IAPM Exam S1 Sep 2020 Recommended Solutions PDF

STOCKBROKER EXAM INVESTMENT ADVICE AND PORTFOLIO MANAGEMENT (IAPM) RECOMMENDED SOLUTIONS PART A [140 marks] Question 1...

STOCKBROKER EXAM INVESTMENT ADVICE AND PORTFOLIO MANAGEMENT (IAPM) RECOMMENDED SOLUTIONS PART A [140 marks] Question 1 (140 marks) You are the portfolio manager for the stockbroking firm, Gamma Securities (Pty) Ltd. You are approached by a new client, Peter Ndlovu, who is a legal advisor at the South African Reserve Bank (SARB). His marriage partner, Brian Edwards, is a member of a political party’s executive and owns a wedding catering business, which because of COVID-19 has been struggling. The couple have recently gotten married with their assets falling into a joint estate. They want you to structure a joint portfolio from their existing assets that will provide for their future and have provided the relevant information below. The assets to be used as well as any specific instructions are as follows: a. They have accepted an offer for Brian’s house, from which the net proceeds after settling the outstanding bond on Peter’s house will be paid into the portfolio. The sale has been finalised and the conveyancer will distribute the net funds as instructed: Sale price: R3 800 000; Outstanding bond: R250 000; and Agreed estate agents fee including VAT: R175 500 b. Peter’s house will become their family home and has an outstanding bond of R375 905. They will use part of the sale proceeds from Brian’s house to settle this bond. Peter has the following portfolio that will be put at your disposal for inclusion in the new portfolio you structure for the couple. You must sell all securities not on the Allowed Securities List. c. Asset Type Code No. held Price (cents) Value (Rand) Collective Investment Scheme Units CIS.u 80 000 1 538 1 230 400 Sasol Ltd ordinary shares SOL 10 000 13 831 1 383 100 Discovery Hldgs Ltd B Pref DSBP 35 000 6 650 2 327 500 British Am. Tobacco Plc BTI 2 000 67 320 1 346 400 Total 6 287 400 SAIS Stockbroker Exams – IAPM – September 2020 Page 1 of 28  Peter also has two accounts with Barclays Bank on the Isle of Man (IOM). Both are disclosed and therefore have the SARB and the SARS approval. He pays tax at a reduced rate of 10% on the interest income from these accounts because they are being taxed in the IOM. The couple has been granted the same tax directive from SARS. The couple have advised you that these two foreign exchange holdings are to be kept as a Rand hedge and the interest earned on these accounts is to be capitalised, with the South African tax being paid out of the portfolio Rand earnings in South Africa. These two accounts’ details are as follows: Peter’s foreign accounts details as at 21 Sept 2020 Barclays Bank: Isle of Man Interest rate Account denomination Amount in account (after IOM tax at source) US Dollars ($) $78 339,00 1,75% per annum UK Pounds (£) £65 652,00 1,55% per annum d. Brian has a savings account with R800 892.00 and will pay this into the broking firm’s trust account for use in the portfolio. Brian also has a 50% share in a private company that owns a block of flats, for which the other shareholder has offered a net amount of R3 150 000.00 after all costs. e. The couple have instructed you to provide for the following: An annual payment by the portfolio of the following amounts into their ABSA cheque account. These amounts are to be paid on the 22nd Sept each year, the amount being the sum of the following: o Adopted daughter’s school fees of R18 000.00 per month; and o R12 500.00 per month to subsidise their home expenses. They want this covered by the coupons from the bond asset class investments, which must form part of the portfolio. Assume an annual escalation of 7,5% for these payments. A buffer or emergency saving to be held in JSE Trustees account of at least R280 000.00; The portfolio must have a minimum of 10% of its value excluding the 2 foreign bank accounts in each of the following three asset classes: Bonds, Satrix ETF’s and JSE Trustees account. The balance of the portfolio’s on-shore allocation may be applied to growth investments. f. The brokerage charges applicable to purchases and sales for this couple are based on the gross transaction value, are an all-in cost including any taxes and are as follows: Satrix ETF’s: 0.45% all-in cost including any taxes; Preference and ordinary shares: 0.40% including any taxes; and Bonds: 0.50% all-in cost including any taxes. The price shown in (c) above for the collective investment scheme units is the net price at which the scheme manager will buy back the units. There are no charges on JSE Trustees deposits and withdrawals and the quoted rates are net of broker’s charges. You must ignore CGT implications on sales of assets. g. The portfolio management fee is 1.5% of the gross portfolio value, including JSE Trustee amounts and foreign bank accounts values and is levied on the balance at the beginning of each year and deducted before the determination of the value of the portfolio to be invested. The amount in all the asset classes balances + profits (excluding costs and tax) is hereinafter referred to as the Opening Portfolio value for the start of each year, which will run from 21st Sept of the current year to 20th Sept of the next year. SAIS Stockbroker Exams – IAPM – September 2020 Page 2 of 28  h. The portfolio may only include securities provided in the “Allowed Securities List”. These