Financial Analysis: Accounting and Finance Homework

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Accounting and Finance

Table of Contents
Question 1..................................................................................................................................................3
(A)...........................................................................................................................................................3
(B)...........................................................................................................................................................3
(C)...........................................................................................................................................................5
Question 2..................................................................................................................................................6
(A)...........................................................................................................................................................6
(B)...........................................................................................................................................................7
Question 3..................................................................................................................................................9
(A)...........................................................................................................................................................9
(B)...........................................................................................................................................................9
(C).........................................................................................................................................................10
(D).........................................................................................................................................................11
References................................................................................................................................................20

Question 1
(A)
Total Amount $60,000
Rate of Interest 4%
Time 5 years
In the following question,
A Total Amount
P
Principal or amount of money
deposited
r Annual Interest Rate
n number of times compounded per year
t time in years
Formula = A= P(1+r/n)^n*t
60000 = P(1+ 0.04/12)^12*5
60000 = P(1+ 0.0033)^60
60000 = P(1.0033^60)
60000 = P*60.198
P = 60000/60.198
P = 996.710
Answer: An amount of $ 996.710 or approx. $ 997 is required to be deposited monthly, so that
the total fees of $ 60,000 will be accumulated in the span of 5 years.
(B)
(i)
Initial Investment $22,000,000
Term of Project 5 years
Rate of Return 10%

Time Taken
Investment
Amount ($) Balance CF PV PV Balance
0 22,000,000 22,000,000 22,000,000 22,000,000
1 1,800,000 20,200,000 1,636,364 20,363,636
2 3,000,000 17,200,000 2,479,339 15,480,090
3 6,500,000 10,700,000 4,883,546 9,742,777
4 8,400,000 2,300,000 5,737,313 17,380,109
5 12,300,000 -10,000,000 -7,637,332
Payback Period 4.2
Discounted Payback Period 4.7
As per the required rate of return, that is 10%, the project will pay back the initial amount of
investment in 4.7 years. The normal Payback period for the project is 4.2 years. It is feasible to
purchase the company as it has potential to retrieve the amount in a very short span of time.
(ii)
Initial Investment $22,000,000
Term of Project 5 years
Rate of Return 15%
Time Taken
Investment
Amount ($) Balance CF PV PV Balance
0 22,000,000 22,000,000 22,000,000 22,000,000
1 1,800,000 20,200,000 1,565,217 20,434,783
2 3,000,000 17,200,000 2,268,431 16,160,927
3 6,500,000 10,700,000 4,273,856 11,358,200
4 8,400,000 2,300,000 4,802,727 17,473,474
5 12,300,000 -10,000,000 -6,115,274
Payback Period 4.2
Discounted Payback
Period 5.4
If the expected rate of return would increase to 15%, then the payback period for the project
would be 5.4 years. This means, it will take 7 more months to cover the initial cost of the

investment and also the profits earned with the interest rate of 10% will be less than that of the
rate of 15%.
(C)
(i)
Number of years = (67 – 34)
(I) Future value of the share portfolio:
Present value = $ 47000
Rate ( i ) = 0.07
Time ( n ) = 33 years
Future Value = Present value * ( 1 + i )n
i
Future Value = 47000 * ( 1 + 0.07 ) 33
0.07
Future Value = 47000 * 9.33
Future Value = $ 438290.97
(II) Future value of Superannuation balance $ 78000
Present value = $ 78000
Rate ( i ) = 0.08
Time ( n ) = 33 years
Future Value = Present value * ( 1 + i )n
i
Future Value = 47000 * ( 1 + 0.07 ) 33
0.08
Future Value = 47000 * 12.676
Future Value = $ 988731.87
(III) Future Value of $ 1000 deposited every month
Present value = $ 1000
Rate ( i ) = 0.08 / 12
Rate ( i ) = 0.006667
Time ( n ) = 33 * 12

