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FNCE 249 Personal Investment Assignment
Assignment 2 should be completed after Lesson 5.
Part 1: Preparing Financial Statements (50 marks total)
Explain the difference between saving and investing. (5 marks)
List and explain investors’ motivation for investing in stocks, bonds, preferred shares, and convertibles, based on the characteristics of each of these financial vehicles, from the risk and income perspective of investors. (10 marks)
Sylvia comes to you for advice in organizing her financial affairs. She is 29 years old and makes $50,000 per year, 30% of which goes to payroll deductions and taxes. Sylvia also receives $400 per year in interest from miscellaneous investments and savings accounts.
Sylvia has tracked her expenses for the last six months and provides you with the following estimates for the year:
Mortgage payments, including property taxes and interest
$5,886
($3,094 is interest)
Groceries
$3,600
Holidays
$3,500
Car payments, including interest
$4778
($958 is interest)
Utilities
$3,000
House and car insurance
$1,600
Gas for auto
$2,200
Auto maintenance
$600
Life and disability insurance premiums
$400
House maintenance
$1,500
Household expenses
$600
Medical and dental expenses
$400
Entertainment and lunches
$5,500
Gifts
$1,400
Clothing
$3,400
Miscellaneous expenses
$3,200
Sylvia has the following assets:
House value
$100,000
Cash in the bank
$1,800
Canada Savings Bonds
$8,000
Furnishings and personal assets
$18,000
Auto
$20,000
RRSP
$28,500
FNCE 249 Personal Investment Assignment
Sylvia has the following debt:
Credit card balances owing
$2,800
Line of credit owing
$5,000
Mortgage
$62,000
Car loan
$18,500
Required:
Based on the information provided, prepare a net worth statement and an annual cash flow statement for Sylvia. (10 marks)
Sylvia also has plans for saving and investing, and wants to find a way to “pay herself first.” She is willing to make adjustments to her spending habits and would like to see the effect of putting away 10% of her net pay for investing. Draw up a proposed future cash flow budget that will incorporate her ideas.(5 marks)
Explain three advantages and three disadvantages of investing in mutual funds rather than directly investing in assets such as stocks and bonds. (6 marks)
Discuss why investors may be attracted to investing in ETFs rather than mutual funds. (4 marks)
Describe why investors will commonly allocate a reasonable percentage of their investment portfolio to bonds. (5 marks)
Describe the difference between an investor who has a high risk tolerance and an investor with a low risk tolerance. (5 marks)
Part 2: Investment Activities (50 marks total)
To better manage the stocks of the two companies you selected in Assignment 2/3 Preparation, Part 2, you will prepare a “top-down” fundamental analysis following the steps below. The top-down approach refers to analyzing the economy and the industries in which the two companies are involved, as well as the companies themselves.
Analyze current and recent economic conditions. Provide a two-page (maximum) economic summary. Identify whether the economy is expanding (booming) or contracting (in recession). Justify your conclusion by citing economic statistics and trends over the past three years. You can obtain economic data from the Statistics Canada website. Analyze and interpret data trends (e.g., unemployment, inflation, real GDP, interest, housing starts) over the most recent three-year period to evaluate the economy and Canada’s current economic status. (10 marks)
Briefly describe political and social trends that might affect the success of your companies in the long term. How will these trends affect your companies’ stock values? (5 marks)
Describe the business sector or industry in which each of the two companies operates. Focus on information that helps you understand whether the industry is healthy or struggling. Try to find news stories about these industries in the media and other sources, including searching the Internet—good sources include The Globe and Mail and Financial Post. You can also access company news stories at the Globe Investor website by typing the name or trading symbol of a company into the Search box and scrolling to the Latest section. These news stories may be specifically about your company or about the industry and the company’s competitors. (5 marks)
For each of the companies you have selected, find financial statements at the company’s website or at SEDAR for the three most recent fiscal year ends. Then, for each company, perform the following steps (20 marks):
Table the revenue/sales dollar amounts and net income after-tax dollar amounts for at least a three-year period.
Calculate all of the ratios (liquidity ratios, financial leverage ratios, etc.) shown in the learning objectives in Lesson 3 for each of the companies for each fiscal year end over the past three years. If a ratio is irrelevant—for example, if there is no inventory in your chosen company (such as a bank or other service company)—then indicate “not applicable.” Be sure to show your complete calculations.
Identify the business/product cycle of your companies. Does the company introduce new products from time to time? Are current products still increasing sales, are they levelling off, or are they declining? How does this compare with competitors’ product cycles? Are each company’s business cycles cyclical, counter-cyclical, or non-cyclical?
Identify and explain the risks that apply to each of the two companies’ stocks.
Assess management’s abilities and strategies to the extent that information is available. (You can find management and strategy information by reading management reports in each company’s financial statements or at sites such as those indicated in Step 3 above.)
Incorporating the information gathered in the “top-down” fundamental analysis in
Steps 1 to 4 above, provide a one-page summary for each of your companies indicating
your projection of company performance and resulting stock prices over the short term (one year) and longer term (five years). Explain your thoughts and rationale for your projections. (5 marks)
how good a fit these equity investments are for you, given your analysis above and your personal risk tolerance (based on the assessment you completed for Assignment 2/3 Preparation, Part 1). (5 marks)
FNCE 249 Personal Investment Assignment
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