What evidence does Gibson provide against timing the market? Why is it so difficult to be successful at timing the market? Feel free to bring up points discussed by Benjamin Graham.

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Discussion Questions: Asset Allocation

Directions: Complete these questions while you are reading Asset Allocation. Submit your responses via Blackboard prior to class on 3/25. Please be prepared to discuss your responses during class or via Zoom on 3/25. As a reminder, in-class discussion is part of your participation grade.

1. Why is the decade of the 2000s often referred to as the “lost decade” for U.S. investors? Provide an explanation for why it really wasn’t a “lost decade.”
2. In chapter 2 Gibson discusses the historical performance of many different financial asset classes. Which asset classes is Gibson missing? Include both financial and non-financial asset classes in your response.
3. In chapter 4 Gibson discusses future returns of stocks and bonds. What outlook did Gibson provide for future stock and bond returns, and why? Now, approximately 10 years later, how accurate was his forecast?
4. What evidence does Gibson provide against timing the market? Why is it so difficult to be successful at timing the market? Feel free to bring up points discussed by Benjamin Graham.
5. Have U.S. stocks become less risky over longer holding periods? What about other countries? Provide evidence to support your claims.
6. Which set of asset classes produced the highest risk-adjusted return from 1972-2011? Why?
7. Gibson describes a scenario where a new client asks, “Does diversification really work?” He answers, “Yes, it works. But you actually may be asking a different question: This is, will you like diversification?” What does Gibson mean by this?
8. Has this book made you re-think your current portfolio strategy? Why or why not?

Evaluate the financial crisis which began in around 2008 based on the perspective of the country in which you plan to offer your product or service (ie, semester project). In other words, this event happened over 10 years ago, but some effects may still be felt today.

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Short Paper—Financial Crisis and its impact on your company

Read the entire assignment before starting.
Prepare a short paper (about 1000 words) which has three parts:

1. Evaluate the financial crisis which began in around 2008 based on the perspective of the country in which you plan to offer your product or service (ie, semester project). In other words, this event happened over 10 years ago, but some effects may still be felt today. For example:
a. Which factors helped cause the crisis?
b. What was the impact?
c. To which extent is this still being felt today?

2. Predict how (or whether) this could affect your company today. This could include:
a. How you would get money to start
b. How it could affect your customers’ ability to buy your goods or services
c. Other things—your choice based on the product or service you will provide
d. NOTE: The economic impact of the Covid-19 pandemic is being felt and is still developing. See additional notes (below) on how you can use this instead of the 2008 crisis.

3. Recommend ways your company would address the above. For example, you may have to simplify or reduce your plans. You may have to think of creative ways to finance purchases made by your company’s customers. There could be many other choices. Please try to have at least two suggestions on what you could do.

NOTE: The reason the Covid-19 pandemic is an option is because we are only part way through it, and it is difficult to predict its long-term economic impact. Therefore, you do not have to include it in your evaluation. In comparison, there is a lot of information about impact of the 2008 financial crisis.

Construct the capitalization table for each term sheet. Figure out total shares outstanding postmoney, and then calculate the size of the option pool.

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CellFree – Background

You are the founder of CellFree, a cellphone battery and charging unit that allows cellphones to charge wirelessly.

CellFree has been in operation for 2 years. For the first year and a half you were able to self- fund your company with $50,000 which you had saved from working at your previous job. Six months ago, however, you realized that additional outside financing would be necessary to enable your company to keep growing at its current pace.

To obtain this financing you went on AngelList, and secured an investment from South Philly Angels, a well-known local angel group, in the form of $300,000 in convertible notes. These notes carried a 10% annual interest rate, payable at maturity, and would be automatically converted into preferred stock at a 20% discount upon the raising of a Series A financing round. Over the course of the next 6-months you quickly used up these funds.

Realizing that you would soon need new financing you went to work trying to drum up investments from the venture capital community. Within a few weeks, you received term sheets from two VC firms: TruCost Venture Partners and Robin Hood Ventures. TruCost Venture Partners is a well-known venture capital firm located in Silicon Valley. They’re known for their past successful investments. They’ve recently raised their largest fund to date with $650M in committed capital. Robin Hood Ventures is a smaller, more recently established VC firm located in Philadelphia. They’ve raised $150M for their most recent fund and have had good success in their investments thus far.

Together with your co-founders you need to review each VC’s term sheet and decide which offer your firm will take.