Time ( n ) = 396 months
Future Value = Present value * ( ( 1 + i )n – 1
i
Future Value = 1000 * ( 1 + 0.006667 ) 396 - 1
0.006667
Future Value = 1000 * 1933.65
Future Value = $ 1933645
Consolidated figures at Brant Jerome retirement .i.e. at the age of 67
Particulars Amount
Future value of the share portfolio $ 438290.97
Future value of Superannuation balance
$ 78000
$ 988731.87
Future Value of $ 1000 deposited every
month
$ 1933645.00
Total $ 3360668.19
Question 2
(A)
1.
The rate of interest offered to James is Nominal rate of interest. It is so because the current
existing rate of return in Australia’s Bank is ranging from 2.99% - 3.75%, and James is getting
an interest of 4%, which means that inflation is included or adjusted in the following interest
rate. The bank provides the rate after keeping a certain percent of margin for them.
2.
Difference between the Real and Notional Rate of Interest:
Real Rate of Interest: It is the rate of interest at which an investor, saver or lender gets a loan.
The real rate of interest rate is very much similar to the nominal or notional rate of interest, but.
It just includes the inflation rate within it (Laubach and Williams, 2016). The rate of inflation
affects the interest rate. This indicates that when the rate of inflation is zero, then the real rate of
interest or nominal rate of interest is the same. If the inflation is positively high then the interest
rate also becomes higher.
Notional Rate of Interest: It is the simplest type of interest rate. It is the stated rate of interest
provided on any bond or loan. The notional rate of interest is in actual terms the monetary price

that the borrowers have to pay to the lenders for the purpose of using their money (Gust, et.al.,
2016). In simpler words, if the notional rate for a particular loan or bond is 5%, then it is
expected for the borrowers to pay $ 5 as interest on every $ 100, they have taken on loan. The
only difference it has from real rate of interest is that it includes both the cost of capital and
inflation. It is the rate that is used by the banks to discount actual, inflated values of the future.
3.
Loan Amount
$250,00
0
Rate of Interest 4%
Real Rate of Interest in Australia 2.99%
Notional Rate of Return 4%
Inflation Rate 1.0100%
Real Rate of Return 2.9900%
Therefore, it can be said that, the real rate of interest at which James can get a loan is 2.99%.
The notional rate of return is 4%. The inflation rate is 1.01%.
4.
Yes, it is possible for the real rate of interest to be equivalent to the notional rate of interest. It is
so because, the notional rate of interest includes inflation in it. To find the real rate of interest we
have to subtract the inflation rate from the notional rate. If the inflation rate is Zero, then both the
rates, notional and real will be equal.
(B)
The operations of banks follow from the lending and borrowing of the banks from one another.
As per the Reserve Bank cash rate is the rate at which the banks are allowed to keep a certain
amount of cash as holdings with them. This impacts the circulation of capital in the economy.
The cash is the most common and the lowest interest rate at which the banks lend money and it is
considered as the benchmark rate in the country (Jensen and Spange, 2015). Any changes
brought in the cash rate effects the economy as a whole, but it particularly impacts the segment
of housing loan and market because the loans are provided following the current cash rate.
Every interest rate of the banks are influenced by the inflation rate. To maintain the balance of
the economy, banks set an inflation target that helps in keeping the inflation between 2-3 percent
in average. Cash rate is used to influence the inflation to achieve targets.
When the Reserve Bank decreases the cash rate, then it impacts on the other interest rates
prevailing in the country to fall. When the interest rates are low, then people tend to spend more

and this bring good flow of capital in the economy (Moore, 2017). As more the capital inflow
comes in the economy, the more it effects the business and production.
The Cash rate is termed as the market interest rates, when loans are taken from the financial
institutions. It is taken as the benchmark for the rates at which the loans are taken or borrowed
from the financial markets.

