BUA325 Chapter One
1) General Information
TEXT: Gitman and Joehnk, Fundamentals of Investing, 12th ed. Addison-Wesley, Boston MA.
i) PearsonMyLab : Instructor supplies a course code
ii) Listen throughout the course to the audio book by Benjamin Graham: The intelligent
investor
(a) You can find this audio book on You Tube under the above title or at the weebly site
2) OBJECTIVE: This course explores the basics in investing. We will follow a process of examining the
economy, industries and individual companies. We will explore common stock, bonds, and other
common financial instruments.
3) Tentative course schedule: The course will follow the general layout of the text. Each chapter is
supplemented by homework, group assignments, and a quiz. The PearsonMYLAB online program is
utilized to complete the individual homework and quizzes. This will also serve as the gradebook for
the course.
(a) Grading
1. Quizzes
50%
2. Research Assignments
20%
3. Individual Homework
20%
4. Attendance and participation
10%
(b) Grades are based on a total point system. The above weights are approximate
Content Coordinator: Dr. Lawrence Byerly
BUA325 Chapter One
4) Chapter One: Investment Environment
5) What is an Investment?
a) How do you make money from investing?
Income from investment
Increase in value from investment
6) Figure 1.1 Direct Stock Ownership by Households
a) What does “direct” investment mean?
b) Who invests the most in equity? The least?
c) How does this impact the economy of that country?
Purchase of stock
USA / France
Citizen wealth tied closely to the stock market
Content Coordinator: Dr. Lawrence Byerly
BUA325 Chapter One
7) Types of Investments
a) Debt, Equity or Derivative Securities
(a) What is a derivative?
Neither debt or equity
Derive value from underlying assets
b) Low Risk or High Risk
i) What is Risk?
Uncertainty
Volatility
The chance of not getting what you expected
Can this be good and bad??
c) Short-Term or Long-Term
What is short-term?
Short-term less than 365 days
Why so important?
d) Types of Investors
i) Individual Investors
Invest for personal financial goals
Retirement / homes / vacations / cars / education
ii) Institutional Investors
Paid to manage other people’s money
Large volumes
Banks / ins companies / mutual funds / pension funds
Content Coordinator: Dr. Lawrence Byerly
BUA325 Chapter One
8) Steps in Investing
a) Step 1: Meeting Investment Prerequisites
What are the necessities of life?
Protection against common risks
Emergency funds
b) Step 2: Establishing Investment Goals
i) What are examples of goals?
Retirement funds
Enhancing income
Saving for expenditures
Sheltering income from taxation
c) Step 3: Adopting an Investment Plan
written
d) Step 4: Evaluating Investment Vehicles
Assess potential return and risk
e) Step 5: Selecting Suitable Investments
Research and gather information on specific investments
f) Step 6: Constructing a Diversified Portfolio
Diversification can increase returns or decrease risk
Chapter 5 content
g) Step 7: Managing the Portfolio
Make comparisons and adjustments
9) Taxes in Investing Decisions
a) What does this mean? “It’s not what you make, it’s what you keep that is important.”
Content Coordinator: Dr. Lawrence Byerly
BUA325 Chapter One
b) Tax Planning Involves:
The desired return after-taxes
Type of income received from investments
Timing of profit and ;loss recognition
c) What are the three basic types of income?
Active : 1099 and W2
Portfolio income : investing in securities
Passive Income : tax sheltering income / rentals , royalties, limited partnerships
d) What is the difference between Ordinary Income and capital gains?
10) Table 1.2 Tax Rates and Income Brackets for Individual and Joint Returns (2009)
Have you ever heard the concern about people getting a pay raise and then complaining
because they are in a higher tax bracket? Why is this wrong?
Individual
Taxable Income
0
8,701
35,351
85,651
178,651
388,351 over
Joint
Taxable Income
0
17,401
71,701
142,701
217,451
388,351 over
8,700
35,350
85,650
178,650
388,350
marginal tax base
formula
10%
0 0+(amount over 0)
15%
870 870+(15% *amount over 8700)
25%
4867 4867+(25%*amount over 35350)
28%
17442 17442+(28% of amount over 85650)
33%
43481 43481+(33% of amount over 178650)
35% 112682 112682+(35% of amount over 388350)
17,400
70,700
142,700
217,450
388,350
marginal tax base
formula
10%
0 0+(amount over 0)
15%
1740 1740+(15% *amount over 17400)
25%
9734 9734+(25%*amount over 70700)
28%
27484 27484+(28% of amount over 85650)
33%
48414 48414+(33% of amount over 178650)
35% 104811 104811+(35% of amount over 388350)
Content Coordinator: Dr. Lawrence Byerly
BUA325 Chapter One
11) Tax Example
a) Don Winsalot and his wife, Lucy, have taxable income of 75K and 120K, respectively. What is the
tax liability, if they file single? Joint? What are the average and marginal tax rates?