securities are to be bought at the prices provided in the “Allowed Securities List” and their provided yields or interest rates are to be used. i. The couple want a portfolio that meets their requirements as listed above. Assume all property or other sales are finalised and the relevant proceeds are available. The yields to be used are as provided. Dividends are taxed at 20%, while there is a SARS directive with agreed rates of tax on local and foreign interest income as per the handout. Note: Any securities retained or bought must be from those included in the ’Allowed Securities List’ provided. You are required to answer 1.1. to 1.9. below: 1.1. Determine the value of the portfolio to be invested (i.e. the Opening Portfolio value) for Year 1, after all assets intended for sale are sold and all brokerage and costs are deducted. You must: 1.1.1. Calculate the amount of money provided to you by the couple for investment into a portfolio (include asset and security sales and show related costs) and the net amount remaining for use in creating their portfolio; (10 marks) 1.1.2. Show the portfolio management fee calculation and amount; and (2 marks) 1.1.3. Show any disbursements and the amount. (2 marks) Recommended Solutions 1.1. Portfolio for asset allocation on 21/22 Sep 2020 Summary Cash for Portfolio a. Sale Brian’s house 3 374 500,00 b. Pay off Peters bond -375 905,00 b. Sell Peters securities 6 267 172,00 c. Brian’s savings Acc 800 892,00 c. Sale of Brian’s flats 3 150 000,00 Cash provided for Portfolio 13 216 659,00 b. Rand value of foreign bank accounts 2 749 624,50 Opening Portfolio value 15 966 283,50 f. Portfolio Management Fee -239 494,25 d. Disbursements from portfolio -366 000,00 Net amt of portfolio 22Sep2020 15 60 789,25 Workings: a. Sale of Brian's house Sale price 3 800 000,00 O/s Bond -250 000,00 Estate Agent -175 500,00 3 374 500,00 SAIS Stockbroker Exams – IAPM – September 2020 Page 3 of 28  b. Sale of Peter’s securities Security Qty Price (R) Value Transaction Costs Net Proceeds Sell CIS.u 80 000 15,38 1 230 400 - 1 230 400,00 Sell SOL 10 000 138,31 1 383 100 5 532,40 1 377 567,60 Sell DSBP 35 000 66,50 2 327 500 9 310,00 2 318 190,00 Sell BTI 2 000 673,20 1 346 400 5 385,60 1 341 014,40 6 267 172,00 b. Foreign Bank Acc's Barclays Bank: Isle of Man Amount in Exch Rate - Account denomination account handout Rand Value 21Sep2020 US Dollars ($) $78 339,00 17,50 1 370 932,50 UK Pounds (£) £65 652,00 21,00 1 378 692,00 Total: 2 749 624,50 d. Disbursements from portfolio add tax on int of 30% Detail Per Month Annual d. School fees 18 000 12 216 000,00 d. Home Exp subsidy 12 500 12 150 000,00 366 000,00 475 800,00 1.2. Using the following asset classes, provide your respective allocation per class as a percentage of the Opening Portfolio value for Year 1 and in Rand terms. Provide an explanation specifically for the Bond and Equity asset class allocations. (10 marks) Mark Allocation Asset Class Allocation Value Cash (JSE Trustees) (1,5 marks) Bonds (3,5 marks) Equities (2 marks) Satrix ETF’s (1,5 marks) Foreign Bank accounts (1 mark) Total Portfolio Value (0,5 marks) Recommended Solutions Bonds calc Note: Want bonds to provide coupon of at least R366 000 p.a. +tax rate 30% = 522 857,14 Coupon = 10,5% therefore face = 4 979 592 Cost = 108 + broke so use 109 5 427 755 Lets buy 6 000 000 Which is greater than 10% of value of portfolio 39,06% 1. SAIS Stockbroker Exams – IAPM – September 2020 Page 4 of 28  Asset Class Allocation Value Cash (JSE Trustees) 10,00% 1 536 079 Foreign Bank accounts 17,90% 2 749 625 Bonds 39,06% 6 000 000 Equities 23,04% 3 539 006,90 Satrix ETF’s 10% 1 536 079 Total Investable Portfolio Value 100,00% 15 360 789 2. 1.3. You must have 4 different types of shares for use in the Equity Asset class. Choose these from the “Allowed Securities List” and motivate your choice in each case. (8 marks) Recommended Solutions Choose 4 shares from the “Allowed Securities List” and provide reason for each? …. 2 marks each. Share A Why you choose this share for this client 2 marks B Why you choose this share for this client 2 marks C Why you choose this share for this client 2 marks D Why you choose this share for this client 2 marks 3. Example: ABG o Banks have been hard hit and should recover …. 1 mark o After COVID-19 need for loans and funding therefore prime time for banks…. 1 mark o Out of list, ABG pays highest div yield…. 1 mark o ABG is financially sound, is one of the big four…. 1 mark o ABG currently on lowes PE so if perform, not only will earnings rise, but PE may be rerated higher…. 1 mark Max 2 marks per share and its relevant motivation. 1.4. Provide six important points that would be relevant in terms of the needs analysis of these specific clients. (6 marks) Recommended Solutions 1. Their age and stage of life cycle. 1 mark 2. Their FICA = ID, Proof of Address, etc… 1 mark 3. Brian is a Politically Exposed Person (PEP), must be dealt with. 1 mark 4. Peter is SARB employee, and must be dealt with. 1 mark 5. Mandate instructions noted and signed by clients. 1 mark 6. Assess their risk appetite and explain. 1 mark 7. Agree brokerage charges and explain. 1 mark 8. Other reasonable and valid points. 