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Final

# BU111 - Final Exam Course Package.pdf

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Wilfrid Laurier University

Business

BU111

Sofy Carayannopoulos

Fall

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Wilfrid Laurier University
BU111
Final Exam-AID
Review Package
Course Coordinators: Chanaka Conpiti, Kyndra Wilson
Tutor: Vreshin Nagarajan
Tutor: Jacob Dekoning
Tutor: Srinidhi Sridharan
Tutor: Mark Hanson
Students Offering Support is sponsored by:
About Students Offering Support: Wilfrid Laurier University
Students Offering Support
Students Offering Support is a multi-national charitable sustainable social
venture that develops and supports chapters in post-secondary schools across North
America. Each University chapter raises money to raise roofs through raising marks
during our ‘Exam-AID’ group review sessions, taught and coordinated by student
volunteers for university and high school students. Each year, the money raised is spent
on sustainable education projects in developing nations on volunteer outreach trips.
Since 2005, over 2,000 Students Offering Support volunteers have tutored over 25,000
students and raised more than $700,000 for various rural communities across Latin
America.
To learn more about Students Offering Support, please visit our website at:
www.studentsofferingsupport.ca
Follow Us!
@SOSheadoffice
www.fa cebook.com/StudentsOfferingSupport
www.youtube.com/user/StudsOfferingSupport
Raising Marks. Raising Money. Raising Roofs.
www.schoolsos.com Students Offering Support: Wilfrid Laurier University
The Straight Market Order
Steps to Success:
1. Calculate the purchase price
= #shares x (market price per share at the time of purchase)
2. Calculate the “commission in”
= 2% of the purchase price
3. Calculate the total cost
= purchase price + “commission in”
4. Calculate the return on the sale
= #shares x (market price per share at the time of sale)
5. Calculate the “commission out”
= you 2% of the return on the sale
6. Calculate the total return
= return on the sale – “commission out”
7. Calculate the capital gain (if this # is negative it is a capital loss)
= total return – total cost
8. Calculate the yield
= capital gain ÷ purchase price
Problem 1
On January 1 2011 you purchase 200 shares of WOW Company at $5.30 per
share. It is now December 2011 and the current market value of one WOW share
has increased by $0.50 since January. Assume the brokerage commissions are
2% in, 2% out.
(a) How much would you receive if you decided to sell your holdings?
(b) How much would it cost you to purchase an additional 100 shares?
Problem 2
You purchased 500 shares of GOO Company last week for $2.50 per share.
(a) The current market value of one share today is $3.00. If you sold your
holdings today, how much would you gain or lose after commission? What
is the yield on this investment?
(b) The current market value of one share today is $2.00. If you sold your
holdings today, how much would you gain or lose after commission? What
is the yield on this investment?
Raising Marks. Raising Money. Raising Roofs.
www.schoolsos.com Students Offering Support: Wilfrid Laurier University
Selling Short
Steps to Success:
1. Calculate proceeds from the short sale
= #shares x (market price per share at the time of purchase)
2. Calculate the “commission out”
= 2% of the proceeds from the short sale
3. Calculate additional deposit in short account 1
= 50% of the proceeds from the short sale
4. Calculate total amount in short account
= proceeds from the short sale + additional deposit
5. Calculate the cost of covering the short position
= # shares x (market price per share at the time it is covered)
6. Calculate the “commission in”
= 2% of the cost of covering the short the position
7. Calculate the capital gain (if this # is negative it is a capital loss)
= proceeds from the short sale – commission in - cost of covering
the short position – commission out
Problem 3
Stock Price Jan 1 Price Nov 1
JAM $20 $20
PEA $30 $15
NUT $10 $15
(a) Sell short 1,000,000 shares of JAM on Jan 1. Cover Nov 1. How much
would you gain or lose after commissions?
(b) Sell short 500 shares of PEA on Jan 1. Cover Nov 1. How much would
you gain or lose after commissions if the stock was valued at $35 on
March 1 and you received a short call from your broker at that time? What
would be the amount of the short call?
(c) Sell short 200 shares of NUT on Jan 1. Cover Nov 1. How much would
you gain or lose after commissions? What is the yield on this investment?
1
The investor must always have at least 150% of the current market value of the stock in their short
account. 100% of this comes from the proceeds of the short sale (which are deposited directly into the short
account at the time of sale) and the other 50% is deposited out of investor’s pocket at the time of sale. The