No spreadsheet application
b) Single
Don
Joint
Lucy
Don and Lucy
(1) Don? 14,779
Lucy? 27,060
75,000-35,350 * .25 + 4,867
120,000-85,650 *.28 + 17,442
ATR = tax / income
19.71%
22.55%
(2) Joint? 42,128
195,000 – 142,701 * .28 + 27,484
ATR = 21.60%
12) Capital Gains and Losses
a) Taxation of Capital Gains
i)
Capital assets held less than one year: ordinary income tax rates
ii) Capital assets held more than one year: 15% (or 5 %)
b) Taxation of Capital Losses
i)
Capital losses can be used to offset capital gains
ii) Up to $3,000 per year of capital losses can be used to offset ordinary income (such as
wages)
13) Capital losses
a) This year a person has sustained $20,000 in capital losses. Their other income is $50,000.
i) What can they do this year?
Deduct $3K from the $50K
Carry forward the $17K
Content Coordinator: Dr. Lawrence Byerly
BUA325 Chapter One
b) Next year they earn $10,000 in capital gains and $50,000 in other income.
i) What can they do this year?
Offset the $10K gain with the carried forward $17K (remainder is $7K
Reduce income $50K with $3K in ST cap losses carry forward $4K
14) Tax-Advantaged Retirement Vehicles
a) Allows taxes to be deferred until withdrawn in future
b) Employer-sponsored plan
c) Individual plans
i) Individual retirement arrangements (IRAs) and Roth IRAs
15) Investing Over the Life Cycle
a) Growth-oriented youth stage
i) Higher potential growth; Higher potential risk
ii) Stress capital gains over current income
b) Middle-Aged Consolidation Stage
i) Move toward less risky investments to preserve capital
ii) Transition to higher-quality securities with lower risk
c) Retirement Stage
i) Preservation of capital becomes primary goal
ii) Highly conservative investment portfolio
iii) Income needed to supplement retirement income
d) What are some investments for each stage?
i) Growth-oriented: Common stocks, options or futures
ii) Middle-age: Low-risk growth and income stocks, preferred stocks, convertible stocks, highgrade bonds
iii) Income-oriented: Low-risk income stocks and mutual funds, government bonds, quality
corporate bonds, bank certificates of deposit
Content Coordinator: Dr. Lawrence Byerly
BUA325 Chapter One
16) Investments and the Business Cycle
a) Investments are affected by conditions in the U.S. economy
b) The business cycle reflects the current status of several common economic indicators:
i)
What are the definitions of the following
(1) gross domestic product (GDP)
(2) industrial production
(3) disposable income
(4) unemployment rate
c) A strong economy is reflected by an expanding business cycle
i) What do stock prices do during expanding business cycles?
Stock prices tend to rise during expanding business cycles and fall during declining
business cycles
d) Bonds and other forms of fixed-income securities are also affected by the business cycle since
their values are tied to interest rates, which are affected by economics conditions
(1) What happens to interest rates in expanding business cycles
(2) What happens to bond prices?
(a) Interest rates and bond prices move in opposite directions
Interest rates rise
Bond prices fall
17) The Role of Short-Term Investments
a) Define Liquidity
Ability to be converted into cash quickly at the current market value
How liquid is a check?
How liquid is a house? Can you sell a house very quickly?
Content Coordinator: Dr. Lawrence Byerly
BUA325 Chapter One
b) Primary use is for emergency cash reserve or to save for a specific short-term financial goal
c) Advantages and Disadvantages of Short-Term Investments
Adv
High liquidity
Low risk
Disadv
Low returns
Purchasing power losses
18) Investment Suitability
a) Short-Term Vehicles are used for:
i)
Savings
(1) Emphasis on safety and security instead
of high yield
ii) Investment
(1) Yield is often as important as safety
(2) Used as component of diversified portfolio
(3) Used as temporary outlet waiting for attractive permanent investments
19) Investment Profile
a) A mechanism used to establish the risk tolerances for a certain person for a certain investment.
i)
Each person will answer the questions differently
ii) Different investment needs will also have different strategies for achieving them.
Content Coordinator: Dr. Lawrence Byerly
BUA325 Chapter One
Web Exercises: (50 points)
1) Open the finance spreadsheet. Go to the worksheet BUA325 Project 1.
2) Create a line graph with the companies on one axis and the index on the other. Graph the
returns for the past 4 years data. (insert here) (20 pts)
From a visual inspection, what can you say about the performance over the past several years?
(10 pts)
3) Choose one of the companies from #1, go to http://finance.yahoo.com and find the competitors
for this company. Identify the competitors and complete the following table: (10 pts)
Company
Industry
Competitor 1
Mkt cap.
Employees
Net Income
Qtrly Rev
growth
EPS
How does this company compare to it’s competitors? (10 pts)
Content Coordinator: Dr. Lawrence Byerly
Competitor 2