1 mark Max 6 marks SAIS Stockbroker Exams – IAPM – September 2020 Page 5 of 28 1.5. Provide brief explanations of the following: 1.5.1. The major differences between Active and Passive Investment strategies (4 marks) Recommended Solutions See SG 5 The major differences can be summarised as follows: Passive strategies offer low-cost and tax-efficient management, but sacrifice the ability to outperform the market; and Active strategies offer the capacity to capitalise on market opportunities, and provide returns in excess of the market average, but picking winners consistently is uncertain. … An actively managed portfolio might include individual shares and bonds if there are sufficient assets to achieve optimum diversification. Smaller portfolios can achieve the proper diversification through passive funds (e.g. mutual funds or ETF’s, ETN’s, etc.). An investor might construct a passively managed portfolio with index funds selected from various asset classes and economic sectors. 1.5.2. Provide 2 Pros and 2 Cons for same and explain 3 different investment strategies. (8 marks) Recommended Solutions See course notes SG 5 Comparing the Pros and Cons of Active and Passive Investment Management Active Passive Pros The positions taken in the portfolio can The portfolios performance is linked to be unique choices facilitated by the the long-term performance of the setup exclusive research and expertise of the asset mix, and the portfolios portfolio manager; performance would accordingly match or The portfolio manager can take be close to the market indexes advantage of market inefficiencies; performance, which traditionally The portfolios performance can beat the outperforms many the active portfolio market and relevant indices’ managers; performance, as it may take advantage The portfolio managers fees for passive of ups and downs over the investment portfolio management are generally period; and lower than for active management; and The portfolio manager can protect the The passive investment strategy may be portfolio returns from downside risk more tax efficient than in the case of through both active trading and hedging active investment strategies. activities. Cons The active investment strategy results The portfolios performance usually may be less than that of the relevant involves a tracking error in terms of the market index; market index that is equal to the fees The costs associated with an active paid for the passive investment investment strategy are generally higher management; than those incurred in a passive A passive investment management investment strategy, both due to more strategy usually lacks potential for trading costs and more intensive downside protection in a negative market management attention to the portfolio; environment; The active investment strategy may Trading and rebalancing are usually a provide fewer tax advantages due to the function of the performance of the higher frequency of trading; and market index, and do not relate to the SAIS Stockbroker Exams – IAPM – September 2020 Page 6 of 28  An active investment strategy usually exclusive research and expertise of the involves a higher tracking error in terms portfolio manager; and of the market index than is the case in The costs involved in trying to replicate passive investment strategies. the market index may be substantial. Max 1 mark per point Max 8 marks for question 1.6. Using the “Investment Yield Spread Sheet” provided, populate the relevant asset classes and their constituent securities. Then calculate the following for each security utilised (i.e. each line item) for the portfolio in terms of: 1.6.1. The asset details, allocations and Rand return before-tax per line item and the total (12 marks) 1.6.2. The return or yield % per line item, explain bonds and foreign bank accounts yields (7 marks) 1.6.3. The respective tax rates (4 marks) 1.6.4. Calculate the following using the “Investment Yield Spread Sheet”: 1.6.4.1. The after-tax rand return per line item and the total for the portfolio (6 marks) 1.6.4.2. The total charges, being the brokerage, VAT and STT in setting up the portfolio (3 marks) 1.6.4.3. The amount of taxes paid on the portfolio earnings in Rands (3 marks) 1.6.4.4. The pre-tax return on the portfolio as a % (2 marks) 1.6.4.5. The after tax return on the portfolio as a % (2 marks) Note: Costs are inclusive of brokerage VAT and STT as set out in 1.1 (f) above. Recommended Solutions 1.6.1. See table “Value incl costs”, Brokerage & taxes (= costs) and Net Value after costs. Max 10 marks 1.6.2. See Yield p.a. … 5 marks Explanation: Bonds: Adjusted to % of price which is 108 … 1 mark Foreign bank accounts: the rate used is weighted average for $ and £. … 1 mark 1.6.3. See tax… 4 marks 1.6.4. 1.6.4.1. See the “After-tax Return” on the “Investment Yield Spread Sheet” … 6 marks 1.6.4.2. The total charges, being the brokerage, VAT and STT in setting up the portfolio… 3 marks Portfolio Investment Value - Net after tradind cost Total Trading Costs = value SAIS Stockbroker Exams – IAPM – September 2020 Page 7 of 28  R15 360 789,25 - R15 309 720,86 = R 51 068,39 1.6.4.3. The amount of taxes paid on the portfolio earnings in Rands… 3 marks Pre Tax Return 903 190,68 After Tax Return 660 598,55 Tax paid 242 592,13 1.6.4.4. The pre-tax return on the portfolio as a % … 2 marks; and Pre-tax Return as % 5,90% Based on the After Cost / Net Value of the portfolio 1.6.4.5. The after tax return on the portfolio as a % … 2 marks. After-tax Return as % 4,31% Based on the After Cost / Net Value of the portfolio SAIS Stockbroker Exams – IAPM – September 2020 Page 8 of 28  Investment Yield Spread Sheet for Year 1 for the couple to take