investor will receive a short call if the amount of money in the short account is less than 150% of the
current market value of the stock.
Raising Marks. Raising Money. Raising Roofs.
www.schoolsos.com Students Offering Support: Wilfrid Laurier University
Bonds
Important Terminology:
New Bond = a bond that is issued today
Old Bond = a bond that was issued before today
Face Value = Par = price of the bond when it was issued = the fixed amount the
holder of the bond will receive at expiry = $1000
Premium = price the investor pays for a bond (this will change over the life of a
bond, the premium = the face value when the bond is first issued)
Coupon Rate = fixed rate of interest the bond hold receives once a year
Approximate Yield to Maturity = How much return the investment produced
expressed as a % of its current purchase price
Determining the price of an Old Bond today:
Steps to Success:
1. Equate the yield of New Bond to the yield of the Old Bond 2
Yield of the old bond = Yield of the new bond
2. Plug in the all variables in the yield formula that you know
- Coupon Rate
- Face Value
- # years to maturity
- Yield of the new bond (which is equal to the prevailing interest
rate)
3. Solve for the price of the Old Bond
Problem 4
(a) How much would a rational investor pay today for a BIEBS 9 of December
4, 2021 if bonds of similar risk issued today are carrying a coupon rate of
11%?
(b) What if bonds of similar risk issued today are carrying a coupon rate of 7%?
(c) What if bonds of similar risk issued today are carrying a coupon rate of 9%?
Problem 5
Fill in the blanks for each of the following inequalities with “” or “=”.
1. For bonds sold at premium: Yield ____ Coupon Rate
2. For bonds sold at par: Yield ____ Coupon Rate
3. For bonds sold at discount: Yield ____ Coupon Rate
2
Note that a rationale investor would only consider purchasing both new and old bonds if their yields are
the same. For example, if the yield of a new bond is higher than the yield of an old bond, a rationale
investor will always invest in the new bond (higher yield = more money = happy investor). How can we
make sure the old bond is still considered by the investor? Ah-ha! ... we can lower the price of the old
bond to increase its yield! We must determine what the current market price of the old bond must be
lowered to, in order for it to be equally attractive as the new bond.
Raising Marks. Raising Money. Raising Roofs.
www.schoolsos.com Students Offering Support: Wilfrid Laurier University
Options
Important Terminology:
Writer = seller of an option contract
Holder = buyer of an option contract
1 Option Contract = 100 shares
PUT = a contract that gives the holder the option to sell shares at some point in
the future, at some predetermined price
CALL = a contract that gives the holder the option to buy shares at some point in
the future, at some predetermined price
Steps to Success:
1. Calculate the Premium
= # of shares x (option cost per share)
2. Calculate the commission on the premium
= 2% of the cost of purchasing the option
3. Calculate the total cost in obtaining the option
= cost of purchasing the option + commission on the purchase of the
option
If the option is not exercised, than Step 3 is the total cost to the holder.
If the option is exercised, proceed to Step 4.
4. Calculate the proceeds from exercising the option
CALL Option = (# of shares x current market value per share) – (# of
shares x strike price)
PUT Option = (# of shares x strike price) – (# of shares x current
market value per share)
5. Calculate the commission incurred in exercising the option
CALL Option = 2% of (# of shares x current market value per share)
PUT Option = 2% of (# of shares x strike price)
6. Calculate the capital gain (if this # is negative it is a capital loss)
= proceeds from exercising the option – commission incurred in
exercising – premium – commission on premium
Problem 6
Fill in each the blanks with “rise” or “fall”.
When you purchase a PUT option you want to price of the stock to ________ .
When you purchase a CALL option you want to price of the stock to ________ .
When you sell a PUT option you want to price of the stock to ________ .
When you sell a CALL option you want to price of the stock to ________ .
Raising Marks. Raising Money. Raising Roofs.
www.schoolsos.com Students Offering Support: Wilfrid Laurier University
Problem 7
Stock Price Jan 1 Price Nov 1
PEACE $10 $35
LOVE $30 $20
HAPP $10 $12
(a) You purchase a 11 month PUT on 2,000 shares of HAPP on Jan 1 costing $0.10
per share, and exercise at a strike price of $10. How much would you have
gained or lost on Nov. 1 if you allowed the PUT to expire?
(b) You purchase an 11 month CALL on 700 shares of PEACE on Jan 1 costing $2
per share, and exercise at a strike price of $25. You exercise the option on Nov
1. How much would you have gained or lost after all costs have been
considered?
Buying on Margin
Steps to Success:
1. Calculate the Broker Loan
