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Midterm

midterm cheat sheet for FIN502

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Department
Finance
Course Code
FIN 502
Professor
Laleh Samarbakhsh

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Principals- Integrity, Objectivity, Competence, Confidentiality,
Professionalism, Diligence
Annual Percentage Rate (Nominal Rate) ROR–ignore compounding
effect(m x km)
Effective Annual Rate (EAR) – Restated from APR to include
compounding (1+km)m -1 / If km is = 7%weekly, Pv=-4, N=52, I= 7, Fv= ?/
Hurdle Rate= The min acceptable rate of return é min attractive rate of
return
Arithmetic - assumes no compounding – is a straight average of all the
ROR
Geometric Assume compounding- 1.17 x 1.08 = 1.2636 FV, PV= -1, n=2,
i= ?
Ordinary or deferred annuity = occurs and the END of the period
Annuity Due = Occurs at the BEG of the period.
Constant Growth
FVCGA = x ((1+k)n – (1+g)n ) / (k-g) )) k=ROR, g= (inflation) annual increase
in X
FVCGAD (BEG)= (1+K) (FVCGA)
PVCGA = x (1- (1+g / 1+K)n / (k-g) )
PVCGAD (BEG) = (1+k) (PVCGA)
Fisher Equation
Real Interest Rate (taking inflation back into a real rate) = (1 + Nominal
rate / 1 + inflation rate) -1
Nominal Interest Rate (putting inflation back into real rate) = [(1+ real
rate) (1 + Inflation Rate)] – 1
Nominal / $ Current = what they actually are / were / will be (includes
inflation)
$ Real / $ Constant – without inflation
Nominal – Interest or Discount Rate = with Inflation
Real – interest or discount rate = without inflation
Inflation on prices = prices x (1 + inf)^years
Financial Planning Process (family)
1. Goal setting : These must reflect you own personal values
2. Actions plan: you must make decisions for yourself
3. Take action
4. Feedback/ monitoring progress
Financial Planning Process (Professional)
1.Establish the client-planner engagement
2. Gather client data; determine your goals and expectations
3. Clarify your present financial status; identify any problem areas and
opportunity
4.Develop and present the financial plan
5. Implement the Financial Plan
6.Monitor the financial Plan
Wn=Wo(FVIF n,k) + (E-C) (FVIFA n,k) >>> Wn=saving at retirement,
Wo=saving now, n= years to retire, K=rate of return on your savings,
E=earning each year, C=consumptions each year, E-C= Saving each year
until retirement
Wn = C boy (PVIFA n,k)
Personal Debt Management (Tips)
1.Consumer debt should not exceed 20% of take-home pay
2. Families should pay off consumer debt as soon as possible
3. Covert consumer loans into investment loans (if possible)
4.Before more consumer borrowing, check family has sufficient cash flow to
support debt
5. Pay off higher interest debt first (could include attaining more lower
interest debt, such as line of credit)
Child support above 150k income. .monthly pension is 0.74%,(1 child) ,
1.26%, 1.54%, 1.84%
Mediator – Independent third party who helps
Arbitrator – Like a private judge, binding, cost more, but faster
Chatper 7
Indexation – tax brackets are increased each year to keep up with inflation
Interest or Ordinary income with Surtaxes
Tc = Combined marginal tax rate, Tf= marginal federal
rate, Tp= marginal provincial rate, Tsp= Provinvial surtax rate on the
marginal provincial tax
Dividends with Surtaxes
Tc(dividend) = [(1+G)tf – DTCf]+ [(1+G)tp – DTCp] (1+tsp)
Capital Gains with Surtaxes
Tc(gain) = (.5Tf) + .5Tp(1+Tsp)
After-Tax Discount Rate
Kt = Kb (1-Tc) Kb=beforetax
Max CPP 2013 contribution is $51,100 (YMPE) first $3500 of earning is
exempt from contributions. (Years basic Exemption) Contribution Rate is
4.95% of CPP pensionable earnings
Max EI 2013 is $47,400 and contribution rate is 1.88%
>For employees, both CPP contributions and EI premiums are included in
the non-refundable tax credits.
>For CPP, employers pay the same as employees and these contributions
are tax deductible to the employer. Self-employed people pay both the
employee’s share (and include it in the nonrefundable tax credits) and the
employer’s share (which is tax deductible).