effect on 21/22 Sept 2020 to 20 Sept 2021 Total Investment Amount at start of period = R 15 360 789,25 Asset Security Trading Net Yield Tax After Tax Allocation Value incl broke Return Class Identity Costs Value pa Return Cash JSE Trustees 10,00% 1 536 078,92 0,00% 1 536 078,92 5,50% 84 484,34 30% 59 139,04 Bonds R186 39,06% 6 000 000,00 0,50% 5 970 000,00 9,72% 580 416,67 30% 406 291,67 ABG 5,76% 884 751,72 0,40% 881 212,72 9,54% 84 067,69 20% 67 254,15 AGL 5,76% 884 751,72 0,40% 881 212,72 4,00% 35 248,51 20% 28 198,81 884 Equities BID 5,76% 0,40% 881 212,72 2,31% 20 356,01 20% 16 284,81 751,72 884 XMH 5,76% 0,40% 881 212,72 2,92% 25 731,41 20% 20 585,13 751,72 2 749 FX Bank Acc's 17,90% 0,00% 2 749 624,50 1,65% 45 361,04 10% 40 824,94 624,50 1 536 Satrix ETF 1 10,00% 0,45% 1 529 166,57 1,80% 27 525,00 20% 22 020,00 078,92 15 360 Total 100,00% 15 309 720,86 903 190,68 660 598,55 789,25 SAIS Stockbroker Exams – IAPM – September 2020 Page 9 of 28 1.7. Provide a report for the client providing an analysis in terms of the following: 1.7.1. Explain the two major classifications of risks, systematic and un-systematic? (6 marks) Recommended Solutions See notes Systematic risk (systemic risk) refers to the risk inherent to the entire market or market segment. Systematic risk, also known as “undiversifiable risk,” “volatility” or “market risk,” affects the overall market, not just a particular share or industry. This type of risk is both unpredictable and impossible to completely avoid. It cannot be mitigated through diversification, only through hedging or by using the correct asset allocation strategy. Unsystematic Risk (non-systemic risk) is any risk that is specific to a company as opposed to the entire economy or an entire industry. Investors can usually reduce their exposure to unsystematic risk by diversifying their investments. 1.7.2. Provide the major steps of your portfolio process and then explain the reasons for and impact of the ‘final step’ in the management process of the portfolio. (10 marks) Recommended Solutions Step 1: Assess the Current Situation Planning for the future requires having a clear understanding of an investor’s current situation in relation to where they want to be. Step 2: Establish Investment Objectives Identifying the investor’s risk-return profile and expectations. Step 3: Determine Asset Allocation Using the investor’s objectives, the manager can develop an asset allocation strategy based on the investors risk-return profile. Step 4: Select Investment Options / securities Individual securities for each asset class are selected based on client’s parameters, needs analysis, etc. (also look at active or passive management. Step 5: Monitor, Measure and Rebalance Max 5 marks for 5 steps, and max 5 marks for explanation below of management process. Can include points re above steps. Management Process: After implementing a portfolio plan, the management process begins. This includes monitoring the investments and measuring the portfolio’s performance relative to the benchmarks. It is necessary to report investment performance at regular intervals, typically quarterly, and to review the portfolio plan annually. Once a year, the investor’s situation and goals get a review to determine if there have been any significant changes. The portfolio review then determines if the allocation is still on target to track the investor’s risk-reward profile. If it is not, then the portfolio can be re-balanced, selling investments that have reached their targets, and buying investments that offer greater upside potential. When investing for lifelong goals, the portfolio planning process never stops. As investors move through their life stages, changes may occur, such as job changes, births, divorce, deaths or shrinking time horizons, which may require adjustments to their goals, risk-reward profiles or asset allocations. As changes occur, or as market or economic conditions dictate, the portfolio planning process begins anew, following each of the five steps to ensure that the right investment strategy is in place. 1.8. Assuming the following apply for Year 2: SAIS Stockbroker Exams – IAPM – September 2020 Page 10 of 28  JSE Trustee rates increase by 50 basis points; The bond price decreases by 5%; The share prices increase by 4%; and Satrix prices increase by 6%; and The SARS agreed tax rate for this family on interest income, increases to 37% local and 11% foreign source. Using another “Investment Yield Spread Sheet”, populate the relevant asset classes for Year 2, their constituent securities. Then calculate the following for each security utilised (i.e. each line item) for the portfolio in terms of: 1.8.1. The asset details, allocations and Rand return before-tax per line item and the total (12 marks) 1.8.2. The return or yield % per line item (3 marks) 1.8.3. The respective tax rates (2 marks) 1.8.4. Calculate the following using the “Investment Yield Spread Sheet” for Year 2: 1.8.4.1. The after-tax rand return per line item and the total for the portfolio (6 marks) 1.8.4.2. The amount of taxes paid on the portfolio earnings in Rands (4 marks) 1.8.4.3. The pre-tax return on the portfolio as a % (2 marks) 1.8.4.4. The after tax return on the portfolio as a % (2 marks) Recommended Solutions See Investment Yield Spread Sheet for the couple for Year 2 to take effect on 21/22 Sept 2021 to 20 Sept 2022 Total Investment for start Year 2 After costs Year 1 total 15 