Question 3
(A)
(B)
Australian Dividend Imputation System This is a corporate tax system, under which the total
tax paid by the company is attributed or imputed to the stakeholders in a certain way of tax
credit, which aids the company in reducing the income tax payable on the distribution (Manalo,
et.al., 2015). In comparison with the classical system, the use of dividend imputation aids in
eliminating the tax disadvantages that are incurred while distribution of dividends to the
shareholders. Under this the shareholders just have to pay the difference between the corporate
and the marginal rate.
The main aim of dividend imputation system is to eradicate the system of double taxation of the
profits earned by the companies. It is witnessed twice at the corporate level and at the
distribution of dividends to the shareholders. Earlier it was seen that the company and the
shareholders had an incentive for the taxed income which was tend to be retained by the
company.
Before the period of 1987 in Australia, the companies would pay 49% flat tax rate at the profits
earned by it. After paying taxes, if the company was left with any further profits, they used to
pay dividends to its shareholders, this dividend was again taxed as the income of the shareholder
(Rees, et.al., 2016). This gave rise to double taxation. With the introduction of dividend
imputation, the tax rate for the companies was reduced to 39% in 1988 and 33% in 1993 and
30% in 2001.
In Australia, the dividend paid to the shareholders by the Australian resident companies are taxed
under a system known as ‘imputation’. The base of the system follows that if a company is
paying the shareholders or investors with dividends that have been franked, then the investors
may be entitled to a franking tax offset for that particular tax the firm has paid on its income
generated in one fiscal year. A franking credit is a kind of tax credit that gives the taxes paid on
the profits made by the company back to the shareholder including the payment of the dividend.
Franking Credits assists in promoting the long-term equity ownership and this has led to an
increase of dividend payouts to the firm’s investors (Brunnermeier and Koby, 2016)
In Australia, if a company completely pays tax on its income, the franking proportion is 100%.
However, this is not applicable on all companies of Australia. Calculation of Franking Credit can
be provided as below:
Franking Credit = (Dividend Amount/(1- Company Tax Rate)) – Dividend Amount

(C)
(i)
Monthly Holding Return Period
Date Initial Value Closing Value
17-Jul 3.79 4.14
17-Aug 4.15 5.04
17-Sep 5.1 5.86
17-Oct 5.92 7.62
17-Nov 7.34 7.59
17-Dec 7.6 7.37
18-Jan 7.4 8.29
18-Feb 8.32 12.23
18-Mar 12.21 11.46
18-Apr 10.96 11.31
18-May 11.36 9.93
18-Jun 9.7 10.52
Date Initial Value Closing Value Income Generated
Holding
Period
Return (%)
17-Jul 3.79 4.14 7.93 11.15
17-Aug 4.15 5.04 9.19 13.41
17-Sep 5.1 5.86 10.96 15.95
17-Oct 5.92 7.62 13.54 20.4
17-Nov 7.34 7.59 14.93 21.55
17-Dec 7.6 7.37 14.97 21.31
18-Jan 7.4 8.29 15.69 23.09
18-Feb 8.32 12.23 20.55 32.10
18-Mar 12.21 11.46 23.67 34.06
18-Apr 10.96 11.31 22.27 32.61
18-May 11.36 9.93 21.29 30.08
18-Jun 9.7 10.52 20.22 29.82

(ii)
Date Open High Low Close Adj Close Returns
7/1/2017 3.79 4.26 3.6 4.14 4.14 -17.857%
8/1/2017 4.15 5.37 4.11 5.04 5.04 -13.993%
9/1/2017 5.1 6.4 5.03 5.86 5.86 -23.097%
10/1/2017 5.92 7.91 5.91 7.62 7.62 0.395%
11/1/2017 7.34 8.05 6.33 7.59 7.59 2.985%
12/1/2017 7.6 7.63 6.82 7.37 7.37 -11.098%
1/1/2018 7.37 8.56 6.97 8.29 8.29 -32.216%
2/1/2018 8.32 13.78 7.7 12.23 12.23 6.719%
3/1/2018 12.21 13.21 11.26 11.46 11.46 1.326%
4/1/2018 11.46 12.58 10.83 11.31 11.31 13.897%
5/1/2018 11.36 12.385 9.19 9.93 9.93 -5.608%
6/1/2018 9.7 11.41 9.4 10.52 10.52
Average Returns: -7.141%
(iii)
Shareholder of A2M Ltd = Sequoia Fund Inc
Date Shares % Out Value Returns
31/12/2018 10,957,493 1.49% 113081327 10.32
Annual Holding Returns = 10.32%
(D)
(i)
Date Initial Value Closing Value Income Generated
Holding Period
Return (%)
17-Jul 5764 5773.9 11537.9 17310.80
17-Aug 5773.9 5776.3 11550.2 17325.50
17-Sep 5776.3 5744.9 11521.2 17265.09
17-Oct 5744.9 5976.4 11721.3 17696.7