Ottawa University 401K Account at East Coast Yachts Managerial Finance Case Study

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ofhaxnen

Business Finance

Ottawa University

Description

Please review the Mini case named "Your 401(k) Account at East coast Yachts" available in pg.no 466 at the end of the Chapter 14: Efficient Capital Markets and Behavioral Challenges in Corporate Finance textbook and complete the 3 questions.

In your 2-3 page analysis, be sure to thoroughly answer the questions presented with a strong supporting rationale. Be sure to compose your analysis in APA format with a title page, introduction, and conclusion.

If applicable, include:

  • references cited in text and in the reference section
  • appropriate calculations and critical thought
  • the financial statement of cash flows and the accounting statement of cash flows
  • any additional documentation or information to support your analysis

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Mini Case Page 466 Your 401(k) Account at East Coast Yachts You have been at your job with East Coast Yachts for a week now and have decided you need to sign up for the company's 401(k) plan. Even after your discussion with Sarah Brown, the Bledsoe Financial Services representative, you are still unsure which investment option you should choose. Recall that the options available to you are stock in East Coast Yachts, the Bledsoe S&P 500 Index Fund, the Bledsoe Small-Cap Fund, the Bledsoe Largo-Company Stock Fund, the Bledsoe Bond Fund, and the Bledsoe Money Market Fund. You have decided that you should invest in a diversified portfolio, with 70 percent of your investment in equities, 25 percent in bonds, and 5 percent in the money market fund. You also have decided to focus your equity investment on largecap stocks, but you are debating whether to select the S&P 500 Index Fund or the Large-Company Stock Fund. In thinking it over, you understand the basic difference in the two funds. One is a purely passive fund that replicates a widely followed large-cap index, the S&P 500, and has low fees. The other is actively managed with the intention that the skill of the portfolio manager will result in improved performance relative to an index. Fees are higher in the latter fund. You're not certain which way to go. So you ask Dan Ervin, who works in the company's finance area, for advice. After discussing your concerns. Dan gives you some information comparing the performance of equity mutual funds and the Vanguard 500 Index Fund. The Vanguard 500 is the world's largest equity index mutual fund. It replicates the S&P 500 and its return is only negligibly different from the S&P 500. Fees are very low. As a result, the Vanguard 500 is essentially identical to the Bledsoe S&P 500 Index Fund offered in the 401(k) plan, but it has been in existence for much longer, so you can study its track record for over two decades. The nearby graph summarizes Dan's comments by showing the percentage of equity mutual funds that outperformed the Vanguard 500 Fund over 10-year periods. For the 20 Page 457 investment periods shown (1986-1995 through 2005-2014), in only 7 of these periods did more than 50 percent of mutual fund managers beat the Vanguard 500 Index Fund. Dan suggests that you study the graph and answer the following questions: 1. What implications do you draw from the graph for mutual fund investors? 2. Is the graph consistent or inconsistent with market ciciency? Explain carefully. 3. What investment decision would you make for the equity portion of your 401(k) account? Why? 90% 80% 70% 60% 50% Percent 40% 30% 20% 10% 0% 8666 2000 2004 9002 2008 2010 2012 2014 1996 2002 Year Source: Jordan, Bradford, Thomas Miller, and Steven Delvin, Fundamentals of Imh, Sth cd. New York, NY: McGraw-Hill, 2017.
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Explanation & Answer

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Outline
Task: Business
Question 1
Discusses implications from the graph on mutual investors
Question 2
Entails discussions on the graph inconsistent nature with market efficiency
Question 3
Discusses the investment decision to be taken
References
Szyszka, A. (2013). Behavioral finance and capital markets: How psychology influences
investors and corporations. Springer.


Running Head: BUSINESS

1

Discussions
Student's Name
University Affiliation
Course
Date

BUSINESS

2
Discussions
Question 1

From the graph, we observe that mutual fund investors are high performers, but the index
performance is inconsistent for a significant period. Consequently, in the first investment period,
mutual fund investors experienced a consistent decrease in performance percentages. The graph
explains the decline in performance percentages from the 1996-1998 investment periods. In
contrast, the lowest percentage performance is at fifteen percent in the 1998 investment period.
There is a significant in...


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