309 720,86 add After tax earnings Yr 1 660 598,55 less pre tax earnings FX accs capitalised - 45 361,04 15 924 958,37 Amount added to JSE Trustees After tax earnings Yr 1 660 598,55 less pre tax earnings FX accs capitalised - 45 361,04 615 237,50 New balance for FX bank accounts Year 1 balance 2 749 624,50 add Capitalised interest 45 361,04 2 794 985,54 1.8.1. Portfolio for asset allocation on 21/22 Sep 2021 SAIS Stockbroker Exams – IAPM – September 2020 Page 11 of 28  Summary Cash for Portfolio Portfolio after Costs value 2020 15 309 720,86 add After tax earnings Yr 1 660 598,55 less Capitalised value for FX bank acc's -45 361,04 Opening Portfolio value 15 970 319,41 Port Mgt Fee (1,5%) -239 554,79 Disbursements Year 2 -393 450,00 Net amt of portfolio 22Sep2020 15 337 314,62 Add non-capitalised to FX bank accounts portion of after tax income to JSE trustees. FX bank accounts increase as follows: Peters foreign accounts details as at 21 Sept 2021 Barclays Bank : Isle of Man Account Interest rate New Amount denomination Amount 21Sep2020 to be capitalised 21Sept2021 US Dollars ($) $78 339,00 1,75% per annum $79 709,93 UK Pounds (£) £65 652,00 1,55% per annum $66 669,61 Share prices are increased by 4% (i.e. multiply by 1,04) Satrix prices are increased by 6% (i.e. multiply by 1,06) Bond unchanged Tax change = on local income to 37% and on foreign to 11%. Recommended Solutions 1.8.2. to 1.8.4 See Investment Yield Spread Sheet for the couple for Year 2 to take effect on 21/22 Sept 2021 to 20 Sept 2022 1.8.4.2. Pre Tax Return 1 709 083,76 After Tax Return 1 234 064,99 Tax paid 475 018,77 4. 1.8.4.3. Pre-tax Return as % 5,21% Based on the new Net Value of the portfolio 1.8.4.4. After-tax Return as % 3,76% Based on the new Net Value of the portfolio SAIS Stockbroker Exams – IAPM – September 2020 Page 12 of 28  1.8. Spreadsheet for Year 2 Investment Yield Spread Sheet for the couple for Year 2 to take effect on 21/22 Sept 2021 to 20 Sept 2022 Total Investment Amount at start of period = R 15 337 314,62 Asset Net Value Adjusted Return Tax After Tax Security Identity Allocation after adding 21Sep2021- Class Yield pa Return income 20Sep2022 Cash JSE Trustees 10,00% 2 151 316,43 6,00% 129 078,99 37% 81 319,76 Bonds R186 19,17% 6 000 000,00 9,72% 583 200,00 37% 367 416,00 ABG 13,01% 884 751,72 9,54% 84 405,31 20% 67 524,25 AGL 13,01% 884 751,72 4,00% 35 390,07 20% 28 312,06 Equities BID 13,01% 884 751,72 2,31% 20 437,76 20% 16 350,21 RMH 13,01% 884 751,72 2,92% 25 834,75 20% 20 667,80 FX Bank Acc's 8,78% 2 794 985,54 1,65% 46 117,26 11% 41 044,36 Satrix ETF 1 10,00% 1 536 078,92 1,80% 27 649,42 20% 22 119,54 Total 100,00% 16 021 387,79 952 113,57 644 753,98 SAIS Stockbroker Exams – IAPM – September 2020 Page 13 of 28 1.9. Calculate the Opening Portfolio value, portfolio management fee and disbursements for Year 3. (4 marks) Recommended Solutions 1.9. Portfolio for asset allocation on 21/22 Sep 2022 Summary Cash for Portfolio Portfolio value 2021 pre mgt fees and disbursements 16 620 024,51 Port Management Fee (1,5%) -249 300,37 Disbursements Year 3 -422 958,75 Net amt of portfolio 22Sep2022 15 947 765,39 Total Investment for start Year 3 After costs Year 2 total 16 021 387,79 add After tax earnings Yr 2 644 753,98 less pre tax earnings FX accs capitalised - 46 117,26 16 620 024,51 END OF PART A 140 MARKS SAIS Stockbroker Exam – IAPM – September 2020 Page 14 of 28 Part B [80 marks] Question 2 - 4 relate to the information provided below. Mr Stork, a longstanding client, calls you today (21 Sep 2020) and instructs you to buy a R186 bond for an all-in amount of R2 000 000. He instructs you to sell enough of his Impala Platinum Holdings Ltd shares (IMP) to fund the bond purchase. The prices to be used are as per the “Allowed Securities List”. If the IMP sale proceeds do not allow, you must reduce the all-in value purchase amount by increments of R100 000 until it is affordable. This bond pays its coupons on the 1st June and the 1st Dec and the new ownership registration takes T+14. Mr Stork is loaded as a premium client and is charged brokerage of 20 basis points on both equity and bond transactions. His minimum brokerage is R150 per transaction and both STT and VAT still need to be added, in addition to the brokerage. You call up Mr Stork’s account and find he currently holds 20 000 IMP of which 5 000 are out on loan until the end of February 2021 (scrip lending agreement). Question 2 (8 marks) You must determine the all-in value of the R186 you can afford to purchase for Mr Stork from the sale of IMP shares. Calculate the number of IMP shares you must sell to fulfil this client’s instructions. He wants the R186’s bought by the close of business on the 22nd September 2020. Show and label all your workings. Recommended Solutions Q2 # of IMP Price (R) Value 15000 118,52 1 777 800 Incl Brokerage Broke per share 0,23704 VAT on broke 0,035556 STT per share 0,2963 Total costs per share 0,568896 Net gain per share 117,951104 For 15000 shares 1 769 267 This means limit all-in is: 1 700 000,00 No of IMP = 14 412,75 Therefore sell # IMP Round up 14 413 SAIS Stockbroker Exam – IAPM – September 2020 Page 15 of 28 Question 3 (5 marks) You must determine the face value of the R186 you will be able to purchase for Mr Stork given his instructions. Show and label all your workings. Recommended Solutions Q3 From Q2 we know the all-in value of R186 to be bought is R1,7 m From provided handout we know