Assignment 1: Lupuls Leverage?

Instructions:

1. Read the scenario.
2. Given the above scenario, and assuming a marginal tax rate of 30%, assess and analyze Lupuls investment idea. Justify your answer with both qualitative and quantitative reasoning.
   • Should Joffrey make this investment?
   • Should he include leverage in his investment mix?
3. Submit your work to your instructor through Brightspace.

Scenario:

Joffrey Lupul, a soon to be retired player with the Toronto Maple Leafs hockey team, is a long-standing client of yours. His net worth is well over of $10,000,000, and he is an avid player in the stock market and other high-risk investments. However, with his looming retirement, he has decided to move some of his wealth into low-moderate risk investments.

Joffrey feels he has done his homework and found a nice low-moderate investment: the RBC Monthly Income Fund. The fund has paid an annual distribution of .51 annually or (.0425 per month) over the past year. Joffrey believes that the funds price will not fluctuate more than plus or minus 20% over the next year (compared to its current price of $14.17 per share).

He is considering investing $300,000 of his own money into the fund. In addition, he is also considering borrowing additional funds from your firm to invest. He thinks that this fund is going to be a winner over the next 12 months. Your firms call money rate is currently 6.50% annually. The maximum margin rate on this investment is 30%.

Marking Guide

Criteria	For full marks	Marks
Qualitative analysis	Detailed and clearly stated analysis of the situation. Justification is logical given the data provided.	10
Quantitative analysis	Correct formulas are used. Calculations are accurate.	10
Format	Clear structure with headers, consistent font, double spaced, few to no grammatical errors.	5
Total		25