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Finals Review.doc

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Wilfrid Laurier University
Leanne Hagarty

BU 111 - Final Exam 1 Chapter 4A: Economic Factors • Financial institutions facilitate flow of money • 4 distinct legal areas/(“Pillars”) -Chartered banks -Alternate banks -Life insurance companies -Investment dealers • Lines between pillars have been blurred due to deregulation >Changes in Banking: • Deregulation • Changes in consumer demands • Competition from foreign banks >Bank of Canada: • Canada’s central bank • Manages economy & regulates aspects of chartered bank operations • Manages money supply >International Banking & Finance • Governments & corporations frequently borrow in foreign markets • International Bank Structure -Aims for stability -World Bank provides limited services, funds national improvements -International Monetary Fund: -Promotes stability of exchange rates -Provides short-term loans to members -Encourages member cooperation -Promotes system for international payments >Pillars: 1. Pillar #1 - Chartered Banks -Privately owned, publicly traded, profit seeking -Largest & most important institution -Concentrated & highly regulated industry -5 largest account for 90% of total bank assets -BankAct limits foreign-controlled banks to < 8% of total domestic bank assets -Serve individuals, business, and others -Major source of short-term loans for business -Secured v.s unsecured loans -Expand money supply through deposit expansion 2. Pillar #2 - Alternate Banks -Trust companies & credit unions 3. Pillar #3 - Specialized lending/saving intermediaries -Insurance Companies, venture capital firms, pension funds 4. Pillar #4 - Investment Dealers BU 111 - Final Exam 2 -Facilitate trade of stocks, bonds and other products in Securities Markets -Primary markets -Investment bankers/dealers -Advise, underwrite, distribute -Secondary markets -Toronto Stock Exchange and other exchanges Chapter 4B: Economic Factors >Types of Investments: BONDS • Represents debt for issuing corporation or government • Characteristics: -Legal, binding agreement -Fixed rate of return (often paid semi-annually) -Fixed term - principal repaid at maturity -Priority over stockholders • Types -Secured v.s Unsecured (debentures) -Registered v.s Bearer • Features -Callable -Serial -Convertible >What Impacts Bond Value? • Prevailing interest rates • Credit rating of issuer • Inflation • Economic/Market Risk • Features >Concept of Yield • Percentage return on any investment • Helps us to compare investments • • Interest = Coupon Rate x Face Value • Capital Gain = Face Value - Purchase Price *Always use face value of $1,000 for bonds in BU 111* >Approximate Yield to Maturity BU 111 - Final Exam 3 • Assumes you will hold the bond until maturity • Need to calculate “what you made” on an annual basis 1) Identify key information 2) Calculate components 3) Plug components into formula >Bond Pricing 3 Scenarios to Consider: 1) Pay less than face value (< $1000) for the bond -Priced “At a Discount” 2) Pay more than face value (> $1000) for the bond -Priced “At a Premium” 3) Pay face value (= $1000) for the bond -Priced “At Par” Scenario 1: Pay at a Discount • This scenario happens when the coupon rate is less than the expected yield • EX: You are buying a 2008 bond with a 3% coupon & today’s expected bond yields are 5% • Notice: With a Yield expectation that is greater than the coupon rate, you would need a capital gain to attain the Yield, which means you pay less than face value for the bond Scenario 2: Pay at a Premium • This scenario happens when the coupon rate is more than the expected yield • EX: You are buying a 2004 bond with a 7% coupon & today’s expected bond yields are 5% BU 111 - Final Exam 4 • Notice: With a Yield expectation that is less than the coupon rate, you would be willing to pay more than face value (a premium) for the bond; in other words you would take a capital loss Scenario 3: Pay at Par • This scenario happens when the coupon rate is equal to the expected yield • EX: You are buying a 2006 bond with a 5% coupon and today’s expected bond yields are 5% • Notice: Since your Yield expectation is met by the coupon rate, you would have no capital gain, which means you pay face value for the bond >Types of Investments: STOCKS • Represents equity/capital for issuing company • Characteristics: -Voting rights -No fixed term -Variable return -Discretionary payment (dividends) -Risk >What impacts stock price? • Demand & supply of stock due to negative or positive perceptions/facts • Primary factors • Price of a