You recently graduated from Kwantlen Polytechnic University, and your job search led you to Mac n' Cheeze Inc., a new producer of healthy macaroni and cheese products. Because you felt the company's business was taking off, you accepted a job offer. The first day on the job, while you are finishing your employment paperwork, Dilbert Doodles, who works in the company's Finance Department, stops by to inform you about the company's defined contribution (DC) pension plan.

A DC pension plan is a retirement plan offered by many companies. Such plans are tax-deferred savings vehicles, meaning that any deposits you make into the plan are deducted from your current pre-tax income, so no current taxes are paid on the money. For example, assume your salary will be $100,000 per year. If you contribute $6,000 to the DC pension plan, you will pay taxes on only $94,000 in income. There are also no taxes paid on any capital gains or income while you are invested in the plan, but you do pay taxes when you withdraw money at retirement. The company also has a 5% match. This means that the company will match your contribution up to 5% of your salary, but you must contribute to get the match. The DC pension plan has several options for investments, most of which are mutual funds. A mutual fund is a portfolio of assets. When you purchase shares in a mutual fund, you are purchasing partial ownership of the fund's assets. The return of the fund is the weighted average of the 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 management fee is compensation for the manager, who makes all investment decisions for the fund. Mac n' Cheeze Inc. uses TD Canada Trust as its DC pension plan administrator. You have been offered the following investment options (see also Exhibit A): Company Stock One option in the DC pension plan is stock In Hillsdale Inc. The company is currently privately held. However, when you interviewed with the owners, Allen Mac and Karen Cheeze, they informed you the company stock was expected to go public in the next three to four years. Until then, a company stock price is simply set each year by the board of directors. TD Canadian Index Fund This mutual fund tracks the S&P/TSX Composite. Stocks in the fund are weighted exactly the same as the S&P/TSX Composite. This means the fund return is approximately the Page 2 of 3 return on the S&P/TSX Composite, minus expenses. Because an index fund purchases assets based on the composition of the index it Is 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 TD Canadian Index Fund charges expenses of 0,88% of assets per year. TD Canadian Small-Cap Equity Fund This fund primarily Invests In small-capitalization stocks. As such, the returns of the fund are more volatile. The fund can also invest 10% of its assets in companies based outside Canada. This fund charges 2.53% in expenses. TD Canadian Blue Chip Equity Fund This fund invests primarily in large-capitalization stocks of J companies based In Canada. The fund Is managed by Rich Richie and has outperformed the market in six of the last eight years. The fund charges 2.34% in expenses. TD Canadian Bond Fund This fund invests in long-term corporate bonds Issued by Canada-domiciled companies. The fund is restricted to investments in bonds with an investment-grade credit rating. This fund charges 1.11% in expenses. TD Canadian Money Market Fund This fund invests in short-term, high-credit quality debt instruments, which Include Treasury bills. As such, the return on the money 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 negative return. The fund charges 0.77% in expenses. You take the information home with you to evaluate your options. From your Corporate Finance courses are KPU, you know that there are questions that need to be addressed to make an appropriate decision: 1. You need to give your answer to Dilbert Doodles by the end of the week. What portfolio allocation would you choose? Why? 2. If you invest 5% of your salary and receive the full 5% match from Mac n' Cheeze Inc., what EAR do you earn from the match? What conclusions do you draw about matching plans? 3. The returns on the TD Canadian Small Cap Equity Fund are the most volatile of all the mutual funds offered In the DC pension plan. Why would you want to invest in this fund? When you examine the expenses of the mutual funds, you notice that this fund also has the highest expenses. Is your decision to invest in this fund affected? Page 3 of 3 4. If you decide you should invest at least part of your money in large capitalization stocks of companies based In Canada, what are the advantages and disadvantages of choosing the TD Canadian Blue Chip Equity Fund compared to the TD Canadian Index Fund? 5. What advantages do the mutual funds offer compared to the company stock?

Exhibit A 10-Year Fund: Annual Return (%) Standard Deviation (%) TD Canadian Index Fund 11.48 15.82 TD Canadian Small-Cap Equity Fund 16.68 19.64 TD Canadian Blue Chip Equity Fund 11.85 15.41 TD Canadian Bond Fund 9.67 10.83