Accounting & Finance Study Material

This document provides study material for Accounting & Finance. It includes solved assignments, essays, and dissertations on various topics. The document also discusses the Australian taxation system and the difference between imputation credit based taxation and classical taxation systems. It also includes Excel spreadsheet outputs for cash flows and investment portfolios. Additionally, it covers the calculation of holding period returns, standard deviation, and the Capital Asset Pricing Model (CAPM).

ACCOUNTING & FINANCE
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Question 1
(a) Cost of house = $500,000
ANX bank offers loan for a period = 30 years
First payment option to pay weekly @ Interest rate = 4.55% p.a.
Second payment option to pay fortnightly @ Interest rate = 4.75% p.a.
(i) Jayne Saxby should choose the payment option that would have lower effective
interest rate.
Here,
EAR (option 1) << EAR (option 2)
Appropriate payment option = Option 1
Jayne Saxby should choose the payment option which includes interest rate 4.55% p.a.
(ii) Jayne wants to pay = $1000 per week
The time period that would take her to pay-off the loan amount =?
The time period that would take her to pay-off the loan amount will be of 657.85 weeks.
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(b)
(i) Jennifer contributes = 30% to the saving
Her husband contributes = 70% to the savings
Future value of the annuity = $200,000
Jennifer’s monthly payment (A) =?
Jennifer contributes = 30% to the saving
Hence,
Jennifer’s monthly payment (A) = 734.11*0.30 = $220.23
(ii) Deposit rate =4% (for 10 years)
Her husband has withdrawn = $100,000
Her son would allow to withdraw = $1000 (At the starting of each month for 3 years after he
turns 18 years old)
Value of the gifts =?
Amount kept to Jennifer = (200000) - {(100000+33985.60)}
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Amount that is kept with Jennifer =$66,014.39 (on 18th birthday)
Amount that remains with Jennifer (10 years later after her18th birthday)
=66014.39*(1.04)^(10) = $97,717.4
(iii) Cost of the new house = $800,000
Loan period = 30 years
Nominal rate of interest = 4.5%
Monthly repayment amount =?
Amount remains to Jennifer =$97,717.4
Hence,
Loan required = Cost of the new house- Amount remains to Jennifer =800000 -97717.4
=$702,282.6
Monthly repayment amount will be $3558.27.
Question 2
Excel spreadsheet output (normal view and formula view)
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(1) Timeline to represent the cash flows of the ordinary shares
0 1 2 3 4
-15.00
-10.00
-5.00
0.00
5.00
10.00
15.00
20.00
-12.12
1.42 1.67
16.90
Timeline
(2) Market value of Kai’s investment portfolio
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Question 3
The Australian taxation system allows for imputation credit and is thus different from other
western nations which have the classical taxation system. The central tenet of the imputation
credit based taxation system is that a particular income is taxed only once even if the same is
passed on to a different entity. In regards to classical taxation systems, this is not the case as
corporate tax is applied on the corporate profits and personal income tax is applied on the
dividend income that shareholders obtain. This tends to enhance the taxation burden as the
same stream of income is charged for the company and also the shareholders leading to
higher effective tax rate (Brealey, Myers & Allen, 2014). In contrast to this system,
imputation credit based system ensures minimum tax burden on the shareholders when
dividends are paid as tax at 30% is already paid by the company. Only under the scenario
when the marginal tax rate applicable for the shareholder tends to exceed 30% would
additional tax be paid by the shareholder and it would be only to the extent that the marginal
tax rate exceeds 30%. The effect of this practice is that the overall tax rate tends to be lower
(Petty et. al., 2015).
The above practice can be highlighted through the aid of a numerical instance. Consider a
scenario where a company makes $ 1 million as the profit before tax in Australia. The
corporate tax is levied at 30% and hence $ 0.3 million would be paid as taxes and the
remaining money is the profit after tax. Assume a situation where 100% of the profits are
distributed amongst the shareholders as dividends. For simplicity, assume that the marginal
tax rate for the recipients is 30%.
Imputation credit available for the shareholders = (0.7/(1-0.3)) – 0.7 = $ 0.3 million
The above imputation credit would be added back into the quantum of dividends to determine
the total amount of taxable income from dividends which would amount to $ 1 million. Since
the personal income tax is levied at 30%, hence the tax obligation on the shareholders would
be 30% of $1million or $ 0.3 million. This amount of imputation credit is already available
and hence the shareholders do not pay any tax on the dividends received. Therefore, the
effective tax rate under this system remains only 30%.