security is a collective expression of all opinions of those who are buying and selling • Undervalued issue - offers higher return than stocks of similar risk >Reading Stock Quotations BU 111 - Final Exam 5 • Prices < $5 move in 1 cent increments • Prices > $5 move in 5 cent increments • If not traded on a particular day...BID ASK >Other Investment Vehicles • Capitalization = share price x # of shares outstanding • Blue chip stocks • Small-cap stocks • Penny stocks • Canada Savings Bonds - CSBs • Guaranteed Investment Certificates - GICs • Treasury Bills - T-Bills • Mutual Funds >Stock Transactions • Lab manual outlines process for Market Order • Reading Stock Quotations: Lab Manual pg. 117 question#5 >Leverage • Engaging in a transaction whose value is greater than the actual dollars you have available • Creates potential to make a larger return or loss than indicated by the investment you have made • EX: Buying on margin & Selling short >Buying on Margin • Put up only part of the purchase price • Broker lends remainder (w/ interest) • Minimum requirements set and enforced by Securities Commission - crash of ’29 - 10% Comparisons of Long & Margin Buy Example: XYZ is trading @ $45. You have $6,300 to invest. The minimum margin requirement is 70%.Annual interest on the margin loan is 10%. In each scenario, you sell at $55 3 months later. A) What is your capital gain if you go long and purchase the stock with your money only? B) What is your capital gain if you utilize the full margin and borrow funds from the broker? Note:Assume commissions/brokerage fees of 2% on all purchases and sales of stocks. Example: XYZ is trading @ $45. You have $6,300 to invest. •A. Go Long - purchase $6,300/$45 = 140 shares Sell 140 shares @ = $ Bought for $ BU 111 - Final Exam 6 $ Less: 2% (purchase comm.) 2% (sale comm.) Capital gain $ • B. Use full margin -Minimum margin requirement is 70% -Let total amount invested be ‘x’~ 70% x = $: x = $ -Broker advances $ -Purchase $ *Interest:10% x $2,700 X 3/12 year = $67.50 Sell 200 shares @ = $ Bought for $ $ Less: 2% (p.c.) 2% (s.c.) Interest Capital gain $ >Margin Buying Rules: • Must qualify for margin account • Must sign ‘hypothecation’agreement (MarginAccountAgreement Form) --pledging of securities as collateral for a loan • Must pay interest on loan • The investors % equity (margin) in the margined stocked must always be >= the minimum margin requirement • CCurrent Market Value - loan > % margin Current Market Value requirement >EXAMPLE: Margin Call • 1 month into the transaction the price of XYZ drops to $40 • CMV = $40 x 200 shares = $8,000 • CMV - Loan >/= % margin req’t CMV •$8000 - $2700 = 66.25% BU 111 - Final Exam 7 Therefore, receive a ‘margin call’for amount ‘x’that will bring % equity back up to minimum • requirement (increase equity by reducing loan) > 2 Ways to Calculate Margin Call: •Broker is only willing to lend 30% of market value -CMV= $8000 x 0.30 = $2400 Max. loan -Current loan $2700 -Therefore, reduce loan by $300 (margin call) OR • (CMV – loan) + margin call >/= margin req’t CMV - [($8000 - $2700) + ‘x’] / $8000 = 70% - $5300 + ‘x’= $5600 - ‘x’= $300 The amount of the margin call is used to reduce the debt to the broker • - $2700 owed - $300 call = $2400 owing (after 1 month) > Impact on Interest: •Margin call 1 month into transaction •Sell stocks after total of 3 months Interest = $2700 x 10% x 1/12 = $22.50 + $2400 x 10% x 2/12 = $40.00 = $62.50 >Selling Short: •Buy low, sell high = sell high, buy low •sell shares you don’t own - borrow from broker RULES: •Short deposit must be 150% CMV at all times agreement may be terminated by either party at any time - forced to cover/ “buy-in” • •Short sale price governed by ‘last sale’rule •Dividends declared are the responsibility of the seller Current market value Required total Short accounts (CMV) of investment balance (100 shares) 150% = 50% 100% Short @ $10/sh. $1000 $1500 = $500 $1000 Short Selling Example: ABC selling at $70/share; expect drop in price, short 100 shares • •Broker lends you 100 shares BU 111 - Final Exam 8 Sell @ $ $ Deposit 50% of CMV as collateral •Buy •Shares go back to broker - short seller gets back additional collateral Short Selling Summary: •What is maximum profit you can make ? -Price of short What is maximum loss? • •Risks •Notice similarities & differences between margin buying & short selling Chapter 4C: Economic Factors *ON SLIDES HANDOUT* Chapter 5: Technological Factors PEST - Technological Factors: >Elements • Internet affects buying, selling, communication, • Information technologies affects information access, inter-firm