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Combined Problems

Combined Problems. Reminder For the Class. 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. If you are not sure, look on your students card, that is the name you are registered with.

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Combined Problems

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  1. Combined Problems

  2. Reminder For the Class • 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. • 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.

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

  4. Midterm • 20 Multiple Choice • 40 marks short answer • 40 Marks problems – last one a combined • Short answer • 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.

  5. For Example • 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 • 4 marks for showing the relationship between them.

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

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

  8. 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?) • Price = time value + intrinsic value = $2 + ($50-$45) = $2 + $5 = $7 • Remember, there are 100 shares per contract so the cost of one contract is $700

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

  10. 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 option will be exercised if the stock price is less than $40 at the maturity of the option.

  11. 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 • The option will be exercised if the stock price is greater then $100

  12. Combined Problems • 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 • There will be a combined problem on the midterm • Always has been one, always will be one • Will most likely be in paragraph form

  13. Combined Problems • Step 2: Analyze potential sources of income • 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 • By doing this, you will not forget something later

  14. Combined Problems • 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 • These income: Bond holdings, Stock holding, options held, employment income etc.

  15. Combined Problem • 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 • At this point, record the income, specifying the type of income (capital gain, interest) and either note, or calculate the specific tax consequence

  16. Combined Problems • 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 dividends, make a note of the gross up, and the dividend tax credit which will be required

  17. Combined Problems • 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

  18. 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?

  19. Next week… • 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

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