= (investor’s money ÷ minimum margin requirement) - investor’s
money
2. Calculate the # of shares that can be purchased
= (investor’s money + broker loan) ÷ (market price per share at the
time of purchase)
3. Calculate the purchase price
= # shares x (market price per share at the time of purchase)
= investor’s money investing + broker loan
4. Calculate ‘Commission In’
= 2% of the purchase price
5. Calculate the return on the sale 3
= #shares x (market price per share at the time of sale)
6. Calculate ‘Commission In’
= 2% of the return on the sale
7. Calculate the capital gain (if this # is negative it is a capital loss)
= return on the sale - purchase price – commission in – commission
out
Problem 8
You purchased shares ABC common stock on margin at $25 on May 1. Assume the
minimum margin requirement is 75% and you invested 45,000. O Nov 1 you decide to
sell your shares at $23 per share, what is your capital gain (loss)?
3
Here the investor is hoping for the price of the stock to increase
Raising Marks. Raising Money. Raising Roofs.
www.schoolsos.com Students Offering Support: Wilfrid Laurier University
Time Value of Money
Steps to Success:
1. Draw a Timeline 4
Today 1 2 n
2. Determine what kind of investment it is and if you need the future
value or the present value – this will help you choose which
formula(s) to use
- Single Payment
- Annuity
- Annuity Due
- Perpetuity
3. Determine the appropriate r
4. Plug all variables into the correct formula(s)
5. Write a therefore statement
Problem 9
Which grows to a larger future value?
a) $4000 invested for 10 years at 5% or
b) $2000 invested for 10 years at 10%
Problem 10
Your grandparents bought their collection of one hundred silver dollars at face
value in 1952. If they appreciate at a rate of 3% per year, how much are they
worth today (2006)?
Problem 11
You have come across an investment opportunity that will give you $63,000 in 14
years if you put up $14,000 today. Calculate the annual return on this investment.
Problem 12
You currently have $48,000 in your bank account, which pays annual interest of
5% and you are saving up to buy a brand new $150,000 Jaguar convertible. In
how many years will you have enough money to buy the car?
4Although the timelines for each of the practice questions in this section are not given, you should always
begin with one to guarantee full marks for the question. Please see the timelines in the corresponding
slideshow to get an idea of how to develop them.
Raising Marks. Raising Money. Raising Roofs.
www.schoolsos.com Students Offering Support: Wilfrid Laurier University
Problem 13
You have just won $50,000 on your Scratch and Win ticket, but you won’t be
awarded the money until your 40 birthday, 20 years from now. If the appropriate
discount rate is 15%, what is the present value of your winnings?
Problem 14
Solve for A, B, C, D, E, F, G and H in the table below.
Stated Rate Number of Times Effective
(APR) Compounded Annual Rate
7% Daily A
9% Quarterly B
C Semi-annually 8%
23% Continuous D
E Weekly 15%
F Monthly 11%
G Continuous 22%
10% Monthly H
Problem 15
Suzanne has identified a project with the following cash flows:
Year Cash Flow
1 $2,000
2 $650
3 $375
4 $1,200
Calculate the present value of the cash flows if the discount rate is 9%.
Problem 16
You are 30 years old and you want to retire at age 60 with $1.5 million. You are
going to make equal annual deposits into your savings account at the end of
each year in order to save up this money. Your savings account pays 8%
interest. What amount must you deposit each year?
Problem 17 st
You are saving for your child’s university education. It is her 1 birthday today.
She will start university just after her 18 birthday. You are going to save $2,000
per year each year (starting today and ending on her 18 birthday) in a
Registered Education Savings Plan (RESP). If you expect to earn a real rate of
5% on the investment, how much will you have saved by her 18 birthday?
Raising Marks. Raising Money. Raising Roofs.
www.schoolsos.com Students Offering Support: Wilfrid Laurier University
Problem 18
Jennifer has offered you an insurance policy that will pay you $1,250 per year
forever. How much would you be willing to pay for this policy if the required rate
of return is 10.5%?
Raising Marks. Raising Money. Raising Roofs.
www.schoolsos.com Students Offering Support: Wilfrid Laurier University
Wilfrid Laurier University
BU111
Final Exam-AID
ANSWERS
Raisinwww.schoolsos.comMoney. Raising Roofs. Students Offering Support: Wilfrid Laurier University
Problem 1
On January 1 2011 you purchase 200 shares of WOW Company at $5.30 per
share. It is now December 2011 and the current market value of one WOW share
has increased by $0.50 since January. Assume the brokerage commissions are
2% in, 2% out.
(c) How much would you receive if you decided to sell your h

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