cooperation, cycle times • Computer technologies have changed our products & how we design & build • Not limited to computers & information • Affects what we produce/what it can do • Affects how we produce & sell, how we manage & run organization(s) • Demands constant learning & scanning >Opportunities: • Products - innovation, uniqueness, value • • Management Processes • InstantAccess to Information Sales info, profit info, daily week basis • •Client information, access to customer data • Better Service Through Coordination •When people fly over to other countries • Leaner Organization BU 111 - Final Exam 9 • Labour for employees, paying bills, accessing account info, scanning groceries means less staff & less operating costs • Improved Operations Efficiency i.e. CAD, ERP • CAD = Computer Assisted Design • Enterprise Resource Planing = having software to get enough supply & materials & not too much to incur much costs, becoming obsolete • Greater Independence of Company & Workplace • Sales people never need to be in the office, (email contact) allows them to be on the road & be mobile • Globalization • Skype conference call if country is dangerous • Competitiveness • Create barriers to entry; cooperation with other firms Patent or know how, keeps new entrants out of space (technology) • • Creating alliances with suppliers & customers • Communication & Collaboration • Within firm & new customers • Market to customers in a richer way (TV ad., radio, etc.) • Boeing designs 747 & likes to collaborate on its design, using websites make it much more affordable • Customization • Machinery & equipment more adaptive, can do much more different products and being put in by a computer • Website to invite customers to design their product & the design can right to the manufacturer as an order >Threats • Imitation • Information costly to develop but cheap to share • Not allowing technology to be stolen or copied • New Technologies in Unfamiliar Areas • Disruptive technologies challenge the value of organizational capabilities & resources • Unpredictable Evolution • VHS v.s BetaMax • Blu-Ray v.s DVDs Need for constant learning & scanning • • Information Overload • Greater independence of company & workplace • No boundary >Distraction or Hunch Helper? •What you think? BU 111 - Final Exam 10 •Is technology making us more distracted or are we leaning toward more innovation through our ‘hunches’? • >Technology Standards: •Standard wars • Battles between incompatible technologies • Can determine survival of companies involved • Not limited to information technology •Blu-Ray v.s (HD) DVD • >Important Technology Terms: •Installed base • # of user (of particular format) • bigger = greater influence •Lock-in • Size of investment • Larger = greater resistance to switch Switching Costs • • Cost of moving • Entry barrier; makes lock-in worse •Complementary Goods • Needed for value; creates vicious or virtuous cycle (increase attractiveness of existing product) in TV set would be TV broadcasts (channels), (apps for apple iPad v.s no apps for BlackBerry tablet) •Network Effects • Value depends on users • Value of a product goes up because so many people are using it • EX: Facebook enjoys positive network effects. Only so effective because a lot of people use it. More Ex: Skype, Twitter, Instagram, etc. >Key Assets & Strategies: •Control over installed base of users • First-mover advantages - preemption • Expectations Management • Want to announce expectations for new products to communicate to customers from straying (Apple) • Offer Customers a Migration Path • Provide partial upgrade to a product if the new updated product is prolonged from coming to the market to make sure customers don’t buy competitor goods •Intellectual Property Rights • Slows imitation or requires cooperation •Ability to Innovate Stay on your guard • BU 111 - Final Exam 11 •Strength in Complements - uses alliances >On the Outside Looking In? •Lower customer switching costs • Make your product cheap or easy (Firefox) • Build in an adapter (Apple) • Able to use Microsoft documents •Offer a leap in performance for price (sporting goods) Make your product compatible with the dominant standard (if you can’t beat them join them) • >Sustaining Technology: •Presents improvements to existing products in expected ways •Provides mainstream, high-margin customers with enhancements in product functionality •Existing firms normally win • >Disruptive Technology: •Presents a different package of performance attributes that aren’t initially valued by mainstream customers (starts in peri
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