AFM121 Chapter Notes - Chapter 19: Relative Risk, Expense Ratio, Peer Group

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peachgerbil481

3 Apr 2016

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM121

Professor

Craig Geoffrey

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Document Summary

Chapter 19: mutual funds types and features. Cash and equivalent/money market funds: short term investments, treasury bills, hardly any yield/interest these days buy good for liquidity/short term cash. Money market will not hold ixed income securities. Attractive investors seeking low risk and high liquidity; interest distributions are fully taxable. Fixed income: focus on income not capital appreciation, most important: Ignore income trust funds (very few income trusts these days: fixed income will hold instruments of longer maturities, also have the lowest mer of all mutual fund types, mortgage funds, bond funds, and canadian income trust funds. Balanced funds: mix of money market, ixed income, and equities, mixture of safety income and capital appreciation, often minimum and max % Asset allocation funds but they are not restricted to min or max % Balanced funds usually have highest mer: makes balanced funds poor performers. Index funds: mirror a particular equity or bond index.

Related Questions

Question 11

Advantages of mutual funds include

	A.	professional management.
	B.	all of these.
	C.	liquidity.
	D.	diversification.

Question 12

Which of the following types of investment companies operates much like an index fund?

	A.	exchange-traded fund
	B.	unit investment trust
	C.	closed-end fund
	D.	REIT

Question 13

A common stock fund that invests in only one industry is called a(n) ____ fund.

	A.	maximum capital gains
	B.	growth and income
	C.	index
	D.	sector

Question 14

Mutual funds that charge a load do so to compensate

	A.	fund managers.
	B.	brokers.
	C.	shareholders.
	D.	the SEC.

Question 15

Your first task in selecting a mutual fund is to

	A.	review your investment policy.
	B.	locate sources of comparative performance data.
	C.	eliminate funds inappropriate for your investment goals.
	D.	screen and compare funds that meet your investment criteria.

Question 16

Taxes on annual earnings from mutual funds can be avoided

	A.	while those amounts are kept in an IRS-qualified retirement account.
	B.	as long as the mutual shares are not sold.
	C.	while those amounts are kept in an IRS-qualified retirement account and if those earnings are interest from municipal bonds.
	D.	if those earnings are interest from municipal bonds.

Question 17

Mutual funds permit automatic income reinvestment of

	A.	ordinary income dividend distribution.
	B.	none of these.
	C.	both ordinary income dividend distributions and capital gains distributions.
	D.	capital gains distribution.

Question 18

The type of mutual fund that is not actively managed is called a(n) ____ fund.

	A.	emerging market
	B.	money market
	C.	index
	D.	sector

Question 19

A mutual fund that does not assess a sales charge at the time of the investment purchase is called a ____ fund.

	A.	back-end load
	B.	front-end load
	C.	low-load
	D.	no-load

Question 20

Open-end mutual funds

	A.	make up about 75 percent of all mutual funds.
	B.	are sold only through brokers.
	C.	are sold at their current net asset value.
	D.	are sold to other investors on a secondary market.

apricotsnail400

The study of finance consists of the following interrelated area(s):

a) Financial markets and institutions

b) Financial services

c) Investments

d) Managerial (business finance)

e) All of the above

The liquidity asset is one that can be easily converted to __________ without significant loss of its original value.

a) Bonds

b) Cash

c) Gold

d) Liquid

e) Silver

A goal of financial intermediaries is to improve the economic well-being. Other benefits include:

a) Diversification (risk)

b) Financial flexibility

c) Funds divisibility/pooling

d) Reduced costs

e) Related services

f) All of the above

4.____________ represents the current value of some future amount.

a)Assumed value

b)Future value

c)Present value

d)Zero value

The cost of money (interest rates) is based on (1) the rate of return that borrowers expect to earn on their investments, (2) saversâ preferences to spend income in the current period rather than delay consumption until some future period, _____________________________, and (4) expected inflation.

a) the level of economic activity

b) the risks associated with investments/loans

c) the trade deficit

d) the yield, or return that is earned on an investment

6.Short-term debt includes all of the following EXCEPT:

a)Bankerâs Acceptances

b)Certificates of Deposits (CDâs)

c)Commercial Paper

d)Eurodollar Deposits

e)Federal Funds

f)Government Bonds

g)Money Market Mutual Funds

h)Repurchase Agreements (Repos)

i)Treasury Bills (T-bills)

7.Common stockholders are usually referred to as the owners of the firm because investors in common stock have certain rights and privileges generally associated with ________________.

a)Contracts

b)Income stocks

c)Property ownership

d)Treaties

8.The concept of reducing the stand-alone risk of an individual investment by combining it with other investments to form a portfolio is called ______________.

a)Correlation coefficient

b)Diversification

c)Realized rate of return

d)Risk aversion

9.A _____________ is defined as the cash flows that could be generated from assets the firm already owns if they are not used for the project in question.

a)Balance Sheet

b)Budget

c)Income Statement

d)Opportunity Cost

e)Sunk Cost

To determine its required rate of return, the firm must compute the cost of each source of funds of capital that investors provide; that is, the firm must compute the ___________, the cost of preferred stock, the cost of retained earnings, and the cost of new common equity.

a) Cost of debt

b) Cost of equity

c) Cost of living

d) Cost of unemployment

ivorybat714

1. Use the attached balance sheet and income statement to compute the required financial ratios for 2012. Use 360 for the number of days in a year. The computations for 2011 are already done for you.