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Description
Principals- Integrity, Objectivity, Competence, Confidentiality, Professionalism, Diligence Annual Percentage Rate (Nominal Rate) ROR–ignore compounding effect(m x km) Effective Annual Rate mEAR) – Restated from APR to include compounding (1+km) -1 / If km is = 7%weekly, Pv=-4, N=52, I= 7, Fv= ?/ Hurdle Rate= The min acceptable rate of return é min attractive rate of return Arithmetic - assumes no compounding – is a straight average of all the ROR Geometric – Assume compounding- 1.17 x 1.08 = 1.2636 FV, PV= -1, n=2, i= ? Ordinary or deferred annuity = occurs and the END of the period Annuity Due = Occurs at the BEG of the period. Constant Growth FVCGA = x ((1+k) – (1+g) ) / (k-g) )) k=ROR, g= (inflation) annual increase in X FVCGAD (BEG)= (1+K) (FVCGA) n PVCGA = x (1- (1+g / 1+K) / (k-g) ) PVCGAD (BEG) = (1+k) (PVCGA) Fisher Equation Real Interest Rate (taking inflation back into a real rate) = (1 + Nominal Interest or Ordinary income with Surtaxes rate / 1 + inflation rate) -1 Nominal Interest Rate (putting inflation back into real rate) = [(1+ real rate) (1 + Inflation Rate)] – 1 Tc = Combined marginal tax rate, Tf= marginal federal Nominal / $ Current = what they actually are / were / will be (includes rate, Tp= marginal provincial rate, Tsp= Provinvial surtax rate on the inflation) marginal provincial tax $ Real / $ Constant – without inflation Dividends with Surtaxes Nominal – Interest or Discount Rate = with Inflation Tc(dividend) = [(1+G)tf – DTCf]+ [(1+G)tp – DTCp] (1+tsp) Real – interest or discount rate = without inflation Capital Gains with Surtaxes Inflation on prices = prices x (1 + inf)^years Tc(gain) = (.5Tf) + .5Tp(1+Tsp) Financial Planning Process (family) After-Tax Discount Rate 1. Goal setting : These must reflect you own personal values Kt = Kb (1-Tc) Kb=beforetax 2. Actions plan: you must make decisions for yourself 3. Take action 4. Feedback/ monitoring progress Financial Planning Process (Professional) 1.Establish the client-planner engagement 2. Gather client data; determine your goals and expectations 3. Clarify your present financial status; identify any problem areas and opportunity 4.Develop and present the financial plan 5. Implement the Financial Plan 6.Monitor the financial Plan Wn=Wo(FVIF n,k) + (E-C) (FVIFA n,k) >>> Wn=saving at retirement, Wo=saving now, n= years to retire, K=rate of return on your savings, E=earning each year, C=consumptions each year, E-C= Saving each year until retirement Wn = C boy (PVIFA n,k) Personal Debt Management (Tips) 1.Consumer debt should not exceed 20% of take-home pay 2. Families should pay off consumer debt as soon as possible 3. Covert consumer loans into investment loans (if possible) 4.Before more consumer borrowing, check family has sufficient cash flow to support debt 5. Pay off higher interest debt first (could include attaining more lower interest debt, such as line of credit) Child support above 150k income. .monthly pension is 0.74%,(1 child) , Max CPP 2013 contribution is $51,100 (YMPE) first $3500 of earning is 1.26%, 1.54%, 1.84% exempt from contributions. (Years basic Exemption) Contribution Rate is Mediator – Independent third party who helps 4.95% of CPP pensionable earnings Arbitrator – Like a private judge, binding, cost more, but faster Chatper 7 Max EI 2013 is $47,400 and contribution rate is 1.88% Indexation – tax brackets are increased each year to keep up with inflation >For employees, both CPP contributions and EI premiums are included in the non-refundable tax credits. >For CPP, employers pay the same as employees and these contributions are tax deductible to the employer. Self-employed people pay both the employee’s share (and include it in the nonrefundable tax credits) and the employer’s share (which is tax deductible). >For EI, employers pay 1.4 times the premiums paid by employees. The ->= Total amount of medical expenses – fixed amount ($2,171 in 2013 employers’ share is tax deductible. Most self-employed people do not make indexed to inflation) X lowest marginal tax rate EI contributions. ->E.g. $5,000 medical expenses results in tax deduction of $580 = (5000 – 2171) *.205 Disability Tax Credit ->Severe prolonged impairment results in person being unable to perform at least one normal living function, e.g. dress or feed oneself ->Non-refundable tax credit. Specified amount ($7,756 in 2013 indexed to inflation) multiplied by lowest marginal tax rate = (7756*.205 = $1,592) ->May also deduct care expenses and support costs if incurred to attend school or earn income – deducted from net income Registered Disability Saving Plan ->Tax assisted vehicle to save for retirement. Must be eligible for DTC. ->No tax deduction, but government grants, income deferral (like RESP) ->Money accumulates in 4 ways: Chapter 8 1.Contributions Main strategy on Income tax planning No annual limit; lifetime limit of $200k for beneficiary; no contributions after Income tax deferrals – time value of money and potential to pay in years beneficiary turns 59; anyone can contribute to the plan and RRSP or RRIF can be rolled in tax-free for disabled child or grandchild with lower marginal tax rate Income splitting – by dividing income with spouse, may pay less overall, as 2.Canadian Disability Savings Bond – government contributions marginal rates may be lower when split ->$1,000/yr.; $20,000 lifetime limit; income tested – reduced if income is Income spreading – distributing irregular high income over multi years to over $25,356 and eliminated if over $43,561 (indexed) reduce overall income ->based on family net income for minor, after 18 based on beneficiary (and Tax shelters – TFSAs, flow-throughs, etc. sp
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