price of R186 is 108 Brokerage per R100 face value is 20bp, or 0,002 0,216 VAT on broke 15% 0,15 0,0324 STT 0,25% 0,0025 0,27 All-inprice per R100 face value of R186 (i.e. incli costs) 108,5184 Face value of what we can buy = R1,7m/108,5184 x R100 1 566 554,61 Cost: 1 700 000,00 Question 4 (3 marks) You must determine the coupon payments value in Rands that Mr Stork will receive in 2020. Recommended Solutions Coupon on R186 = 10,5% pa 164 488,23 2 coupons pa thus ÷ 2 82 244,12 Therefore Mr Stork will get 31 Dec 2020 coupon in 2020 82 244,12 SAIS Stockbroker Exam – IAPM – September 2020 Page 16 of 28 Question 5 (8 marks) Mr Dithers, a client of your firm, requests advice. He would like to buy shares, but subject to a target price that is based on the expected market return. He has a research report issued by your firm where your economist has proposed a scenario based probability and respective return possibility matrix for the market as follows: A 21% probability of the economy stagnating, where the expected rate of return for the market will be 6%; A 15% probability of the economy showing strong growth, where the expected rate of return for the market will be 20%; The expected rate of return for the market will be 15% if the economy shows moderate growth, for which the probability is 35%; and The remaining probability of the economy contracting, where the expected rate of return for the market will be 2.9%. Using this information, you are required to calculate the expected rate of return for the market. Recommended Solutions Remaining prob: = 100% - 21% - 15% - 35% 29,00% Expected Rate of return Prob R of R 21% 6,00% 1,26% 15% 20% 3,00% 35% 15% 5,25% 29% 2,90% 0,84% 100% 10,35% OR Expected rate of return for the market is: First, calculate the probability of the economy entering a contraction phase Total prob = 100%, therefore remaining = 100% - 21% - 15% - 35% = 29% Expected Rate of Return is the rate of return expected to be received from holding an asset or portfolio of assets over a period, and is generally expressed as a percentage. Expected Return = (0.21 × 6%) + (0.15 × 20%) + (0.35 × 15%) + (0.29 x 2,9%) = 1,26% + 3.00% + 5.25% + 0.84% = 10.35% is the expected market return. SAIS Stockbroker Exam – IAPM – September 2020 Page 17 of 28 Question 6 (20 marks) Your client has a portfolio that consists of 10 000 shares in AngloGold Ltd. at a price of R462.94 per share. Your client has invested in OTC Puts and Calls written by a respected Bank as follows: 5 000 × Calls strike 480.00 expiring 31 June 2021, at a price of R60 per ANG share; and 5 000 × Puts strike 440.00 expiring 31 June 2021, at a price of R50 per ANG share. Your firm’s calculations show a hedge ratio (i.e. delta) of 0.70 for the Puts and 0.80 for the calls, in terms of the underlying share. Required (Note – show and label detailed workings): 6.1. Assume the share price declines by R50 (i.e. decline in each AngloGold share by R50 per share), what is the value change to each put and call option? (6 marks) Recommended Solutions If the share price declines by R50 (i.e. decline in each AngloGold share by R50 per share), what is the value change to each Put option (4 marks) Note the hedge ratio (refers to the delta) of an option, and means the price/value of an option with a delta of 0.70 as provided, will be R0.70 for every R1.00 move in the underlying (i.e. in AngloGold Ltd shares in this case). Portfolio managers use the hedge ratio in order to buy (or sell) the correct number of options to effectively hedge the relevant share position, and a bought put option (right to sell) hedges a long position in the underlying. As share price declines by R50 per share, each put option for 1 share will increase by the hedge ratio x share price decline. Put Option value change, and as share price declines bought Put value increases = 0.7 x R50 + its starting value = R35 + R50.00 Puts = R85 …… 3 marks If the share price declines by R50 (i.e. decline in each AngloGold share by R50 per share), what is the value change to each Call option (4 marks) As share price declines by R50 per share, each call option for 1 share will decrease by the hedge ratio x share price decline. Call Option value change, and as share price declines bought Call value decreases = - 0.8 x R50 + its starting value = -R40 + R60.00 Calls = R20 …… 3 marks SAIS Stockbroker Exam – IAPM – September 2020 Page 18 of 28 6.2.Given the scenario in 6.1, calculate the portfolio Rand change in value (i.e. overall portfolio value change), where the options are not exercised but revalued and their value change must be taken into account. (4 marks) Recommended Solutions Pre price fall Security # R price Value Shares: 10000 462,94 4 629 400 Calls 5000 60 300 000 Puts 5000 50 250 000 5 179 400 Post Fall of R50 in share price Security # R price Value Shares: 10000 412,94 4 129 400 Calls 5000 20 100 000 Puts 5000 85 425 000 4 614 400 Drop in Value of Portfolio: 525 000 6.3.You are faced with a different scenario (below) and you are required to: 6.3.1. Determine the portfolio Rand change in value in response to the new scenario where: a. There is a R150 decline in the share price; and b. The puts are exercised and a relevant number of shares sold using the Puts (6 marks) 6.3.2. Advise whether this strategy was the correct one or not. Explain why? (4 marks) Recommended Solutions Pre price fall Security # R price Value Shares: 10000 462.94 4 629 400 Calls 5000 60 300 000 Puts 5000 50 250 000 5 179 400 Post Fall of R150 and OX Puts Security # R price Value Shares: 5000 312.94 1 564 700 Calls 5000 0 - Puts OX 5000 127,06 635 300 2 200 000 Drop in Value of Portfolio: (R5 179 400 – R2 200 000) = 2 979 400 6 marks SAIS Stockbroker Exam – IAPM – September 2020 Page 19 of 28  Wrong strategy …… 1 mark If held Puts, or sold puts at their higher value, would lose less Note: Calls were bought so cannot become negative value, therefore valued at See below: Would only loose R1 275 000 versus the decline of R2 979 400 with the provided strategy... 