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Now consider the same scenario in a country which adopts the classical tax system. In order
to facilitate comparison of the two systems, the underlying corporate tax rates and marginal
tax rate for shareholders has been assumed to be same. The post-tax profit for the company
would be $ 0.7 million. This is paid as dividend to shareholders who would have to bear 30%
tax burden and would have to pay 30% *0.7 = $ 0.21 million as personal income tax. Thus,
the total tax liability on $ 1 million profit amounts to $ 0.51 million. This implies a
significantly high tax rate of 51% in comparison to 30% for Australia.
In the recent times, various businesses have been making case for a lower corporate tax in
Australia driven by the instances of corporate tax rate cut which has been witnessed recently
in various developed nations. It has been claimed that lower tax rate would attract foreign
businesses and attract foreign capital into country (Taylor, 2018). But the key parameter
which is often overlooked is the difference in tax systems between Australia and other
developed nations. The effective tax rate in Australia despite a higher corporate tax rate is not
significantly higher than other developed countries (Montgomery, 2018). Also, the impact of
the corporate tax rate cut also needs to be analysed. With regards to domestic businesses, it
would only result in shifting of tax burden to shareholders which is not in the best interest of
the domestic firms. The foreign firms tend to repatriate capital to their parent company
abroad and hence they would be the real beneficiaries of corporate tax cut but many experts
feel that the current tax regime in Australia is competitive even without any cut (Smith,
2015).
Question 4
(1) Monthly holding period returns for the financial year 2017/18
Stocks: Westpac (WBC), Commonwealth (CBA)
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Market index: All Ordinaries Index (MKT)
Line Plot
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(2) The average monthly holding period return for the three investment options is shown
below.
Average monthly holding period return
WBC CBA All Ordinaries Index
(3) Annual holding period return for the three investment options is shown below.
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WBC CBA All Ordinaries Index
¿( 29.30+1.88−31.82
31.82 )∗100
¿−2.01 %
¿( 74.79+ 4.3−83.73
83.73 )∗100
¿−5.54 %
¿( 6366.2−5773.9
5773.9 )∗100
¿ 10.26 %
(4) Standard deviation for the monthly rates of the return for the three investment options is
shown below.
Standard deviation= ∑ ( HPR−Mean ) 2
Number of data points =(1.82/12)% = 3.90% per year
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Standard deviation= ∑ ( HPR−Mean )2
Number of data points = (1.77
12 )%=3.84 % per year
Standard deviation= ∑ ( HPR−Mean ) 2
Number of data points = ( 0.52
12 ) %=2.07 % per year
(5) Scatter plot (x axis- Risk, y axis- Returns)
(6) Capital Asset Pricing Model (CAPM)
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Beta for WBC= 1.26
Beta for CBA = 1.23
Bond rate = 2.78%
Long term return on market as proxied by ASX = 5.85%
Return (WBC) = [1.26*{(5.85%) – (2.78%)}] +2.78% = 6.65%
Return (CBA)= [1.23*{(5.85%) – (2.78%)}] +2.78% = 6.56%
(7) Security Market Line (SML) (x axis- Systematic Risk, y axis- Expected Return)
(8) Portfolio
Portion of WBC in portfolio = 40%
Portion of CBA in portfolio = 60%
Estimated return of the portfolio = -0.60*0.4 + (-0.39*0.60) = -0.47% per month
Estimated beta value of the portfolio = 1.26*0.4 + 1.23*0.60 = 1.242
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(9) The preferred investment would be one which tends to provide maximum returns but does
so at the lowest risk as measured by the standard deviation. Amongst the two stocks, portfolio
and index, the lowest standard deviation or risk would be observed for the index. Also,
amongst the choices available, it also offers the highest return. Hence, neither of the stocks or
their underlying portfolio would be chosen. Instead, the index i.e. S&P/ASX 200 would be
the preferred investment (Petty et. al., 2015).
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References
Brealey, R. A., Myers, S. C. & Allen, F. (2014) Principles of corporate finance, 6th ed. New
York: McGraw-Hill Publications
Montgomery, R. (2018, February, 19).Should Australia cut the corporate tax rate ? Retrieved
from https://rogermontgomery.com/should-australia-cut-the-corporate-tax-rate/
Petty, J.W., Titman, S., Keown, A., Martin, J.D., Martin, P., Burrow, M. & Nguyen, H. (2015).
Financial Management, Principles and Applications, 6th ed.. NSW: Pearson Education,
French Forest Australia
Smith , W. (2015, February 10). FactCheck: is Australia’s corporate tax rate not competitive
with the rest of the region. Retrieved from https://theconversation.com/factcheck-is-
australias-corporate-tax-rate-not-competitive-with-the-rest-of-the-region-37226
Taylor, D. (2018, March 29). Corporate tax cuts: What are the key issues in the
debate? Retrieved from http://www.abc.net.au/news/2018-03-29/corporate-tax-cuts-
explained/9600004
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