing economic conditions in Canada and globally. Your report must include discussion on common economic indicators, and the

analysis should be current to the date of assignment submission. The report should not exceed three typewritten pages and must include a list of the

references you consulted. Grammar and spelling account for four of the 20 possible marks, so take time to write and proofread your report carefully.

Part C: (10 marks in total)

This part of Assignment 1 is very important because it is the foundation of your term project (Assignment 4). You must decide right now between two options, and you are not allowed to switch options part way through the course. Think

carefully about your interests and strengths and decide between Option 1 and Option 2.

Assignment 4 Option 1:

Term Paper

The topic of the term paper must fall in the field of investment. The

paper should have a theme, discuss the chosen topic

thoroughly, express your original view clearly, and make

Assignment 4 Option 2:

Investment Project

Imagine you have inherited a large amount of money. You are

expected to carry out an investment project detailing your

strategy for investing this money and at the end of the project write

contributions to the field of

investments.

Review the term paper requirements carefully.

an investment report.

Review the investment project

requirements carefully.

Part C of Assignment 1 requires you to indicate whether you have decided to do Option 1 or Option 2 in Assignment 4 and submit either a written outline for

your term paper or a written outline discussing your strategy for investing in a windfall. This part of Assignment 1 is worth a total of 10 marks, with two marks

allotted to grammar and spelling.