Lanni Investments Case Study

Assignment 1

1. Identify real/financial assets and any presence of financial assets that are created/destroyed:

1. Lanni transfers a financial asset (cash) in return for another financial asset (loan from the bank). The financial asset created is the promissory note (Lanni’s IOU to the bank).
2. Lanni uses the financial asset (cash) and his own funds to create a real asset (financial planning software). No financial assets were created or destroyed in the process.
3. Lanni gives the real asset (software) to Microsoft in exchange for a financial asset (Microsoft shares). If Microsoft issued new shares to pay Lanni, then financial assets would have been created.  
4. Lanni exchanges one financial asset (1500 shares of stock) for another financial asset (cash) of 120k. Lanni then gives the financial asset (50k cash) to get back the financial asset IOU. The loan is “destroyed” in the transaction since it is retired when it is paid off and no longer exists.

1. Securitization would take place in highly developed markets since it is a way of making illiquid investments liquid. In highly developed capital markets, investors would typically demand exposure into investments such as real property, which are difficult to invest in without securitization. Securitization allows the investor to buy, in the case a share of a REIT, which would effectively provide the investor with a piece of ownership of the real property. Also, securitization allows for new ways to raise capital and achieve liquidity at a lower cost than most traditional financing instruments.
2. Various forms for managerial compensation:

1.   Fixed salary

1. Advantages: Stable income for managers and predictable salaries expenses.
2. Disadvantages: May not inspire high job performance since there are no incentives for performance bonuses

1. Stock in the firm

1. Advantages: Ties performance of the firm with the compensation.
2. Disadvantages: Agency costs (manager has self-interest to maximize his equity holdings, rather than in the best interest of the shareholders)

1. Call options on the shares of the firm

1. Advantages: Ties performance of the firm with the compensation
2. Disadvantages: backdating of options to unethically and illegally provide the managers with risk free profit, agency costs (managers may make decisions that maximize their value of options on the shares, rather than act in the best interest of the shareholders)

1. Short 100 shares of Alcan:

1. In a short sell position, the maximum possible loss is infinite. Since there is no limit how high the share price can go, there is technically no cap on how large the loss is from short selling a rising stock.
2. The maximum loss will be 8 x 100 shares = $800 maximum loss.

1. Buy on margin BCE stock:

1. Value of BCE stock after 1 year: 1.10 x $10,000 = $11,000; Interest = 0.08 x $5,000 = $400; profit = $11,000 - $10,000 - $400 = $600. Rate of return = $600/$5000 = 12%
2. Currently own 200 shares. (200p – 5000)/200p = 0.3 => p = $35.71

1. Short sell Weston:

1. Margin = $15,000; Short position = $20,000; total market value = $35,000

1. Profit = (80-88)*250 = -2000; ROI = -13.33%
2. Profit = (80-72)*250 = 2000; ROI = 13.33%

1. 35,000/250p – 1= 0.3 => p = $107.69
2. A)        

1. Profit = (80-88-2)*250 = -2500; ROI = -16.67%
2. Profit = (80-72-2)*250 = 1500; ROI = 10%

B) (35,000- 2x250)/250p – 1 = 0.3 => p= $106.15        

1. The broker will attempt to sell Kinross when the price drops to $38. However, the trade may not be executed since the bid price now is $37.85.