Combined Problems

Reminder For the Class DO NOT put your names on any assignments, midterms or finals, only your ID number. DO NOT put your names on any assignments, midterms or finals, only your ID number. Make sure that the name on the list is the name you are registered with. Make sure that the name on the list is the name you are registered with. If you are not sure, look on your students card, that is the name you are registered with. If you are not sure, look on your students card, that is the name you are registered with. If this identification in incorrect, you will not receive a mark in this course. If this identification in incorrect, you will not receive a mark in this course.

First off… Cases were well written for the most part Cases were well written for the most part Only a handful of cases that missed some key criteria Only a handful of cases that missed some key criteria No groups got the proper problem statement No groups got the proper problem statement High Mark: 83% High Mark: 83% Low Mark: 81% Low Mark: 81% Average: 83% Average: 83%

Midterm 20 Multiple Choice 20 Multiple Choice 40 marks short answer 40 marks short answer 40 Marks problems – last one a combined 40 Marks problems – last one a combined Short answer Short answer Look for the key words!!! (Describe, Explain etc) Look for the key words!!! (Describe, Explain etc) If it says explain, then do not just list the answer, you MUST EXPLAIN the relationship between the answers on the list. If it says explain, then do not just list the answer, you MUST EXPLAIN the relationship between the answers on the list.

For Example Identify the five critical success factors for a business and explain how each is related to the other factors… Identify the five critical success factors for a business and explain how each is related to the other factors… 1 mark for listing all 5 factors and 1 mark for listing all 5 factors and 4 marks for showing the relationship between them. 4 marks for showing the relationship between them.

Selling Short Theory Follow the diagram I put on the board… Follow the diagram I put on the board… What are some dangers associated with selling short? What are some dangers associated with selling short? Forced to cover at a bad time (stock price went up) Forced to cover at a bad time (stock price went up) Theoretically unlimited loss Theoretically unlimited loss Responsible for any dividends declared Responsible for any dividends declared Others? Others?

Options Call Options Call Options Put Options Put Options Intrinsic Value Intrinsic Value Call = Stock Price – Exercise Price Call = Stock Price – Exercise Price Put = Exercise Price – Stock Price Put = Exercise Price – Stock Price Value of the option if exercised today, or 0. Value of the option if exercised today, or 0. Time Value – value associated to an option due to the length of time to expiry. Time Value – value associated to an option due to the length of time to expiry.

Options Continued January 45 Call on JTS stock with $2 time value and the underlying share price is $50. What is the price of the option (per share?) What is the price of the option (per share?) Price = time value + intrinsic value Price = time value + intrinsic value = $2 + ($50-$45) = $2 + ($50-$45) = $2 + $5 = $2 + $5 = $7 = $7 Remember, there are 100 shares per contract so the cost of one contract is $700 Remember, there are 100 shares per contract so the cost of one contract is $700

Options Continued Factors affecting the price of an option: Factors affecting the price of an option: Exercise price Exercise price Share price Share price Time to Expiry Time to Expiry Volatility Volatility Dividends Dividends Risk free interest rate Risk free interest rate

Option Problems An investor buys a European put on a share for $3. The exercise price is $40. Under what circumstances does the investor make a profit? Under what circumstances will the option be exercised? The investor will make a profit if the price of the stock on expiration date is less than $37. The investor will make a profit if the price of the stock on expiration date is less than $37. The option will be exercised if the stock price is less than $40 at the maturity of the option. The option will be exercised if the stock price is less than $40 at the maturity of the option.

Option Problems Suppose that a European call option to buy a share for $100 costs $5 and is held until maturity. Under what circumstances will the holder of the option make a profit? Under what circumstances will the option be exercised? Make a profit is the stock price is greater then $105 Make a profit is the stock price is greater then $105 The option will be exercised if the stock price is greater then $100 The option will be exercised if the stock price is greater then $100

Combined Problems How to effectively do a combined problem How to effectively do a combined problem Step 1: Relax, they are exactly the same as the problems you have been doing, just with the combination of ideas Step 1: Relax, they are exactly the same as the problems you have been doing, just with the combination of ideas There will be a combined problem on the midterm There will be a combined problem on the midterm Always has been one, always will be one Always has been one, always will be one Will most likely be in paragraph form Will most likely be in paragraph form

Combined Problems Step 2: Analyze potential sources of income Step 2: Analyze potential sources of income Scan the problem once, to identify the different types of investments Scan the problem once, to identify the different types of investments Use a highlighter to ensure that you remember the different types of revenue generating sources Use a highlighter to ensure that you remember the different types of revenue generating sources By doing this, you will not forget something later By doing this, you will not forget something later

Combined Problems This should not take very long, maximum of 3- 5 minutes This should not take very long, maximum of 3- 5 minutes During this step you should look at all the different types of income you can potentially have During this step you should look at all the different types of income you can potentially have These income: Bond holdings, Stock holding, options held, employment income etc. These income: Bond holdings, Stock holding, options held, employment income etc.

Combined Problem Step 3: Look to see if any of these holdings will bring income Step 3: Look to see if any of these holdings will bring income In this, go through the combined problem day by day, finding out what has happened on that day In this, go through the combined problem day by day, finding out what has happened on that day At this point, record the income, specifying the type of income (capital gain, interest) and either note, or calculate the specific tax consequence At this point, record the income, specifying the type of income (capital gain, interest) and either note, or calculate the specific tax consequence

Combined Problems For example: For example: In the case of a capital gain, ensure that it is recorded at the 50% taxable amount, or make a note indicating that this must be done for tax purposes In the case of a capital gain, ensure that it is recorded at the 50% taxable amount, or make a note indicating that this must be done for tax purposes In the case of dividends, make a note of the gross up, and the dividend tax credit which will be required In the case of dividends, make a note of the gross up, and the dividend tax credit which will be required

Combined Problems By breaking the problem into smaller sections, it will make it easier to understand and less intimidating for the preparation By breaking the problem into smaller sections, it will make it easier to understand and less intimidating for the preparation Last step, calculate the tax payable on the income that you have calculated Last step, calculate the tax payable on the income that you have calculated

Combined Problems Are we comfortable enough to work through a combined problem now, or would we like to wait until next week and do one then? Are we comfortable enough to work through a combined problem now, or would we like to wait until next week and do one then?

Next week… First thing we will do is take up the case First thing we will do is take up the case We will postpone the tax set #4 until the week after the midterm because it will not be on the midterm We will postpone the tax set #4 until the week after the midterm because it will not be on the midterm