Financial Services _Çô Client Services RFC121 Study Guide - Final Guide: Dow Jones Industrial Average, Chief Operating Officer, Marketwatch

Company Project

Purpose: The goal of the company project is for students to learn how to apply the theoretical concepts presented in class to analysis of a publicly-traded company. Each student will complete an in-depth examination of a company’s governance, operations, financing and strategy.

Data: Students will be responsible for gathering the data for their company from a variety of sources including Yahoo! Finance, SEC filings and other internet sites. Students should use the most recent data available.

Content: Topics that will be included in the report will be assigned on a week-by-week basis and follow the theoretical discussions in class. Students should work on the project as assigned in order to keep from falling behind schedule. Students may wish to include certain additional topics, beyond those assigned, to enhance their reports.

Perspective: Students should assume they are taking the role of a consultant in completing their company project. Therefore, the final work product should be a formal report expected to be read by a client who has requested an outside assessment of the firm’s management practices.

Format: The report should include ten chapters. Chapter 1 is a brief introduction of the company, which includes information on the background of the company’s lines of business and the exchange on which the company is traded. Chapters 2-9 will contain analyses of the company’s management practices based on applications of the eight topics listed in the Tentative Class Schedule (i.e., the eight chapters of the text that will be covered in class). Chapter 2 will analyze corporate governance, Chapter 3 will examine the firm’s policies relating to dividends and stock repurchases, etc. Chapter 10 will present a summary of and conclusions from the analysis.

Length: There is no prescribed length for the report. As it is a consultant’s report, it should be as long as necessary to provide the client with useful, actionable results with respect to the topics covered.

Chapter 13 and 14

Corporate governance

Dividends and stock repurchases

Dividends and stock Chapter 14

repurchases (cont.)

Capital structure Chapter 15

Working capital management Chapter 16

Leasing and hybrid securities Chapters 19 and 20

Mergers Chapter 22

Bankruptcy, reorganization and Chapter 24

liquidation

6. The Santa Fe Mutual Automobile Insurance Company has the following financial statements. 2016 2015

Net Premiums Written 48,612 47,398

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Income Statement ($ mils.)

Premiums Earned 37,094 36,297

Loss Expenses 25,379 23,771

Operating Expenses 15,921 15,484

Total Policy Expenses 41,300 39,255

Net Underwriting Gain/Loss (4,206) (2,958)

Net Investment Income 5,340 3,512

Operating Income before taxes 1134 554

Dividends to Policyholders 0 0

Income Tax Recovered (Plus) 1,003 492

Net Income $2,137 $1,046

Ave Investment Yield 6.29% 3.83%

Balance Sheet (mils.) 2016 2015

Assets

Cash & ST Investments 1,345 1,397

Bonds 41,766 43,834

Common & Preferred Stock 43,120 47,863

Equity in Insurance Subsidiaries 34,842 31,529

Other Assets 17,422 14,175

Total Assets $138,495 $138,798

Liabilities

Claims & Claim Expenses 28,566 28,534

Unearned Premiums 11,518 11,101

Other Liabilities 15,780 19,568

Total Liabilities 55,864 59,203

Equity Accounts 82,631 79,595

Total Liabs. & Equity 138,495 138,798

6a. Calculate and evaluate the Net Underwriting Margin (NUM); Loss Ratio

Expense Ratio; Combined Ratio; and Overall Profitability Ratio for each year

using the information in the income statement above. Also calculate the firm’s OPM, OROA, ROA, ROE, and equity multiplier (EM).

Recall NUM = (Premiums Earned – Total Policy Expenses) / Total Assets

NUM 2016 __________ NUM 2015 ______________

Recall: expense ratio = (operating expenses/net premiums written) and loss ratio = (loss expenses/premium earned), and combined ratio = (loss ratio + expense ratio), and overall profitability ratio = {[100% - Combined Ratio%] + (Investment Yield% } for the firm each year) Also calculate asset turnover (revenues/total assets), net profit margin [net income/revenues], OROA (operating income/total assets), return on assets (net income/total assets) and return on equity (net income/equity accounts) & equity multiplier (total assets / equity).