3 marks Post Fall of R150 and held Puts Security # R price Value Shares: 10000 312.94 3 129 400 Calls 5000 0 - Puts value 5000 155 775 000 3 904 400 Drop in Value of Portfolio: (R5 179 400 – R3 904 400) = 1 275 000 Question 7 to 13 are related to the information below. You are provided with the following information for ABSA Group Ltd (ABG) and Standard Bank Ltd (SBK) as at 21 Sept 2020. ABG and SBK’s share prices and number of shares in issue are as per the Allowed Securities List as at 21 Sept 2020. Suppose that on 31 August 2021 ABG’s shares had increased in price to R110 while SBK’s shares had decreased in price to R95. Question 7 (3 marks) Calculate the market capitalization for ABG and SBK respectively on 21 Sept 2020. Recommended Solutions Market Cap = shares in issue × Price Their respective market capitalization values are on 21Sep2020: ABG = R 76 984 239 160 SBK = R 167 970 470 880 See calc below On 21 Sep 2020 Code # shares Price (R) Market Cap (R) ABG 840 439 292 91,60 76 984 239 160 SBK 1 619 929 317 103,69 167 970 470 880 SAIS Stockbroker Exam – IAPM – September 2020 Page 20 of 28 Question 8 (4 marks) Calculate the value of a portfolio that holds 100 000 shares in each company as at 21 Sept 2020. Recommended Solutions The value of a portfolio that holds 100 000 shares in each of these two companies as at 21 Sept 2020 is: R 19 529 000 See calc below Value of a portfolio that holds 100 000 shares in each company as at 21 Sept 2020 Portfolio of 100 000 of each on 21 Sep 2020 Code # shares Price (R) Value of each share type ABG 100 000 91,60 9 160 000 SBK 100 000 103,69 10 369 000 Portfolio Value 19 529 000 5. Question 9 (3 marks) Calculate the market capitalization for ABSA and Standard Holdings Ltd respectively on 31 August 2021. Recommended Solutions Market Cap = shares in issue × Price On 31 Aug 2021, ABG price is R110, and SBK price is R95. Their respective market capitalization values are on 31Aug2021: ABG = R 92 448 322 135 SBK = R 153 893 285 115 See calc below On 31 August 2021 Code # shares Price (R) Market Cap (R) ABG 840 439 292 110,00 92 448 322 135 SBK 1 619 929 317 95 153 893 285 115 6. Question 10 (4 marks) Calculate the value of a portfolio that holds 100 000 shares in each company as at 31 Aug 2021. Recommended Solutions The portfolio of 100 000 each of ABG and SBK on 31 Aug 2021 is: R20 500 000 See calc below Value of a portfolio that holds 100 000 shares in each company as at 31Aug2021 Portfolio of 100 000 of each on 21 Sep 2020 Code # shares Price (R) Value of each share type ABG 100 000 110,00 11 000 000 SBK 100 000 95,00 9 500 000 Portfolio Value 20 500 000 SAIS Stockbroker Exam – IAPM – September 2020 Page 21 of 28 Question 11 (4 marks) Calculate the percentage change in the price weighted average index of the two equities from 21 Sept 2020 to 31 August 2021. Recommended Solutions The price weighted average index of the two equities increased from 21Sept2020 to 31Aug2021 by 4,97% See calc below Percentage change in the price weighted average index of the two equities from 21 Sept 2020 to 31 August 2021. Code Price (R) 21 Sep 2020 Price (R) 31 Aug 2021 ABG 91,60 110,00 SBK 103,69 95,00 Sum 195,29 205,00 ÷ 2 97,65 102,50 Thus price weighted average index is: 21-Sep-20 97,65 31-Aug-21 102,50 Increase % 4,97% Check: 21Sep2020 + 4.97% 102,50 Question 12 (3 marks) Calculate the percentage increase/decrease in the portfolio values calculated in Questions 8 and 10 above. Recommended Solutions The percentage increase in the portfolio values calculated in Questions 9 and 11 above is: 4,97% See calc below Calculate the percentage increase/decrease in the portfolio values calculated in Questions 9 and 11 above. Question No Date Portfolio Value (R) 9 21-Sep-20 19 529 000 11 31-Aug-21 20 500 000 Percentage INCREASE = 4,97% SAIS Stockbroker Exam – IAPM – September 2020 Page 22 of 28 Question 13 (3 marks) Discuss the answers to Question numbers 11 and 12. Recommended Solutions The portfolio return is equal to the price-weighted index increase. The reason is that we have used the same number of shares in each counter, meaning the relationship of the change remains constant for the portfolios, and the index also uses the same number of shares in each counter, that being 1. Question 14 to 15 relate to the scenario provided below. Mrs Spendthrift, a private client of your firm has asked you to provide insight into her interest in Aspen Pharmacare Ltd (APN). Mrs Spendthrift has read your company’s research report on APN, wherein your analyst projects APN’s dividend growth to be 3.5% per annum for the next few years. APN’s current dividend is as per the Allowed Securities List provided and is payable on 31 Dec 2020. Mrs Spendthrift has stated she would like to earn a 12% p.a. rate of return on her investment. Note: Show detailed workings and label them in your answers to these questions. Question 