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					                     UNIVERSITY OF BALLARAT
                       SCHOOL OF BUSINESS


         BA521 PERSONAL FINANCIAL PLANNING 1

                             Semester 2, 2000

                      Tutorial Solutions Week 6
Reading:
Blue chip magic, Shares, May 2000, pp 58 - 67
New economy survivors, Shares, June 2000, pp 56 - 79

Questions for consideration:

1. What are three different goals that affect the type of shares held in
   an investment portfolio?
   Investing for security, income or capital gain affects the types of shares that we hold
   in a portfolio.

    Security looks at maintaining the value of capital while still providing an
     acceptable return. Examples are shares in long established companies sometimes
     referred to as 'blue chip'. These companies tend to present steady returns that are
     not subject to significant cyclical ups and downs. They are companies such as
     banks and others that have good resources , expertise , assets or promotional
     power.

    Income looks at shares that offer the ability to supplement income by way of
     paying regular fully franked dividends. These companies offer a good dividend
     yield and would include bank stocks.

    Capital gain focuses on building wealth and protecting against inflation.
     Generally associated with companies who are in the early part of their life cycle.
     These companies offer expansion opportunities and therefore the potential for
     above average returns. Companies in the technology and telecommunications
     sectors are more likely to achieve significant capital growth. They are likely to
     represent more risky shares.
                    UNIVERSITY OF BALLARAT
                      SCHOOL OF BUSINESS


         BA521 PERSONAL FINANCIAL PLANNING 1

                            Semester 2, 2000

                     Tutorial Solutions Week 6


2. In the article, Suit your style, Personal Investor, July 2000, pp 48 - 61,
   what are the three different share portfolios put forward by the
   author?
    Defensive portfolio, one that tends to fall less than the market when economies
     move into recession.
    Balanced portfolio, represents the middle ground and looks to offer a balance of
     income and capital growth.
    Aggressive portfolio, designed to capture capital gains.



3. What does the above article say are the 'dos and don’ts' of
   sharemarket investing?
   DO
    Make informed business decisions.
    Establish your own investment strategy
    Diversify.
    Remember the fundamentals: P/e ratio, dividend yield, NTA, low gearing, sound
      management.
    Buy good quality stocks when they appear neglected.

   DON'T
    Follow hot tips.
    Throw good money after bad.
    Buy illiquid stocks.
    Panic.
    Try to get rich overnight.
                    UNIVERSITY OF BALLARAT
                      SCHOOL OF BUSINESS

        BA521 PERSONAL FINANCIAL PLANNING 1

                             Semester 2, 2000

                     Tutorial Solutions Week 6

4. What is the significance of cum and ex-dividend prices?
   Cum dividend - the buyer of the share is entitled to the dividend.
   Ex dividend - from the ex dividend date the buyer of the share is not entitled to
    the dividend (the seller retains the dividend).

  The seller of the share is entitled to retain the dividend up to one week after the
  announcement date by the company of the dividend being paid. Therefore the seller
  can have sold the dividend and still the receive the next dividend payment.

  The buyer of the share is entitled to the dividend from one week after the
  announcement date. This implies that even though he may have only recently
  acquired the share , he is going to receive the dividend. This represents a good yield,
  considering having only invested the funds for such a short period of time.

  The impact of the impending dividend on share prices is that cum is generally higher
  than ex to compensate for the length of time that the investor will have to hold the
  share before the next dividend is declared.


5. What is the difference between the primary and secondary market?
   Which market is used by companies to raise funds?
   Primary market - allows a company to raise capital through the sale of new
    shares to the public via a prospectus. The company is 'floated'.
   Secondary market - a regulated market place for the trading of existing shares
    between investors.
                       UNIVERSITY OF BALLARAT
                         SCHOOL OF BUSINESS

         BA521 PERSONAL FINANCIAL PLANNING 1

                              Semester 2, 2000

                       Tutorial Solutions Week 6

6. Explain the role of a broker and what types of broker services exist.

   The role of a broker is to aid in the process of buying and selling shares whether via
   the primary or secondary market.
   The types of broker services that exist include:
               Full service
               Standard
               Discount

   The needs of the client will determine the types of things that a broker will do. This
   will in turn affect the level of fees that are charged. This may range from providing a
   complete investment service or just entering a trade request (to buy or sell securities)
   by a client.



7. What are some of the key measures included in sharemarket trading
   tables (refer Clitheroe 1999, pp 231 - 233) used to assess the health of
   a company?

      Dividend c (cents) per share - the size of the latest annual dividend distributed by
      the company per share (in cents).

      Dividends times coverage - shows the proportion of the company's net earnings
      distributed.

      Calculated as:          EPS (Earnings per share)/ DPS (Dividends per share).

      Net asset backing - if all assets were liquidated and all debts paid what would
      each share then be worth.

      Calculated as:          Value of shareholders' funds/ No. of issued shares.

      Dividend yield % - generally speaking the higher the yield the healthier the
      company. It measures the dividend against the last quoted share price.

      Calculated as:          DPS/ Last sale price of share.
                       UNIVERSITY OF BALLARAT
                         SCHOOL OF BUSINESS

        BA521 PERSONAL FINANCIAL PLANNING 1

                            Semester 2, 2000

                       Tutorial Solutions Week 6
7.(cont.) What are some of the key measures included in sharemarket
trading tables (refer Clitheroe 1999, pp 231 - 233) used to assess the
health of a company?

      Earnings share cents - stands for earnings pre share EPS and is
      expressed in cents. It shows the amount of profit earned for every
      ordinary issued share.
      Calculated as:        Net profit/ No. of ordinary issued shares.

      Price earnings ratio - provides a measure of the investors' expectations of the
      company's performance. If a company has a low P/E ratio compared with other
      companies working in the same or similar industries this indicates the market
      anticipates a poor profit performance from the company in the future. A high P/E
      indicates the opposite.

      Calculated as:        Last sale price of share/Earnings per share (EPS)

				
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