 

Robin Hood Ventures Term Sheet Summary

THE OFFERING  
Investors: Investor #1: Robin Hood Ventures: 3,000,000 shares,

$3,000,000

Investor #2: Other VC to be mutually agreed upon by RHV and the Company: 3,000,000 shares, $3,000,000
Amount raised: $6,000,000
Price per share: $1 per share (Original purchase price)
Pre-money valuation: $6,000,000
Employee pool: 15% of the fully-diluted post-money capitalization (taken from founder’s equity)
ADDITIONAL TERMS  
Dividends: Paid on the Series A Preferred on an as-converted basis when,

as, and if paid on Common Stock.
Liquidation preference: Participating preferred with a 1X preference and a 2.5X cap
Anti-dilution: Full-ratchet
Mandatory conversion: Series A will automatically convert into common stock in the event of (i) the closing of an underwritten public offering with a price of 6X the original purchase price and net proceeds of not less than $40,000,000, or (ii) upon the written consent of two-thirds of the Series A Preferred.
Board composition: The board shall consist of 3 members: One founder, one from Robin Hood Ventures, and one from the other VC
Founder vesting: Stock owned by founders will be 25% vested and the remaining 75% will vest over the next 36 months
Pay to play: Yes

All other provisions not stated are in their most standard form.

TruCost Venture Partners Term Sheet Summary

 

THE OFFERING  
Investors: TruCost Venture Partners: 4,000,000 shares, $4,000,000
Amount raised: $4,000,000
Price per share: $1 per share (Original purchase price)
Pre-money valuation: $5,000,000
Employee pool: 25% of the fully-diluted post-money capitalization (taken from founder’s equity)
ADDITIONAL TERMS  
Dividends: The Series A Preferred will be entitled to receive non-

cumulative dividends in preference to the common stock, at the rate of 8% per annum when, as and if declared by the company’s board of directors.
Liquidation preference: Convertible preferred with a 1X preference (No participation)
Anti-dilution: Broad-based weighted average
Mandatory conversion: Series A will automatically convert into common stock in the event of (i) the closing of an underwritten public offering net proceeds of not less than $50,000,000 and a pre-offering valuation of not less than $350,000,000, or (ii) upon the written consent of the majority of the Series A Preferred.
Board composition: The board shall consist of 3 members: Two designated by the founder, and one from TruCost Venture Partners.
Pay to play: No

All other provisions not stated are in their most standard form.

 

Questions

  1. Construct the capitalization table for each term sheet.

 

Tip: Figure out total shares outstanding postmoney (i.e. calculate the number of shares going to the angel investor), and then calculate the size of the option pool.

 

Hint: The angel investor invested $300,000 for 6 months at 10% annual interest (paid-in-kind) in the form of a convertible note which would convert at a 20% discount following the Series A round (i.e instead of paying the Series A full price of $1 per share, they get to buy shares at $0.8). Thus, post Series-A the angel owns how many shares? (300000*(1+.1/2))/0.8 = 393750

2.How does the payout to the founders change under each term sheet if the exit valuation is low ($10M), medium ($30M), or high ($100M)? (Assume that all options have been issued by the time of exit)

Hint: For each exit amount, first figure out whether or not the preferred share holders will convert to common stock or remain with their preferred shares

3.Suppose the probability of low, medium, and high are 60%, 35%, and 5% respectively, what would be the founder’s expected payout under each term sheet?

 

4.Score each item in the term sheet according to their level of importance to the founders on a scale of 1 to 5 (1=low, 5=high). For each item indicate which term sheet (RHV or TC) gives the better terms.

 

  Ranked by importance to a “Control-focused”

founder

 Ranked by importance to a “Economics-

focused” founder

 Which term sheet offers better terms for the founders?
Pre-money valuation      
Founders’ equity      
Employee pool      
Investment amount      
Liquidation preference      
–Preference      
–Participation      
Dividends      
Mandatory conversion      
Anti-dilution      
Board composition      
Founder vesting      
Pay to play      

 

Develop an understanding of equity yields by computing portfolio yields. Develop an understanding of fixed income yields by computing portfolio yields.