Current ratio_________________________

Quick ratio__________________________

Inventor turnover____________________

Average Collection Period_____________

Total asset turnover__________________

Net profit margin____________________

Operating profit margin_______________

Times Interest Earned_________________

Debt/Net Worth Ratio_________________

Return on Equity ratio__________________

2. Using the computed financial ratios from question 1, compare Grounds Keeperâs performance from 2011 to 2012. Address what areas the company has improved and what areas it has not

A.)Liquidity

B.) Activity / turnover / efficiency

C.) Profitability

D.) Leverage / use of debt / solvency

3. If you were the CEO of Grounds Keeper, what area(s) would you concentrate on to improve the performance of the company?

4. Define the terms capital structure, cost of capital, and working capital. Focus on how they are different from each other and impact both profitability and risk.

5. Determine Grounds Keeperâs capital structure and working capital.

6. If Grounds Keeper has a required rate of return on its long-term debt of 9% (before taxes) and a required rate of return on its common stock, a tax rate of 40%, what is its weighted average cost of capital (WACC) for 2012? How could Grounds Keeper lower its WACC? (HINT: you will need to look at the balance sheet to determine the weight of debt to equity.

7. What are the advantages to Grounds Keeper in using money market instruments as financing? How does this related to financing net working capital?

8. Explain what Grounds Keeper should consider when deciding whether to issue stocks or bonds? Answer using at least 3 different characteristics comparing and contrasting stocks and bonds.

9. Define money market instruments; list at least one type of security that would be considered a money market instrument. What are the advantages to Grounds Keeper in using money market instruments as financing? What are the disadvantages?

	Grounds Keeper
	Consolidated Balance Sheets
	(Dollars in thousands)
	2012	2011
Assets
Current assets:
Cash and cash equivalents	78,240	44,395
Receivables	399,891	340,062
Inventories	844,737	736,677
Total current assets	1,322,868	1,121,133

Fixed assets, net	1,244,384	889,613
Other long-term assets	1,048,537	1,187,141
Total assets	3,615,789	3,197,887

Liabilities and Stockholdersâ Equity
Current liabilities:
Accounts payable	309,222	319,465
Accruals	201,017	145,240
Notes payable	9,748	6,669
Total current liabilities	519987	471374
Long-term debt	834574	814298
Total liabilities	1,354,561	1,285,672
Stockholdersâ equity:
Common stock, $0.10 par value:	15,268	15,447
Additional paid-in capital	1,464,560	1,499,616
Retained earnings	781400	397152
Total stockholdersâ equity	2,261,228	1,912,215
Total liabilities and stockholdersâ equity	3,615,789	3,197,887

Grounds Keeper

Consolidated Statements of Operations

(Dollars in thousands except per share data)

2012

2011

Net sales

3,889,426

2,642,390

Cost of sales

2,589,799

1,746,274

Gross profit

1,299,627

896,116

Selling and operating expenses

481,493

348,696

General and administrative expenses

219,010

187,016

Operating income

599,124

360,404

Interest expense

22,983

57,657

Income before income taxes

576,141

302,747

Income tax expense

212,641

101,699

Net Income

363,500

201,048

Basic income per share:

Average shares outstanding

154,933,948

146,214,860

Earnings per common share

2.35

1.38

Current Ratio	Current assets/ Current liabilities
Quick Ratio	Current assets â inventory/ Current liabilities
Inventory Turnover	Cost of goods sold/ Inventory
Receivables Turnover	Sales/ Accounts receivables
Average Collection Period	Receivables/ Sales per day
Fixed Asset Turnover	Sales/ Fixed assets
Total Asset Turnover	Sales/ Total Assets
Gross Profit Margin	Revenues - Cost of goods sold/ Sales
Operating Profit Margin	Earnings before interest and taxes/ Sales
Net Profit Margin	Net income/ Sales
Return on Total Assets	Net income/ Total assets
Debt/Net Worth Ratio	Total Debt/ Total Equity
Times-Interest-Earned	Operating Income/ Interest expense
Return on Equity	Net income/ Total equity

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AFM121 Chapter Notes - Chapter 19: Relative Risk, Expense Ratio, Peer Group

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