14 (5 Marks) Mrs Spendthrift would like you to calculate the intrinsic value of APN’s share price using the information provided. Recommended Solutions Using dividend growth model, and the information provided for Mrs Spendthrift, the intrinsic value of APN is R per share The intrinsic value of APN shares is R36.69 or 3669 cents per share. See calc below 𝐷1 𝑃0 = 𝑘− 𝑔 First calc dividend Share price per list × list div yield APN,s dividend is: Share price per list (R) 148,49 Dividend Yield (%) 2,10% Dividend (R) 3,12 𝑅3,12 𝑅3,12 = 0.12 − 0.035 …… 0,12 – 0,035 = 0.085 = R36.69 or 3669 cps k = expected rate of return 12% g = growth rate 3,50% k-g = 8,50% Therefore P0 = 36,69 SAIS Stockbroker Exam – IAPM – September 2020 Page 23 of 28 Question 15 (2 Marks) Using the dividend discount model, what would APN’s expected intrinsic value be in one year? Recommended Solutions ….. R37,97 𝑃1 = 𝑃0 (1 + 𝑔) = R36,69 (1 + 0.035) = R36,69 × 1.035 = R37.97 The expected intrinsic value of APN in one year is R37.97 or 3792 cents per share. Question 16 (5 Marks) Assume Mr Bilbo Baggins has bought 1 000 AGL’s (Anglo American shares) on 21st Sept 2020 at the current price provided in the Allowed Securities List and then sold them on the 21st February 2021 after receiving the dividend. The dividend is paid in January 2021, based on the Allowed Securities List information. The share price increased by 10% between him buying and selling. The relevant trading costs for Mr Bilbo Baggins are made up as follows: Brokerage is 2.5%; STT; and VAT. You are required to: Provide a detailed account of the whole transaction, from the purchase to the sale. Recommended Solutions Mr Bilbo Baggins Date Detail Qty Price Amount 21-Sep-20 Buy AGL 1 000 392,12 - 392 120,00 Brokerage 2,50% - 9 803,00 VAT 15,00% on broke - 1 470,45 STT 0,25% - 980,30 Sub-Total - 404 373,75 Jan-21 Earn Divs 4% 15 684,80 Sub-Total - 388 688,95 21-Feb-21 Sell AGL - 1 000 - 431,33 431 332,00 Brokerage 2,50% - 10 783,30 VAT 15,00% on broke 1 617,50 Net Profit 33 477,25 Dividend must be taxed at 20%. END OF PART B 80 MARKS END OF EXAM 220 MARKS SAIS Stockbroker Exam – IAPM – September 2020 Page 24 of 28 ANSWER SHEET Investment Yield Spreadsheet Question: ___________________ Student Number: ____________________ Total Investable Amount for Year 1 for period ___________ to ___________ = R________________________ Funds available for Portfolio: R __________________ Distributions: R_________________ Port Mgt Fees: R__________________ Asset Security Allocation Value before Costs Value after Yield Return Tax After Tax Return Class Identity % costs costs p.a. % Cash JSE Trustees Bonds Equities FX Bank Ac’s Funds (ETF) Total SAIS Stockbroker Exam – IAPM – September 2020 Page 25 of 28 ANSWER SHEET Investment Yield Spreadsheet Question: ___________________ Student Number: ____________________ Total Investable Amount for Year 2 for period ___________ to ___________ = R________________________ Funds available for Portfolio: R __________________ Distributions: R_________________ Port Management Fees: R_________________ Asset Security Identity Allocation Net Value Yield Return Tax After Tax Return Class % Year 2 pa Status / Rate Cash JSE Trustees % Income (______%) Bonds Income (______%) Equities Foreign Income (_____%) Bank Acc’s Funds (ETF) Total 100.00% SAIS Stockbroker Exam – IAPM – September 2020 Page 26 of 28 EXAM HANDOUT Tax Rates Dividend withholding tax 20% Securities Transfer Tax (STT) 0.25% (not included in any of the brokerage figures quoted) VAT 15% (not included in any of the brokerage figures quoted) SARS directive applicable to couple: Interest earned locally 30% Interest earned on foreign accounts (IOM) 10% Allowed Securities List Money Market (JSE Trustees) 5.5% p.a. EQUITIES Price Shares PE DY Anglo American AGL 392,12 1 363 118 080 11 4,00% Anglogold Ashanti ANG 462,94 416 505 973 9 3,50% Aspen Pharmacare APN 148,49 456 451 541 11,63 2,10% ABSA Group ABG 91,6 840 439 292 5,39 9,54% Bidcorp BID 285,6 335 404 212 21,32 2,31% Discovery DSY 107,91 658 290 736 14,73 1,55% Impala Plats IMP 118,52 770 314 222 21,51 0,85% RMB Hldg RMH 51,31 1 411 428 086 8,03 2,92% Standard Bank Group SBK 103,69 1 619 929 317 6,06 7,43% Allowed EXCHANGE TRADED FUNDS (ETF’s) Fund Sector Price Dividend Yield ETF 1 ALSI 40 R17.00 1.8% ETF 2 Emerging Markets R19.00 1.1% ETF 3 International Shares R24.50 1.5% Allowed BONDS RSA Bond Code Maturity Coupon Price R182 2021/12/31 12,00% 112 R186 2026/12/31 10,50% 108 Assume no accrued interest, all pay semi-annual coupons on the 1st June and the 1st December respectively. SAIS Stockbroker Exam – IAPM – September 2020 Page 27 of 28 Formula Sheet 𝐶𝑛 𝐶𝐹𝑡 𝐶𝐹𝑡 𝑁𝑃𝑉 = ∑𝑇𝑡=1 IRR: 0 = ∑𝑇𝑡=1 𝑃𝑉 = ∑ (1+𝑟)𝑡 (1+𝐼𝑅𝑅)𝑡 𝑛 (1 + 𝑟)𝑛 𝑁 ∞ 𝐷0 (1+𝑔)𝑡 𝐸[𝑅] = ∑(𝑃𝑖 × 𝑅𝑖 ) 𝑃0 = ∑ 𝑃 (1 + 𝑟)𝑡 PE = 𝐸𝑃𝑆 𝑖=1 𝑡=1 𝐷1 𝑃0 = and 𝑃1 = 𝑃0 (1 + 𝑔) 𝑘− 𝑔 CAPM ER = 𝑟𝑓 + 𝛽 (𝑟𝑚 − 𝑟𝑓 ) 𝑤ℎ𝑒𝑟𝑒 𝑟𝑖𝑠𝑘 𝑝𝑟𝑒𝑚𝑖𝑢𝑚 = (𝑟𝑚 − 𝑟𝑓 ) 𝐸 𝐷 WACC = [(𝑉) × 𝑅𝑒 ] + [((𝑉 ) × 𝑅𝑑 ) × (1 − 𝑇)] WC = CA - CL 𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑊𝐶 = 𝑊𝐶 𝐴𝑏𝑠𝑜𝑙𝑢𝑡𝑒 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝐿𝑎𝑠𝑡 𝑦𝑒𝑎𝑟 𝑤𝑖𝑡ℎ 𝑁𝐶𝐹 𝑖𝑛 𝑙𝑎𝑠𝑡 𝑦𝑒𝑎𝑟 𝑤𝑖𝑡ℎ − 𝑣𝑒 𝑁𝐶𝐹 𝑃𝑎𝑦𝑏𝑎𝑐𝑘 𝑝𝑒𝑟𝑖𝑜𝑑 = [ ]+ [ ] 𝑎 𝑛𝑒𝑔𝑎𝑡𝑖𝑣𝑒 𝑁𝐶𝐹 𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤 𝑖𝑛 𝑡ℎ𝑒 𝑓𝑜𝑙𝑙𝑜𝑤𝑖𝑛𝑔 𝑦𝑒𝑎𝑟 1 𝐷 𝐷2 𝐷𝑛 + 𝑅𝑉 1 + Redeemable Pref Share: PSR = (1+𝑟) (1+𝑟)2 + ⋯+ (1+𝑟)𝑛 𝑁 1 σ = √ ∑(𝑥𝑖 − 𝜇)2 𝑁 𝑖=1 𝑇 𝐶 𝐹 𝐵𝑜𝑛𝑑: 𝑃 = ∑ 𝑡 + (1 + 𝑦) (1 + 𝑟𝑛 )𝑛 𝑡=1 SAIS Stockbroker Exam – IAPM – September 2020 Page 28 of 28