A A E C D E F G H [ I E Ii; my [ [ [ T T | e 2 A JOB AT EAST COAST YACHTS, PART 1 3 4 You recently graduated from college, and your job search led you to East Coast Yachis. Because you felt the company's business was seaworthy, you '5 accepted a job offer. The first day on the job, while you are finishing your employment paperwork, Dan Ervin, who works in finance, stops by to inform you 6 about the company's 401(k) plan, [ A 40N[k) plan is a retirement plan offered by many companies, Such plans are tax-deferred savings vehicles, meaning that any deposits you make into the g plan are deducted from your current pretax income, 56 no current taxes are paid on the money. For example, assume your salary will be $50,000 per year, If Q you contribute 3,000 to the 401(k) plan, you will only pay taxes on $47,000 in income. There are also no taxes paid on any capital gains o income while you 1'0 are invested in the plan, but you do pay taxes when you withdraw money at retirement. As is fairly common, the company also has a 5 percent match. This 1 means that the company will match your contribution up te 5 percent of your salary, but you must contribute 1o get the match, 12 The 401(k] plan has several options for investments, most of which are mutual fumds. A mutual fund is a pertfolio of assets. When you purchase Page 314 1'3 shares in a mutual fund, you are actually purchasing partial ownership of the fund's assets. The return of the fund is the weighted average of the 14 return of the assets owned by the fund, minus any expenses. The largest expense is typically the management fee, paid to the fund manager. The 15 management fee is compensation for the manager, who makes all of the investment decisions for the fund. 16 [Fast Coast Yachts uses Bledsoe Financial Services as its 401(k] plan administrator. The investment options offered for employees are discussed below, 1.? Company Stock One option in the 401(k) plan is stock in East Coast Yachts, The company s currently privately held, However, when you interviewed with the 13 | owner, Larissa Warren, she informed you the company stock was expected 1o go public in the next three to four years. Until then, a company stock price is 1_9 set each year by the board of directors. 20 Bledsoe S&P 500 Index Fund This mutual fund tracks the S&P 500, Stocks in the fund are weighted exactly the same as the S&P 500. This means the fund 21 return is approximately the return on the S&P 300, minus expenses. Because an index fund purchases assets based on the composition of the index it is 22 following, the fund manager is not required to research stocks and make investment decisions. The result is that the fund expenses are usually low. The 25 Bledsoe S&P 500 Index Fund charges expenses of 15 percent of assels per year. Bledsoe Small-Cap Fund This fund primarily invests in small-capitalization stocks. As such, the returns of the fund are mare volatile. The fund can also invest 10 percent of its assets in companies based outside the United States. This fund charges 1.70 percent in expenses. 2-? Bledsoe Large-Company Stock Fund This fund invests primarily in large-capitalization stecks of companies based in the United States. The fund is managed o by Evan Bledsoe and has outperformead the market in six of the last eight years. The fund charges 1.50 percent in expenses. 20 | Bledsoe Bond Fund This fund invests in long-term corporate bends issued by U.S.-domiciled companies. The fund is restricted to investments in bonds with 30 | an investment-grade credit rating. This fund charges 140 percent in expenses, S pHledsoe Money Market Fund This fund invests in short-term, high-credit-guality St instruments, which include Treasury bills. As such, the return on the 2 33 34 3] % 37, 3. 30 10 41 2 43 84 85 4. 47, 1 19 50, 51 52, 53 54 5 % 57, 58 50, 60, 61 maney market fund is only slightly higher than the return on Treasury bills. Because of the credit quality and short-term nature of the investments, there is only a very slight risk of a negative return. The fund charges 60 percent in expenses. 1. What advantages do the mutual funds offer compared to the company stock? 2. Assume that you invest 5 percent of your salary and receive the full 5 percent match from East Coast Yachts. What EAR do you earn from the match? What conclusiens do you draw about matching plans? 3. Assume you decide you should invest at least part of your money in large-capitalization stocks of companies based in the United States. What are the advantages and disadvantages of cheosing the Bledsoe Large-Company Stock Fund compared 1o the Bledsoe S&P 500 Index Fund? 4, The returns on the Bledsoe Small-Cap Fund are the most volatile of all the mutual funds offered in the 401(k) plan. Why would you ever want to invest in this fund? When you examine the expenses of the mutual funds, you will notice that this fund also has the highest expenses. Does this affect your decision to invest in this fund? 5. & measure of risk-adjusted performance that is often used is the Sharpe ratio. The Sharpe ratio is calculated as the risk premium of an asset m divided by its standard deviation. The standard deviation and return of the funds over the past 10 years are listed below. Calculate the Sharpe ratio for each of these funds. Assume that the expected return and standard deviation of the company stock will be 15 percent and 65 percent, respectively, Calculate the Sharpe ratio for the company stock. How appropriate is the Sharpe ratio for these assets? When would you use the Sharpe ratio? Assume the risk-free rate was 2.76 percent. 10Year Annmal Return Standard Deviation Bledsoe S&P 500 Index Fund 11.85% 2385% Bledsoe Small-Cap Fund 13.32 2062 Bledsoe Large-Company Stock Fund 10.73 373 Bledsoe Bond Fund 804 10.34 6. What partfolio allacation would you choose? Why? Explain your thinking carefully. | Chapter 10 Case | Case Details @ B C D E F G H J K Directions: Work the case provided on the 2nd tab. ##The calculations in this case are simple, the answers to the questions are the challenge*# Chapter 10 A Job at East Coast Yachts Input area: 10 10-year annual Standard deviation 11 return 12 Bledsoe S&P 500 Index Fund 11.85% 23.85% 13 Bledsoe Small-Cap Fund 15.32% 29.62% Bledsoe Large Company Stock 10.73% 26.73% 14 Fund 15 Bledsoe Bond Fund 8.04% 10.34% 16 17 Company stock expected return 15.00% 18 Company stock standard deviation 65.00% 19 20 Risk-free rate 2.76% 21 22 23 Output area. 24 25 Delete this text and replace with your Question 1 answer. 25 27 Delete this text and replace with your Question 2 answer. 29 30 31 Delete this text and replace with your Question 3 answer. 32 33 34 35Delete this text and replace with your Question 4 answer. 38 39 40 41 42 43 44 45 Question 5 Calculations 46 47 Bledsoe S&P 500 Index Fund 48 Bledsoe Small-Cap Fund Bledsoe Large Company Stock 49 Fund 50 Bledsoe Bond Fund 51 Company stock 52 53 Question 5: How appropriate is the Sharpe Ratio for these assets? 54 55 56 57 Question 5: When would you use the Sharpe Ratio? 58 59 160 61 Question 5: Interpret your result for the Bledsoe Large Company Stock Fund 62 63 64 65 Delete this text and replace with your Question 6 answer. 66 67 63 69 70 71 72 73 74 75