2016 2015

Expense ratio

Loss ratio

Combined ratio

Average Investment Yield

Overall Profitability

Dupont Analysis:

Asset Turnover

Net Profit Margin

OROA

ROA

ROE

Equity Multiplier (EM)

6b. Analyze the trends in all of the ratios, and the other financial information provided. What do they reveal for trends over time including trends as well on the firm’s balance sheet? What areas of strength & weakness are revealed? What advice for improvement would you give?

Part 5: Module 7: Mutual Funds & Security Firms (see Module 7 lecture notes, pp. 10 to 12)

7. a. Briefly discuss different types of mutual funds that mutual fund companies offer including: (1) index funds, (2) actively managed diversified funds; (3) mutual funds with a diversified allocation; (4) sector investing; (5) style investing including different types of style investing (value, growth, blend, aggressive growth); (6) hybrid asset allocation or balanced funds; (7) target date funds; (8) Socially Responsible Mutual funds (often called impact funds).; and (9) Multi-alternative Strategy Funds and Commodity Funds.

b. Why are index funds cheaper than actively managed funds?

1. (TCO 8) Which one of the following is a correct definition ofan Ibbotson and Sinquefield investment category as used to reporthistorical returns in your textbook? (Points : 3)
U.S. Treasury bills: 1-year debt securities issued by the U.S.Department of the Treasury
Small-company stocks: Stocks of the smallest 20 percent of thefirms listed on the NYSE
Large-company stocks: Stocks of the largest 10 percent of the firmslisted on the NYSE
Long-term U.S. government bonds: Bonds issued by the U.S.government with a 30-year maturity

2. (TCO 8) If the financial markets are efficient, then: (Points :3)
stock prices should never change.
stock prices should only respond to unexpected news andevents.
stock prices should increase or decrease slowly as new events areanalyzed and the information is absorbed by the markets.
stock prices will only change when an event actually occurs, not atthe time the event is anticipated.

3. (TCO 8) Which of the following statements is false regardingsystematic risk? Select all that apply: (Points : 4)
is always diversifiable
is the total risk associated with surprise events
affects only a specific project or firm
is measured by standard deviation

4. (TCO 8) Assume a project that has the following returns foryears 1 to 5: 15%, 4%, -13%, 34%, and 17%. What is the approximateexpected return of this investment? (Points : 3)
11%
17%
16.60%
10%

5. (TCO 8) Assume you are considering investing in two stocks, A& B. Stock A has an expected return of 16% and Stock B has anexpected return of 9.5%. Your goal is to create a two-securityportfolio that will have an expected return of 12%. If you have$250,000 to invest today, approximately how much would you investin Stock B? (Points : 3)
$96,000
$150,000
$175,000


More than $200,000


6. (TCO 8) For this exercise, use the information provided forProblem 30 of Chapter 11 (page 375 of your textbook). Assume thatthe probability of the state of the economy has changed asfollows:

The probability of a recession has increased to 30% and theprobability for a normal state of economy is now 40%. The marketrisk premium has increased by 1% as well. What is the standarddeviation of Stock I and II respectively? (Points : 3)
12 and 20%
12.5 and 23%
1.25 and 2.326%
Cannot be determined with the information given

7. (TCO 8) For this exercise, use the information provided forProblem 30 of Chapter 11 (page 375 of your textbook). Assume thatthe probability of the state of the economy has changed asfollows:

The probability of a recession has increased to 30% and theprobability for a normal state of economy is now 40%. The marketrisk premium has increased by 1% as well. Which statement is true?Select all that apply: (Points : 4)
Stock I has more overall risk than Stock II
Stock II has less systematic risk than Stock I
Stock I has a higher risk premium than Stock II
None of the above are correct statements

8. (TCO 8) Which statements are false regarding risk? Select allthat apply: (Points : 4)
The expected return is always the same as the actual return
A key to assessing risk is determining how much risk an investmentadds to a portfolio
Risks can always be diversified
The higher the risk, the higher the return investors require forthe investment

9. (TCO 8) What is systematic risk? Provide two or three examples.How can you diversify it? (Points : 3)