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Unit 4: Investor Yields: Equities and Fixed Income (with tax shield effect)

Topics:
Equities Securities
Fixed Income Securities (bonds and preferred stock)
Corporate Bond Tax Shield (issuer perspective)
Municipal Bond Tax Shields (investor perspective)
Market Pricing Impact on Yields

Learning Objectives:
By the end of this Unit, you will be able to:
1. Develop an understanding of equity yields by computing portfolio yields.
2. Develop an understanding of fixed income yields by computing portfolio yields.
3. Determine the implications of the effect tax shields have on fixed income yields.

Tasks:
Peer assess Unit 3 Written Assignment
Read the Learning Guide and Reading Assignments
Participate in the Discussion Assignment (post, comment, and rate in the Discussion Forum)
Complete and submit the Written Assignment
Respond to the Portfolio Activity

Discuss what forecasting horizon you have chosen for your company and why. Explain what terminal value growth rate you intend to use in your perpetuity free cash flow model and what you have done to prepare the cash flows for the terminal value calculation.

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Financial Question

  1. Create a MS Excel financial model that represents your views of the future prospects of your target company. The financial model is to include forecasts for at least five years. Your model should contain a complete set of financial statements and appropriate supplemental schedules. Thus, at a minimum your forecasts should include an income statement, balance sheet, statement of cash flows (that reconciles to the change in cash), free cash flow statement ( in a separate tab). Your Model should have a tab that clearly shows the drivers or key factors (or Input) for the model. This section should also clearly show your Forecast Assumptions which will “drive” all your forecasts and later will be used for Sensitivity and Scenario Analysis.
  1. Provide a discussion of the method you used to forecast the key factor(s) driving the firm’s operations. Your discussion should answer the following questions: What are the key factors that drive the operations of the firm? How did you conclude that these are the key factors? How did you forecast these key factors?
  1. For the tax rate projection, it is okay to just use the firm’s historical effective tax rate [i.e., taxes paid divided by earnings before taxes].
  1. Discuss what forecasting horizon you have chosen for your company and why. Explain what terminal value growth rate you intend to use in your perpetuity free cash flow model and what you have done to prepare the cash flows for the terminal value calculation.
  1. Discuss the reasonableness of the forecasts you have generated using whatever metrics you believe would be relevant. Discuss the methods you used to check the overall reasonableness of your forecasts. Include any relevant graphs or tables you think demonstrate the reasonableness of your forecasts. If there are elements of your forecasts that you were not able to make reasonable, indicate what they are and how it is that the forecasts appear unreasonable.

 

California Inc., has sales of $14.2million, total assets of $11.3 million, and total debt of $4.9 million. If the profit margin is 5%, what is net income? What is ROA? What is ROE?

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Financial question

  1. What is the goal of financial management?
  2. What are the three main questions to be addressed if you wanted to start your own business?
  3. Prepare a balance sheet for Alaskan Salmon Corp. as of December 31, 2022, based on the following information: cash = $186,000; patents and copyrights = $784,000; accounts payable = $264,000; accounts receivable = $239,000; tangible net fixed assets = $4,743,000; inventory = $521,000; notes payable = $181,000; accumulated retained earnings = $4,209,000; long term debt = $1,512,000.
  4. California Inc., has sales of $14.2million, total assets of $11.3 million, and total debt of $4.9 million. If the profit margin is 5%, what is net income? What is ROA? What is ROE?
  5. You are scheduled to receive $10,000 in two years. When you receive it, you will invest it for six more years at 6.8% per year. How much will you have in eight years?
  6. You expect to receive $30,000 at graduation in two years. You plan on investing it at 9% until you have $140,000. How long will you wait from now?
  7. You have decided that you want to be a millionaire when you retire in 45 years. If you can earn an annual return of 11.8%, how much do you need to invest today? What if you can earn 5.9%?

 

What is eXtensible Business Reporting Language (XBRL)? Why does the SEC mandate data disclosure, whereby data items are tagged to make them easily searchable?

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Financial Planning and Budgeting

  1. What is eXtensible Business Reporting Language (XBRL)?
  2. Why does the SEC mandate data disclosure, whereby data items are tagged to make them easily searchable?
  3. What is insider fraud? What are some other terms for insider fraud?
  4. What is fraud risk management?
  5. What four factors increase the risk of fraud?
  6. Explain how accounting ISs can help deter fraud.

 

Would it be considered a financial institution; precisely a bank? If yes how would you relate its financial services to the definition of a bank? Would you consider “STC Pay” successfully compete on the financial market?

