SNHU FIN340 module 3 assignment

| November 9, 2018

Case 5.2Susan Lussier is 35 years old and employed as a tax accountant for a major oil and gas explora- tion company. She earns nearly $135,000 a year from her salary and from participation in the company’s drilling activities. An expert on oil and gas taxation, she is not worried about job security—she is content with her income and finds it adequate to allow her to buy and do what- ever she wishes. Her current philosophy is to live each day to its fullest, not concerning herself with retirement, which is too far in the future to require her current attention.A month ago, Susan’s only surviving parent, her father, was killed in a sailing accident. He had retired in La Jolla, California, 2 years earlier and had spent most of his time sailing. Prior to retirement, he managed a children’s clothing manufacturing firm in South Carolina. Upon retire- ment he sold his stock in the firm and invested the proceeds in a security portfolio that provided him with supplemental retirement income of over $30,000 per year. In his will, he left his entire estate to Susan. The estate was structured in such a way that in addition to a few family heir- looms, Susan received a security portfolio having a market value of nearly $350,000 and about $10,000 in cash.Susan’s father’s portfolio contained 10 securities: 5 bonds, 2 common stocks, and 3 mutual funds. The following table lists the securities and their key characteristics. The common stocks were issued by large, mature, well-known firms that had exhibited continuing patterns of divi- dend payment over the past 5 years. The stocks offered only moderate growth potential— probably no more than 2% to 3% appreciation per year. The mutual funds in the portfolio were income funds invested in diversified portfolios of income-oriented stocks and bonds. They provided stable streams of dividend income but offered little opportunity for capital appreciation.Now that Susan owns the portfolio, she wishes to determine whether it is suitable for her situation. She realizes that the high level of income provided by the portfolio will be taxed at a rate (federal plus state) of about 40%. Because she does not currently need it, Susan plans to invest the after-tax income primarily in common stocks offering high capital gain potential. During the coming years she clearly needs to avoid generating taxable income. (Susan is already paying out a sizable portion of her income in taxes.) She feels fortunate to have received the portfolio and wants to make certain it provides her with the maximum benefits, given her finan- cial situation. The $10,000 cash left to her will be especially useful in paying brokers’ commis- sions associated with making portfolio adjustments.Questionsa. Briefly assess Susan’s financial situation and develop a portfolio objective for her that is con- sistent with her needs.b. Evaluate the portfolio left to Susan by her father. Assess its apparent objective and evaluate how well it may be doing in fulfilling this objective. Use the total cost values to describe the asset allocation scheme reflected in the portfolio. Comment on the risk, return, and tax implications of this portfolio.c. If Susan decided to invest in a security portfolio consistent with her needs—indicated in response to question a—describe the nature and mix, if any, of securities you would recommend she purchase. Discuss the risk, return, and tax implications of such a portfolio.d. From the response to question b, compare the nature of the security portfolio inherited by Susan with what you believe would be an appropriate security portfolio for her, based on the response to question c.e. What recommendations would you give Susan about the inherited portfolio? Explain the steps she should take to adjust the portfolio to her needs.Case 6.2Wally Wilson is a commercial artist who makes a good living by doing freelance work—mostly layouts and illustrations—for local ad agencies and major institutional clients (such as large department stores). Wally has been investing in the stock market for some time, buying mostly high-quality growth stocks as a way to achieve long-term growth and capital appreciation. He feels that with the limited time he has to devote to his security holdings, high-quality issues are his best bet. He has become a bit perplexed lately with the market, disturbed that some of his growth stocks aren’t doing even as well as many good-grade income shares. He therefore decides to have a chat with his broker, Al Fried.During their conversation, it becomes clear that both Al and Wally are thinking along the same lines. Al points out that dividend yields on income shares are indeed way up and that, because of the state of the economy, the outlook for growth stocks is not particularly bright. He suggests that Wally seriously consider putting some of his money into income shares to capture the high dividend yields that are available. After all, as Al says, “the bottom line is not so much where the payoff comes from as how much it amounts to!” They then talk about a high-yield public utility stock, Hydro-Electric Light and Power. Al digs up some forecast information about Hydro-Electric and presents it to Wally for his consideration:The stock currently trades at $60 per share. Al thinks that within 5 years it should be trading at $75 to $80 a share. Wally realizes that to buy the Hydro-Electric stock, he will have to sell his holdings of CapCo Industries—a highly regarded growth stock that Wally is disenchanted with because of recent substandard performance.Questionsa. How would you describe Wally’s present investment program? How do you think it fits him and his investment objectives?b. Consider the Hydro-Electric stock.1. Determine the amount of annual dividends Hydro-Electric can be expected to pay over the years 2013 to 2017.2. Compute the total dollar return that Wally will make from Hydro-Electric if he invests $6,000 in the stock and all the dividend and price expectations are realized.3. If Wally participates in the company’s dividend reinvestment plan, how many shares of stock will he have by the end of 2017? What will they be worth if the stock trades at $80 on December 31, 2017? Assume that the stock can be purchased through the dividend rein- vestment plan at a net price of $50 a share in 2013, $55 in 2014, $60 in 2015, $65 in 2016, and $70 in 2017. Use fractional shares, to 2 decimals, in your computations. Also, assume that, as in part b, Wally starts with 100 shares of stock and all dividend expecta- tions are realized.c. Would Wally be going to a different investment strategy if he decided to buy shares in Hydro- Electric? If the switch is made, how would you describe his new investment program? What do you think of this new approach? Is it likely to lead to more trading on Wally’s behalf? If so, can you reconcile that with the limited amount of time he has to devote to his portfolio?

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