Week 1 Textbook Problems

FIN/402

Week 1

Case Problem 1.2, A-E (page 35)

7 years= $259,140 / 10 years= $302,122.50

Age 62 income = $20,470.81 / Age 65 income = $27,174.17

Age 62 = $46,778 / Age 65 = $47,430.17

At the current rate she will need meet her retirement goals by the age of 62. At 65 she will earn $47,430.17 which is over the $45,000 she expects to need a year at retirement.

Carolyn has a low risk plan which is typical for a person of her age. Her risk is low and so is the interest. If she really wants to retire at 62, investing the proceeds of the house in bond funds would be yield higher returns.

Case Problem 2.1 A-C (page 71)

A1. The tech company has received good press which is always good for the company which could help boost the company’s earnings. Technology IPOs typically do better depending on how current they are with products.

A2. This is risky because she may not be able to sell her stocks in the event that the case does adversely.

A3. The company is already struggling selling at this point could stop any loss but if the company were to rebound its stock price, Dara would lose out.

A4. Waiting until more information on the case can give Dara the opportunity to understand if the company can reverse its debt and she will not be commit to the stock.

B. If the stock price rises under Alt2/3 Dara would be able to sell to stock as planned get the profit.

C. In Alt 2, Dara would have a loss. In Alt 3 Dara would not experience a loss because the stock would have been sold already.

Case Problem 2.2 A-E (page 72)

Pyramiding is a margin trading technique that involves investors using the unrealized profits to increase holdings. Ravi can use the debit portion of his account to invest in the stock.

Ravi’s margin in his account is 60%.

1. This would make the new margin 55,000-95,000 = 57.9%

2. The new margin would be 47,500/95,000 = 50%

3.Ravi had satisfied the requirement on his account. Since he has enough funds afterwards he can make additional transactions and the transaction margin percentage is below the initial requirement.

D. 1. If Ravi were to purchase the stock using 2,500 in cash and 17,500 in margin, his return would be 730%.

2.If Ravi were to purchase the shares using 20,000 in cash, his return would be 100%.

E. As a seasoned investor Ravi has been able to build a sizeable portfolio. Using the pyramid method gives him the opportunity to maximize profits but the caveat is the interest that has to be paid. Given the potential for the stock to grow tremendously, the risk would be worth it.

Case Problem 3.1 A-E (page 119)

Wall Street Journal and Barron’s are great resources for information on the stock market. Bloomberg is also a good resource and the money section of the New York Times would be helpful because it gives a different perspective of wall street and the newspaper is filled with general information.

Standards and Poor’s publishes information on a wide variety of companies, which is good if Angel. Value Lines offers an unbiased look at companies.

One online site that I personally love at the moment is Ally.com The platform has so much information with great rates on securities and low fees. The website is also very user friendly.

A stockbroker can ease the tension when the stock market is not doing particularly well or help advise Maria and Angel of potential gains or loses with certain markets. Someone who has firsthand experience in the market is valuable.

I would first advise Mario to understand what type of holdings are in the portfolio and see how well they are performing. Sitting down with a finance specialist can help reallocate the funds to meet the family needs.

Case Problem 12.1 A-C (page 508)

Mutual funds would be a great way for Mark to start investing in his future. The risk is low and he has the opportunity to make decent earnings. A 529 Plan would be great for his child.

I do not think Mark should invest the entire amount into one particular security. He should put some money in a money market fund that is more liquid in case of an emergency.

Since Mark is not interested in taking a lot of risk, he should look into balanced funds to diversify his portfolio into growth and bond funds. Growth-funds which are more secure than average and typically do not offer dividends which will minimize his need to report earnings. Government bond funds will give Mark the liquidity of a savings account at a higher yield.