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Assignment Questions

(2 points)

  • List at least two money market instruments that are traded in Saudi Arabia.
  • List at least three capital market instruments that are traded in Saudi Arabia.

(4 points) What are the rules provided by the Real Estate General Authority in Saudi Arabia (list a least 5 of them) and briefly explain whether the authority added value to the financial system in the country? You need to search on the Real Estate General Authority official website.

(4 points) STC Pay is a Saudi Digital Payment which provide a digital wallet to its client, so answer these questions regarding to STC Pay:

  • Would it be considered a financial institution; precisely a bank? If yes how would you relate its financial services to the definition of a bank?
  • Would you consider “STC Pay” successfully compete on the financial market?

 

 

Based on the above summary, recommend and justify the risk exposures that should be reported as part of an Enterprise Risk Management System for XYZ Motor Company.

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Case Study & Problem solving

Question(s):

Q.1. Abdullah follows the automotive industry, including XYZ Motor Company. Based on XYZ’s 2021 annual report, Abdullah writes the following summary: XYZ Motor Company has businesses in several countries around the world. XYZ frequently has expenditures and receipts denominated in non-U.S. currencies, including purchases and sales of finished vehicles and production parts, subsidiary dividends, investments in non-U.S. operations, etc. XYZ uses a variety of commodities in the production of motor vehicles, such as nonferrous metals, precious metals, ferrous alloys, energy, and plastics/resins. XYZ typically purchases these commodities from outside suppliers. To finance its operations, XYZ uses a variety of funding sources, such as commercial paper, term debt, and lines of credit from major commercial banks. The company invests any surplus cash in securities of various types and maturities, the value of which are subject to fluctuations in interest rates. XYZ has a credit division, which provides financing to customers wanting to purchase XYZ’s vehicles on credit. Overall, XYZ faces several risks. To manage some of its risks, XYZ invests in fixed-income instruments and derivative contracts. Some of these investments do not rely on a clearing house and instead effect settlement through the execution of bilateral agreements.

  1. Based on the above summary, recommend and justify the risk exposures that should be reported as part of an Enterprise Risk Management System for XYZ Motor Company. (5 Marks)

Q2 An investment manager placed a limit order to buy 500,000 shares of Ahmad Corporation at SAR 21.35 limit at the opening of trading on February 8. The closing market price of Ahmad Corporation on February 7 was also SAR 21.35. The limit order filled 40,000 shares, and the remaining 460,000 shares were never filled. Some good news came out about Ahmad Corporation on February 8, and its price increased to SAR 23.60 by the end of that day. However, by the close of trading on February 14, the price had declined to SAR 21.74. The investment manager is analyzing the missed trade opportunity cost using the closing price on February 8 as the benchmark price.

  1. What is the estimate of the missed trade opportunity cost if it is measured at a one-day interval after the decision to trade? (2.5 Marks)
  2. What is the estimate of the missed trade opportunity cost if it is measured at a one-week interval after the decision to trade? (2.5 Marks)

 

Q3.Consider some stocks that trade in two markets, with a trader being able to trade in these stocks in either market. Suppose that the two markets are identical in all respects except that bid–ask spreads are lower and depths (the number of shares being offered at the bid and ask prices) are greater in one of the two markets. State in which market liquidity-motivated and information-motivated traders would prefer to transact. Justify your answer. (2.5 Marks)

 

Q4. Zaid retired from his firm. He has continued to hold his private retirement investments in a portfolio of common stocks and bonds. At the beginning of 2019, when he retired, his account was valued at SAR 453,000.By the end of 2019, the value of his account was SAR 523,500. Zaid made no contributions to or withdrawals from the portfolio during 2019. What rate of return did Zaid earn on his portfolio during 2019? (2.5 Marks)

 

 

 

 

Is this good performance on this ratio? Discuss which actions would improve (i.e., increase) this ratio. Discuss some of the problems encountered when performing financial statements and operating indicator analysis.

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Financial Analysis

Consider a healthcare organization in Saudi Arabia and assume they have a debt-to-equity ratio of 1.3.

Address the following requirements:

  • Is this good performance on this ratio?
  • Discuss which actions would improve (i.e., increase) this ratio.
  • Discuss some of the problems encountered when performing financial statements and operating indicator analysis.

Embed course material concepts, principles, and theories (which require supporting citations) in your initial response along with at least one scholarly, peer-reviewed journal article.Use the academic writing standards and APA style guidelines